-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SYjGJeUezlhx++KWDwsLHjpf3W1DbsECtd6yzx/6ga8IT9D4QqfUTkrUtlgc/t3O BT8WwSJK7mY33Y3w629P3A== 0000950131-96-002504.txt : 19960529 0000950131-96-002504.hdr.sgml : 19960529 ACCESSION NUMBER: 0000950131-96-002504 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXTENDED STAY AMERICA INC CENTRAL INDEX KEY: 0001002579 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363996573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03373 FILM NUMBER: 96573207 BUSINESS ADDRESS: STREET 1: 500 E BROWARD BLVD STREET 2: STE 950 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 BUSINESS PHONE: 9547131600 MAIL ADDRESS: STREET 1: 500 E BROWARD BLVD STREET 2: STE 950 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 S-1/A 1 AMENDMENT #2 TO S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996 REGISTRATION NO. 333-03373 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- EXTENDED STAY AMERICA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7011 36-3996573 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 500 E. BROWARD BOULEVARD FT. LAUDERDALE, FLORIDA 33394 TELEPHONE (954) 713-1600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- GEORGE D. JOHNSON, JR. CHIEF EXECUTIVE OFFICER EXTENDED STAY AMERICA, INC. 500 E. BROWARD BOULEVARD FT. LAUDERDALE, FLORIDA 33394 TELEPHONE (954) 713-1600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) JOHN T. MCCARTHY, ESQ. JOHN J. SABL, ESQ. BELL, BOYD & LLOYD SIDLEY & AUSTIN THREE FIRST NATIONAL PLAZA ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60602 CHICAGO, ILLINOIS 60603 TELEPHONE: (312) 372-1121 TELEPHONE: (312) 853-7000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE
======================================================================================================= PROPOSED PROPOSED MAXIMUM AMOUNT MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE - ------------------------------------------------------------------------------------------------------- 8,050,000 Common Stock, par value $.01 per share.... shares $33.25 $267,662,500 $92,298 =======================================================================================================
(1) Includes 1,050,000 shares of Common Stock which may be purchased pursuant to an over-allotment option granted by the Company to the Underwriters. (2) Calculated in accordance with Rule 457(c) and based upon the closing sale price of Extended Stay America, Inc. common stock reported on the Nasdaq National Market on May 23, 1996, as reported in The Wall Street Journal. The registration fee has been increased to reflect the additional shares to be registered, of which $52,544 was previously paid. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 28, 1996 PROSPECTUS , 1996 7,000,000 SHARES [LOGO OF EXTENDED STAYAMERICA APPEARS HERE] COMMON STOCK All of the 7,000,000 shares of Common Stock offered hereby are being issued and sold by Extended Stay America, Inc. The Common Stock is traded on the Nasdaq National Market under the symbol "STAY." On May 23, 1996, the closing sale price of the Common Stock was $33 1/4 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- ------------------------------------------------------------------------------ PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------ Per Share............. $ $ $ Total(3).............. $ $ $ - ------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $500,000. (3) The Company has granted to the Underwriters an option, exercisable within 30 days hereof, to purchase up to an aggregate of 1,050,000 additional shares of Common Stock at the price to the public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ , $ , and $ , respectively. See "Underwriting." The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as, and if accepted by them, subject to certain prior conditions, including the right of the Underwriters to reject orders in whole or in part. It is expected that delivery of such shares will be made in New York, New York, on or about , 1996. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ALLEN & COMPANY INCORPORATED CS FIRST BOSTON SMITH BARNEY INC. EXTENDED STAYAMERICA EFFICIENCY STUDIOS [PHOTO OF INTERIOR CORRIDOR PROPERTY] [PHOTO OF EXTERIOR CORRIDOR PROPERTY] [PHOTO OF INTERIOR CORRIDOR ROOM] [PHOTO OF EXTERIOR CORRIDOR ROOM] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH CS FIRST BOSTON CORPORATION (OTHER THAN CS FIRST BOSTON, INC. OR ANY OF ITS SUBSIDIARIES) OR OTHER PERSONS ENGAGING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS FROM RULES 10b-6, 10b-7 AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context suggests otherwise, references in this Prospectus to the "Company" mean Extended Stay America, Inc. and its subsidiaries and references to the year ended December 31, 1995 mean the period from January 9, 1995, the Company's date of inception, through December 31, 1995. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." On May 9, 1996, the Board of Directors of the Company declared a dividend of one additional share of Common Stock for each share issued as of the close of business on July 5, 1996, to be distributed on July 19, 1996, thereby effecting a 2-for-1 stock split (the "Stock Dividend"). Except as otherwise noted, none of the information contained in this Prospectus reflects the Stock Dividend. THE COMPANY Extended Stay America, Inc. was organized in January 1995 to develop, own, and manage extended stay lodging facilities which are designed to appeal to value-conscious guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. They feature fully furnished rooms which are generally rented on a weekly basis to guests such as business travelers (particularly those with limited expense accounts), professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. The Company's facilities provide a variety of features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. To help maintain affordability of room rates, labor intensive services such as daily cleaning, room service, and restaurants are not provided. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. The economy extended stay sector of the lodging industry appears to present a number of attractive characteristics compared to traditional hotels, including higher occupancy rates and operating margins. Based on published occupancy rates for other participants in the extended stay market, the Company believes that demand in the economy extended stay market is greater, relative to supply, than in the lodging industry generally. The Company is not aware of any operator who serves the economy extended stay market niche on a national level. The Company's goal is to become a national provider of economy extended stay lodging. The Company intends to achieve this goal by rapidly developing properties in selected markets, providing high value accommodations for its guests, actively managing its properties to increase revenues and reduce operating costs, and increasing awareness of the economy extended stay concept. Through May 13, 1996, the Company had developed and opened three facilities, acquired five others, and had an agreement to acquire one additional facility. As of such date, the Company had 20 facilities under construction, substantially all of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 45 additional facilities during the remainder of 1996 and to continue an active development program thereafter. The Company's plans call for the average facility to have approximately 125 extended stay rooms and to take approximately 7-9 months to construct. The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who are the two largest shareholders of the Company. Mr. Johnson, who is the President and Chief Executive Officer of the Company, 3 was formerly the President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of Directors of the Company, is the Chairman and Chief Executive Officer of Republic Industries, Inc. and was formerly Vice-Chairman of Viacom, Inc. and Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation. The Company's management team has extensive experience in the acquisition and development of real estate and the operation of properties on a national scale. The Company was initially capitalized with approximately $60 million in equity from a group of private investors, a number of whom constitute part of the Company's management team. On December 19, 1995, the Company completed an initial public offering of 5,060,000 shares of Common Stock at a price of $13.00 per share (the "IPO") and a concurrent offering to the Company's then existing shareholders of 2,067,825 additional shares of Common Stock at a price of $12.09 per share, being the initial public offering price per share less the underwriting discounts and commissions (the "Concurrent Offering", and, collectively with the IPO, the "Prior Offerings"). The net proceeds to the Company from the Prior Offerings were approximately $85 million after deduction of the underwriting discounts and commissions and other offering expenses. In addition, pursuant to its mortgage facilities, the Company may be able to borrow up to $400 million to finance its properties. The Company was formed in 1995 as a Delaware corporation and its executive offices are located at 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394 and its telephone number is (954) 713-1600. THE OFFERING Common Stock offered(1)............. 7,000,000 shares Common Stock to be outstanding after 29,853,092 shares this offering(2)................... Use of proceeds..................... To finance the development of additional extended stay lodging facilities and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol....... STAY
- -------------------- (1) Assumes no exercise of the over-allotment option granted by the Company to the Underwriters. (2) Excludes 4,417,060 shares of Common Stock reserved for issuance under the Option Plans (as defined below). As of March 31, 1996, options with respect to 2,436,258 shares of Common Stock have been granted under the Option Plans. Also excludes approximately 91,000 shares of Common Stock the Company expects to issue in connection with a pending acquisition. SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus Summary and under the captions "Risk Factors," "Recent Developments," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the Company's limited operating history and uncertainty as to the Company's future profitability; the ability to meet construction and development schedules and budgets; the ability to develop and implement operational and financial systems to manage rapidly growing operations; the uncertainty as to the consumer demand for economy extended stay lodging; increasing competition in the extended stay lodging market; the ability to integrate and successfully 4 operate acquired properties and the risks associated with such properties; the ability to obtain financing on acceptable terms to finance the Company's growth strategy; and the ability of the Company to operate within the limitations imposed by financing arrangements; and other factors referenced in this Prospectus. See "Risk Factors." SUMMARY FINANCIAL INFORMATION
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ------------------------- -------------------------- ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(2) OPERATING STATEMENT DATA: Revenue................ $ 877,885 $6,983,658 $ 1,170,829 $ 1,889,586 Operating expenses..... 2,887,091 6,782,841 2,846,928 3,212,945 Depreciation and amortization.......... 146,726 1,041,514 203,343 298,780 Loss from operations... (2,155,932) (840,697) (1,879,442) (1,622,139) Interest income........ 848,510 804,510 1,450,132 1,425,132 Income taxes........... 0 0 0 0 Net loss............... $(1,307,422) $ (36,187) $ (429,310) $ (197,007) =========== ========== ============ ============ Net loss per share(3).... $ (0.10) $ (0.00) $ (0.02) $ (0.01) Weighted average number of shares of common stock and equivalents outstanding(3).......... 12,652,110 13,808,783 22,467,393 22,944,092 AS OF MARCH 31, 1996 -------------------------- ACTUAL PRO FORMA(4) BALANCE SHEET DATA: Cash and cash equivalents....................... $104,010,918 $324,369,043 Total assets.................................... 166,369,727 391,752,852 Long-term debt(5)............................... 0 0 Shareholders' equity............................ 164,533,055 389,916,180
- -------------------- (1) Giving pro forma effect to the acquisition of the Norcross, Georgia lodging facility in January 1996 and the Norcross, Georgia and Riverdale, Georgia lodging facilities in February 1996 (collectively, the "Acquired Facilities"), the acquisition of the Marietta, Georgia lodging facility in August 1995 (the "Marietta Facility"), and the proposed acquisition of the lodging facility in Lakewood, Colorado (the "KHEC Facility") from Kipling Hospitality Enterprise Corporation ("KHEC") as if they all had occurred at the beginning of the period and to the Company operating as a publicly held entity as of such date. See the pro forma financial statements and notes thereto and note 5 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (2) Giving pro forma effect to the acquisition of the Acquired Facilities and the proposed acquisition of the KHEC Facility as if they had occurred at the beginning of the period. See the pro forma financial statements and notes thereto and note 5 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (3) See notes 2 and 5 to the Company's consolidated financial statements contained elsewhere herein. (4) Giving pro forma effect to the proposed acquisition of the KHEC Facility and this offering as if they occurred on March 31, 1996. See the pro forma financial statements and notes thereto contained elsewhere herein. (5) Does not give effect to future borrowings. 5 RISK FACTORS Prospective purchasers of the shares of Common Stock offered hereby should consider carefully the specific factors set forth below as well as the other information contained in this Prospectus in evaluating an investment in the Common Stock. LIMITED OPERATING HISTORY AND COSTS ASSOCIATED WITH EXPANSION The Company first began operating economy extended stay hotels in August 1995 and has a limited operating history upon which investors may evaluate the Company's performance. The Company has incurred losses to date and there can be no assurance that the Company will be profitable in the future. Given the substantial development and financing expenses relating to the Company's expansion, it expects to have net losses for the foreseeable future. DEVELOPMENT RISKS The Company intends to grow primarily by developing additional Company-owned lodging facilities. Development involves substantial risks, including the risk that development costs will exceed budgeted or contracted amounts, the risk of delays in completion of construction, the risk of failing to obtain all necessary zoning and construction permits, the risk that financing might not be available on favorable terms, the risk that developed properties will not achieve desired revenue or profitability levels once opened, the risk of competition for suitable development sites from competitors which have greater financial resources than the Company, the risks of incurring substantial costs in the event a development project must be abandoned prior to completion, changes in governmental rules, regulations, and interpretations (including interpretations of the requirements of the Americans with Disabilities Act), and general economic and business conditions. Although the Company intends to manage development to reduce such risks, there can be no assurance that present or future developments will perform in accordance with the Company's expectations. As of May 13, 1996, the Company operated eight facilities (Spartanburg, South Carolina; Columbia, South Carolina; Marietta, Georgia; Norcross, Georgia (2); Riverdale, Georgia; Downers Grove, Illinois; and Lenexa, Kansas). As of such date, the Company had 20 facilities under construction, substantially all of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 45 additional facilities during the remainder of 1996 and to continue an active development program thereafter. There can be no assurance, however, that the Company will complete the development and construction of the facilities or will acquire each of the planned properties and complete development of a Company-owned facility thereon, or that any such developments will be completed in a timely manner or within budget. RISKS ASSOCIATED WITH RAPID GROWTH The Company's rapid development plans will require the implementation of enhanced operational and financial systems and will require additional management, operational, and financial resources. For example, the Company will be required to recruit and train property managers and other personnel for each new lodging facility as well as additional accounting personnel. In addition, the Company needs to complete the development of a systemwide integrated computer network. There can be no assurance that the Company will be able to manage its expanding operations effectively. The failure to implement such systems and add such resources on a cost-effective basis could have a material adverse effect on the Company's results of operations and financial condition. RISKS ASSOCIATED WITH THE LODGING INDUSTRY The economy extended stay segment of the lodging industry, in which the Company operates, may be adversely affected by changes in national or local economic conditions and other local market conditions, such as an oversupply of hotel space or a reduction in demand for hotel space in a geographic area, changes in travel patterns, extreme weather conditions, changes in governmental regulations which influence or determine wages, 6 prices, or construction costs, changes in interest rates, the availability of financing for operating or capital needs, and changes in real estate tax rates and other operating expenses. The Company's principal assets will consist of real property, and real estate values are sensitive to changes in local market and economic conditions and to fluctuations in the economy as a whole. In addition, due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues and profits. These risks may be exacerbated by the relatively illiquid nature of real estate holdings. The ability of the Company to vary its portfolio in response to changes in economic and other conditions will be limited. There can be no assurance that downturns or prolonged adverse conditions in real estate or capital markets or in national or local economies, and the inability of the Company to dispose of an investment when it finds disposition to be advantageous or necessary, will not have a material adverse impact on the Company. COMPETITION IN THE LODGING INDUSTRY There is no single competitor or small number of competitors of the Company that is or are dominant in the economy extended stay market. However, some of the Company's indirect competitors have substantially larger networks of locations and greater financial resources than the Company. A number of major lodging companies recently have announced their intent to aggressively develop extended stay lodging properties which may compete with the Company's properties. Competition in the U.S. lodging industry is based generally on convenience of location, price, range of services and guest amenities offered, and quality of customer service. The Company considers the location of its lodging facilities, the reasonableness of its room rates, and the services and guest amenities provided by it to be among the most important factors in its business. Demographic or other changes in one or more of the Company's markets could impact the convenience or desirability of the sites of certain lodging facilities, which would adversely affect their operations. Further, there can be no assurance that new or existing competitors will not significantly lower rates or offer greater convenience, services, or amenities or significantly expand or improve facilities in a market in which the Company's facilities compete, thereby adversely affecting the Company's operations. See "Business-- Competition." RISKS ASSOCIATED WITH ACQUISITIONS Although the Company expects that the construction and development of new extended stay lodging facilities will be its primary means of expansion, the Company has also made, and may continue making, acquisitions of existing extended stay lodging facilities or other properties that are suitable for conversion to the extended stay concept. There can be no assurance that the Company will be able to acquire other extended stay lodging facilities on terms favorable to the Company. When the Company does make such acquisitions, it encounters various associated risks, including possible environmental and other regulatory costs, goodwill amortization, diversion of management's attention, and unanticipated problems or liabilities, some or all of which could have a material adverse effect on the Company's operations and financial performance. RISKS OF BORROWING The Company expects to incur substantial borrowings in connection with its expansion. Pursuant to its mortgage facilities, the Company may be able to borrow up to $400 million to finance its properties, depending on certain conditions. This compares to total equity of $389.9 million as of March 31, 1996, including assumed net proceeds from this offering of approximately $222.4 million and the issuance of shares of Common Stock in connection with the proposed acquisition of the KHEC Facility. These borrowings will be secured by mortgages on the Company's properties and various accounts and other assets. The Company may incur additional debt from time to time. See "-- Need for Additional Capital." Leverage increases the risks to the Company of any variations in its results, construction cost overruns, or any other factors affecting its cash flow or liquidity. In addition, the Company's interest costs could increase as the result of general increases in interest rates because a portion of the Company's borrowings under these facilities will bear interest at floating rates, the rates on individual term loans under these facilities will depend on the level of prevailing yields on U.S. Treasury securities at the times loans are made, and additional borrowings may bear interest at floating rates. See "Financing." 7 NEED FOR ADDITIONAL CAPITAL The extent to which the Company will be able to borrow under its mortgage facilities will be dependent on the Company meeting certain conditions and maintaining certain reserves. In addition, these mortgage facilities may restrict the ability of the Company to incur additional debt in the future. Although the Company is unable to quantify its needs for additional financing, the Company expects that it will need to procure additional financing over time, the amount of which will depend on a number of factors including the number of properties the Company constructs or acquires and the cash flow generated by its properties. There can be no assurance regarding the availability or terms of additional financing the Company may be able to procure over time. Any future debt financings or issuances of preferred stock by the Company will be senior to the rights of the holders of Common Stock, and any future issuances of Common Stock will result in the dilution of the then existing shareholders' proportionate equity interests in the Company. RESTRICTIONS ON OPERATIONS IN MORTGAGE FACILITIES The Company's financing arrangements contain a number of provisions that impose restrictions on the Company which could, under certain circumstances, limit the Company's operating and financial flexibility and adversely affect its results of operations. These provisions include restrictions on the ability of the Company to incur additional indebtedness, prepay indebtedness, declare dividends, enter into certain financing arrangements, acquire or dispose of certain assets, or make certain investments. In addition, the Company's ability to utilize these mortgage facilities is subject to it meeting certain conditions. See "Financing." NEW MANAGEMENT Since its formation in January 1995, the Company has recruited a management team, most of whom have had no prior experience in the lodging industry. The Company's success depends upon the ability of these individuals to develop expertise in managing such business. See "Management--Directors and Officers." IMPACT OF ENVIRONMENTAL REGULATIONS The Company's operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances, and regulations. In addition, in the event any future legislation is adopted, the Company may, from time to time, be required to make significant capital and operating expenditures in response to such legislation. The Company attempts to minimize its exposure to potential environmental liability through its site-selection procedures. The Company typically secures an option to purchase land subject to certain contingencies. Prior to exercising such option and purchasing the property, the Company conducts a Phase I environmental assessment (which generally involves a physical inspection and database search, but not soil or groundwater analyses). Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. 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 borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may 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 releases of hazardous materials, including asbestos-containing materials ("ACMs"), into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. Environmental laws also may impose restrictions on the manner in which property may be used or transferred or in which businesses may be operated, and these restrictions may require expenditures. In connection with the ownership of its properties, the Company may be potentially liable for any such costs. The 8 cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect the Company's results of operations and financial condition. LOSSES IN EXCESS OF INSURANCE COVERAGE The Company intends to maintain comprehensive insurance on each of its properties, including liability, fire, and extended coverage, in the types and amounts customarily obtained by an owner and operator in the Company's industry. Nevertheless, there are certain types of losses, generally of a catastrophic nature, such as hurricanes, earthquakes, and floods, that may be uninsurable or not economically insurable. The Company uses its discretion in determining amounts, coverage limits, and deductibility provisions of insurance, with a view to obtaining appropriate insurance on the Company's properties at a reasonable cost and on suitable terms. This may result in insurance coverage that in the event of a loss would not be sufficient to pay the full current market value or current replacement value of the Company's lost investment and the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to such property. RELIANCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the efforts and abilities of its senior management and key employees, particularly Mr. George D. Johnson, Jr., President and Chief Executive Officer, and Mr. Robert A. Brannon, Senior Vice President and Chief Financial Officer. The loss of the services of any of these individuals could have a material adverse effect upon the Company. See "Management--Directors and Officers." The Company does not have employment or consulting agreements with any of its officers other than Mr. Harold E. Wright nor does it carry key man life insurance on any of its officers. CONTROL OF THE COMPANY BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS As of March 31, 1996, George D. Johnson, Jr., H. Wayne Huizenga, and Stewart H. Johnson beneficially owned approximately 47.6% of the outstanding shares of Common Stock of the Company and these individuals together with other executive officers and directors of the Company as a group owned approximately 56.3% of the outstanding shares of Common Stock. By reason of such holdings, such shareholders acting as a group will be able to effectively control the affairs and policies of the Company and will be able to elect a sufficient number of directors to control the Company's Board of Directors and to approve or disapprove any matter submitted to a vote of the shareholders, including certain fundamental corporate transactions (such as certain mergers and sales of assets) requiring shareholder approval. See "Principal Shareholders." In addition, the Company's debt agreements contain, and future financing arrangements may contain, provisions regarding the composition of the Company's Board of Directors. See "Financing." ANTITAKEOVER EFFECT OF CHARTER, BYLAWS, STATUTORY PROVISIONS, AND FINANCING ARRANGEMENTS The ownership positions of Messrs. George D. Johnson, Jr., H. Wayne Huizenga, and Stewart H. Johnson and the other executive officers and directors of the Company as a group, together with the anti-takeover effects of Section 203 of the Delaware General Corporation Law which, in general, imposes restrictions upon acquirors of 15% or more of the Common Stock, and of certain provisions in the Company's Certificate of Incorporation and Bylaws, may have the effect of delaying, deferring, or preventing a change of control of the Company, even if such event would be beneficial to shareholders. For example, the Certificate of Incorporation requires that all shareholder action must be effected at a duly-called annual or special meeting of shareholders, and the Bylaws require that shareholders follow an advance notification procedure for certain shareholder nominations of candidates for the Board of Directors and for certain other business to be conducted at any meeting of shareholders. In addition, the Company's Certificate of Incorporation authorizes "blank check" preferred stock, so that the Company's Board of Directors may, without shareholder approval, issue preferred shares through a shareholders rights plan or otherwise which could inhibit a change of control. In the event that the current 9 members of the Company's Board of Directors cease to constitute a majority of the Board or Mr. George D. Johnson, Jr. or Mr. Huizenga cease to be a member of the Board, amounts outstanding under its financing arrangements would become immediately due. See "Principal Shareholders," "Financing," and "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE At March 31, 1996, the Company had 22,853,092 shares of Common Stock outstanding, 7,850,062 of which were freely tradeable (other than by an "affiliate" of the Company as such term is defined in the Securities Act of 1933, as amended (the "Securities Act")) without restriction or registration under the Securities Act. The remaining 15,003,030 shares of Common Stock will become eligible for sale in the public market at various times, subject to compliance with an exemption from the registration requirements of the Securities Act, such as Rule 144 or Rule 144A, or registration under the Securities Act. In connection with the IPO, the holders of these shares agreed that they would not sell any shares of Common Stock held by them until June 11, 1996 without the consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), one of the representatives of the Underwriters, subject to certain exceptions, including pursuant to a foreclosure by a lender on a loan for which shares of Common Stock have been pledged as collateral. The Company has registered under the Securities Act all of those 15,003,030 shares of Common Stock so that such shareholders may make resales in the public market of their Common Stock upon expiration of their lock-up agreements described above. The holders of approximately 13.3 million shares of Common Stock (including all shares beneficially owned by the Company's directors and executive officers) have agreed that they will not sell any shares of Common Stock for a period of 90 days from the date of this Prospectus without the consent of DLJ, subject to exceptions similar to those contained in their prior lock-up agreements. The Company also has registered under the Securities Act 4,000,000 shares of Common Stock which may be issued from time to time in connection with potential future acquisitions of various businesses and resales of such shares by the recipients thereof, and the Company has issued an aggregate of 722,237 of such shares of Common Stock and expects to issue approximately 91,000 shares of Common Stock in connection with the proposed acquisition of the KHEC Facility. See "Recent Developments." The Company also intends to register under the Securities Act all shares reserved for issuance under the 1995 Plan, the 1996 Plan, and the Directors' Plan (each as defined below and collectively the "Option Plans"). Shares so registered could be sold in the public market. No predictions can be made as to the effect, if any, that market sales of such shares or the availability of such shares for sale will have on the market price for shares of Common Stock prevailing from time to time. Sales of substantial amounts of shares of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of equity securities. See "Shares Eligible for Future Sale." ABSENCE OF DIVIDENDS The Company intends to retain its earnings to finance its growth and for general corporate purposes and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's debt agreements contain, and future financing agreements may contain, limitations on the payment of cash dividends or other distributions of assets. See "Dividend Policy." 10 RECENT DEVELOPMENTS On January 26, 1996, the Company acquired substantially all of the assets of Apartment/Inn, L.P., a Georgia limited partnership ("Apartment/Inn"). Apartment/Inn owned and operated a 196-room economy extended stay lodging facility in Norcross, Georgia which is similar in concept to the Company's lodging facilities. In consideration for such acquisition, the Company issued an aggregate of 293,629 shares of Common Stock. The acquisition was accounted for using the purchase method of accounting. For historical and pro forma financial information concerning this acquisition, see "Index to Financial Statements--Apartment/Inn, L.P." and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." On February 23, 1996, the Company acquired substantially all of the assets of Hometown Inn I, LTD and Hometown Inn II, LTD (collectively "Hometown Inn"). Hometown Inn owned and operated a 130-room economy extended stay lodging facility in Norcross, Georgia and a 144-room economy extended stay lodging facility in Riverdale, Georgia, both of which are similar in concept to the Company's lodging facilities. In consideration for such acquisition, the Company issued 428,608 shares of Common Stock and paid an additional $75,000 in cash. The acquisition was accounted for using the purchase method of accounting. For historical and pro forma financial information concerning this acquisition, see "Index to Financial Statements--Hometown Inn I, LTD and Hometown Inn II, LTD" and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." On May 10, 1996, the Company acquired substantially all of the assets of American Apartmen-Tels Investors II, L.P. ("AATI"), which owned and operated a 59-room extended stay lodging facility in Lenexa, Kansas, for a purchase price of approximately $3.3 million in cash. This purchase includes adjacent land on which the Company intends to build a new 60-room economy extended stay lodging facility. On May 1, 1996, the Company entered into an agreement to acquire the KHEC Facility, a 145-room traditional lodging facility located in Lakewood, Colorado, which the Company intends to remodel and convert to the economy extended stay format. The purchase price will be approximately $3.0 million, which the Company expects to pay by delivering shares of Common Stock. Consummation of the proposed acquisition of the KHEC Facility is subject to a number of conditions. The Company expects to account for this acquisition using the purchase method of accounting. For historical and pro forma financial information concerning this proposed acquisition, see "Index to Financial Statements--Kipling Hospitality Enterprise Corporation" and "--Pro Forma Financial Statements of Extended Stay America, Inc. and Subsidiaries." On May 9, 1996, the Board of Directors of the Company declared the Stock Dividend of one additional share of Common Stock for each share issued as of the close of business on July 5, 1996. Except as otherwise noted, none of the information contained in this Prospectus reflects the Stock Dividend. USE OF PROCEEDS The net proceeds to the Company from this offering are estimated to be approximately $222.4 million ($255.8 million if the Underwriters' over- allotment option is exercised in full) assuming a public offering price of $33.25 per share (the closing sale price of the Common Stock on May 23, 1996 on the Nasdaq National Market) and after deduction of the estimated underwriting discounts and commissions and other offering expenses. The Company intends to use substantially all of such net proceeds to expand its business by developing additional economy extended stay lodging facilities and for other general corporate purposes. Pending use of the proceeds as set forth above, they will be invested in short-term interest bearing investments. 11 PRICE RANGE OF COMMON STOCK The Common Stock began trading in the Nasdaq National Market on December 14, 1995. The following table sets forth, for the periods indicated, the high and low sale prices of the Common Stock as quoted on the Nasdaq National Market. On May 23, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $33.25 per share. At March 31, 1996, there were approximately 150 record holders and approximately 3,500 beneficial holders of Common Stock.
PRICE RANGE OF COMMON STOCK --------------- HIGH LOW Year Ended December 31, 1995: Fourth Quarter (from December 14, 1995)................. $28 $20 1/4 Year Ended December 31, 1996: First Quarter........................................... 31 1/4 20 Second Quarter (through May 23, 1996)................... 34 22
DIVIDEND POLICY The Company has not paid dividends on its Common Stock, and the Board of Directors intends to continue a policy of retaining earnings to finance its growth and for general corporate purposes and, therefore, does not anticipate paying any such dividends in the foreseeable future. In addition, the Company's debt agreements contain, and future financing agreements may contain, a minimum net worth covenant and limitations on payment of any cash dividends or other distributions of assets, which covenants, limitations, and requirements could restrict the Company's ability to pay dividends. See "Financing." CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and as adjusted to give pro forma effect to this offering (based upon an assumed offering price of $33.25 per share) and the acquisition of the KHEC Facility. This table should be read in conjunction with the selected financial data, the historical and pro forma financial statements of the Company, and the related notes thereto contained elsewhere herein.
MARCH 31, 1996 -------------------------- ACTUAL PRO FORMA Long-term debt(1)............................ $ 0 $ 0 Shareholders' equity: Preferred Stock, par value $.01 per share, 10,000,000 shares authorized; no shares issued and outstanding.................... 0 0 Common Stock, par value $.01 per share, 200,000,000 shares authorized; 22,853,092 shares issued and outstanding; 29,944,092 shares issued and outstanding pro forma... 228,531 299,441 Additional paid-in capital................. 166,041,256 391,353,471 Accumulated deficit........................ (1,736,732) (1,736,732) ------------ ------------ Total shareholders' equity(2)............ 164,533,055 389,916,180 ------------ ------------ Total capitalization..................... $164,533,055 $389,916,180 ============ ============
- --------------------- (1) Does not give effect to future borrowings. (2) Excludes 2,436,258 shares of Common Stock subject to issuance upon exercise of outstanding stock options and 1,980,802 additional shares reserved for issuance under the Option Plans at March 31, 1996. 12 SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from the historical and pro forma financial statements of the Company and from the historical financial statements of Welcome Inn America 89-1, L.P. ("Welcome"). The selected financial data for Welcome is included because Welcome may be deemed to be a predecessor of the Company. The historical financial statements of the Company for the year ended December 31, 1995 have been audited by Coopers & Lybrand L.L.P., independent accountants, whose report thereon appears elsewhere herein. The historical financial statements of Welcome for the years ended December 31, 1992, 1993, and 1994, and for the period from January 1, 1995 through August 18, 1995, have been audited by Coopers & Lybrand L.L.P., independent accountants, whose report for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995 thereon appears elsewhere herein. The selected financial data set forth below for the year ended December 31, 1991 has been derived from Welcome's unaudited internal financial statements and reflects all adjustments which management considers necessary for a fair and consistent presentation of the results of operations for that period. Operating statement data for the three months ended March 31, 1995 and 1996 and balance sheet data as of March 31, 1996 are derived from unaudited financial statements of the Company included herein. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for the fair presentation of its financial position and the results of its operations for these periods. The pro forma data is unaudited but, in the opinion of management, all necessary pro forma adjustments have been made. The unaudited pro forma consolidated operating statement data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the pro forma transactions had been completed as of the beginning of the period, nor does it purport to represent the results of operations for any future periods. The unaudited pro forma consolidated balance sheet data is not necessarily indicative of what the actual financial position would have been assuming the pro forma transactions had been completed as of March 31, 1996, nor does it purport to represent the future financial position of the Company. These selected financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical and pro forma financial statements and related notes thereto of the Company and the historical financial statements and related notes thereto of Welcome, Apartment/Inn, Hometown Inn, and KHEC contained elsewhere herein. THE COMPANY
FOR THE THREE YEAR ENDED MONTHS ENDED FOR THE THREE MONTHS DECEMBER 31, 1995 MARCH 31, 1995 ENDED MARCH 31, 1996 ------------------------ -------------- -------------------------- PRO ACTUAL FORMA(1) ACTUAL ACTUAL PRO FORMA(2) OPERATING STATEMENT DATA: Revenue............... $ 877,885 $6,983,658 $ $ 1,170,829 $ 1,889,586 Operating expenses.... 2,887,091 6,782,841 248,601 2,846,928 3,212,945 Depreciation and amortization......... 146,726 1,041,514 203,343 298,780 Loss from operations.. (2,155,932) (840,697) (248,601) (1,879,442) (1,622,139) Interest income....... 848,510 804,510 1,450,132 1,425,132 Income taxes.......... 0 0 0 0 Net loss.............. $ (1,307,422) $ (36,187) $ (248,601) $ (429,310) $ (197,007) ============ ========== ========== ============ ============ Net loss per share(3). $ (0.10) $ (0.00) $ (0.02) $ (0.02) $ (0.01) ============ ========== ========== ============ ============ Weighted average number of shares of common stock and equivalents outstanding(3)....... 12,652,110 13,808,783 11,489,017 22,467,393 22,944,092 ============ ========== ========== ============ ============ AS OF DECEMBER 31, 1995 AS OF MARCH 31, 1996 ------------ -------------------------- ACTUAL ACTUAL PRO FORMA(4) BALANCE SHEET DATA: Cash and cash equivalents.......... $123,357,510 $104,010,918 $324,369,043 Total assets.......... 149,618,649 166,369,727 391,752,852 Long-term debt(5)..... 0 0 0 Shareholders' equity.. 147,222,245 164,533,055 389,916,180
13 WELCOME INN AMERICA 89-1, L.P.
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31, 1995 THROUGH ------------------------------------------ AUGUST 18, 1991(6) 1992 1993 1994 1995 OPERATING STATEMENT DATA: Revenue............... $ 686,970 $ 866,314 $999,371 $1,079,287 $712,837 Operating expenses.... 503,508 502,611 557,002 561,746 367,217 Depreciation and amortization......... 153,066 159,874 138,987 141,362 95,546 --------- --------- -------- ---------- -------- Income from operations........... 30,396 203,829 303,382 376,179 250,074 Interest expense...... 470,698 398,650 382,306 360,639 272,152 --------- --------- -------- ---------- -------- Net income (loss)..... $(440,302) $(194,821) $(78,924) $ 15,540 $(22,078) ========= ========= ======== ========== ========
- --------------------- (1) Giving pro forma effect to the acquisition of the Acquired Facilities and the Marietta Facility and the proposed acquisition of the KHEC Facility as if they all had occurred at the beginning of the period and to the Company operating as a publicly held entity as of such date. See the pro forma financial statements and notes thereto and note 5 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (2) Giving pro forma effect to the acquisition of the Acquired Facilities and the proposed acquisition of the KHEC Facility as if they had occurred at the beginning of the period. See the pro forma financial statements and notes thereto and note 5 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (3) See notes 2 and 5 to the Company's consolidated financial statements contained elsewhere herein. (4) Giving pro forma effect to the proposed acquisition of the KHEC Facility and this offering as if they occurred on March 31, 1996. See the pro forma financial statements and notes thereto contained elsewhere herein. (5) Does not give effect to future borrowings. (6) The Marietta Facility commenced operations in February 1991. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was organized in January 1995 to develop, own, and manage extended stay lodging facilities. The Company began construction of its first lodging facility in Spartanburg, South Carolina on February 1, 1995. This facility was completed and commenced operations in August 1995. The Company's activities during the quarter ended March 31, 1995 consisted of corporate organization, site selection, and site development. The Company did not have operating facilities or other revenue sources during the quarter ended March 31, 1995. On May 1, 1995, the Company contracted to manage an extended stay facility in Marietta, Georgia which was subsequently acquired by the Company on August 18, 1995. On August 18, 1995 the Company also issued 11,718,000 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock in exchange for net proceeds of approximately $55.8 million. In October 1995, the Company executed a mortgage facility providing for up to $200 million in mortgage loans, which may be used to finance on a long-term basis newly constructed facilities. The Company completed the Prior Offerings in December 1995 from which it received net proceeds of approximately $85 million. As of March 31, 1996 the Company had 5 operating facilities, 17 facilities under construction, and options to purchase 64 sites for development in 23 states. The Company expects to complete the construction of the facilities currently under construction and to commence construction on the majority of these sites under option during 1996. There can be no assurances, however, that the Company will complete the acquisition of the sites under option or, if acquired, commence construction during 1996 and the Company's ability to do so may be materially impacted by various factors including zoning, permitting, and environmental due diligence issues and weather-induced construction delays. Although the Company expects that the construction and development of new extended stay lodging facilities will be its primary means of expansion, the Company has also made, and may continue making, acquisitions of existing extended stay facilities or other properties that are suitable for conversion to the extended stay concept. During the quarter ended March 31, 1996, the Company acquired three operating facilities (two in Norcross, Georgia and one in Riverdale, Georgia). On January 26, 1996, the Company acquired substantially all of the assets of Apartment/Inn, which owned and operated a 196-room economy extended stay lodging facility in Norcross, Georgia. In consideration for the acquisition, the Company issued an aggregate of 293,629 shares of Common Stock. On February 23, 1996, the Company acquired substantially all of the assets of Hometown Inn which owned and operated a 130-room economy extended stay lodging facility in Norcross, Georgia and a 144-room economy extended stay lodging facility in Riverdale, Georgia. In consideration for the acquisition, the Company issued an aggregate of 428,608 shares of Common Stock and paid an additional $75,000 in cash. These acquisitions were accounted for using the purchase method of accounting. On May 10, 1996, the Company acquired substantially all of the assets of AATI, which owned and operated a 59-room extended stay lodging facility in Lenexa, Kansas, for a purchase price of approximately $3.3 million in cash. This purchase includes adjacent land on which the Company intends to build a new 60-room economy extended stay lodging facility. On May 1, 1996, the Company entered into an agreement to acquire from KHEC a 145-room traditional lodging facility located in Lakewood, Colorado, which the Company intends to remodel and convert to the economy extended stay format. The purchase price will be approximately $3.0 million, which the Company expects to pay by delivering shares of Common Stock. Consummation of the proposed acquisition of the KHEC Facility is subject to a number of conditions. The Company will account for this acquisition using the purchase method of accounting. RESULTS OF OPERATIONS PROPERTY OPERATIONS Property operations for the year ended December 31, 1995 included the Spartanburg, South Carolina property from the date of opening on August 1, 1995 and the Marietta, Georgia facility from the date of 15 acquisition on August 18, 1995. These properties realized average occupancy of 83% and average weekly room rates of $198 for their periods of operation by the Company during 1995. The Company did not have operating facilities during the quarter ended March 31, 1995. The Company began the quarter ended March 31, 1996 with two operating facilities and acquired three additional operating facilities during that quarter. During the period owned by the Company, these properties realized average occupancy of 90% and average weekly room rates of $198 during the quarter ended March 31, 1996. There can be no assurance that the foregoing occupancy and room rates can be maintained or are representative of rates to be expected for new facilities. Occupancy rates are determined by dividing the guest rooms occupied on a daily basis by the total number of guest rooms. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates vary from standard room rates due primarily to (i) stays of less than one week, which are charged at a higher nightly rate, (ii) higher weekly rates for a limited number of rooms which are larger than the standard rooms, and (iii) additional charges for more than one person per room. The Company recognized total room revenues of $817,133, along with other revenues, consisting of telephone and vending revenues which vary based on occupancy, of $42,977 during 1995. Total room revenues for the quarter ended March 31, 1996 were $1,137,841 and other revenues were $32,988. Property operating expenses, consisting of all expenses directly allocable to the operation of the properties but excluding any allocation of corporate operating expenses and depreciation, were $332,523 or 37.9% of total revenues for 1995 and $442,540 or 37.8% of total revenues for the quarter ended March 31, 1996. Depreciation of the cost of the facilities was provided using the straight- line method over the estimated useful lives of the properties. The provision for the period ended December 31, 1995 was $126,772 and the provision for the quarter ended March 31, 1996 was $193,113. These provisions reflect a pro-rata allocation of the annual depreciation charge for the period for which the properties were in operation. CORPORATE OPERATIONS The Company realized management fees of $17,775 in 1995 from its management of the Marietta facility prior to its acquisition of that facility. The Company has not managed properties for a fee since that property was acquired. Corporate operating and property management expenses include all expenses not directly related to the development or operation of facilities. Expenses of $2,042,039 for the year ended December 31, 1995, $1,580,655 for the quarter ended March 31, 1996, and $195,823 for the quarter ended March 31, 1995 consist primarily of personnel expenses, professional and consulting fees, and related travel expenses. The increase in corporate operating and property management expenses for the quarter ended March 31, 1996 as compared with the quarter ended March 31, 1995 reflects an increase in personnel and related expenses in connection with the Company's increased level of operating properties and site development. The total amount of these expenses will increase in the future with the development of additional facilities. Site selection costs of $512,529 for the year ended December 31, 1995, $823,733 for the quarter ended March 31, 1996 and $52,778 for the quarter ended March 31, 1995 consist of real estate and construction personnel costs which are not directly related to a site that will be developed by the Company, along with expenditures made to third parties for services and costs related to the investigation of such sites. The increase in these costs for the quarter ended March 31, 1996 as compared with the quarter ended March 31, 1995 reflects the increased level of sites under development. These costs will continue in the future and could increase depending on the rate of expansion because the Company's development personnel must evaluate numerous potential sites in an effort to identify sites meeting the Company's standards. Depreciation and amortization in the amount of $19,954 for the year ended December 31, 1995, and $10,230 for the quarter ended March 31, 1996 were provided using the straight-line method over the estimated useful lives of the assets for assets not directly related to the operation of the facilities, including primarily organization 16 costs and office furniture and equipment. These assets were acquired subsequent to March 31, 1995 and therefore no provision for depreciation and amortization was made for the quarter ended March 31, 1995. The Company realized $848,510 of interest income during the year ended December 31, 1995 and $1,450,132 during the quarter ended March 31, 1996 which was primarily attributable to the short-term investment of funds received from the initial capitalization of the Company in the third quarter of 1995 and the consummation of the Prior Offerings on December 19, 1995. There were no funds held for investment by the Company during the quarter ended March 31, 1995. LIQUIDITY AND CAPITAL RESOURCES From the inception of the Company in January 1995 through August 18, 1995, the Company's operations were financed primarily by loans from the Company's two largest shareholders in an aggregate amount of approximately $6.1 million. These loans accrued interest at an annual rate of 8.75% with such interest being capitalized as a cost of development of the Spartanburg, South Carolina facility. The loans were repaid in full in August 1995 from the proceeds of $55.8 million received upon the issuance of 11,718,000 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock. In December 1995, the Company completed the Prior Offerings from which the Company received net proceeds of approximately $85 million upon the issuance of 7,127,825 shares of Common Stock. The Company had cash balances of $123.4 million as of December 31, 1995 and $104.0 million as of March 31, 1996. Substantially all of the cash balances as of December 31, 1995 and March 31, 1996 were invested in an overnight sweep account with a commercial bank which invests in short-term, interest bearing reverse repurchase agreements for U.S. government securities. The market value of the securities held pursuant to the agreements approximates the carrying amount. In consideration for the three existing facilities acquired by the Company in the quarter ended March 31, 1996, the Company issued Common Stock valued at approximately $17.9 million and paid cash, including the payment of related expenses, of approximately $356,000. In addition, approximately $15.4 million was used to acquire land and develop and furnish the 17 sites under construction during the quarter. This compares to approximately $281,000 used to develop one property during the first quarter of 1995. A total of approximately $2.7 million, less refunds of site deposits of $240,000, was used for site deposits and preacquisition costs in the three months ended March 31, 1996, compared to approximately $120,000 used for such costs in the comparable prior year period. The Company expects to finance the construction and development of its lodging facilities principally with its cash balances and with loans under mortgage facilities. The Company has two mortgage facilities which provide for up to a total of $400 million in loans, subject to certain conditions and limitations, for facilities after completion of construction. See "Financing." The Company in the future may seek to increase the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. Any debt incurred or issued by the Company may be secured or unsecured, with a fixed or variable interest rate, and may be subject to such terms as the Board of Directors of the Company deems prudent. The Company expects that it will need to procure additional financing over time, although there can be no assurance that such financing will be available when needed. SEASONALITY AND INFLATION Based upon the operating history of the Company's facilities, management believes that extended stay lodging facilities are not as seasonal in nature as the overall lodging industry. Management does expect, however, that occupancy and revenues may be lower than average during the months of December and January due to the holiday season. Because many of the Company's expenses do not fluctuate with occupancy, such declines in occupancy may cause fluctuations or decreases in the Company's quarterly earnings. 17 The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenue or operating results of the Company from its inception on January 9, 1995. There can be no assurance, however, that inflation will not affect future operating or construction costs. See "Risk Factors--Development Risks." EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement requires the Company to identify properties for which it has committed to an exit plan or which may be otherwise impaired. The fixed assets for such properties must be written down to fair market value. The Company anticipates that the adoption of SFAS 121, required for fiscal years beginning after December 15, 1995, will not result in a reduction of net fixed assets or an increase in expenses in the fiscal year 1996 statement of operations. The FASB has also issued Statement No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. Under SFAS 123, companies are encouraged but not required to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value accounting rules. Companies that choose not to record compensation expense under the new rules will be required to disclose pro forma net income and earnings per share under the new method. The Company has not yet determined the financial statement impact of SFAS 123 and has elected not to recognize the impact of this pronouncement in its fiscal 1995 statement of operations, but will disclose as required in the fiscal 1996 financial statements on a pro forma comparative basis the effect of SFAS 123 on net income and earnings per share. 18 BUSINESS OVERVIEW Extended Stay America, Inc. was organized in January 1995 to develop, own, and manage extended stay lodging facilities which are designed to appeal to value-conscious guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. They feature fully furnished rooms which are generally rented on a weekly basis to guests such as business travelers (particularly those with limited expense accounts), professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. The Company's facilities provide a variety of features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. To help maintain affordability of room rates, labor intensive services such as daily cleaning, room service, and restaurants are not provided. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. The economy extended stay sector of the lodging industry appears to present a number of attractive characteristics compared to traditional hotels, including higher occupancy rates and operating margins. Based on published occupancy rates for other participants in the extended stay market, the Company believes that demand in the economy extended stay market is greater, relative to supply, than in the lodging industry generally. The Company is not aware of any operator who serves the economy extended stay market niche on a national level. The Company's goal is to become a national provider of economy extended stay lodging. The Company intends to achieve this goal by rapidly developing properties in selected markets, providing high value accommodations for its guests, actively managing its properties to increase revenues and reduce operating costs, and increasing awareness of the economy extended stay concept. Through May 13, 1996, the Company had developed and opened three facilities, acquired five others, and had an agreement to acquire one additional facility. As of such date, the Company had 20 facilities under construction, substantially all of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 45 additional facilities during the remainder of 1996 and to continue an active development program thereafter. The Company's plans call for the average facility to have approximately 125 extended stay rooms and to take approximately 7-9 months to construct. The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who are the two largest shareholders of the Company. Mr. Johnson, who is the President and Chief Executive Officer of the Company, was formerly the President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of Directors of the Company, is the Chairman and Chief Executive Officer of Republic Industries, Inc. and was formerly Vice-Chairman of Viacom, Inc. and Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation ("Blockbuster"). The Company's management team has extensive experience in the acquisition and development of real estate and the operation of properties on a national scale. GROWTH AND DEVELOPMENT STRATEGY The Company's goal is to become a national provider of economy extended stay facilities. The Company plans to rapidly develop new economy extended stay lodging facilities. Although the Company expects that the construction and development of new extended stay lodging facilities will be its primary means of expansion, the Company has also made, and may continue making, acquisitions of existing extended stay lodging facilities or other properties that are suitable for conversion to the extended stay concept. 19 Through May 13, 1996, the Company has developed and opened three economy extended stay facilities and acquired five other facilities since the Company began operations in 1995. As of such date, the Company had 20 facilities under construction, substantially all of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 45 additional facilities during 1996 and to continue an active development program thereafter. The Company's strategy is to identify regions of the country that contain the demographic factors necessary to support one or more economy extended stay lodging facilities and to focus its development in those regions in order to obtain the maximum benefit from operational efficiencies. The Company expects target sites will generally have a large and/or growing population in the surrounding area with a large employment base. Such sites also are generally expected to have good visibility from a major traffic artery and be in close proximity to convenience stores, restaurants, and shopping centers. For the economy extended stay facilities developed and opened by the Company in Spartanburg, South Carolina, Columbia, South Carolina, and Downers Grove, Illinois, the average development cost was approximately $5.1 million with an average of 133 rooms. The cost to develop a facility varies significantly by geographic location. For the 20 facilities that were under construction as of May 13, 1996, the estimated average cost is approximately $4.6 million with an average of approximately 125 rooms. The cost of these facilities is expected to vary from a low of approximately $3.7 million to a high of $5.9 million with the number of rooms ranging from a low of 111 to a high of 150. Sites for development are selected by the Company's real estate professionals, subject to review and approval by senior management. The Company currently maintains offices in Spartanburg, South Carolina; Park Ridge, Illinois; Bellevue, Washington; Morristown, New Jersey; El Segundo, California; San Rafael, California; and Phoenix, Arizona for these real estate professionals and the construction supervisors for the region. The Company expects to open regional offices in other geographic areas in the future as the Company increases the number of regions in which it is focusing its development. The Company utilizes independent general contractors for the construction of its lodging facilities and is using a number of such contractors depending upon geographic area, costs of construction, and financial and physical capacities of the contractors. The Company's construction personnel will oversee the progress of construction on a regular basis during the development cycle. Certain members of the Company's management team have extensive experience in the rapid development of standardized commercial properties nationwide. In connection with past development activities, in particular the nationwide roll-out of Blockbuster video stores, these individuals were responsible for site selection, construction management, and subsequent operation of hundreds of locations. OPERATING STRATEGY The Company's business strategy is to develop the economy extended stay concept by providing an affordable and attractive lodging alternative for value-conscious travelers looking for extended stay accommodations. The Company's goal is to provide its guests with the level of amenities needed to optimize room and occupancy rates while maintaining high operating margins at its facilities. The Company attempts to achieve this goal through the following: Appeal to Value Conscious Guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. As of May 13, 1996, the Company's facilities offered extended stay accommodations for $169 to $269 per week. Room rates at the Company's facilities may vary significantly depending upon market factors affecting such locations. These rates contrast with average weekly rates of approximately $545 for traditional extended stay hotels and approximately $330 for hotels in the economy segment of the lodging industry. Lodging Facility Features. The Company's facilities contain a variety of non-labor intensive features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. 20 Standardized Concept. The Company has developed standardized plans and specifications for its facilities which should lower construction and purchasing costs and establish uniform quality and operational standards. The Company also expects to benefit from the experience of various members of the Company's management team in developing numerous commercial properties to a uniform set of design standards and in operating systems on a cost-effective basis. Operating Efficiencies. The Company believes that the design and price level of its facilities attract guest stays of several weeks, which should result in a more stable revenue stream and which, coupled with low-labor amenities, could in turn lead to reduced administrative and operational costs and higher operating margins. In addition, members of the Company's management team have extensive experience in the utilization of sophisticated control and information systems which should enable the Company to manage, on a Company-wide basis, individual facility specific factors such as pricing, payroll, and occupancy levels. Each Company facility employs a property manager who is responsible for the operations of the particular property. The property manager shares duties with and oversees a staff typically consisting of an assistant manager, a desk clerk, a maintenance person, and a housekeeping/laundry staff of approximately 8-10 persons (most of whom are part-time employees). The office at each facility is generally open daily from 7:00 a.m. to 11:00 p.m., although an employee normally is on duty twenty-four hours a day to respond to guests' needs. The majority of daily operational decisions are made by the property manager. Each property manager is under the supervision of a regional manager who will be responsible for five to ten facilities, depending on geographic location. The regional manager oversees the performance of the property managers in such areas as guest service, property maintenance, and payroll and cost control. The corporate office utilizes state-of-the-art information systems to support its regional managers. Each facility is measured against a detailed revenue and expense budget, as well as against the performance of the Company's other facilities. The Company is developing centralized pricing, purchasing, marketing, and operational procedures in order to achieve operating efficiencies. The Company's current operating subsidiaries are ESA Development, Inc. ("ESA Development") and ESA Properties, Inc. ("ESA Properties"), which acquire and develop properties, and ESA Management, Inc. ("ESA Management"), which provides construction and management services for all of the lodging facilities owned by the Company and its subsidiaries. The Company expects that each lodging facility will be owned by a separate single-purpose subsidiary formed for such purpose. See "Financing." LODGING FACILITIES As of May 13, 1996, the Company had eight economy extended stay lodging facilities in operation and 20 facilities under construction in a total of eleven states. The following table sets forth certain information regarding the Company's lodging facilities that are in operation.
DATE OPENED NUMBER LOCATION OR ACQUIRED OF ROOMS Spartanburg, South Carolina........................ August 1995 123 Marietta, Georgia.................................. August 1995 119 Norcross, Georgia.................................. January 1996 196 Norcross, Georgia.................................. February 1996 130 Riverdale, Georgia................................. February 1996 144 Columbia, South Carolina........................... April 1996 120 Downers Grove, Illinois............................ May 1996 154 Lenexa, Kansas..................................... May 1996 59
21 The following table sets forth certain information regarding the Company's lodging facilities that are under construction.
PLANNED ESTIMATED NUMBER LOCATION OPENING DATE OF ROOMS Greensboro, North Carolina................... Second Quarter 1996 129 Chesapeake, Virginia......................... Second Quarter 1996 132 Chattanooga, Tennessee....................... Second Quarter 1996 120 Sharonville, Ohio............................ Third Quarter 1996 130 Winston-Salem, North Carolina................ Third Quarter 1996 111 Charleston, South Carolina................... Third Quarter 1996 126 Virginia Beach, Virginia..................... Third Quarter 1996 120 Maryland Heights, Missouri................... Third Quarter 1996 150 Lexington, Kentucky.......................... Third Quarter 1996 126 Brentwood, Tennessee......................... Fourth Quarter 1996 120 Springdale, Ohio............................. Fourth Quarter 1996 126 Little Rock, Arkansas........................ Fourth Quarter 1996 120 Rolling Meadows, Illinois.................... Fourth Quarter 1996 125 Novi, Michigan............................... Fourth Quarter 1996 124 Louisville, Kentucky......................... Fourth Quarter 1996 120 Itasca, Illinois............................. Fourth Quarter 1996 125 Memphis, Tennessee........................... Fourth Quarter 1996 126 Greece, New York............................. Fourth Quarter 1996 125 Burr Ridge, Illinois......................... Fourth Quarter 1996 119 Newport News, Virginia....................... Fourth Quarter 1996 120
The design plans for the Company's economy extended stay lodging facilities call for a newly-constructed apartment style complex with two to three story buildings containing an average of approximately 125 guest rooms with laundromat and office areas. The Company utilizes both interior and exterior corridor building designs, depending primarily on local zoning and weather factors. Rooms generally offer approximately 250 to 300 square feet of fully furnished living space, including a kitchenette and a dining/working area. The kitchenette is fully-equipped with a refrigerator, stovetop, microwave, and sink. INDUSTRY OVERVIEW TRADITIONAL LODGING INDUSTRY The U.S. lodging industry is estimated to have generated approximately $51 billion in annual room revenues in 1995 and had approximately 3.3 million rooms at the end of 1995. Over 60% of the industry's rooms are owned, managed, or franchised by the 10 largest lodging chains. Industry statistics, which the Company believes to be reliable, indicate that the U.S. lodging industry's performance is strongly correlated to economic activity. Room supply and demand historically have been sensitive to shifts in economic growth, which has resulted in cyclical changes in average daily room and occupancy rates. Overbuilding in the lodging industry in the mid and late 1980s, when approximately 500,000 rooms were added, resulted in an oversupply of rooms. The Company believes this oversupply and the general downturn in the economy led to depressed industry performance and a lack of capital available to the industry in the late 1980s and early 1990s. The Company believes that the lodging industry has benefited from a gradually improving supply and demand balance, evidenced by increased average daily room and occupancy rates. Room supply growth in the lodging industry has slowed in recent years as the industry absorbs the oversupply of rooms that resulted from an average annual room supply growth of approximately 3.5% for 1988 through 1991. According to industry reports, which the Company believes are reliable, this growth slowed to an average of 1.4% for 1992 through 1995. The 3.1% average annual increase in demand (measured by occupied rooms) for 1992 through 1995 as 22 compared to increases in supply during the same period reflects an improved supply and demand balance in the industry. The Company believes these factors were primarily responsible for the increase in industry occupancy rates from 61.7% for 1991 to 66.1% for 1995 and the increase in average daily room rates from $58.11 for 1991 to $65.62 for 1995. The lodging industry generally can be segmented by the level of service provided and the pricing of the rooms. Segmentation by level of service is divided into the following categories: full service hotels, which offer food and beverage services, meeting rooms, room service, and similar guest services; limited service hotels, which generally offer only rooms with amenities such as swimming pools, continental breakfast, or similar limited services; and all-suites, which generally have limited public spaces but provide guests with two rooms or distinct partitioned areas and which may or may not offer food and beverage service to guests. Segmentation by price level may generally be divided into the following categories with the respective average daily room rates for 1995: budget ($36), economy ($47), mid-price ($61), upscale ($80), and luxury ($118). The all-suites segment of the lodging industry is a relatively new segment, having developed largely over the past 10 years, and is principally oriented toward business travelers in the mid-price to upscale price levels. All-suite hotels were developed partially in response to the increasing number of corporate relocations, transfers, and temporary assignments and the need of business travelers for more than just a room. To address those needs, all- suite hotels began to offer suites with additional space and, in some cases, an efficiency kitchen, and guests staying for extended periods of time were offered discounts to daily rates when they paid on a weekly or monthly basis. Because of the perceived positive price/value relationship, all-suite hotels have generally outperformed the lodging industry as a whole over the last five years. EXTENDED STAY MARKET The Company believes that the extended stay market, in which the Company participates, is a continuation of the all-suites phenomenon, and that the same price/value relationship which has enabled the all-suites segment to achieve higher than industry average occupancy rates and operating margins will also carry through to the extended stay market. Demand for extended stay lodging has been stimulated by the economic and social changes resulting from the increased volume of corporate reorganizations and trends toward down- sizing and out-sourcing of various functions, the break-up and geographic dispersion of the traditional family, and technological improvements which have allowed businesses to relocate outside of large metropolitan areas. These changes have created new accommodation needs for, among others, corporate executives and trainees, consultants, sales representatives, construction workers, and people in between jobs or houses. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms has increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. ECONOMY EXTENDED STAY CONCEPT Economy extended stay lodging competes on the basis of price compared to the extended stay market generally, thereby providing an economic inducement to guests who are already attracted to the extended stay concept. In addition, economy extended stay lodging provides a new and affordable lodging alternative for guests who are value conscious, have lower incomes, or are on limited expense accounts. Based on published occupancy rates for other participants in the extended stay market, the Company believes that there is a strong demand for economy extended stay accommodations and that there is little organized competition for that business on a national or regional basis. Of the approximately 3.3 million total available rooms in the U.S. lodging industry at the end of 1995, there were approximately 38,000, or 1.2%, dedicated extended stay rooms at approximately 325 separate properties. More than two-thirds of these extended stay properties were controlled by only two other competitors, both of which are priced toward the upscale segment of the extended stay market. 23 COMPETITION The lodging industry is highly competitive. Competitive factors within the lodging industry include room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, name recognition, and supply and availability of alternative lodging in local markets, including short-term lease apartments. The Company's facilities compete with a number of competitors, including budget and economy segment hotels and other companies focusing on the extended stay market. All of the Company's existing facilities are located in developed areas that include competing lodging facilities. In addition, each of the Company's proposed facilities is likely to be located in an area that includes competing facilities. The number of competitive lodging facilities in a particular area could have a material adverse effect on the levels of occupancy and average weekly room rates of the Company's existing and future facilities. The Company anticipates that competition within the economy extended stay lodging market will increase as participants in other segments of the lodging industry and others focus on this relatively new market. A number of major lodging companies recently have announced their intent to aggressively develop extended stay lodging properties which may compete with the Company's properties. Numerous other extended stay lodging facilities exist, most of which are oriented toward the upscale segment. The Company may compete for development sites with established entities which have greater financial resources than the Company and better relationships with lenders and sellers. These entities may generally be able to accept more risk than the Company can prudently manage. Further, there can be no assurance that new or existing competitors will not significantly reduce their rates or offer greater convenience, services, or amenities or significantly expand, improve, or develop facilities in a market in which the Company competes, thereby adversely affecting the Company's operations. ENVIRONMENTAL MATTERS Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of its properties, the Company may be potentially liable for any such costs. The Company has obtained recent Phase I environmental site assessments ("Phase I Surveys") on its existing properties and intends to obtain Phase I Surveys prior to the purchase of any future properties. The Phase I Surveys are intended to identify potential environmental contamination and regulatory compliance concerns. Phase I Surveys generally include historical reviews of the properties, reviews of certain public records, preliminary investigations of the sites and surrounding properties and the preparation and issuance of written reports. Phase I Surveys generally do not include invasive procedures, such as soil sampling or ground water analysis. The Phase I Surveys have not revealed any environmental liability or compliance concern that the Company believes would have a material adverse effect on the Company's business, assets, results of operations, or liquidity, nor is the Company aware of any such liability or concern. Nevertheless, it is possible that Phase I Surveys will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns of which the Company will not be aware. Moreover, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, or (ii) the current environmental condition of the Company's existing and future properties will not be affected by the condition of the neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Company. 24 GOVERNMENTAL REGULATION A number of states regulate the licensing of hotels by requiring registration, disclosure statements, and compliance with specific standards of conduct. The Company believes that each of its facilities has the necessary permits and approvals to operate its respective business and the Company intends to continue to obtain such permits and approvals for its new facilities. In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions, and work permit requirements. An increase in the minimum wage rate, employee benefit costs, or other costs associated with employees could adversely affect the Company. Both at the federal and state level from time to time, there are proposals under consideration to increase the minimum wage. Under the Americans With Disabilities Act ("ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. Although the Company has attempted to satisfy ADA requirements in the designs for its facilities, no assurance can be given that a material ADA claim will not be asserted against the Company, which could result in a judicial order requiring compliance, and the expenditure of substantial sums to achieve compliance, an imposition of fines, or an award of damages to private litigants. These and other initiatives could adversely affect the Company as well as the lodging industry in general. INSURANCE The Company currently has the types and amounts of insurance coverage that it considers appropriate for a company in its business. While management believes that its insurance coverage is adequate, if the Company were held liable for amounts exceeding the limits of its insurance coverage or for claims outside of the scope of its insurance coverage, the Company's business, results of operations, and financial condition could be materially and adversely affected. EMPLOYEES As of March 31, 1996, the Company and its subsidiaries employed approximately 180 persons. The Company expects that it will significantly increase the number of its employees as it expands its business. The Company's employees are not subject to any collective bargaining agreements and management believes that its relationship with its employees is good. PROPERTIES In addition to its lodging facilities described above (see "--Lodging Facilities"), the Company also maintains a corporate headquarters and seven regional offices. The Company's principal executive offices are located in Ft. Lauderdale, Florida and the Company's regional offices are located in Spartanburg, South Carolina; Park Ridge, Illinois; Bellevue, Washington; Morristown, New Jersey; El Segundo, California; San Rafael, California; and Phoenix, Arizona. The Company generally rents its office space on a short-term basis, although it has recently entered into a new five-year lease for its corporate headquarters in Ft. Lauderdale, Florida. These offices are sufficient to meet the Company's present needs and it does not anticipate any difficulty in securing additional office space, as needed, on terms acceptable to the Company. LEGAL PROCEEDINGS The Company is not a party to any litigation or claims, other than routine matters incidental to the operation of the business of the Company. To date, no claims have had a material adverse effect on the Company nor does the Company expect that the outcome of any pending claims will have such an effect. 25 MANAGEMENT DIRECTORS AND OFFICERS The directors and executive officers of the Company and its subsidiaries, their ages at March 31, 1996, and their positions with the Company or such subsidiaries are as follows:
NAME AGE POSITION H. Wayne Huizenga(1)...... 58 Chairman of the Board of Directors George D. Johnson, Jr.(1). 53 President, Chief Executive Officer, and Director Robert A. Brannon......... 45 Senior Vice President, Chief Financial Officer, Secretary, and Treasurer Michael R. Beck........... 34 Vice President--Real Estate of ESA Properties, Inc. Corry W. Oakes............ 29 Vice President--Construction of ESA Management, Inc. Gregory R. Moxley......... 41 Vice President--Finance and Controller Michael M. Wilson......... 56 Vice President--Marketing of ESA Management, Inc. James M. Harley........... 44 Vice President--Operations of ESA Management, Inc. Shawn R. Ruben............ 29 Vice President--Development of ESA Management, Inc. Robert W. Levis........... 32 Vice President--Corporate Development of ESA Management, Inc. Harold E. Wright.......... 53 President of ESA Development, Inc. Donald F. Flynn(2)(3)..... 56 Director Stewart H. Johnson(3)..... 52 Director John J. Melk(2)........... 59 Director Peer Pedersen(3).......... 71 Director
- --------------------- (1) Member of Executive Committee of the Board of Directors (2) Member of the Compensation Committee of the Board of Directors (3) Member of the Audit Committee of the Board of Directors All directors are elected to serve until the next annual meeting of shareholders and until their successors are elected and qualified. Officers serve at the pleasure of the Board. H. Wayne Huizenga became a director of the Company in August 1995 and serves as Chairman of its Board of Directors. Mr. Huizenga also currently serves as Chairman of the Board of Directors and Chief Executive Officer of Republic Industries, Inc., ("Republic"), a diversified company with operations in solid waste collection, disposal, and recycling, electronic security services, and out-of-home advertising, and served until 1995 as Vice-Chairman of Viacom, Inc. ("Viacom"), a diversified media and entertainment company, a position he assumed upon its merger with Blockbuster in 1994. Mr. Huizenga became a director of Blockbuster in February 1987 and was elected as Chairman of the Board and Chief Executive Officer from April 1987 through September 1994. He is a co-founder of Waste Management, Inc. (now WMX Technologies, Inc. ("WMX")), a waste disposal and collection company, where he served in various capacities, including President, Chief Operating Officer, and director until May 1984. From May 1984 to present, Mr. Huizenga has been an investor in several businesses and is the sole shareholder and Chairman of the Board of Huizenga Holdings, Inc., a holding and management company with various business interests. In connection with these business interests, Mr. Huizenga has been actively involved in strategic planning for, and executive management of, these businesses. He also has a majority ownership interest in the Florida Marlins, a Major League Baseball franchise, and owns the Florida Panthers, a National Hockey League franchise, the Miami Dolphins, a National Football League franchise, and Joe Robbie Stadium in South Florida. 26 George D. Johnson, Jr. has been President, Chief Executive Officer, and a director of the Company since January 1995. He is responsible for all aspects of development, operation, marketing, and personnel of the Company. Mr. Johnson is the former President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom. In this position he was responsible for all U. S. video and music stores. Mr. Johnson has over 30 years of experience developing and managing various businesses. He was formerly the managing general partner of WJB Video, the largest Blockbuster franchisee which developed over 200 video stores prior to a merger with Blockbuster in 1993 and is the managing general partner of American Storage Limited Partnership, a chain of 23 self-storage facilities located in the Carolinas and Georgia. He currently serves on the board of directors of Viacom, Republic, and Duke Power Company and has been the Chairman of the Board of Directors of Johnson Development Associates, Inc. since its founding in 1986. Johnson Development Associates, Inc. is a real estate management, leasing, and development company controlling approximately two million square feet of commercial, retail, and industrial property located in the Carolinas and Georgia which are owned by various partnerships controlled by Mr. Johnson and his brother, Stewart H. Johnson. Mr. Johnson practiced law in Spartanburg, South Carolina from 1967 until 1986 and served three terms in the South Carolina House of Representatives. Robert A. Brannon has been Chief Financial Officer of the Company since February 1995 and Senior Vice President, Secretary, and Treasurer since August 1995. He is responsible for overseeing accounting procedures and controls, along with financial reporting and cash management. Prior thereto, he served as Vice President--Finance for the Domestic Home Video division of the Blockbuster Entertainment Group, where he was responsible for financial management and control of over 2,000 video stores. Prior to joining Blockbuster in 1993, Mr. Brannon was Chief Financial Officer for WJB Video and for American Storage Limited Partnership. In those capacities, Mr. Brannon was responsible for the financial aspects of the development of over 200 video stores and 23 self-storage facilities. Prior to his participation in these businesses, Mr. Brannon served as a Certified Public Accountant in various management and staff positions with local and national accounting firms. Michael R. Beck has been Vice President--Real Estate of the Company from September 1995 to January 1996 and Vice President--Real Estate of ESA Properties since January 1996. Mr. Beck is responsible for identifying and negotiating the purchase of suitable locations for the Company's expansion. Prior to joining the Company, Mr. Beck served in various capacities including Vice President--Development at Blockbuster Entertainment Group from July 1993 to May 1995, where he was responsible for new store development including real estate construction and distribution for Blockbuster Video and Blockbuster Music. From May 1989 to July 1993, Mr. Beck served in various capacities at WJB Video, including the position of Director of Strategic Planning where he was responsible for real estate acquisition and construction, marketing, and video tape purchasing. Corry W. Oakes has been Vice President--Construction of the Company from January 1995 to January 1996 and Vice President--Construction of ESA Management since January 1996. Mr. Oakes is responsible for managing initial construction of all properties as well as ongoing renovations and repairs. Prior thereto, he served as a National Director of Construction for the Blockbuster Entertainment Group. In that capacity, he was responsible for the development of over 400 video and music stores during 1994 alone. Prior to joining Blockbuster in 1993, Mr. Oakes served as Construction Manager for WJB Video. Mr. Oakes also served as property manager with Westover Development Company, a real estate development firm. Gregory R. Moxley became Controller of the Company in October 1995 and Vice President--Finance in January 1996, where he is responsible for the accounting, budgeting, and financial reporting functions. From 1990 until joining the Company, Mr. Moxley held various positions, including Director of Financial Reporting and Assistant Treasurer, with One Price Clothing Stores, Inc., a national chain of women's apparel stores. Prior to that, Mr. Moxley served as a Certified Public Accountant in various management and staff positions with Ernst & Young from 1978 to 1990. Michael M. Wilson has been Vice President--Marketing of ESA Management since February 1996. Mr. Wilson is responsible for developing and implementing marketing strategy and public relations. From September 27 1993 until he joined the Company, he served as Director of Marketing--Special Projects for Blockbuster, where he was responsible for marketing and developing proprietary technology. Before joining Blockbuster in 1993, Mr. Wilson was Director of Marketing of WJB Video. Prior thereto, Mr. Wilson founded and served as President of two private consumer products companies, Lasso Closure Corp. and Torus Corporation, and served as Senior V.P. for Henderson Advertising in Greenville, South Carolina. James M. Harley has been Vice President--Operations of ESA Management since September 1995. Mr. Harley is responsible for managing the operations of the Company's extended stay facilities. From September 1993 until he joined the Company, he served as Vice President--Asset Management for Homestead Village, a division of Security Capital Pacific Trust ("Security Capital"). Before joining Security Capital in 1993, Mr. Harley served as Vice President-- Development for Holiday Inn Worldwide. Shawn R. Ruben has been Vice President--Development of ESA Management since December 1995. Mr. Ruben is responsible for managing the due diligence process on all of the Company's properties as well as land closings and loan approvals. Prior thereto, he served as National Director of Real Estate for the Blockbuster Entertainment Group, where he was responsible for new store development, asset management, and all real estate legal matters. Before joining Blockbuster in 1991, Mr. Ruben practiced law in Florida. Robert W. Levis has been Vice President--Corporate Development of ESA Management since April 1996. Mr. Levis is responsible for corporate strategy, including acquisitions. From 1992 until he joined the Company, Mr. Levis was Director, Corporate Development for Blockbuster where he was responsible for corporate strategy for new lines of business, including mergers and acquisitions. From 1995 until he joined the Company, Mr. Levis was also Vice President, Corporate Development and Finance for Discovery Zone, Inc. ("Discovery Zone"), an owner and franchisor of family indoor entertainment and fitness facilities, during the period it was managed by Blockbuster. On March 25, 1996, Discovery Zone announced that it had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Prior thereto, Mr. Levis was a Manager, Real Estate and Hospitality Consulting with KPMG Peat Marwick. Harold E. Wright has been President of ESA Development, Inc., a wholly-owned subsidiary of the Company, since June 1995. Mr. Wright is responsible for selection and development of suitable locations in certain geographic areas. See "--Management Compensation," and "--Employment and Stock Option Agreements." Prior to joining ESA Development, Inc., Mr. Wright was President of HVI, Inc., formerly Homestead Venture, Inc., a site selection and development company of extended stay facilities in the Southwest. From 1989 to 1992, Mr. Wright was President of Homestead Properties, Inc., which developed and operated three extended stay properties in North Carolina. Prior to that time, Mr. Wright was involved in commercial and real estate development in Georgia and Florida. Donald F. Flynn became a director of the Company in August 1995. Mr. Flynn is Chairman and Chief Executive Officer of Flynn Enterprises, Inc., a business consulting and venture capital company, and from July 1992 until March 1996 was Chairman of Discovery Zone. From July 1992 until May 1995, Mr. Flynn also served as Chief Executive Officer of Discovery Zone. Mr. Flynn also currently serves as a director of WMX, Waste Management International plc, Wheelabrator Technologies, Inc., and Psychemedics, Inc. ("Psychemedics"). Mr. Flynn is a former director of Blockbuster. From 1972 to 1990, Mr. Flynn served in various positions with WMX, including Senior Vice President and Chief Financial Officer. Stewart H. Johnson became a director of the Company in August 1995. Mr. Johnson is currently the Chairman of the Board of Directors, Chief Executive Officer, and President of Morgan Corporation, a construction company specializing in grading, site preparation, and sewer and utility installation. Mr. Johnson has been directing the operations of Morgan Corporation since 1971. Mr. Johnson also serves as Secretary for Johnson Development Associates, Inc. Mr. Johnson is the brother of George D. Johnson, Jr. 28 John J. Melk became a director of the Company in August 1995. He has been Chairman and Chief Executive Officer of H/2/0 Plus, Inc. since 1988. H/2/0 Plus develops and manufactures health and beauty products and distributes them through a national chain of company-owned retail stores as well as through over 500 wholesale/department stores. Prior to 1984, Mr. Melk held various positions with WMX and its subsidiaries, and served as President of Waste Management International, Ltd. based in London, England. Mr. Melk currently serves as a director of Psychemedics and Republic and is a former Vice- Chairman and director of Blockbuster. Mr. Melk is also Chairman of M.W. Partners, which is a major investor in residential and commercial real estate development, resort hotels, marinas, and other private ventures. Peer Pedersen became a director of the Company in August 1995. He is the founder and has been Chairman of the law firm of Pedersen & Houpt, P.C., in Chicago, Illinois for more than five years. He serves on the board of directors of Aon Corporation, Boston Chicken, Inc., and WMX. MANAGEMENT COMPENSATION The Company was incorporated in January 1995 and did not conduct any operations prior to that time. The Company's executive officers commenced their service with the Company at various times during 1995 and none was employed by the Company during all of 1995. Accordingly, the following table sets forth, on an annualized basis with respect to the salary information, the information regarding the compensation paid by the Company to its Chief Executive Officer and each of the other four most highly compensated officers of the Company (hereinafter, the "Named Executive Officers") for services rendered in all capacities to the Company during 1995. The Company does not have a restricted stock award program or a long-term incentive plan. Directors of the Company are not paid any cash compensation for their services but are reimbursed for their out-of-pocket expenses. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------- ------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($) George D. Johnson, Jr...... 200,000 -- -- 200,000 -- President and Chief Executive Officer Robert A. Brannon.......... 175,000 -- -- 301,875 -- Senior Vice President, Chief Financial Officer, Secretary, and Treasurer Michael R. Beck............ 100,000 -- -- 21,000 -- Vice President--Real Estate of ESA Properties, Inc. Corry W. Oakes............. 100,000 -- -- 21,000 22,837(1) Vice President-- Construction of ESA Management, Inc. Harold E. Wright........... 175,000 -- -- -- 51,179(1) President of ESA Development, Inc.
- --------------------- (1) Represents the taxable portion of reimbursed relocation expenses. 29 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth individual grants of stock options made to the Named Executive Officers during 1995.
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF STOCK TOTAL PRICE APPRECIATION OPTIONS GRANTED EXERCISE FOR OPTION TERM(2) DATE OF OPTIONS TO EMPLOYEES IN OR BASE EXPIRATION --------------------- NAME GRANT GRANTED FISCAL YEAR PRICE(1) DATE 5% 10% George D. Johnson, Jr... 11/17/95 200,000 17.7% $13.00 11/17/05 $1,635,126 $4,143,730 Robert A. Brannon....... 8/18/95 301,875 26.7 4.76 8/18/05 903,675 2,290,087 Michael R. Beck......... 8/18/95 21,000 1.9 4.76 8/18/05 62,864 159,310 Corry W. Oakes.......... 8/18/95 21,000 1.9 4.76 8/18/05 62,864 159,310 Harold E. Wright........ -- -- -- -- -- -- --
- --------------------- (1) Under the 1995 Plan, the exercise price must be the fair market value on the date of grant. Except for specific situations, the options granted become exercisable as to one-fourth of the grant on each of the first, second, third, and fourth anniversary of the date of grant. (2) These amounts represent certain assumed annual rates of appreciation calculated from the exercise price, as required by the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock. There can be no assurance that the amounts reflected in this table will be achieved. AGGREGATE 1995 OPTION/SAR VALUES The following table provides certain information concerning the value of unexercised options to purchase Common Stock at December 31, 1995 for the Named Executive Officers. No options to purchase Common Stock were exercised during 1995.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT 12/31/95 AT 12/31/95(1) ------------------------- ------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE NAME (#) (#) ($) ($) George D. Johnson, Jr....... -- 200,000 -- 2,900,000 Robert A. Brannon........... -- 301,875 -- 6,864,638 Michael R. Beck............. -- 21,000 -- 477,540 Corry W. Oakes.............. -- 21,000 -- 477,540 Harold E. Wright............ -- -- -- --
- --------------------- (1) This column indicates the aggregate amount, if any, by which the market value of the Common Stock on December 31, 1995 exceeded the options' exercise price based on the closing per share sale price of the Common Stock on such date of $27.50 as quoted on the Nasdaq National Market as reported by The Wall Street Journal. EMPLOYMENT AND STOCK OPTION AGREEMENTS In June 1995, Mr. Wright entered into an employment agreement, which was terminated in March 1996, with ESA Development, a wholly-owned subsidiary of the Company which was formed for the purpose of developing economy extended stay facilities in the Midwest and certain other areas. In connection with the termination of a business relationship before joining ESA Development, Mr. Wright entered into a non-compete agreement that may restrict him from performing certain functions for ESA Development in the states of Texas, New Mexico, Colorado, Arizona, Nevada, Utah, California, Oklahoma, Louisiana, Florida and the greater metropolitan areas of Las Vegas, Nevada; Portland, Oregon; Atlanta, Georgia; Charlotte, North Carolina and 30 Washington, D.C. until the end of 1996. As a result, neither Mr. Wright nor ESA Development will operate in those areas and Mr. Wright will focus his time and efforts locating and developing sites for ESA Development in regions not restricted by his non-compete agreement. Pursuant to his employment agreement, Mr. Wright was entitled to receive a minimum annual base salary of $175,000. The agreement had an initial term of two years and was to have been automatically renewed for one-year periods thereafter unless notice of termination was given by either party. The agreement provided that in the event Mr. Wright's employment with ESA Development was terminated for any reason other than for cause, Mr. Wright was entitled to receive an amount equal to his then base salary for the remainder of the then current term. In addition, in the event ESA Development did not grant to Mr. Wright, during each twelve month period from June 1 through May 31 of the term of the agreement, options to purchase shares of common stock of ESA Development in an amount equal to 2 1/2 times his then base salary at the fair market value per share on the date of grant, Mr. Wright could declare his employment terminated other than for cause. In June 1995, Mr. Wright also entered into a stock option agreement with ESA Development which was also terminated in March 1996 and all options granted thereunder terminated. Pursuant to the stock option agreement, ESA Development granted to Mr. Wright non-qualified options to purchase a total of 1,437.5 shares of the common stock of ESA Development. The options were to vest ratably on each of the next four anniversaries of the date of the option grant. With respect to options underlying 437.5 shares, the exercise price per share was $1,000 and the term of the options was ten years. With respect to options underlying the remaining 1,000 shares, the exercise price per share was $1,000 plus interest accrued at 10% per year, compounded annually, from the date of the option grant through the date of exercise of the option, and the term of the options was five years. In March 1996, Mr. Wright and ESA Development entered into a new employment agreement for the period commencing on March 18, 1996 and ending on June 30, 1999. Pursuant to this employment agreement, Mr. Wright is to act as the President of ESA Development and is entitled to receive a minimum annual base salary of $175,000. ESA Development also agreed to pay Mr. Wright additional compensation equal to $15,000 for each site upon which ESA Development or its subsidiaries has commenced construction of an extended stay lodging facility during the term of the agreement. This additional compensation shall apply only to the first 40 sites for 1996, 1997, and 1998 and the first 20 sites for 1999 and may be paid by delivering shares of the Company's Common Stock with a fair market value equal to the amount due. In addition, pursuant to this employment agreement, the Company granted to Mr. Wright, under the 1996 Plan, ten-year options to purchase 600,000 shares of the Company's Common Stock at an exercise price per share of $21.00 (the fair market value on the date of grant), which options vest as to one-fourth of the grant on September 19, 1996 and June 1 of each of 1997, 1998, and 1999, respectively. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Until August 1995, Mr. George D. Johnson, Jr., the Company's Chief Executive Officer, approved the terms of the compensation of the Company's executive officers. In August 1995, the Company's Board of Directors formed a Compensation Committee, which is currently composed of Messrs. Flynn and Melk, which determines the compensation of the Company's executive officers. STOCK OPTION PLANS 1995 PLAN The Board of Directors of the Company adopted in August 1995, and the shareholders of the Company have approved, the Amended and Restated 1995 Employee Stock Option Plan (the "1995 Plan") which will be administered by the Compensation Committee of the Board of Directors, which consists solely of non-employee directors. The Compensation Committee has authority to determine the persons to be granted options under the 1995 Plan, the number of shares subject to each option, the time or times at which options will be granted, the 31 option price of the shares subject to each option (which price shall not be less than the fair market value of the shares at the date of grant), and the time or times when each option becomes exercisable and the duration of the exercise period. Except for specific situations, such as a change in control of the Company, options which have been granted become exercisable as to one- fourth of the grant on each of the first, second, third, and fourth anniversary of the date of grant. Options may be granted under the 1995 Plan to key employees and consultants, (other than members of the Compensation Committee) of the Company. Options may be granted with respect to a total of not more than 1,677,060 shares of Common Stock under the 1995 Plan, subject to antidilution and other adjustment provisions. No options may be granted to a single optionee under the 1995 Plan in excess of 50% of the total number of shares authorized for issuance under the 1995 Plan. No options may be granted under the 1995 Plan after August 18, 2005. If an option expires or is terminated or canceled unexercised as to any shares, such released shares may again be optioned (including a grant in substitution for a canceled option). The Compensation Committee has granted, under the 1995 Plan, ten-year options to purchase 150,000 shares and 200,000 shares of Common Stock to Messrs. Huizenga and George D. Johnson, Jr., respectively, at an exercise price per share equal to $13.00 and ten year options to purchase Common Stock at an exercise price per share equal to $4.76 to the other Named Executive Officers, among others, for the following number of shares: Mr. Brannon, 301,875; Mr. Beck, 21,000; and Mr. Oakes, 21,000. In January 1996, the Compensation Committee granted additional ten-year options to purchase 500,821 shares of Common Stock to employees at exercise prices per share ranging from $26.75 to $29.625, including grants to Named Executive Officers for the following number of shares: Mr. Brannon, 39,252; Mr. Beck, 28,037; Mr. Oakes, 28,037; and Mr. Wright, 39,252. As of March 31, 1996, options to purchase an aggregate of 1,676,873 shares of Common Stock had been granted under the 1995 Stock Option Plan. 1996 PLAN The Board of Directors of the Company adopted in January 1996, and the shareholders of the Company have approved, the Amended and Restated 1996 Employee Stock Option Plan (the "1996 Plan"). The 1996 Plan will be administered by the Compensation Committee of the Board of Directors and the terms of the 1996 Plan are substantially identical to those of the 1995 Plan. Options may be granted with respect to a total of not more than 2,500,000 shares of Common Stock under the 1996 Plan, subject to antidilution and other adjustment provisions. No options may be granted under the 1996 Plan after January 24, 2006. As of March 31, 1996, options to purchase 679,385 shares of Common Stock had been granted under the 1996 Plan, including ten-year options to purchase 600,000 shares of Common Stock granted to Mr. Wright at an exercise price per share equal to $21.00. DIRECTORS' PLAN The Board of Directors of the Company adopted in November 1995, and the shareholders of the Company have approved, a 1995 Stock Option Plan for Non- Employee Directors (the "Directors' Plan"). The Directors' Plan is administered by the Board of Directors. Options shall be granted under the Directors' Plan only to non-employee directors of the Company. Options may be granted with respect to a total of not more than 240,000 shares of Common Stock under the Directors' Plan, subject to antidilution and other adjustment provisions. If an option expires or is terminated or canceled unexercised as to any shares, such released shares may again be optioned. A one-time option covering 20,000 shares of Common Stock is automatically granted to each non-employee director of the Company effective upon initial election to the Board of Directors of the Company. During the four-year period following the initial election of a non-employee director to the Board of Directors, an additional option covering 5,000 shares of Common Stock shall be granted to such non-employee director on each anniversary of the initial grant; provided that such non-employee director remains a director and that not more than four such additional options shall be granted to any one non- employee director. The option price for all 32 options granted under the Directors' Plan shall be the fair market value of a share of Common Stock on the date of grant. Each option granted under the Directors' Plan is for a term of ten years, subject to earlier termination if the optionee's service as a director terminates. Each option granted under the Directors' Plan becomes exercisable with respect to all of the shares subject to the option six months after the date of its grant. Options to purchase 20,000 shares of Common Stock at an exercise price per share of $13.00 were automatically granted under the Directors' Plan on the closing of the IPO on December 19, 1995 to each of Messrs. Flynn, Stewart H. Johnson, Melk, and Pedersen. 33 CERTAIN TRANSACTIONS In order to finance the construction of the Company's Spartanburg, South Carolina facility and the Company's initial operations, George D. Johnson, Jr., the Company's President and Chief Executive Officer, and H. Wayne Huizenga, the Chairman of the Board of Directors of the Company, loaned an aggregate of approximately $6.1 million at various times between February 1995 and July 1995. Those loans accrued interest at an annual rate of 8.75% and were repaid in full in August 1995 with the proceeds from the subscriptions of the Company's shareholders described below. In connection with the formation of the Company in January 1995, Mr. George D. Johnson, Jr. purchased 1,677,060 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock for an aggregate purchase price of $2,000. In August 1995, the Company entered into Subscription Agreements pursuant to which certain investors, including H. Wayne Huizenga, George D. Johnson, Jr., Donald F. Flynn, Stewart H. Johnson, John J. Melk, Peer Pedersen, and Robert A. Brannon, contributed $55.8 million to the capital of the Company in exchange for 11,718,000 shares (adjusted to reflect a 210-for-1 stock split in October 1995) of Common Stock ($4.76 per share). Approximately one-half of such amount was contributed in August 1995 and the balance in October 1995. As consideration for the commitment to provide a mortgage loan facility (the "DLJ Mortgage Facility"), the Company issued 750,540 shares of Common Stock, with a then estimated fair market value of approximately $3.6 million, to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), one of the Representatives of the Underwriters. In connection therewith, DLJ Capital Corporation, an affiliate of DLJ, also purchased 500,430 shares of Common Stock for a purchase price of $2.4 million. See "Financing." In the Concurrent Offering, the Company sold to its then existing shareholders (other than DLJ and its affiliates), on a pro-rata basis, for $25 million, 2,067,825 shares of Common Stock for $12.09 per share, such price being the IPO price per share less underwriting discounts and commissions. These shareholders included the Company's directors and certain of its officers. The amounts paid by the Company's directors and certain of its officers in the Concurrent Offering were as follows: Mr. H. Wayne Huizenga, $7,253,456; Mr. George D. Johnson, Jr., $3,048,747; Mr. Stewart H. Johnson, $954,396; Mr. Robert A. Brannon, $381,765; Mr. Donald F. Flynn, $381,765; Mr. John J. Melk, $1,145,285; and Mr. Peer Pedersen, $1,145,285. In addition, the amounts paid by trusts for the benefit of various members of the immediate family of George D. Johnson, Jr. was an aggregate of $5,726,429 and the amounts paid by trusts for the benefit of various members of the immediate family of Stewart H. Johnson was an aggregate of $381,754. The Company has airplane leasing arrangements with companies owned by George D. Johnson, Jr., Stewart Johnson, and certain of their family members. In connection therewith, the Company incurred aggregate charges of approximately $412,000 during the year ended December 31, 1995. The Company believes that the terms of its use of the planes are at least as favorable to the Company as those it could have obtained from an unaffiliated party. In April 1995, the Company acquired a parcel of real estate in Spartanburg, South Carolina for approximately $562,000 from a limited partnership controlled by George D. Johnson, Jr. and Stewart H. Johnson. The Company believes that the terms of the acquisition were as favorable to it as it could have obtained from an unaffiliated party. In 1996 the Company entered into (i) a 10-year lease for a suite at Joe Robbie Stadium for a base rental of $115,000 per year, subject to certain additional charges and periodic escalation, and (ii) a 3-year lease for a suite at Homestead Motor Sports Complex for a base rental of $53,250 per year, subject to certain additional charges. Mr. Huizenga owns Joe Robbie Stadium and has an approximately 50% ownership interest in Homestead Motor Sports Complex. The Company believes that the terms of these leases are comparable to those charged to other persons. 34 PRINCIPAL SHAREHOLDERS The following table sets forth, as of March 31, 1996, certain information regarding the beneficial ownership of the Company's Common Stock by each person known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock, by each of the Company's directors and Named Executive Officers, and by all directors and executive officers of the Company as a group. As of such date, there were approximately 150 record holders and approximately 3,500 beneficial holders of Common Stock.
SHARES BENEFICIALLY OWNED ------------------ NAME(1) NUMBER PERCENT George D. Johnson, Jr.(2).............................. 5,552,881 24.3% H. Wayne Huizenga...................................... 4,589,955 20.1 Stewart H. Johnson(3).................................. 724,729 3.2 Donaldson, Lufkin & Jenrette Securities Corporation(4)............................ 1,219,457 5.3 277 Park Avenue New York, New York 10172 Robert A. Brannon...................................... 241,577 1.1 Michael R. Beck........................................ 18,000 * Corry W. Oakes......................................... 16,425 * Harold E. Wright....................................... 2,904 * Donald F. Flynn(5)..................................... 241,577 1.1 John J. Melk(6)........................................ 744,730 3.3 Peer Pedersen.......................................... 724,730 3.2 All directors and executive officers as a group (15 persons)(2)(3)(5)(6).............................. 12,868,008 56.3%
- --------------------- * Represents less than 1% of the outstanding Common Stock. (1) Unless otherwise indicated, the address of such person is c/o Extended Stay America, Inc., 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394. (2) Includes 3,623,650 shares of Common Stock held in various trusts for the benefit of members of Mr. Johnson's immediate family, of which Mr. Johnson's brother, Stewart H. Johnson, is a trustee and does not include 120,788 shares held in various trusts for the benefit of members of Stewart H. Johnson's immediate family and with respect to which Mr. Johnson is trustee, all of which shares Mr. Johnson may be deemed to beneficially own. (3) Includes 120,788 shares Common Stock held in various trusts for the benefit of members of Stewart H. Johnson's immediate family, of which George D. Johnson, Jr. is trustee, but does not include 3,623,650 shares of Common Stock held in various trusts for the benefit of members of George D. Johnson, Jr.'s immediate family, of which Stewart H. Johnson is a trustee, and 120,788 shares of Common Stock held in a trust of which Stewart H. Johnson is a trustee, all of which shares Stewart H. Johnson may be deemed to beneficially own. (4) Includes 199,790 shares of Common Stock owned by DLJ Capital Corporation and 269,127 shares of Common Stock owned by DLJ First ESC L.L.C., each of which is an affiliate of DLJ. (5) Represents 241,577 shares of Common Stock held in a trust, of which Mr. Flynn is a trustee and beneficiary. (6) Includes 724,730 shares of Common Stock beneficially owned by M Group Investment IV, L.P., of which Mr. Melk is a general partner. 35 FINANCING EQUITY The Company was initially capitalized with approximately $60 million of equity from a group of private investors, a number of whom constitute part of the Company's management team. On December 19, 1995, the Company completed the Prior Offerings from which it received aggregate net proceeds of approximately $85 million. The aggregate net proceeds of this offering are expected to be approximately $222.4 million, based upon an assumed public offering price of $33.25 per share, after deducting estimated underwriting discounts and commissions and other offering expenses. See "Certain Transactions," "Shares Eligible for Future Sale," and "Underwriting." MORTGAGE FACILITIES DLJ MORTGAGE FACILITY The Company has a mortgage facility with DLJ Mortgage Capital, Inc., an affiliate of DLJ, providing for up to $100 million in mortgage financing (which was reduced by the Company from $200 million in connection with the establishment of the CSFB Mortgage Facility described below), subject to certain conditions (the "DLJ Mortgage Facility"). Under the DLJ Mortgage Facility, each extended stay lodging facility financed thereby will, upon obtaining a certificate of occupancy, receive funding of 60% of the lesser of the total development cost or the approved budget thereof. In addition, the funding for each facility may be increased to not more than 75% of the lesser of its cost or its appraised value within the first 15 months of operation, with the amount of such additional funding depending upon the lodging facility meeting certain debt service coverage ratios. Interest on each loan will be payable monthly at a fixed rate equal to the rate of 10-year U.S. Treasury securities on the date of funding plus 4.0%. Principal amortization based on a 25-year term will begin not later than 15 months after the initial funding and will continue through various maturity dates from December 31, 2006 through December 31, 2008. Prepayments of loans may be made without penalty within five years of their respective maturity dates. Amounts borrowed under the DLJ Mortgage Facility will be secured by, among other things, a first mortgage encumbering each lodging facility and assignment of the revenues and profits from the respective facility. Funding under the DLJ Mortgage Facility is subject to, among other things, the funding by the Company of certain escrow accounts and prior approval by the lender of the construction and operating budgets. The DLJ Mortgage Facility requires the Company to maintain consolidated tangible net worth (as defined therein) of at least $40 million. In addition, the DLJ Mortgage Facility contains certain affirmative and negative covenants, including without limitation, limitations on any sale, mortgaging, granting of options or other transfer of any legal or beneficial interest in any property financed; making of dividends, share repurchases, or other restricted payments by the Company other than dividends by the Company not exceeding 50% of the excess of its net income for any period over its cumulative losses not previously applied in computing the limitation; financing new properties without first submitting such property for approval by the lender for financing under the DLJ Mortgage Facility; affiliated party transactions; making certain investments; and engaging in businesses other than the ownership, management, and operation of extended stay lodging facilities. All or any portion of the amounts outstanding under the DLJ Mortgage Facility may at any time become immediately due and payable, at the option of the lender, if an event of default occurs, including, among other things, (i) any payment of principal or interest or any payment of any fee or other amount due under the DLJ Mortgage Facility is not paid when the same becomes due and payable; (ii) the Company fails to perform any obligation or observe any agreement or covenant under the DLJ Mortgage Facility or related loan, collateral, or other documentation (collectively, the "Loan Documents") and such failure remains unremedied past the applicable grace period, if any; (iii) any material representation made or deemed to be made by the Company in the Loan Documents shall prove to have been incorrect in any material respect when made or deemed made; (iv) a default occurs and is continuing with respect to any indebtedness of the Company and (in the case of a default other than a payment default) such default permits the acceleration of indebtedness or any such indebtedness is declared due and payable prior to its stated maturity; (v) certain events of bankruptcy, insolvency or 36 reorganization occur with respect to the Company or any of its subsidiaries; (vi) any material provision of collateral documentation relating to a loan ceases to be valid and binding on the Company or fails to create a valid perfected and first priority lien on any of the collateral covered thereby; (vii) a material adverse change, or an event which is reasonably likely to have a material adverse change, occurs in the Company, in the ability of the parties to the Loan Documents to perform their respective obligations, or the legality, validity, or enforceability of the Loan Documents or the rights and remedies of the lender thereunder; or (viii) the current members of the Company's Board of Directors cease to constitute a majority of the Board. CSFB MORTGAGE FACILITY The Company also has a mortgage facility (the "CSFB Mortgage Facility") from CS First Boston Mortgage Capital Corporation (an affiliate of CS First Boston Corporation, one of the Representatives of the Underwriters) which provides up to $300 million in mortgage financing, subject to certain conditions and limitations, for completed facilities. Under the CSFB Mortgage Facility, each extended stay lodging facility financed thereby will, upon obtaining a certificate of occupancy, receive funding of 65% of the lesser of the total development cost, the approved budget, or the appraised value, subject to limitations based on projected debt service coverage ratios. The Company may choose either a fixed rate loan or a floating rate loan at the time the loan is to be funded, subject, however, to a requirement that a minimum of $50 million of loans must be made under the chosen rate program before the other rate program can be selected. Interest on each loan will be payable monthly at either (i) a fixed rate equal to the rate of 7-year U.S. Treasury securities on the date of funding plus from 3.55% to 3.85%, depending upon the aggregate amount of fixed rate loans, or (ii) a floating rate equal to the 30-day LIBOR rate plus 3%. Principal amortization will generally be based on a 15-year term for fixed rate loans and based on a 20-year term with an assumed 9.9% interest rate for floating rate loans. Fixed rate loans will mature on the earlier of 7 years and 3 months from the date that the first such loan is funded or May 2004. All floating rate loans will mature three years from the execution of a credit facility agreement. Prepayments of fixed rate loans may be made after five years, subject to certain penalties. Prepayments of floating rate loans may be made after one year without penalty. Amounts borrowed under the CSFB Mortgage Facility will be secured by, among other things, a first mortgage encumbering each lodging facility so financed and an assignment of the revenues and profits from such facilities. Funding under the CSFB Mortgage Facility is subject to, among other things, the completion of an equity or quasi-equity offering of at least $100 million (such as this offering), market capitalization of the Company of at least $300 million, maintenance of certain debt service coverage ratios, maintenance of the ratio of debt to total book capitalization of not more than 70%, maintenance of unrestricted and unpledged cash of not less than $20 million, the funding by the Company of certain escrow accounts, and prior approval by the lender of the construction and operating budgets. The CSFB Mortgage Facility also contains certain affirmative and negative covenants similar to those contained in the DLJ Mortgage Facility. The Company may, however, finance new properties through other lenders without first submitting such property for approval by the lender for financing under the CSFB Mortgage Facility. However, in the event that the Company finances more than $175 million of secured facility debt (other than construction financing and certain other financings) with another lender prior to May 1999, without having financed at least $100 million of such debt under the CSFB Mortgage Facility, the lender may terminate its obligation to fund additional facilities under the CSFB Mortgage Facility. All or any portion of the amounts outstanding under the CSFB Mortgage Facility will become due and payable, at the option of the lender, if an event of default occurs, including, among other things, (i) a declared default or acceleration under other indebtedness of the Company; (ii) certain events of bankruptcy with respect to the Company or any of its subsidiaries; (iii) the Company's tangible net worth ceases to exceed $50 million; (iv) a dividend payout by the Company in excess of 50% of the excess of its net income for any period over its 37 cumulative losses not previously applied in computing the limitation; (v) the current members of the Company's Board of Directors cease to constitute a majority of the Board; or (vi) Mr. Huizenga or Mr. George D. Johnson, Jr. cease to be Board members to the extent that they are living and have not been declared judicially incompetent. 38 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 200 million shares of Common Stock, $.01 par value per share, and 10 million shares of preferred stock, $.01 par value per share (the "Preferred Stock"). As of March 31, 1996, 22,853,092 shares of Common Stock were issued and outstanding and none of the Preferred Stock was outstanding. The following description is a summary and is qualified in its entirety by reference to the provisions of the Company's Restated Certificate of Incorporation, as amended (the "Certificate"), and its Bylaws (the "Bylaws"), copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Holders of a majority of the shares of Common Stock represented at a meeting can elect all of the directors. Holders of Common Stock are not permitted to act by written consent. Shareholders must follow an advance notification procedure for certain shareholder nominations of candidates for the Board of Directors and for certain other business to be conducted at any meeting of shareholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution, or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and have no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon consummation of this offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by the shareholders, to issue up to 10 million shares of Preferred Stock in one or more series and to fix the voting powers, designations, preferences, and relative, participating, optional, or other special rights, and qualifications, limitations, and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, and the number of shares constituting any series. Because the Board of Directors has the power to establish the preferences and rights of the shares of any such series of Preferred Stock, it may afford holders of any Preferred Stock preferences, powers, and rights (including voting rights), senior to the rights of holders of Common Stock, which could adversely affect the rights of holders of Common Stock and could have the effect of delaying, deferring, or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. DELAWARE GENERAL CORPORATION LAW The Company was incorporated in 1995 as a Delaware corporation and will be subject to Section 203 of the Delaware General Corporation Law ("Section 203"). Pursuant to Section 203, with certain exceptions, a Delaware corporation may not engage in any of a broad range of business combinations, such as mergers, consolidations, and sales of assets, with an "interested shareholder" for a period of three years from the date that such person became an interested shareholder unless (i) the transaction that results in the person's becoming an interested shareholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested shareholder, (ii) upon consummation of the transaction which results in the shareholder becoming an interested shareholder, the interested shareholder owns 85% or more of the voting stock of the corporation outstanding at the time the transaction commenced (other than certain excluded shares), or (iii) on or after the date the person becomes an interested shareholder, the business combination is approved by the corporation's board of directors and by holders of at least two-thirds of the corporation's outstanding voting stock, excluding shares owned by the interested shareholder, at a meeting of shareholders. Under Section 39 203, an "interested shareholder" is defined as any person, other than the corporation and any direct or indirect majority-owned subsidiaries of the corporation, that is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested shareholder. The Company has approved Messrs. George D. Johnson, Jr., Stewart H. Johnson, and H. Wayne Huizenga as "interested shareholders." Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested shareholder" to effect various business combinations with a corporation for a three-year period. The provisions of Section 203 may encourage persons interested in acquiring the Company to negotiate in advance with the Company's Board of Directors because the shareholder approval requirement would be avoided if a majority of the Company's directors then in office approve either the business combination or the transaction which results in the person becoming an interested shareholder. Such provisions also may have the effect of preventing changes in management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions that shareholders may otherwise deem to be in their best interests. TRANSFER AGENT The transfer agent and registrar for the Common Stock is Harris Trust and Savings Bank (Chicago). 40 SHARES ELIGIBLE FOR FUTURE SALE As of March 31, 1996, the Company had 22,853,092 shares of Common Stock outstanding, 7,850,062 of which were freely tradable (other than by an "affiliate" of the Company as such term is defined in the Securities Act) without restriction or registration under the Securities Act. The remaining 15,003,030 outstanding shares of Common Stock originally subscribed for and purchased by the initial shareholders of the Company (the "Initial Shareholders") were issued and sold by the Company in private transactions ("Restricted Shares") and may not be sold unless registered under the Securities Act (which registration is described below) or sold in accordance with an exemption therefrom, such as Rule 144 or Rule 144A thereunder. In connection with the IPO, the Initial Shareholders agreed that they would not sell any shares of Common Stock prior to June 11, 1996, without the consent of DLJ, subject to certain exceptions, including pursuant to a foreclosure by a lender on a loan for which shares of Common Stock have been pledged as collateral. In addition, the holders of approximately 13.3 million shares of Common Stock (including all shares beneficially owned by the Company's directors and executive officers) have agreed that they will not sell any shares of Common Stock for a period of 90 days from the date of this Prospectus without the consent of DLJ, subject to similar exceptions. In general, under Rule 144 as currently in effect, a holder of Restricted Shares who beneficially owns shares that were not acquired from the Company or an affiliate of the Company within the previous two years would be entitled to sell in the public market within any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. The Initial Shareholders will be able to sell shares of Common Stock acquired pursuant to the Subscription Agreements in accordance with such provision on and after August 18, 1997. Sales pursuant to Rule 144 are also subject to certain other requirements relating to manner of sale, notice, and the availability of current public information about the Company. A person who is deemed not to have been an affiliate of the Company at any time during the three months immediately preceding a sale and who beneficially owns shares that were not acquired from the Company or an affiliate of the Company within the past three years is entitled to sell such shares under Rule 144(k) without regard to the foregoing limitations. Rule 144A under the Securities Act permits the immediate sale by the holders of Restricted Shares issued prior to completion of this offering of all or a portion of their shares to certain "qualified institutional buyers" as defined in Rule 144A. The Company has registered under the Securities Act all of the 15,003,030 shares of Common Stock owned by the Initial Shareholders so that such Initial Shareholders may make resales in the public market of their Common Stock upon expiration of their lock-up agreements described above. The Company also has registered under the Securities Act 4,000,000 shares of Common Stock which may be issued from time-to-time in connection with potential future acquisitions of various businesses and resales of such shares by the recipients thereof, and the Company has issued an aggregate of 722,237 of such shares of Common Stock and expects to issue approximately 91,000 shares of Common Stock in connection with the proposed acquisition of the KHEC Facility. See "Recent Developments." The Company also intends to register under the Securities Act all shares reserved for issuance under the 1995 Plan, the 1996 Plan, and the Directors' Plan. All shares purchased in the future under such plans will be available for resale in the public market without restriction, except that affiliates must comply with the provisions of Rule 144 other than the holding period requirement. Shares registered pursuant to any of these registration statements could be sold in the public market. 41 UNDERWRITING Subject to the terms and certain conditions contained in the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation, Allen & Company Incorporated, CS First Boston Corporation, and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company an aggregate of 7,000,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation................ Allen & Company Incorporated....................................... CS First Boston Corporation........................................ Smith Barney Inc................................................... --------- Total.......................................................... 7,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered in this offering are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all the shares of Common Stock offered in this offering (other than the shares of the Common Stock covered by the over-allotment option described below) if any are taken. The Underwriting Agreement contains covenants of indemnity between the Underwriters and the Company against certain liabilities, including liabilities under the Securities Act. The Underwriters have advised the Company that they propose to offer the shares of Common Stock in this offering to the public at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $ per share to any other Underwriter and certain other dealers. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 1,050,000 additional shares of Common Stock, at the offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions, solely to cover over-allotments. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite such Underwriter's name in the preceding table bears to the total number of shares offered in this offering. DLJ, one of the Representatives, and certain of its affiliates own 1,219,457 shares of Common Stock which represented 5.3% of the Company's Common Stock as of March 31, 1996. For a description of the mortgage facility provided to the Company by an affiliate of DLJ, see "Financing." An affiliate of CS First Boston Corporation, one of the Representatives, has agreed to provide to the Company a mortgage facility of up to $300 million, subject to certain conditions. For a description of the CSFB Mortgage Facility, see "Financing." 42 Pursuant to regulations promulgated by the Securities and Exchange Commission (the "Commission"), market makers in the Common Stock who are Underwriters or prospective underwriters ("passive market makers") may, subject to certain limitations, make bids for or purchases of shares of Common Stock until the earlier of the time of commencement (the "Commencement Date") of offers or sales of the Common Stock contemplated by this Prospectus or the time at which a stabilizing bid for such shares is made. In general, on and after the date two days prior to the Commencement Date (1) such market maker's net daily purchases of the Common Stock may not exceed 30% of the average daily trading volume in such stock for the two full consecutive calendar months immediately preceding the filing date of the registration statement of which this Prospectus forms a part, (2) such market maker may not effect transactions in, or display bids for, the Common Stock at a price that exceeds the highest bid for the Common Stock by persons who are not passive market makers and (3) bids made by passive market makers must be identified as such. Subject to certain exceptions, the Company and certain shareholders (including all of its directors and executive officers) have agreed not to offer, sell, contract to sell, or otherwise dispose of any shares of Common Stock or any securities convertible or exchangeable into any shares of Common Stock prior to the expiration of 90 days from the date of this Prospectus, without the prior written consent of DLJ. See "Shares Eligible for Future Sale." At the request of the Company, up to 250,000 shares of Common Stock offered in this offering have been reserved for sale to certain individuals, including employees of the Company and other entities with whom directors of the Company are affiliated, and members of their families. The price of such shares to such persons will be the public offering price set forth on the cover of this Prospectus. The number of shares available to the general public will be reduced to the extent those persons purchase reserved shares. Any shares not so purchased will be offered in this offering at the public offering price set forth on the cover of this Prospectus. LEGAL MATTERS Certain legal matters in connection with the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Bell, Boyd & Lloyd, Chicago, Illinois, and for the Underwriters by Sidley & Austin, Chicago, Illinois. EXPERTS The consolidated balance sheet of Extended Stay America, Inc. and subsidiaries as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the period from January 9, 1995 (inception) through December 31, 1995, the statements of operations, partners' deficit, and cash flows of Welcome Inn America 89-1, L.P. for each of the two years in the period ended December 31, 1994 and the period from January 1, 1995 through August 18, 1995, the balance sheets of Apartment/Inn, L.P. as of December 31, 1994 and 1995 and the related statements of operations and partners' deficit and cash flows for each of the two years in the period ended December 31, 1995, the combined balance sheets of Hometown Inn I, LTD and Hometown Inn II, LTD as of December 31, 1994 and 1995 and the related combined statements of operations and partners' capital and cash flows for each of the three years in the period ended December 31, 1995, and the balance sheet of Kipling Hospitality Enterprise Corporation as of December 31, 1995 and the related statements of operations and retained earnings and cash flows for the year then ended, included in this Prospectus, have been included herein in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 43 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Commission. Reports, registration statements, proxy statements, and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the Common Stock offered hereby. As used herein, the term "Registration Statement" means the initial Registration Statement and any and all amendments thereto. This Prospectus omits certain information contained in said Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits thereto. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to such contract or other document filed with the Commission as an exhibit to the Registration Statement, or otherwise, each such statement being qualified by and subject to such reference in all respects. The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent public accountants. 44 INDEX TO FINANCIAL STATEMENTS
PAGE PRO FORMA FINANCIAL STATEMENTS OF EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES Pro Forma Consolidated Statement of Operations for the period from January 9, 1995 (inception) through December 31, 1995 (unaudited) and the three months ended March 31, 1996 (unaudited)....................... F-2 Pro Forma Consolidated Balance Sheet as of March 31, 1996 (unaudited).... F-4 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES Report of Independent Accountants........................................ F-5 Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)............................................................. F-6 Consolidated Statements of Operations for the period from January 9, 1995 (inception) through December 31, 1995, for the period from January 9, 1995 (inception) through March 31, 1995 (unaudited) and for the three months ended March 31, 1996 (unaudited) ................................ F-7 Consolidated Statements of Shareholders' Equity for the period from January 9, 1995 (inception) through December 31, 1995 and for the three months ended March 31, 1996 (unaudited) ................................ F-8 Consolidated Statements of Cash Flows for the period from January 9, 1995 (inception) through December 31, 1995, for the period from January 9, 1995 (inception) through March 31, 1995 (unaudited) and for the three months ended March 31, 1996 (unaudited)................................. F-9 Notes to Consolidated Financial Statements............................... F-10 WELCOME INN AMERICA 89-1, L.P. Report of Independent Accountants........................................ F-18 Statements of Operations for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995......... F-19 Statements of Partners' Deficit for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995.... F-20 Statements of Cash Flows for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through August 18, 1995......... F-21 Notes to Financial Statements............................................ F-22 APARTMENT/INN, L.P. Report of Independent Accountants........................................ F-23 Balance Sheets as of December 31, 1994 and 1995.......................... F-24 Statements of Operations and Partners' Deficit for the two years ended December 31, 1994 and 1995.............................................. F-25 Statements of Cash Flows for the two years ended December 31, 1994 and 1995.................................................................... F-26 Notes to Financial Statements............................................ F-27 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD Report of Independent Accountants........................................ F-29 Combined Balance Sheets as of December 31, 1994 and 1995................. F-30 Combined Statement of Operations and Partners' Capital for the three years ended December 31, 1993, 1994, and 1995........................... F-31 Combined Statement of Cash Flows for the three years ended December 31, 1993, 1994, and 1995.................................................... F-32 Notes to Combined Financial Statements................................... F-33 KIPLING HOSPITALITY ENTERPRISE CORPORATION Report of Independent Accountants........................................ F-35 Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).... F-36 Statements of Operations and Retained Earnings for the year ended December 31, 1995 and the three months ended March 31, 1995 and 1996 (unaudited)............................................................. F-37 Statements of Cash Flows for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited).................. F-38 Notes to Financial Statements............................................ F-39
F-1 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES These unaudited pro forma consolidated statements of operations are presented as if the acquisitions of the Acquired Facilities and the proposed acquisition of the KHEC Facility and the related issuances of shares of common stock had occurred at the beginning of the relevant period. For the year ended December 31, 1995, the statement also reflects the acquisition of the Marietta Facility and estimated incremental expenses to operate as a publicly held company as if it were publicly held on the date of inception. Such pro forma information is based in part upon the consolidated statements of operations of Extended Stay America, Inc. and subsidiaries and the statements of operations of Welcome, Apartment/Inn, Hometown Inn, and KHEC. They should be read in conjunction with the financial statements listed in the index on page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The acquisition of the lodging facility from AATI has not been included in these unaudited statements of operations because the purchase price and the unaudited results of operations for the periods, when measured in relation to the Company, did not meet certain materiality standards and can be excluded as permitted by the rules and regulations of the Securities and Exchange Commission. These unaudited pro forma consolidated statements of operations are not necessarily indicative of what the actual results of operations of the Company would have been assuming such transactions had been completed as of the beginning of the period, nor do they purport to represent the results of operations for any future periods. Results of operations and the related earnings or loss per share for future periods will be affected by a number of factors, including but not limited to, the number of facilities opened and the operating results therefrom, interest costs incurred on indebtedness (including the amortization of the fees paid in cash and common stock to DLJ), corporate operating and property management expenses, site selection costs and the number of future shares issued. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 9, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 (UNAUDITED)
PRO FORMA COMPLETED COMPLETED PROPOSED ACTUAL ACQUISITIONS ADJUSTMENTS ACQUISITIONS ACQUISITION ADJUSTMENTS PRO FORMA Revenue: Room revenue........... $ 817,133 $4,726,203 $ (108,616)(1) $5,434,720 $1,255,118 $(27,509)(1) $6,662,329 Management fees........ 17,775 (17,775)(2) Other revenue.......... 42,977 215,409 (5,035)(1) 253,351 69,501 (1,523)(1) 321,329 ----------- ---------- ---------- ---------- ---------- -------- ---------- Total revenue........ 877,885 4,941,612 (131,426) 5,688,071 1,324,619 (29,032) 6,983,658 ----------- ---------- ---------- ---------- ---------- -------- ---------- Costs and expenses: Property operating expenses.............. 332,523 2,066,850 (49,037)(1) 2,332,561 757,768 (16,609)(1) 3,073,720 (17,775)(2) Corporate operating and property management expenses... 2,042,039 302,452 800,000 (3) 3,144,491 111,362 (58,093)(2) 3,196,592 (1,168)(1) Site selection costs... 512,529 512,529 512,529 Depreciation and amortization.......... 146,726 514,085 220,703 (4) 881,514 89,018 70,982 (4) 1,041,514 ----------- ---------- ---------- ---------- ---------- -------- ---------- Total costs and expenses............ 3,033,817 2,883,387 953,891 6,871,095 958,148 (4,888) 7,824,355 ----------- ---------- ---------- ---------- ---------- -------- ---------- Income (loss) from operations.......... (2,155,932) 2,058,225 (1,085,317) (1,183,024) 366,471 (24,144) (840,697) Interest income (expense).............. 848,510 (836,797) 836,797 (5) 848,510 (119,011) 75,011 (5) 804,510 ----------- ---------- ---------- ---------- ---------- -------- ---------- Net income (loss)...... $(1,307,422) $1,221,428 $ (248,520) $ (334,514) $ 247,460 $ 50,867 $ (36,187) =========== ========== ========== ========== ========== ======== ========== Net loss per common share(6).............. $ (0.10) $ (0.02) $ (0.00) =========== ========== ========== Weighted average number of common and equivalent shares outstanding during the period(6)......... 12,652,110 13,589,464 13,808,783 =========== ========== ==========
F-2 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
PRO FORMA COMPLETED COMPLETED PROPOSED ACTUAL ACQUISITIONS ADJUSTMENTS ACQUISITIONS ACQUISITION ADJUSTMENTS PRO FORMA Revenue: Room revenue........... $1,137,841 $458,068 $ $1,595,909 $231,426 $ $ 1,827,335 Other revenue.......... 32,988 15,966 48,954 13,297 62,251 ---------- -------- -------- ---------- -------- ------- ----------- Total revenue........ 1,170,829 474,034 1,644,863 244,723 1,889,586 ---------- -------- -------- ---------- -------- ------- ----------- Costs and expenses: Property operating expenses.............. 442,540 152,804 595,344 167,465 762,809 Corporate operating and property management expenses... 1,580,655 38,961 1,619,616 18,047 (11,260)(2) 1,626,403 Site selection costs... 823,733 823,733 823,733 Depreciation and amortization.......... 203,343 49,399 6,038 (4) 258,780 18,132 21,868 (4) 298,780 ---------- -------- -------- ---------- -------- ------- ----------- Total costs and expenses............ 3,050,271 241,164 6,038 3,297,473 203,644 10,608 3,511,725 ---------- -------- -------- ---------- -------- ------- ----------- Income (loss) from operations.......... (1,879,442) 232,870 (6,038) (1,652,610) 41,079 (10,608) (1,622,139) Interest income (expense).............. 1,450,132 1,450,132 (31,836) 6,836 (5) 1,425,132 ---------- -------- -------- ---------- -------- ------- ----------- Net income (loss)...... $ (429,310) $232,870 $ (6,038) $ (202,478) $ 9,243 $(3,772) $ (197,007) ========== ======== ======== ========== ======== ======= =========== Net loss per common share(6).............. $ (0.02) $ (0.01) $ (0.01) ========== ========== =========== Weighted average number of common shares outstanding during the period(6).. 22,467,393 22,853,092 22,944,092 ========== ========== ===========
- --------------------- (1) To eliminate the estimated revenues and expenses for the Acquired Facilities, the Marietta Facility and the KHEC Facility for the period January 1, 1995 through January 8, 1995 in order to present a period comparable to the historical period for the Company. (2) To eliminate in consolidation management fees charged to the Marietta Facility prior to being acquired by the Company and franchise fees incurred by KHEC. (3) Reflects estimated increases in: (i) salaries and benefits--$238,000; (ii) state capital-based taxes--$150,000; (iii) audit and tax fees--$75,000; (iv) legal expenses--$37,000; (v) directors' and officers' insurance-- $150,000; (vi) additional expenses--$150,000, as if the Company had been a public company on the date of inception. (4) To adjust depreciation and amortization expense to reflect the expense based on the purchase price paid and to be paid by the Company for the Acquired Facilities, the Marietta Facility, and the KHEC Facility for any period prior to acquisition. (5) To eliminate non-continuing interest expense paid by the Acquired Facilities, the Marietta Facility and the KHEC Facility prior to acquisition, net of interest income earned by the Company on the amount of cash used in the acquisitions. (6) See notes 2 and 5 to the Company's consolidated financial statements. F-3 EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 (UNAUDITED) This unaudited pro forma consolidated balance sheet is presented as if this offering had been completed and the proposed acquisition of the KHEC Facility had occurred on March 31, 1996. Such pro forma information is based upon the consolidated balance sheet of the Company and the balance sheet of KHEC as of March 31, 1996. It should be read in conjunction with the financial statements listed in the index on page F-1 of this Prospectus. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited pro forma consolidated balance sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of March 31, 1996, nor does it purport to represent the future financial position of the Company.
PROPOSED ACTUAL ACQUISITION ADJUSTMENTS PRO FORMA ASSETS Current assets: Cash and cash equivalents.......... $104,010,918 $ 40,136 $ (2,040,136)(1) $324,369,043 222,358,125 (2) Refundable deposits... 621,654 621,654 Supply inventories.... 291,266 40,338 (40,338)(1) 291,266 Prepaid expenses...... 366,142 366,142 Other current assets.. 56,768 26,569 (26,569)(1) 56,768 ------------ ---------- ------------ ------------ Total current assets............. 105,346,748 107,043 220,251,082 325,704,873 ------------ ---------- ------------ ------------ Property and equipment, net.................... 51,658,313 1,454,178 3,570,822 (1) 56,683,313 Site deposits and preacquisition costs... 3,913,811 3,913,811 Deferred loan costs..... 5,294,114 8,327 (8,327)(1) 5,294,114 Other assets............ 156,741 156,741 ------------ ---------- ------------ ------------ $166,369,727 $1,569,548 $223,813,577 $391,752,852 ============ ========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable...... $ 925,504 $ 15,730 $ (15,730)(1) $ 925,504 Accrued salaries and related expenses..... 67,855 15,537 (15,537)(1) 67,855 Due to related parties.............. 71,845 113,486 (113,486)(1) 71,845 Other accrued expenses............. 440,612 46,881 (46,881)(1) 440,612 Deferred revenue...... 330,856 9,499 (9,499)(1) 330,856 Current maturities of long-term debt....... 64,454 (64,454)(1) ------------ ---------- ------------ ------------ Total current liabilities........ 1,836,672 265,587 (265,587) 1,836,672 ------------ ---------- ------------ ------------ Long-term debt.......... 1,105,358 (1,105,358)(1) Shareholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued or outstanding.......... Common stock, $.01 par value, 200,000,000 shares authorized, 22,853,092 and 29,944,092 shares issued and outstanding for Actual and Pro Forma, respectively......... 228,531 174,000 (173,090)(1) 299,441 70,000 (2) Additional paid in capital.............. 166,041,256 30,270 2,993,820 (1) 391,353,471 222,288,125 (2) Due from affiliated companies and prepaid services............. (521,395) 521,395 (1) Accumulated (deficit)/retained earnings............. (1,736,732) 515,728 (515,728)(1) (1,736,732) ------------ ---------- ------------ ------------ Total shareholders' equity............. 164,533,055 198,603 225,184,522 389,916,180 ------------ ---------- ------------ ------------ $166,369,727 $1,569,548 $223,813,577 $391,752,852 ============ ========== ============ ============
- --------------------- (1) To reflect the purchase adjustments relating to the proposed acquisition of the KHEC Facility assuming the acquisition is completed through the issuance of approximately 91,000 shares of Common Stock and to reflect the use of $2,000,000 of the Company's cash representing the estimated costs to remodel and to convert the property to an extended stay lodging facility. (2) To reflect the estimated net proceeds of this offering. F-4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying consolidated balance sheet of Extended Stay America, Inc. and subsidiaries (the "Company") as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the period from January 9, 1995 (inception) through December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Extended Stay America, Inc. and subsidiaries as of December 31, 1995 and the consolidated results of their operations and their cash flows for the period from January 9, 1995 (inception) through December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina January 26, 1996 F-5 EXTENDED STAY AMERICA, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1995 1996 ASSETS ------------ ------------ (UNAUDITED) Current assets: Cash and cash equivalents (including securities purchased under agreements to resell of $122,904,142 at December 31, 1995).............. $123,357,510 $104,010,918 Refundable deposits.............................. 344,064 621,654 Supply inventories............................... 92,817 291,266 Prepaid expenses................................. 318,541 366,142 Other current assets............................. 20,758 56,768 ------------ ------------ Total current assets........................... 124,133,690 105,346,748 ------------ ------------ Property and equipment, net........................ 18,205,537 51,658,313 Site deposits and preacquisition costs............. 1,931,215 3,913,811 Deferred loan costs................................ 5,293,119 5,294,114 Other assets....................................... 55,088 156,741 ------------ ------------ $149,618,649 $166,369,727 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................. $ 670,708 $ 925,504 Accrued salaries and related expenses............ 271,230 67,855 Due to related parties........................... 133,149 71,845 Other accrued expenses........................... 691,117 440,612 Deferred revenue................................. 330,856 Note payable..................................... 630,200 ------------ ------------ Total current liabilities...................... 2,396,404 1,836,672 ------------ ------------ Commitments Shareholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and outstanding..................................... Common stock, $.01 par value, 200,000,000 shares authorized, 22,130,855 and 22,853,092 shares issued and outstanding, respectively............ 221,309 228,531 Additional paid in capital....................... 148,308,358 166,041,256 Accumulated deficit.............................. (1,307,422) (1,736,732) ------------ ------------ Total shareholders' equity..................... 147,222,245 164,533,055 ------------ ------------ $149,618,649 $166,369,727 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-6 EXTENDED STAY AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE PERIOD FROM PERIOD FROM JANUARY 9, JANUARY 9, 1995 1995 FOR THE (INCEPTION) (INCEPTION) THREE MONTHS THROUGH THROUGH ENDED DECEMBER MARCH 31, MARCH 31, 31, 1995 1995 1996 ----------- ----------- ------------ (UNAUDITED) (UNAUDITED) Revenue: Room revenue........................... $ 817,133 $ $1,137,841 Management fees........................ 17,775 Other revenue.......................... 42,977 32,988 ----------- ---------- Total revenue........................ 877,885 1,170,829 ----------- ---------- Costs and expenses: Property operating expenses............ 332,523 442,540 Corporate operating and property management expenses (including $386,000 to related parties for the period ending December 31, 1995)...... 2,042,039 195,823 1,580,655 Site selection costs................... 512,529 52,778 823,733 Depreciation and amortization.......... 146,726 203,343 ----------- ---------- ---------- Total costs and expenses............. 3,033,817 248,601 3,050,271 ----------- ---------- ---------- Loss from operations................. (2,155,932) (248,601) (1,879,442) Interest income.......................... 848,510 1,450,132 ----------- ---------- ---------- Net loss............................. $(1,307,422) $ (248,601) $ (429,310) =========== ========== ========== Net loss per common share............ $ (0.10) $ (0.02) $ (0.02) =========== ========== ========== Weighted average number of common and equivalent shares outstanding during the period.......................... 12,652,110 11,489,017 22,467,393 =========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-7 EXTENDED STAY AMERICA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 9, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
ADDITIONAL COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT Issuance of common stock, net of issuance costs of $5,709,337... 22,130,855 $221,309 $148,308,358 Net loss........................ $(1,307,422) ---------- -------- ------------ ----------- Balances, December 31, 1995..... 22,130,855 221,309 148,308,358 (1,307,422) Issuance of common stock (unaudited).................... 722,237 7,222 17,845,642 Additional payouts of initial public offering costs (unaudited).................... (112,744) Net loss (unaudited)............ (429,310) ---------- -------- ------------ ----------- Balances, March 31, 1996 (unaudited).................... 22,853,092 $228,531 $166,041,256 $(1,736,732) ========== ======== ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. F-8 EXTENDED STAY AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM FOR THE JANUARY 9, 1995 PERIOD FROM (INCEPTION) JANUARY 9, 1995 THROUGH (INCEPTION) FOR THE THREE DECEMBER 31, THROUGH MARCH 31, MONTHS ENDED 1995 1995 MARCH 31, 1996 --------------- ----------------- -------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss..................... $ (1,307,422) $(248,601) $ (429,310) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization.............. 146,726 203,343 Write-off of site deposits and preacquisition costs.. 288,655 187,418 Change in: Refundable deposits....... (45,516) (3,371) (117,590) Supply inventories........ (92,817) (24,930) Prepaid expenses.......... (318,541) (5,345) (51,154) Other current assets...... (26,284) (36,010) Accounts payable.......... 65,504 205,361 Accrued expenses.......... 355,397 89,537 224,915 Due to related parties.... 133,149 54,857 (133,149) Deferred revenue.......... 330,856 ------------ --------- ------------ Net cash (used in) provided by operating activities.............. (801,149) (112,923) 359,750 ------------ --------- ------------ Cash flows from investing activities: Acquisition of extended stay properties.................. (2,342,346) (355,579) Additions to property and equipment................... (13,230,022) (281,301) (15,356,090) Payments for site deposits and preacquisition costs.... (2,579,667) (120,086) (2,738,578) Refunds of deposits on property sites.............. 191,666 240,000 Payments for other assets.... (65,436) (60,746) ------------ --------- ------------ Net cash used in investing activities.... (18,025,805) (401,387) (18,270,993) ------------ --------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock................ 143,882,880 Additions to deferred loan costs....................... (1,698,416) (21,698) Additions to prepaid registration costs.......... (52,035) Proceeds from related party loans....................... 6,135,462 521,031 Payments on related party loans....................... (6,135,462) Payment of note payable...... (630,200) Payments of initial public offering costs.............. (731,416) ------------ --------- ------------ Net cash provided by (used in) financing activities.............. 142,184,464 521,031 (1,435,349) ------------ --------- ------------ Increase (decrease) in cash.................... 123,357,510 6,721 (19,346,592) Cash and cash equivalents at beginning of period.......... 123,357,510 ------------ --------- ------------ Cash and cash equivalents at end of period................ $123,357,510 $ 6,721 $104,010,918 ============ ========= ============ Noncash investing and financing transactions: Issuance of common stock for acquisition of extended stay properties.................. $ 1,700,000 $ 17,852,864 ============ ============ Capitalized or deferred items included in accounts payable and accrued liabilities..... $ 1,212,154 $ 454,178 $ 654,639 ============ ========= ============ Note payable for purchase of property site............... $ 630,200 ============ Issuance of common stock for deferred loan costs......... $ 3,574,000 ============
The accompanying notes are an integral part of the consolidated financial statements. F-9 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Extended Stay America, Inc. (the "Company") was incorporated on January 9, 1995 as a Delaware corporation to develop, own, and operate extended stay lodging facilities designed to appeal to value-conscious guests. Operations of the Company's first extended stay facility commenced on August 1, 1995. The Company acquired a second extended stay facility on August 18, 1995 (Note 5). The Company's current operating subsidiaries are ESA Development, Inc. and ESA Properties, Inc., which acquire and develop properties, and ESA Management, Inc., which provides management services for all of the lodging facilities owned by the Company and its subsidiaries. The Company expects that each lodging facility will be owned by a separate single-purpose subsidiary formed for such purpose. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Pervasiveness of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk. The Company maintained deposits totaling $123,357,510 at December 31, 1995, with one bank. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. The Company invests excess funds in an overnight sweep account with NationsBank which invests in short-term, interest-bearing reverse repurchase agreements. On December 31, 1995, the Company had invested $122,904,142 in U.S. Government securities under agreements to resell. Due to the short-term nature of these investments, the Company did not take possession of the securities, which were instead held by the bank. The market value of the securities held pursuant to the agreements approximates the carrying amount. Supply Inventories. Supply inventories consist principally of linen, cleaning and other room supplies and are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Property and Equipment. Property and equipment is stated at cost. The Company capitalizes interest, salaries and related costs for site selection, design and construction supervision. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Buildings and improvements...................................... 40 years Furniture, fixtures and equipment............................... 3-7 years
For the period from January 9, 1995 through December 31, 1995 the Company incurred interest of $98,217 all of which was capitalized and included in the cost of buildings and improvements. F-10 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Preacquisition Costs. The Company incurs costs related to the acquisition of property sites. These costs are capitalized when it is probable that a site will be acquired. These costs are reclassified to property and equipment upon acquisition. In the event the acquisition is not consummated, the costs are charged to site selection costs. All other site selection costs are expensed as incurred. Deferred Loan Costs. The Company has incurred costs in obtaining financing. These costs have been deferred and will be amortized over the life of the respective loans using the effective yield method. Preopening Costs. The Company capitalizes compensation and other training- related costs incurred prior to the opening of a property. Included in other current assets at December 31, 1995 are costs of $7,736, net of accumulated amortization of $5,526, which are being amortized over a period of twelve months. Organization Costs. Organization costs at December 31, 1995 of $41,388 are included in other assets, net of accumulated amortization of $10,348, and are being amortized over sixty months using the straight-line method. Income Taxes. Income taxes for the Company are determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of a liability method in which deferred income taxes are provided for temporary differences between the financial reporting and income tax basis of assets and liabilities using the income tax rates, under existing legislation, expected to be in effect at the date such temporary differences are expected to reverse. Revenue Recognition. Room revenue and other income are recognized when earned. Management fees of $17,775 were recognized as earned and represent fees charged to Welcome Inn America 89-1, L.P. for the management of its extended stay property for the period May 1, 1995 through August 18, 1995 prior to the acquisition of such property by the Company (Note 5). Business Segment. The Company operates principally in one business segment which is to develop, own, and operate extended stay lodging facilities. Net Loss Per Common Share. The net loss per common share amount in the statement of operations for the three months ended March 31, 1996 has been computed in accordance with Accounting Principles Board Opinion (APB) No. 15. The net loss per common share amount for the year ended December 31, 1995 and for the three months ended March 31, 1995 has been computed in accordance with a Staff Accounting Bulletin (SAB) of the Securities and Exchange Commission. According to the SAB, equity securities, including stock, warrants, options and other potentially dilutive securities, issued within a twelve-month period prior to an initial public offering of common stock must be treated as common stock equivalents when computing earnings per share for all periods presented if the issue price of the common stock or the exercise price of the warrants, options or other potentially dilutive securities is substantially less than the proposed initial public offering price, including loss years where the impact of the incremental shares is anti-dilutive. As permitted by the SAB, the treasury stock method has been used in determining the weighted average number of shares of common stock outstanding during the periods presented. On October 19, 1995, the Board of Directors of the Company declared a 210- for-1 stock split effected in the form of a dividend. Accordingly, all shares and per share amounts have been adjusted retroactively to reflect this event. Unaudited Interim Financial Statements. The unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles applicable to interim financial statements and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three months ended March 31, 1995 and 1996 are not necessarily indicative of results to be expected for a full year. All data at March 31, 1995 and 1996 and for each of the three-month periods then ended are unaudited. F-11 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1995 Land and improvements, including land under current development................................................ $ 9,074,172 Buildings and improvements.................................. 5,350,107 Furniture, fixtures and equipment........................... 1,197,481 Construction in progress.................................... 2,714,629 ----------- 18,336,389 Less accumulated depreciation............................... 130,852 ----------- Total property and equipment............................ $18,205,537 ===========
The Company had commitments to construct additional extended stay properties totaling approximately $23,000,000 at December 31, 1995. NOTE 4--OPTIONS TO PURCHASE PROPERTY SITES As of December 31, 1995, the Company had options to purchase parcels of real estate at 32 locations in 14 states. The Company has paid $710,000 in connection with these options. If for any reason the Company does not acquire these parcels, the amounts paid in connection with the options are generally refundable. These amounts are included in site deposits and preacquisition costs. NOTE 5--ACQUISITION OF EXTENDED STAY PROPERTIES On August 18, 1995 the Company acquired an existing extended stay property from Welcome Inn America 89-1, L.P. for $4,042,346 which was paid for by the issuance of 357,000 shares of common stock valued at $1,700,000 and payment of $2,342,346 in cash. On January 26, 1996, the Company acquired an existing extended stay property from Apartment/Inn, L.P. for approximately $8,324,000 which was paid for by the issuance of 293,629 shares of common stock plus the payment of related expenses of approximately $106,000 in cash. On February 23, 1996, the Company acquired two existing extended stay properties from Hometown Inn I, LTD and Hometown Inn II, LTD for approximately $9,603,000 which was paid for by the issuance of 428,608 shares of common stock and $75,000 in cash plus the payment of related expenses of $175,000 in cash. (Unaudited) These acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of operations of the properties are included in the Consolidated Statement of Operations from the dates of acquisition. F-12 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following unaudited pro forma condensed statements of operations of the Company have been updated to include all acquisitions occurring through March 31, 1996, as discussed above, and the issuance of shares to acquire and to fund the cash portion of the purchase prices as if the acquisitions had occurred on January 9, 1995 (the date of inception of the Company). Accordingly, the unaudited pro forma statement of operations for the period January 9, 1995 through December 31, 1995 differs from the statement included in the Company's 1995 annual report to shareholders. This statement also reflects estimated incremental expenses to operate as a publicly held company as if the Company were publicly held on the date of inception. This pro forma condensed statement of operations is not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of January 9, 1995, nor does it purport to represent the results of operations for future periods.
PRO FORMA FOR THE PERIOD FROM PRO FORMA FOR THE PERIOD FROM PRO FORMA FOR THE JANUARY 9, 1995 JANUARY 9, 1995 THREE MONTHS (INCEPTION) THROUGH (INCEPTION) THROUGH ENDED DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1996 (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenue: Room revenue.......... $ 5,434,720 $1,128,223 $1,595,909 Other revenue......... 253,351 57,791 48,954 ----------- ---------- ---------- Total revenue....... 5,688,071 1,186,014 1,644,863 ----------- ---------- ---------- Costs and expenses: Property operating expenses............. 2,332,561 522,856 595,344 Corporate operating and property management expenses.. 3,144,491 473,658 1,619,616 Site selection costs.. 512,529 52,778 823,733 Depreciation and amortization......... 881,514 213,486 258,780 ----------- ---------- ---------- Total costs and expenses........... 6,871,095 1,262,778 3,297,473 ----------- ---------- ---------- Loss from operations......... (1,183,024) (76,763) (1,652,610) Interest income....... 848,510 1,450,132 ----------- ---------- ---------- Net loss............ $ (334,514) $ (76,763) $ (202,478) =========== ========== ========== Net loss per common share and equivalent......... $ (0.02) $ (0.01) $ (0.01) =========== ========== ========== Weighted average number of common and equivalent shares outstanding during the period.. 13,589,464 12,493,366 22,853,092 =========== ========== ==========
NOTE 6--NOTE PAYABLE In conjunction with the acquisition of a property site, the Company issued a note payable to the seller in the amount of $630,200. The note bore interest at a rate of three percent per year and was paid on January 2, 1996. The note was collateralized by a deed of trust on the property. NOTE 7--PREFERRED STOCK Shares of preferred stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Prior to issuance of shares of each series, the Board will designate for each such series, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, as are permitted by law. No shares of preferred stock are outstanding and the Company has no present plans to issue any shares of preferred stock. NOTE 8--STOCK OPTION PLANS The Company has adopted the 1995 Employee Stock Option Plan to attract and retain employees and consultants. Under the plan, options may be granted with respect to a total of not more than 1,677,060 shares of common stock, subject to antidilution and other adjustment provisions. No options may be granted under the plan after August 18, 2005. The options vest over a four-year period. During the period January 9, 1995 through December 31, 1995, the compensation committee granted, under the plan, 1,132,501 ten-year options to purchase common stock at exercise prices per share ranging from $4.76 F-13 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) to $13.00. The option price is equal to the fair market value of the stock on the date of grant, as determined by the Board of Directors. No options to purchase common stock under the plan are currently exercisable. During the period January 1, 1996 through March 31, 1996, the compensation committee granted under the 1995 plan 544,372 additional options to purchase common stock at exercise prices per share ranging from $21.00 to $30.25. (Unaudited) Pursuant to an agreement with an officer of ESA Development, Inc. ("ESA Development"), such officer was granted options in June 1995 to purchase a total of 1,437.5 shares of ESA Development common stock. In March 1996, the agreement and options were terminated. (Unaudited) The Company has adopted the 1995 Stock Option Plan for Non-Employee Directors. Under the plan, options may be granted with respect to a total of not more than 240,000 shares of common stock of the Company subject to the antidilution and other adjustment provisions. Each option shall be for a term of ten years and shall become exercisable six months after the date of its grant. Options to purchase an aggregate of 80,000 shares of the Company's common stock were granted to non-employee directors of the Company effective upon the Company's initial public offering of its common stock on December 13, 1995 at an exercise price per share of $13.00 (the initial public offering price). Pursuant to the plan, subsequent non-employee directors of the Company will be granted a one-time option to purchase 20,000 shares of the Company's common stock upon their initial election to the Board of Directors of the Company at a price equal to the fair market value of the stock on the date of grant. During the four-year period following the initial election of a non- employee director to the Board of Directors, an additional option covering 5,000 shares of common stock of the Company shall be granted to such non- employee director on each anniversary of such non-employee director's initial option grant, provided that not more than four such additional options shall be granted to any one non-employee director. No options may be granted under the plan after November 17, 2005. As of December 31, 1995, no options to purchase common stock under the plan were exercisable. Effective January 24, 1996, the Company has adopted (subject to shareholder approval) the 1996 Employee Stock Option Plan to attract and retain employees and consultants. Under the plan, options may be granted with respect to a total of not more than 2,500,000 shares of common stock, subject to antidilution and other adjustment provisions. No options may be granted under the plan after January 24, 2006. The options vest over a four-year period. During the period January 1, 1996 through March 31, 1996, the compensation committee granted under the 1996 plan 679,385 options to purchase common stock at exercise prices per share ranging from $21.00 to $25.88 under this plan. (Unaudited) NOTE 9--MORTGAGE FACILITY On October 31, 1995, the Company executed a mortgage facility (the "Mortgage Facility") for up to $200 million to be used to finance, on a long-term basis, newly constructed extended stay lodging facilities. The Mortgage Facility provides that after the first $100 million of borrowings, the availability of the next $60 million is contingent upon (1) the Company's operating facilities meeting certain debt coverage ratios, and (2) the successful completion of an initial public offering of the Company's common stock which was completed on December 19, 1995. An additional $40 million will become available at the option of the Company, subject to the Company having at least 10 facilities which meet certain debt coverage ratios. Draws under the Mortgage Facility will be made on an individual property basis in amounts ranging from 50% to 75% of construction costs, depending on the operating results of the individual property. The Mortgage Facility provides for the following fees to be paid by the Company: (1) a commitment fee, $1,600,000 of which was paid pursuant to the execution of the Mortgage Facility $400,000 of which will be paid if the availability under the Mortgage Facility is increased; (2) a drawdown fee of 1% of the funds loaned under the Mortgage Facility; and (3) a fee paid by the issuance of 750,540 shares of common stock of the Company at the time the Mortgage Facility was executed. These fees, which include the estimated fair market value of the common stock issued to the lender, will be F-14 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) amortized over the life of the Mortgage Facility using the effective yield method, thus increasing the effective interest rate above the stated interest rate discussed below. Additionally, the lender was provided the right, which it has exercised, to purchase 500,430 shares of common stock at a price of $4.76 per share upon the execution of the Mortgage Facility. The Mortgage Facility also provides for additional fees in the event of termination or nonusage of amounts in excess of $100 million of up to 2.0% of the portion of the facility so terminated or unused. All amounts borrowed under the Mortgage Facility will be fully guaranteed by the Company and will be collateralized by, among other things, first mortgages on the properties financed and assignment of leases, rents and security deposits related to each property. The amounts drawn under the Mortgage Facility will bear interest at a base rate equal to the ten-year U.S. Treasury securities rate plus 4.0% at the times the loans are made. Advances under the Mortgage Facility will be provided on an interest only basis for a pre-stabilization period and will be amortized based on a 25-year schedule thereafter with a final maturity on the December 31 following the tenth anniversary of the date that the loan begins to amortize. Prepayment of mortgage loans may be made subject to specified penalties provided certain conditions are met. Such prepayments may be made without penalty within five years of their respective final maturity dates. The Mortgage Facility provides that the Company must maintain a tangible net worth of not less than $40,000,000 and amounts due under the Mortgage Facility may at any time become immediately due and payable if the current members of the Board of Directors cease to constitute a majority of the board. The Company must place $22,500,000 in an escrow account in the name of the lender prior to obtaining the first loan and an additional $22,500,000 once the loan amount exceeds $33,750,000. Funds deposited in the escrow account will be classified as noncurrent and will be used to acquire and construct extended stay lodging facilities. The loan also requires the Company to fund certain other escrow accounts. The Company's dividends cannot exceed 50% of the excess of its net income for any period over its cumulative losses not previously applied in computing the limitation. The Company believes that there is no material difference in the carrying amount (including the terms and conditions outlined above) and estimated fair value of the Company's Mortgage Facility. NOTE 10--RELATED PARTY TRANSACTIONS During the period ended December 31, 1995, the Company borrowed under an informal revolving loan agreement from shareholders and their affiliates, which was paid on August 18, 1995. The maximum amount outstanding during the period was approximately $4,476,000. Interest payments of approximately $92,000 were made on the loans from shareholders and their affiliates, all of which were capitalized and included in the cost of buildings and improvements. The Company leases office space on a month-to-month basis from a company on whose board the Chief Executive Officer of the Company serves. The Company recognized rent expense of $18,000 through December 31, 1995 related to this lease. In addition, the Company leases office space on a month-to-month basis from a company owned by the Chairman of the Board of the Company. The Company recognized rent expense of $15,000 through December 31, 1995 related to this lease. During 1995, the Company incurred charges of approximately $412,000 from a company controlled by a shareholder for the use of airplanes, including $133,000 in amounts due to related parties at December 31, 1995. Approximately $70,000 of such charges were incurred in connection with the Company's initial public offering and approximately $342,000 is included in corporate operating and property management expenses. Approximately $126,000 in charges were incurred from a law firm, one of the partners of which is a director of the Company. Substantially all of such charges were incurred in connection with the Company's organization, initial public offering and obtaining the Mortgage Facility. The Company acquired a property site for approximately $562,000 in cash from a partnership in which certain shareholders are partners during 1995. F-15 EXTENDED STAY AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--INCOME TAXES The Company adopted SFAS 109 upon inception. Under the provisions of SFAS 109, there was no income tax expense on the net loss for the period ended December 31, 1995. Accordingly, there is no current nor deferred federal or state income tax expense in the initial period. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 are presented below: Deferred tax assets: Start up expenses capitalized for tax......................... $242,000 Net operating loss carryforward............................... 155,000 Other......................................................... 78,000 -------- Total gross deferred tax asset.............................. 475,000 Less valuation allowance........................................ (453,000) -------- Net deferred tax asset...................................... 22,000 -------- Deferred tax liability: Fixed assets, due to differences in depreciation.............. (22,000) -------- Net deferred tax liability.................................. $ -0- ========
A valuation allowance of $453,000 was established in the Company's initial period. The Company believes the reversal of existing taxable temporary differences will be sufficient to recognize the remaining deferred tax assets. At December 31, 1995, the Company has net operating loss carryforwards for federal income tax purposes of approximately $450,000, which are available to offset future federal taxable income, if any, through 2010. No income taxes were paid during the period January 9, 1995 through December 31, 1995. NOTE 12--INITIAL PUBLIC OFFERING On December 19, 1995, the Company closed an initial public offering of 5,060,000 shares of its common stock at a public offering price of $13.00 per share and a concurrent offering to existing shareholders of 2,067,825 shares of common stock at an offering price of $12.09 per share, being the initial public offering price per share less the underwriting discounts and commissions. The proceeds to the Company of such offerings were approximately $85,275,000, net of estimated offering expenses. NOTE 13--EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement requires the Company to identify properties for which it has committed to an exit plan or which may be otherwise impaired. The fixed assets for such properties must be written down to fair market value. The Company anticipates that the adoption of SFAS 121, required for fiscal years beginning after December 15, 1995, will not result in a reduction of net fixed assets or an increase in expenses in the fiscal year 1996 statement of operations. The FASB has also issued Statement No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. Under SFAS 123, companies are encouraged but not required to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value accounting rules. Companies that choose not to record compensation expense under the new rules will be required to disclose pro forma net income and earnings per share under the new method. The Company has not yet determined the financial statement impact of SFAS 123 F-16 and has elected not to recognize the impact of this pronouncement in its fiscal 1995 statement of operations, but will disclose as required in the fiscal 1996 financial statements on a comparative basis the effect of SFAS 123 on net income and earnings per share. NOTE 14--SUBSEQUENT EVENTS (UNAUDITED) The Company executed two purchase agreements for the acquisition of two lodging facilities, each of which is subject to certain terms and conditions. In addition, the Company received a commitment for a new mortgage facility which is expected to provide up to $300 million in mortgage financing, subject to certain conditions and limitations, for completed facilities. The Company expects that upon completion of this new mortgage facility, it will reduce the size of the existing mortgage facility to $100 million. The Company entered into (i) a 10-year lease for a suite at Joe Robbie Stadium for a base rental of $115,000 per year, subject to certain additional charges and periodic escalation, and (ii) a three-year lease for a suite at Homestead Motor Sports Complex for a base rental of $53,250 per year, subject to certain additional charges. The Chairman of the Company's Board of Directors owns Joe Robbie Stadium and has an approximately 50% interest in Homestead Motor Sports Complex. F-17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying statements of operations, partners' deficit and cash flows of Welcome Inn America 89-1, L.P. for each of the two years ended December 31, 1994 and the period from January 1, 1995 through August 18, 1995. 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 results of Welcome Inn America 89-1, L.P. operations and its cash flows for each of the two years in the period ended December 31, 1994 and the period from January 1, 1995 through August 18, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina October 16, 1995 F-18 WELCOME INN AMERICA 89-1, L.P. STATEMENTS OF OPERATIONS
FOR THE FOR THE YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1995 -------------------- THROUGH 1993 1994 AUGUST 18, 1995 Revenue: Room revenue............................. $927,593 $1,009,872 $670,954 Other, net............................... 71,778 69,415 41,883 -------- ---------- -------- Total revenue.......................... 999,371 1,079,287 712,837 -------- ---------- -------- Costs and expenses: Property operating expenses.............. 452,951 495,182 322,337 Property management fees to partners..... 104,051 66,564 44,880 Depreciation and amortization............ 138,987 141,362 95,546 -------- ---------- -------- Total costs and expenses............... 695,989 703,108 462,763 -------- ---------- -------- Income from operations................. 303,382 376,179 250,074 Interest expense: Bank..................................... 185,518 211,607 184,226 Partners................................. 196,788 149,032 87,926 -------- ---------- -------- Total interest expense................. 382,306 360,639 272,152 -------- ---------- -------- Net income (loss)...................... $(78,924) $ 15,540 $(22,078) ======== ========== ========
The accompanying notes are an integral part of the financial statements. F-19 WELCOME INN AMERICA 89-1, L.P. STATEMENTS OF PARTNERS' DEFICIT FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 AND THE PERIOD FROM JANUARY 1, 1995 THROUGH AUGUST 18, 1995 Balance, January 1, 1993............................................ $(611,817) Net loss............................................................ (78,924) --------- Balance, December 31, 1993.......................................... (690,741) Net income.......................................................... 15,540 --------- Balance, December 31, 1994.......................................... (675,201) Net loss............................................................ (22,078) --------- Balance, August 18, 1995............................................ $(697,279) =========
The accompanying notes are an integral part of the financial statements. F-20 WELCOME INN AMERICA 89-1, L.P. STATEMENTS OF CASH FLOWS
FOR THE FOR THE YEAR ENDED DECEMBER PERIOD FROM 31, JANUARY 1, 1995 ---------------------- THROUGH 1993 1994 AUGUST 18, 1995 Cash flows from operating activities: Net income (loss)..................... $ (78,924) $ 15,540 $(22,078) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation......................... 126,110 127,456 86,760 Amortization......................... 12,877 13,906 8,786 Change in: Accounts receivable................. 106 (7,115) 117 Other current assets................ (496) (2,851) 5,672 Accounts payable.................... 3,737 (3,801) 43,481 Accrued expenses.................... 8,361 (1,483) (17,350) Accrued interest.................... (68,493) (112,629) 79,628 Accrued salaries.................... (1,625) 496 (10,338) --------- ----------- -------- Net cash provided by operating activities............................ 1,653 29,519 174,678 --------- ----------- -------- Cash flows from investing activities: Expenditures for buildings and improvements......................... (30,547) (660) Purchases of furniture, fixtures and equipment............................ (5,052) (31,921) --------- ----------- -------- Net cash used in investing activities.. (35,599) (660) (31,921) --------- ----------- -------- Cash flows from financing activities: Proceeds from long-term debt.......... 2,500,000 Proceeds from notes payable to partners............................. 260,000 Principal payments on long-term debt.. (209,333) (1,874,667) (96,000) Principal payments on notes payable to partners............................. (693,781) Additions to deferred loan costs...... (18,000) --------- ----------- -------- Net cash provided by (used in) financing activities.................. 32,667 (68,448) (96,000) --------- ----------- -------- Net increase (decrease) in cash........ (1,279) (39,589) 46,757 Cash at beginning of periods........... 123,676 122,397 82,808 --------- ----------- -------- Cash at end of periods................. $ 122,397 $ 82,808 $129,565 ========= =========== ======== Supplemental cash flow disclosure, interest paid......................... $ 450,799 $ 473,268 $192,524 ========= =========== ========
The accompanying notes are an integral part of the financial statements. F-21 WELCOME INN AMERICA 89-1, L.P. NOTES TO FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Welcome Inn America 89-1, L.P. (the "Partnership") is a Georgia limited partnership that operates an extended stay facility (formerly known as the "Welcome Inn") in Marietta, Georgia. On August 18, 1995, the Partnership's extended stay facility was acquired by Extended Stay America, Inc. (the "Company"). In order to present comparable results of operations and cash flows of the Partnership, the accompanying financial statements represent the historical results of operations and cash flows of the Partnership through August 18, 1995, immediately prior to the acquisition by the Company. Accordingly, any gain or loss on the sale of assets to the Company has not been recognized in the accompanying financial statements. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Buildings and improvements....................................... 40 years Furniture, fixtures and equipment................................ 7 years
Deferred Loan Costs. The Partnership has incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loans using the effective yield method. Income Taxes. Any income taxes related to income earned by the Partnership are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. NOTE 3--LONG-TERM DEBT Interest expense related to long-term debt consisting of mortgages held by various banks and partners. Certain notes have variable rates of interest tied to various commonly used indices. The following is a summary of long-term debt on which interest expense was incurred:
1993 1994 Note payable to a bank paid in August 1995............ $2,416,000 Note payable to a bank paid in 1994................... $1,790,667 Note payable to a partner, bearing interest at twelve percent per year...................................... 1,716,191 1,022,410 ---------- ---------- $3,506,858 $3,438,410 ========== ==========
NOTE 4--RELATED PARTY TRANSACTIONS Management fees and interest charged by partners are as follows:
MANAGEMENT INTEREST FEES EXPENSE 1993.................................................... $104,051 $196,788 1994.................................................... 66,564 149,032 Period from January 1, 1995 to August 18, 1995.......... 44,880 87,926
Management fees in 1993 included a one time bonus payment to a partner of approximately $42,000. F-22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying balance sheets of Apartment/Inn, L.P. as of December 31, 1994 and 1995, and the related statements of operations and partners' deficit and cash flows for each of the two years in the period ended December 31, 1995. 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 Apartment/Inn, L.P. at December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina January 26, 1996 F-23 APARTMENT/INN, L.P. BALANCE SHEETS
DECEMBER 31, ---------------------- 1994 1995 ASSETS Current assets: Cash and cash equivalents............................. $ 379,272 $ 73,407 Accounts receivable: Trade, net of allowance for doubtful accounts of $10,933 in 1994 and $14,627 in 1995................ 19,268 25,448 Related parties..................................... 16,568 68,826 Refundable property taxes............................. 20,062 Other current assets.................................. 3,937 3,142 ---------- ---------- Total current assets.............................. 419,045 190,885 ---------- ---------- Property and equipment, net............................. 2,855,407 2,718,312 Other assets............................................ 13,845 9,502 ---------- ---------- $3,288,297 $2,918,699 ========== ========== LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Accounts payable...................................... $ 27,982 $ 18,292 Accrued salaries...................................... 4,023 5,216 Accrued interest...................................... 26,800 26,800 Other accrued expenses................................ 28,552 17,272 Current maturities of long-term debt.................. 224,773 163,475 ---------- ---------- Total current liabilities......................... 312,130 231,055 ---------- ---------- Long-term debt.......................................... 3,230,201 3,022,197 ---------- ---------- Total liabilities..................................... 3,542,331 3,253,252 ---------- ---------- Partners' deficit....................................... (254,034) (334,553) ---------- ---------- $3,288,297 $2,918,699 ========== ==========
The accompanying notes are an integral part of the financial statements. F-24 APARTMENT/INN, L.P. STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1994 1995 Revenue: Room revenue......................................... $1,696,763 $1,820,680 Other, net........................................... 77,735 76,909 ---------- ---------- Total revenue...................................... 1,774,498 1,897,589 ---------- ---------- Costs and expenses: Property operating expenses.......................... 745,434 755,176 Property management fees to partners................. 106,059 113,215 Depreciation and amortization........................ 202,568 173,936 ---------- ---------- Total costs and expenses........................... 1,054,061 1,042,327 ---------- ---------- Income from operations............................... 720,437 855,262 Interest expense....................................... 418,758 394,413 ---------- ---------- Net income........................................... 301,679 460,849 Partners' deficit, beginning of year................... (467,793) (254,034) Distributions........................................ (87,920) (541,368) ---------- ---------- Partners' deficit, end of year......................... $ (254,034) $ (334,553) ========== ==========
The accompanying notes are an integral part of the financial statements. F-25 APARTMENT/INN, L.P. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------ 1994 1995 Cash flows from operating activities: Net income................................................ $301,679 $460,849 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................. 163,775 169,593 Amortization............................................. 38,793 4,343 Change in: Accounts receivable..................................... (4,433) (58,438) Refundable property taxes............................... (20,062) Other current assets.................................... 10,755 795 Accounts payable........................................ 11,621 (9,690) Accrued expenses........................................ 11,109 (11,280) Accrued salaries........................................ 55 1,193 -------- -------- Net cash provided by operating activities.............. 533,354 537,303 -------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (29,333) (32,498) -------- -------- Net cash used in investing activities.................. (29,333) (32,498) -------- -------- Cash flows from financing activities: Principal payments on long-term debt...................... (130,778) (269,302) Payments of deferred loan costs........................... (5,234) Distributions to partners................................. (87,920) (541,368) -------- -------- Net cash used in financing activities.................. (223,932) (810,670) -------- -------- Net increase (decrease) in cash............................ 280,089 (305,865) -------- -------- Cash at beginning of periods............................... 99,183 379,272 -------- -------- Cash at end of periods..................................... $379,272 $ 73,407 ======== ======== Supplemental cash flow disclosure, interest paid........... $418,758 $394,413 ======== ========
The accompanying notes are an integral part of the financial statements. F-26 APARTMENT/INN, L.P. NOTES TO FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Apartment/Inn, L.P. (the "Partnership") is a Georgia limited partnership that operates an extended stay facility (known as the "Apartment Inn") in Norcross, Georgia. On January 26, 1996, the Partnership's extended stay facility was acquired by Extended Stay America, Inc. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Pervasiveness of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Buildings and improvements....................................... 40 years Furniture, fixtures and equipment................................ 7 years
Deferred Loan Costs. The Partnership has incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loans using the effective yield method. Deferred loan costs are included in other assets. Income Taxes. Any income taxes related to income earned by the Partnership are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. NOTE 3--PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1994 1995 Land............................................... $ 635,639 $ 635,639 Building and improvements.......................... 2,492,855 2,509,540 Furniture and fixtures............................. 671,287 687,100 ---------- ---------- 3,799,781 3,832,279 Less accumulated depreciation...................... 944,374 1,113,967 ---------- ---------- $2,855,407 $2,718,312 ========== ==========
F-27 APARTMENT/INN, L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following as of December 31: 1994 1995 Mortgage loan, principal and interest payable $44,529 monthly with a final balloon payment due June 1997, interest at 12%....................................... $3,322,879 $3,137,376 Mortgage loan, principal and interest payable $6,000 monthly through August 1996, interest at 18%.......... 111,462 45,145 Other.................................................. 20,633 3,151 ---------- ---------- 3,454,974 3,185,672 Less current maturities................................ (224,773) (163,475) ---------- ---------- Long term debt, net of current maturities.............. $3,230,201 $3,022,197 ========== ==========
The mortgage loans are collateralized by substantially all of the Partnership's property and equipment. Aggregate maturities of long term debt are as follows: 1996--$163,475; 1997--$3,022,197. The Partnership believes that there is no material difference in the carrying amount and estimated fair value of the Partnership's long-term debt, since all of it matures on or prior to June 1997. NOTE 5--RELATED PARTY TRANSACTIONS Management fees charged by and room revenue charged to a company controlled by a partner are as follows:
MANAGEMENT ROOM FEES REVENUE 1994................................................... $106,059 $ -- 1995................................................... 113,215 45,607
F-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying combined balance sheets of Hometown Inn I, LTD and Hometown Inn II, LTD (the "Partnerships") as of December 31, 1994 and 1995, and the related combined statements of operations and partners' capital and cash flows for each of the three years in the period ended December 31, 1995. 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 combined financial position of Hometown Inn I, LTD and Hometown Inn II, LTD at December 31, 1994 and 1995 and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina February 23, 1996 F-29 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD COMBINED BALANCE SHEETS
DECEMBER 31, --------------------- ASSETS 1994 1995 Current assets: Cash and cash equivalents............................... $ 177,079 $ 362,357 Accounts receivable, net of allowance for doubtful accounts of $3,813 in 1994 and $7,686 in 1995.......... 3,751 32,260 Supply inventories...................................... 26,660 26,660 Advance to affiliate.................................... 91,938 Other current assets.................................... 2,913 ---------- ---------- Total current assets.................................. 207,490 516,128 Property and equipment, net............................... 4,966,202 4,964,094 Other assets.............................................. 7,000 17,733 ---------- ---------- $5,180,692 $5,497,955 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable........................................ $ 15,801 $ 29,912 Accrued expenses........................................ 75,304 60,274 Deposits................................................ 19,660 161,970 Advances from affiliates................................ 159,120 204,120 Current maturities of long-term debt.................... 117,903 185,949 ---------- ---------- Total current liabilities............................. 387,788 642,225 Long-term debt............................................ 1,483,324 1,529,874 ---------- ---------- Total liabilities..................................... 1,871,112 2,172,099 Partners' capital......................................... 3,309,580 3,325,856 ---------- ---------- $5,180,692 $5,497,955 ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-30 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 Revenue: Room revenue............................. $1,802,707 $2,123,589 $2,234,569 Other, net............................... 84,679 99,719 96,617 ---------- ---------- ---------- Total revenue.......................... 1,887,386 2,223,308 2,331,186 ---------- ---------- ---------- Costs and expenses: Property operating expenses.............. 1,074,103 1,143,716 989,337 Property management fees to related party................................... 105,600 105,600 144,357 Depreciation and amortization............ 229,142 232,632 244,603 ---------- ---------- ---------- Total costs and expenses............... 1,408,845 1,481,948 1,378,297 ---------- ---------- ---------- Income from operations..................... 478,541 741,360 952,889 Interest expense........................... 131,848 137,532 170,232 ---------- ---------- ---------- Net income............................. 346,693 603,828 782,657 Partners' capital, beginning of year....... 3,538,770 3,455,553 3,309,580 Distributions............................ (429,910) (749,801) (766,381) ---------- ---------- ---------- Partners' capital, end of year............. $3,455,553 $3,309,580 $3,325,856 ========== ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-31 HOMETOWN INN I, LTD AND HOMETOWN INN II, LTD COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 Cash flows from operating activities: Net income.................................. $ 346,693 $ 603,828 $ 782,657 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................. 229,142 232,632 243,056 Amortization.............................. 1,547 Change in: Accounts receivable..................... 9,271 37,488 (28,509) Other assets............................ (1,377) 1,377 (2,913) Accounts payable........................ 944 (26,506) 14,111 Deposits................................ 3,927 8,833 142,310 Accrued expenses........................ (10,763) 11,346 (15,030) --------- --------- --------- Net cash provided by operating activities... 577,837 868,998 1,137,229 --------- --------- --------- Cash flows from investing activities, purchases of property and equipment.......... (34,818) (41,384) (240,948) --------- --------- --------- Cash flows from financing activities: Payments of deferred loan costs............. (12,280) Advances to affiliates...................... (91,938) Advances from affiliates.................... 73,650 85,470 45,000 Principle payments on long-term debt........ (97,549) (130,956) (130,404) Proceeds from issuance of long-term debt.... 245,000 Distributions to partners................... (429,910) (749,801) (766,381) --------- --------- --------- Net cash used in financing activities. (453,809) (795,287) (711,003) --------- --------- --------- Net increase in cash.......................... 89,210 32,327 185,278 Cash at beginning of periods.................. 55,542 144,752 177,079 --------- --------- --------- Cash at end of periods........................ $ 144,752 $ 177,079 $ 362,357 ========= ========= ========= Supplemental cash flow disclosure, interest paid......................................... $ 125,141 $ 136,809 $ 170,227 ========= ========= =========
The accompanying notes are an integral part of the combined financial statements. F-32 HOMETOWN INN I, LTD, HOMETOWN INN II, LTD NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation. The combined financial statements include the assets, liabilities, capital and results of operations of two limited partnerships, Hometown Inn I, LTD and Hometown Inn II, LTD. Where referred to herein, the "Partnerships" include the two entities listed above. All significant intercompany accounts and transactions have been eliminated. Description of Business. The Partnerships operate two extended stay facilities in Norcross, Georgia and Riverdale, Georgia. On February 23, 1996, the Partnerships' extended stay facilities were acquired by Extended Stay America, Inc. Pervasiveness of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk. The Partnerships maintained deposits totalling $362,357 at December 31, 1995 with one bank. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. Cash and cash equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Supply Inventory. Supply inventories consist primarily of linen, cleaning and other room supplies and are stated at the lower of cost or market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The estimated useful lives on the assets are as follows: Buildings and improvements...................................... 40 years Furniture, fixtures and equipment............................... 5-7 years
Deferred Loan Costs. The Partnerships have incurred costs in obtaining financing. These costs have been deferred and are being amortized over the life of the respective loan using the effective yield method. Deferred loan costs are included in other assets. Income Taxes. Any income taxes related to income earned by the Partnerships are paid by the partners. Revenue Recognition. Room revenue and other income are recognized when earned. Prepayments and deposits are recorded as unearned revenue. 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31:
1994 1995 Land............................................ $ 646,007 $ 646,007 Building and improvements....................... 4,893,161 4,893,161 Furniture and fixtures.......................... 785,355 1,006,213 ----------- ----------- 6,324,523 6,545,381 Less accumulated depreciation................... (1,358,321) (1,581,287) ----------- ----------- $ 4,966,202 $ 4,964,094 =========== ===========
F-33 HOMETOWN INN I, LTD, HOMETOWN INN II, LTD NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 3. LONG-TERM DEBT:
1994 1995 Long-term debt consists of the following as of December 31: Mortgage loan, principal and interest payable monthly at approximately $23,000 through January 1997, interest at prime plus 1%........................................... $1,601,227 $1,483,325 Mortgage loan principal and interest payable monthly at approximately $5,300 through August 2000, interest at 11%..................................................... 232,498 ---------- ---------- 1,601,227 1,715,823 Less current maturities.................................. 117,903 185,949 ---------- ---------- Long-term debt, net of current maturities................ $1,483,324 $1,529,874 ========== ==========
The mortgage loans are collateralized by substantially all of the Partnerships' property and equipment. Aggregate maturities of long term debt are as follows: 1996--$185,949; 1997--$1,382,719; 1998--$50,217; 1999-- $56,028; 2000--$40,910. The Partnerships believe that there is no material difference in the carrying amount and estimated fair value of the long-term debt. 4. RELATED PARTY TRANSACTIONS: Management fees are charged by a related entity controlled by the partners and advances are made to and taken by the related entity from the Partnerships as follows:
MANAGEMENT ADVANCES TO ADVANCES FROM FEES RELATED ENTITY RELATED ENTITY 1993............................. $105,600 $ $ 73,650 1994............................. 105,600 159,120 1995............................. 144,357 91,938 204,120
F-34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Extended Stay America, Inc. Ft. Lauderdale, Florida We have audited the accompanying balance sheet of Kipling Hospitality Enterprise Corporation as of December 31, 1995 and the related statements of operations and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kipling Hospitality Enterprise Corporation at December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Spartanburg, South Carolina May 4, 1996 F-35 KIPLING HOSPITALITY ENTERPRISE CORPORATION BALANCE SHEETS
DECEMBER 31, MARCH 31, 1995 1996 ASSETS ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents........................... $ 37,728 $ 40,136 Accounts receivable................................. 24,058 21,255 Supply inventories.................................. 40,338 40,338 Prepaid and other current assets.................... 32,425 5,314 ---------- ---------- Total current assets.............................. 134,549 107,043 ---------- ---------- Property and equipment, net........................... 1,468,171 1,454,178 Deferred loan costs, net.............................. 9,797 8,327 ---------- ---------- $1,612,517 $1,569,548 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable.................................... $ 40,758 $ 15,730 Accrued salaries and related expenses............... 16,152 15,537 Accrued property taxes.............................. 31,350 39,475 Accrued expenses.................................... 14,136 7,406 Deferred revenue.................................... 7,062 9,499 Note payable to related party....................... 33,486 33,486 Note payable to former shareholder.................. 80,000 80,000 Current maturities of long-term debt................ 63,437 64,454 ---------- ---------- Total current liabilities......................... 286,381 265,587 ---------- ---------- Long-term debt........................................ 1,116,934 1,105,358 ---------- ---------- Total liabilities................................. 1,403,315 1,370,945 ---------- ---------- Shareholder's Equity: Common stock, $2 par value, 100,000 shares authorized, 87,000 shares issued and outstanding... 174,000 174,000 Additional paid in capital.......................... 30,270 30,270 Due from affiliated companies and prepaid services.. (515,053) (521,395) Retained earnings................................... 519,985 515,728 ---------- ---------- 209,202 198,603 ---------- ---------- $1,612,517 $1,569,548 ========== ==========
The accompanying notes are an integral part of the financial statements. F-36 KIPLING HOSPITALITY ENTERPRISE CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE FOR THE FOR THE THREE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, MARCH 31, MARCH 31, 1995 1995 1996 ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Revenue: Room revenue.......................... $1,255,118 $273,374 $231,426 Telephone income...................... 47,426 11,740 7,595 Other, net............................ 22,075 5,592 5,702 ---------- -------- -------- Total revenue....................... 1,324,619 290,706 244,723 ---------- -------- -------- Costs and expenses: Property operating expenses........... 736,994 165,893 167,465 Management salaries................... 53,269 11,013 6,787 Franchise expense..................... 58,093 12,348 11,260 Depreciation and amortization......... 89,018 16,634 18,132 ---------- -------- -------- Total costs and expenses............ 937,374 205,888 203,644 ---------- -------- -------- Income from operations.................. 387,245 84,818 41,079 Other income (expense): Loss on sale of property and equipment............................ (20,774) Interest income....................... 20,287 66 76 Interest expense...................... (139,298) (34,788) (31,912) ---------- -------- -------- Net income.......................... 247,460 50,096 9,243 Retained earnings, beginning of period.. 374,996 374,996 519,985 Dividends............................. (102,471) (13,500) ---------- -------- -------- Retained earnings, end of period........ $ 519,985 $425,092 $515,728 ========== ======== ========
The accompanying notes are an integral part of the financial statements. F-37 KIPLING HOSPITALITY ENTERPRISE CORPORATION STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, MARCH 31, 1995 1995 1996 ------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income................ $247,460 $ 50,096 $ 9,243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............ 74,140 15,164 16,662 Amortization............ 14,878 1,470 1,470 Loss on sale of property and equipment.......... 20,744 Change in: Accounts receivable..... 6,398 4,021 2,804 Prepaid and other current assets......... (31,709) 1 27,111 Accounts payable........ 8,996 (15,584) (25,028) Accrued expenses........ (1,259) 28,159 3,217 -------- -------- -------- Net cash provided by operating activities. 339,648 83,327 35,479 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment................ (72,240) (41,216) (2,670) Proceeds from sale of property and equipment... 13,779 -------- -------- -------- Net cash used in investing activities. (58,461) (41,216) (2,670) -------- -------- -------- Cash flows from financing activities: Advances to affiliated companies................ (46,434) (6,342) Advances from affiliated companies................ 4,988 Principal payments on long-term debt........... (124,345) (9,693) (10,559) Proceeds from issuance of long-term debt........... 10,065 Dividends................. (102,471) (13,500) -------- -------- -------- Net cash used in financing activities. (263,185) (4,705) (30,401) -------- -------- -------- Net increase in cash........ 18,002 37,406 2,408 Cash at beginning of period. 19,726 19,726 37,728 -------- -------- -------- Cash at end of period....... $ 37,728 $ 57,132 $ 40,136 ======== ======== ======== Noncash financing transaction, prepaid services to former shareholder................ $ 80,000 ======== Supplemental cash flow disclosure, interest paid.. $149,804 $ 34,995 $ 37,612 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-38 KIPLING HOSPITALITY ENTERPRISE CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Business. Kipling Hospitality Enterprise Corporation (the "Company") operates a franchise hospitality property in Lakewood, Colorado. In 1996, the Company entered into an agreement to sell its hospitality property and equipment to Extended Stay America, Inc. Pervasiveness of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at December 31, 1995. Supply Inventory. Supply inventories consist primarily of linen, cleaning and other room supplies and are stated at the lower of cost or market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Maintenance and repairs are charged to operations as incurred; major renewals and improvements are capitalized. The gain or loss on the disposition of property and equipment is recorded in the year of disposition. The lives on the assets are as follows: Building and improvements........................................ 40 years Furniture, fixtures and equipment................................ 7 years
Franchise Fee. Franchise fee is stated at cost and is amortized on a straight-line basis over the period of the franchise agreement. Income Taxes. The Company's shareholder elected that the Company be subject to S Corporation regulations under the Internal Revenue Code. As such, the shareholder is liable for federal and state income taxes. Deferred Loan Costs. The Company has incurred costs in obtaining financing. The costs have been deferred and are being amortized on a straight-line basis over the life of the respective loans. Revenue Recognition. Room revenue and other income are recognized when earned. Unaudited Interim Financial Statements. The unaudited interim financial statements have been prepared pursuant to generally accepted accounting principles applicable to interim financial statements and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three months ended March 31, 1995 and 1996 are not necessarily indicative of results to be expected for a full year. All data at March 31, 1995 and 1996 and for each of the three-month periods then ended are unaudited. F-39 KIPLING HOSPITALITY ENTERPRISE CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31, 1995: Land.......................................................... $ 539,000 Building and improvements..................................... 990,132 Furniture and fixtures........................................ 214,997 Transportation equipment...................................... 38,708 ---------- 1,782,837 Less accumulated depreciation................................. 314,666 ---------- $1,468,171 ==========
3. LONG-TERM DEBT: Long-term debt consists of the following as of December 31, 1995: Mortgage loan, principal and interest payable at approximately $13,450 monthly through September 1997, interest at the bank's base rate (base rate was 9.75% at December 31, 1995) plus 2%...................................................... $1,172,664 Other......................................................... 7,707 ---------- 1,180,371 Less current maturities....................................... 63,437 ---------- Long-term debt, net of current maturities..................... $1,116,934 ==========
The mortgage loan is collateralized by substantially all of the Company's property and equipment. Aggregate maturities of long-term debt are as follows: 1996--$63,437; 1997--$1,116,934. The Company believes that there is no material difference in the carrying amount and estimated fair value of the long-term debt. 4. NOTE PAYABLE TO FORMER SHAREHOLDER: The Company entered into a note payable agreement on September 15, 1995 to pay a former shareholder $100,000 to perform consulting, accounting, and bookkeeping services over a five year period. The note bears interest at 7% and is payable in five annual installments commencing on September 15, 1995. 5. RELATED PARTY TRANSACTIONS: Certain members of the Company's management provide management services to companies owned by the shareholder. The Company allocated approximately $45,000 of expenses to the affiliated companies in 1995 for providing these services. Due from affiliated companies and prepaid services at December 31, 1995 consists of: Advances to affiliated companies................................ $326,000 Prepaid services to former shareholder (Note 4)................. 80,000 Receivable for allocated management services.................... 109,053 -------- $515,053 ========
F-40 KIPLING HOSPITALITY ENTERPRISE CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) 6. LITIGATION From time to time, the Company has been involved in various legal proceedings. Management believes that all such litigation is routine in nature and incidental to the conduct of its business, and that none of such litigation, if determined adversely to the Company, would have a material adverse effect on the financial condition. F-41 [THIS PAGE INTENTIONALLY LEFT BLANK] EXTENDED STAYAMERICA EFFICIENCY STUDIOS [PHOTO OF INTERIOR CORRIDOR LOBBY] [PHOTO OF EXTERIOR CORRIDOR LOBBY] [PHOTO OF INTERIOR CORRIDOR ROOM] [PHOTO OF EXTERIOR CORRIDOR ROOM] [PHOTO OF INTERIOR CORRIDOR BATHROOM] [PHOTO OF EXTERIOR CORRIDOR BATHROOM] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR ANY 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 OR ANY OF THE UNDER- WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA- TION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OF- FERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE- UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA- TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Recent Developments....................................................... 11 Use of Proceeds........................................................... 11 Price Range of Common Stock............................................... 12 Dividend Policy........................................................... 12 Capitalization............................................................ 12 Selected Financial Data................................................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 15 Business.................................................................. 19 Management................................................................ 26 Certain Transactions...................................................... 34 Principal Shareholders.................................................... 35 Financing................................................................. 36 Description of Capital Stock.............................................. 39 Shares Eligible for Future Sale........................................... 41 Underwriting.............................................................. 42 Legal Matters............................................................. 43 Experts................................................................... 43 Available Information..................................................... 44 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 7,000,000 SHARES [LOGO OF EXTENDED STAYAMERICA APPEARS HERE] COMMON STOCK -------------- PROSPECTUS -------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ALLEN & COMPANY INCORPORATED CS FIRST BOSTON SMITH BARNEY INC. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses to be borne by the Company in connection with the registration, issuance, and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimates except the SEC registration fee. Securities and Exchange Commission registration fee............. $ 92,298 NASD filing fee................................................. 27,267 Blue Sky fees and expenses...................................... 35,000 Printing and engraving expenses................................. 150,000 Transfer Agent fees and expenses................................ 5,000 Legal fees and expenses......................................... 90,000 Accounting fees and expenses.................................... 75,000 Miscellaneous................................................... 25,435 -------- Total....................................................... $500,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of Delaware authorizes the Company to indemnify its directors and officers under specified circumstances. The Restated Certificate of Incorporation and Bylaws of the Company provide that the Company shall indemnify, to the extent permitted by Delaware law, its directors and officers (and may indemnify its employees and agents) against liabilities (including expenses, judgments, and settlements) incurred by them in connection with any actual or threatened action, suit, or proceeding to which they are or may become parties and which arises out of their status as directors, officers, or employees. The Company's Restated Certificate of Incorporation and Bylaws eliminate, to the fullest extent permitted by Delaware law, liability of a director to the Company or its stockholders for monetary damages for a breach of such director's fiduciary duty of care except for liability where a director (a) breaches his or her duty of loyalty to the Company or its stockholders, (b) fails to act in good faith or engages in intentional misconduct or knowing violation of law, (c) authorizes payment of an illegal dividend or stock repurchase, or (d) obtains in improper personal benefit. While liability for monetary damages has been eliminated, equitable remedies such as injunctive relief or rescission remain available. In addition, a director is not relieved of his responsibilities under any other law, including the federal securities laws. The directors and officers of the Company are insured within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of actions, suits, or proceedings and certain liabilities which might be imposed as a result of such actions, suits, or proceedings, to which they are parties by reason of being or having been such directors or officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In January 1995, the Company issued 1,677,060 shares of Common Stock to its initial stockholder for a $2,000 contribution to the capital of the Company. Such securities were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. In August 1995, pursuant to subscription agreements, the Company issued to approximately 30 accredited investors 11,718,000 shares of Common Stock in exchange for a $55,800,000 contribution to the capital of the Company made in August and October of 1995. The above-referenced shares were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. II-1 In August 1995, pursuant to a Contribution Agreement dated August 18, 1995 between the Company and Welcome Inn America 89-1, L.P. the Company issued 357,000 shares of Common Stock in exchange for certain assets and real property. The above-referenced shares were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. Pursuant to a commitment agreement dated August 31, 1995, the Company issued shares of Common Stock to DLJ and one of its affiliates as described under "Financing." The above-referenced shares were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE+ ------- ---------------------- ----- 1.1 Revised Proposed form of Underwriting Agreement. 2.1* Contribution Agreement, dated August 18, 1995, between the Company and Welcome Inn America 89-1, L.P. 2.2** Agreement to Purchase Hotel and related agreements dated January 24, 1996 between the Company and John W. Baker and Apartment/Inn, L.P. 2.3** Agreement to Purchase Hotel and related agreements dated February 23, 1996 among ESA 0992, Inc., ESA 0993, Inc., Hometown Inn I, LTD, and Hometown Inn II, LTD. 2.4*** Agreement to Purchase Hotel dated May 1, 1996 and re- lated agreements among ESA Properties, Inc., Kipling Hospitality Enterprise Corporation, and J. Craig McBride 3.1* Restated Certificate of Incorporation of the Company 3.2* Amended and Restated Bylaws of the Company 4.1* Specimen certificate representing shares of Common Stock 5.1++ Opinion of Bell, Boyd & Lloyd as to the legality of the Common Stock 10.1* Form of Subscription Agreement and related Demand Note and Stockholders Agreement between the Company and ap- proximately 30 investors entered into in August 1995 10.2(a)* Commitment for Mortgage Facility between the Company and DLJ Mortgage Capital, Inc. ("DLJMC") 10.2(b)* Mortgage Facility, dated October 31, 1995, between the Company and DLJMC 10.3*** Amended and Restated 1995 Employee Stock Option Plan of the Company 10.4* Employment Agreement, dated as of June 1, 1995, between ESA Development, Inc. and Harold E. Wright 10.5* Stock Option Agreement, dated as of June 1, 1995, be- tween ESA Development, Inc. and Harold E. Wright 10.6*** 1995 Stock Option Plan for Non-Employee Directors of the Company 10.7* Contract to Buy and Sell Real Property, dated April 20, 1995, between the Company and North Town Associates, L.P. 10.8* Aircraft Dry Lease, dated June 12, 1995, between Wyoming Associates, Inc. and the Company 10.9* Aircraft Dry Lease, dated June 12, 1995, between Wyoming Associates, Inc. and the Company
II-2
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE+ ------- ---------------------- ----- 10.10*** Amended and Restated 1996 Employee Stock Option Plan of the Company 10.11*** Employment Agreement, dated as of March 18, 1996, be- tween ESA Development, and Harold E. Wright 10.12++ Aircraft Dry Lease, dated April 5, 1996, between Mor- gan Corp. and the Company 10.13*** Homestead Motorsports Complex Executive Suite License Agreement dated February 14, 1996 among The Homestead Motorsports Joint Venture, Miami Motorsports Joint Venture, and the Company 10.14*** Joe Robbie Stadium Executive Suite License Agreement dated March 18, 1996 between Robbie Stadium Corpora- tion and the Company 10.15(a)*** Commitment letter for mortgage facility between the Company and CS First Boston Mortgage Capital Corporation ("CSFBMC") 10.15(b) Credit Facility Agreement, dated May 24, 1996, between the Company and CSFBMC 11.1*** Revised Statement re: Computation of Per Share Loss 21.1++ List of subsidiaries of the Company 23.1 Consent of Coopers & Lybrand L.L.P. (included in Part II of this registration statement) 23.2++ Consent of Bell, Boyd & Lloyd (included in Exhibit 5.1) 24.1* Powers of Attorney (included on the signature page of this registration statement) 27.1++ Financial Data Schedule (for EDGAR filings only)
- --------------------- ++Previously filed. *Incorporated by reference to the corresponding exhibit to the Company's Registration Statement on Form S-1, Registration No. 33-98452. **Incorporated by reference to the corresponding exhibit to the Company's Registration Statement on Form S-1, Registration No. 333-102. ***Incorporated by reference to the corresponding exhibit to the Company's Report on Form 10-Q for the quarter ended March 31, 1996. +This information appears only in the manually signed copy of this Registration Statement. (b) FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the information has been provided in the consolidated financial statements or the notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Company pursuant to the provisions described under Item 14 above or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer, or controlling person of the Company in the successful defense of any action, suit, or proceeding) is asserted against the Company by such director, officer, or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF FT. LAUDERDALE, STATE OF FLORIDA, ON MAY 28TH, 1996. Extended Stay America, Inc. /s/ Robert A. Brannon By:__________________________________ Robert A. Brannon Senior Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON MAY 28TH, 1996.
SIGNATURE TITLE --------- ----- PRINCIPAL EXECUTIVE OFFICER: George D. Johnson, Jr.* President and Chief Executive Officer PRINCIPAL FINANCIAL OFFICER: /s/ Robert A. Brannon Senior Vice President, Chief Financial ___________________________________________ Officer, Secretary, and Treasurer Robert A. Brannon PRINCIPAL ACCOUNTING OFFICER: Gregory R. Moxley* Vice President--Finance and Controller A MAJORITY OF THE DIRECTORS: H. Wayne Huizenga* Director Donald F. Flynn* Director George D. Johnson, Jr.* Director Stewart H. Johnson* Director John J. Melk* Director Peer Pedersen* Director
/s/ Robert A. Brannon *By:_________________________________ Robert A. Brannon Attorney-in-fact II-5 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated January 26, 1996 on our audit of the consolidated financial statements of Extended Stay America, Inc., our report dated January 26, 1996 on our audits of the financial statements of Apartment/Inn, L.P., our report dated February 23, 1996 on our audits of the combined financial statements of Hometown Inn I, LTD and Hometown Inn II, LTD, our report dated October 16, 1995 on our audits of the financial statements of Welcome Inn America 89-1, L.P. and our report dated May 4, 1996 on our audit of the financial statements of Kipling Hospitality Enterprise Corporation. We also consent to the references to our firm under the captions "Experts" and "Selected Financial Data." Coopers & Lybrand L.L.P. Spartanburg, South Carolina May 24, 1996 II-6 EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 7,000,000 Shares EXTENDED STAY AMERICA, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- May __, 1996 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ALLEN & COMPANY INCORPORATED CS FIRST BOSTON CORPORATION SMITH BARNEY INC. As representatives of the several underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: Extended Stay America, Inc., a Delaware corporation (the "Company") proposes to issue and sell 7,000,000 shares of its Common Stock, par value $.01 per share (the "Firm Shares") to the several underwriters named in Schedule I hereto (the "Underwriters"). The Company also proposes to issue and sell to the several Underwriters not more than 1,050,000 additional shares of its Common Stock, par value $.01 per share (the "Additional Shares") if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are herein collectively called the Shares. The shares of common stock of the Company, par value $.01 per share, to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock. 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively called the "Act"), a registration statement on Form S-1 (Registration No. 333-03373) including a prospectus relating to the Shares, which may be amended. The registration statement as amended at the time when it becomes effective, including a registration statement (if any) filed pursuant to Rule 462(b) under the Act increasing the size of the offering registered under the Act and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Act, is hereinafter referred to as the Registration Statement; and the prospectus (including any prospectus subject to completion meeting the requirements of Rule 434(b) under the Act provided by the Company with any term sheet meeting the requirements of Rule 434(b) as the prospectus provided to meet the requirements of Section 10(a) of the Act) in the form first used to confirm sales of Shares is hereinafter referred as the Prospectus. 2. Agreements to Sell and Purchase. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a price per share of $_____ (the "Purchase Price") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to 1,050,000 Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date specified in any such notice shall be a business day (i) no earlier than the Closing Date (as hereinafter defined), (ii) no later than ten business days after such notice has been given and (iii) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Company hereby agrees to use all reasonable efforts to deliver not later than the date hereof an agreement (a "lockup 2 agreement") executed by (i) each of the directors and officers of the Company, and (ii) each stockholder listed on Annex I hereto, pursuant to which each such person agrees, not to offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any Common Stock or any securities convertible into or exercisable or exchangeable for such Common Stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such Common Stock, except to the Underwriters pursuant to this Agreement, for a period of 90 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such period (i) the Company may grant stock options pursuant to the Company's existing stock option plans, (ii) the Company may issue shares of its common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and (iii) the Company may issue shares of its common stock as consideration for acquisitions provided that such shares are subject to restrictions on disposition during such 90-day period equivalent to those in the lockup agreements referred to in the first sentence of this paragraph. 3. Terms of Public Offering. The Company is advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery and Payment. Delivery to the Underwriters of and payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on the third business day unless otherwise permitted by the Commission pursuant to Rule 15c6- 1 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively called the "Exchange Act") (such day being referred to as the "Closing Date") following the date of the public offering, at such place as you shall designate. The Closing Date and the location of delivery of and the form of payment for the Firm Shares may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at such place as you shall designate at 10:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 (an "Option Closing Date"). Any such Option Closing Date and the location of delivery of and the form of payment for such Additional Shares may be varied by agreement between you and the Company. Certificates for the Shares shall be registered in such names and issued in such denominations as you shall request in 3 writing not later than two full business days prior to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available to you for inspection not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the applicable Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to you on the Closing Date or the applicable Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the Company, for the respective accounts of the several Underwriters, against payment of the Purchase Price therefor by wire transfer of immediately available funds to an account designated by the Company. 5. Agreements of the Company. The Company agrees with you: (a) To use its best efforts to cause the Registration Statement to become effective at the earliest possible time. (b) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment to it becomes effective, (ii) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, and (iv) of the happening of any event during the period referred to in paragraph (e) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to you, without charge, five signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) Not to file any amendment or supplement to the Registration Statement, whether before or after the time 4 when it becomes effective, or to make any amendment or supplement to the Prospectus (including the issuance or filing of any term sheet within the meaning of Rule 434) of which you shall not previously have been advised or to which you shall reasonably object; and to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus (including the issuance or filing of any term sheet within the meaning of Rule 434) which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause the same to become promptly effective. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish to each Underwriter and dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request; provided, that in the event that an Underwriter is required to deliver a Prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issuance of the Prospectus, upon the request of such Underwriter but at its expense, the Company will prepare and deliver to such Underwriter as many copies as it may request of a Prospectus (as amended or supplemented) complying with Section 10(a)(3) of the Act. (f) If during the period specified in paragraph (e) any event shall occur as a result of which, in the reasonable opinion of counsel for the Underwriters it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with any law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law, and to furnish to each Underwriter and to such dealers as you shall specify, such number of copies thereof as such Underwriter or dealers may reasonably request. (g) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by 5 dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not so qualified or required to file such consent. (h) To mail and make generally available to its stockholders as soon as reasonably practicable an earnings statement covering a period of at least twelve months after the effective date of the Registration Statement (but in no event commencing later than 90 days after such date) which shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (i) During the period of five years after the date of this Agreement, (i) to mail as soon as reasonably practicable after the end of each fiscal year to the record holders of its Common Stock a financial report of the Company and its subsidiaries on a consolidated basis (and a similar financial report of all unconsolidated subsidiaries, if any), all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by independent certified public accountants, and (ii) to make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows (and similar financial reports of all unconsolidated subsidiaries, if any) as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (j) During the period referred to in paragraph (i), to furnish to you as soon as available a copy of each report or other publicly available information of the Company mailed to the holders of Common Stock or filed with the Commission and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. 6 (k) Except to the extent provided in subsection (e) of this Section 5, to pay all costs, expenses, fees and taxes incident to (i) the preparation, printing, filing and distribution under the Act of the Registration Statement (including financial statements and exhibits), each preliminary prospectus and all amendments and supplements to any of them prior to or during the period specified in paragraph (e), (ii) the printing and delivery of the Prospectus and all amendments or supplements to it during the period specified in paragraph (e), (iii) the printing and delivery of this Agreement, the Preliminary and Supplemental Blue Sky Memoranda and all other agreements, memoranda, correspondence and other documents printed and delivered in connection with the offering of the Shares (including in each case any disbursements of counsel for the Underwriters relating to such printing and delivery), (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including in each case the reasonable fees and disbursements of counsel for the Underwriters relating to such registration or qualification and memoranda relating thereto), (v) filings and clearance with the National Association of Securities Dealers, Inc. in connection with the offering, (vi) the listing of the Shares on the National Association of Securities Dealers Automated Quotation system ("Nasdaq") National Market and (vii) furnishing such copies of the Registration Statement, the Prospectus and all amendments and supplements thereto as may be requested for use in connection with the offering or sale of the Shares by the Underwriters or by dealers to whom Shares may be sold. (l) To use all reasonable efforts to maintain the inclusion of the Common Stock in the Nasdaq National Market (or on a national securities exchange) for a period of five years after the effective date of the Registration Statement. (m) To use all reasonable efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for 7 such purpose are pending before or threatened by the Commission. (b) (i) Each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Any term sheet and prospectus subject to completion provided by the Company to the Underwriters for use in connection with the offering and sale of the Shares pursuant to Rule 434 under the Act together are not materially different from the prospectus included in the Registration Statement (exclusive of any information deemed a part thereof by virtue of Rule 434(d)). (d) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, and each Registration Statement filed pursuant to Rule 462(b) under the Act, if any, complied when so filed in all material respects with the Act; and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (e) The Company and each of its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as it is currently being conducted and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of 8 property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (f) All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. (g) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (h) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus. (i) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound. (j) The execution, delivery and performance of this Agreement, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby (i) will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the securities or Blue Sky laws of the various states), (ii) will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, (x) the charter or by- laws of the Company or any of its subsidiaries or (y) any agreement, indenture or other instrument to which it or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound, and (iii) will not violate or conflict with any laws, administrative 9 regulations or rulings or court decrees applicable to the Company, any of its subsidiaries or their respective property, except for such failures to obtain consents, approvals, authorizations or orders, and such conflicts, breaches, defaults and violations referred to in clauses (i), (ii)(y) and (iii) which would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, and would not adversely affect the Company's ability to perform its obligations under this Agreement. (k) Except as otherwise set forth in the Prospectus, there are no material legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any of their respective property is the subject, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. (l) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which in each case might result in any material adverse change in the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. (m) The Company and each of its subsidiaries has such material permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate its respective properties and to conduct its business; the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries. 10 (n) Except as otherwise set forth in the Prospectus or such as are not material to the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole, the Company and each of its subsidiaries has good and marketable title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Registration Statement as being owned by it. All leases to which the Company or any of its subsidiaries is a party are valid and binding and no default has occurred or is continuing thereunder, which might result in any material adverse change in the business, prospects, financial condition or results of operation of the Company and its subsidiaries taken as a whole, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use made by the Company or such subsidiary. (o) The Company and each of its subsidiaries maintains reasonably adequate insurance. (p) Coopers & Lybrand L.L.P. are independent public accountants with respect to the Company, Welcome Inn 89-1, L.P. ("Welcome"), Apartment/Inn, L.P. ("Apartment/Inn"), Hometown Inn I, LTD and Hometown Inn II, LTD ("Hometown") and Kipling Hospitality Enterprises Corporation ("KHEC") as required by the Act. (q) The financial statements, together with related notes forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries, of Welcome, Apartment/Inn, Hometown, KHEC and of the Company and its subsidiaries on a pro forma basis, in each case on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and, to the extent derived from the books and records of the Company, prepared on a basis consistent with such financial statements and the books and records of the Company. 11 (r) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (s) Except as otherwise set forth in the Prospectus no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company. (t) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida). (u) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company or any subsidiary thereof except as otherwise disclosed in the Registration Statement. (v) Except as disclosed in the Prospectus, there are no business relationships or related party transactions required to be disclosed therein by Item 404 of Regulation S-K of the Commission. (w) The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (x) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. 12 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use therein; provided that, insofar as this indemnity agreement relates to any untrue statement or omission, or any alleged untrue statement or omission, made in a preliminary prospectus, but cured in the Prospectus, it shall not inure to the benefit of an Underwriter (or to the benefit of any person who controls such Underwriter) if it is established that a copy of the Prospectus (as then amended or supplemented if then so amended or supplemented) was not delivered by such Underwriter to the person asserting the claim arising from such untrue statement or omission, or such alleged untrue statement or omission, at or prior to the time required by the Act (but only if the Company had previously furnished copies thereof to the Underwriters), and delivery thereof would have constituted a defense to the claim asserted by such person. (b) In case any action shall be brought against any Underwriter or any person controlling such Underwriter, based upon any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto and with respect to which indemnity may be sought against the Company, such Underwriter shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all reasonable fees and expenses. Any Underwriter or any such controlling person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company, (ii) the Company shall have failed to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both such Underwriter or such controlling person and the Company and such Underwriter or such 13 controlling person shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action on behalf of such Underwriter or such controlling person, it being understood, however, that the Company shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all such Underwriters and controlling persons, which firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation and that all such reasonable fees and expenses shall be reimbursed promptly upon presentation for payment). The Company shall not be liable for any settlement of any such action effected without its written consent but if settled with the written consent of the Company, the Company agrees to indemnify and hold harmless any Underwriter and any such controlling person from and against any loss or liability by reason of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter but only with reference to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any preliminary prospectus. In case any action shall be brought against the Company, any of its directors, any such officer or any person controlling the Company based on the Registration Statement, the Prospectus or any preliminary prospectus and in respect of which indemnity may be sought against any Underwriter, the Underwriter shall have the rights and duties given to the Company (except that if the Company shall have assumed the defense thereof, such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), and the Company, its directors, any such officers and any person controlling the Company shall have the rights and duties given to the Underwriter, by Section 7(b) hereof. 14 (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares and also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as, but only if a court deems appropriate, any other relevant equitable considerations. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. 8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm 15 Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) The Registration Statement shall have become effective not later than 5:00 P.M. (and in the case of a Registration Statement filed under Rule 462(b) of the Act, not later than 10:00 p.m.), New York City time, on the date of this Agreement or at such later date and time as you may approve in writing, and at the Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c)(i) Since the date of the latest balance sheet included in the Registration Statement and the Prospectus, there shall not have been any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, affairs or business prospects, whether or not arising in the ordinary course of business, of the Company, (ii) since the date of the latest balance sheet included in the Registration Statement and the Prospectus there shall not have been any change, or any development involving a prospective material adverse change, in the capital stock or in the long-term debt of the Company from that set forth in the Registration Statement and Prospectus, (iii) the Company and its subsidiaries shall have no liability or obligation, direct or contingent, which is material to the Company and its subsidiaries, taken as a whole, other than those reflected in the Registration Statement and the Prospectus and (iv) on the Closing Date you shall have received a certificate dated the Closing Date, signed by George D. Johnson, Jr. and Robert A. Brannon, in their capacities as the President and Chief Executive Officer and Chief Financial Officer of the Company, confirming the matters set forth in paragraphs (a), (b), (c), (g), and (h) of this Section 8. (d) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Bell, Boyd & Lloyd, counsel for the Company, to the effect that: (i) the Company and each of its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its 16 jurisdiction of incorporation and has the corporate power and authority required to carry on its business as it is currently being conducted and to own, lease and operate its properties; (ii) the Company and each of its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; (iii) all of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable, and are owned by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (iv) all the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; (v) the Shares have been duly authorized, and when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will have been validly issued and will be fully paid and non-assessable, and the issuance of such Shares is not subject to any preemptive or similar rights; (vi) this Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company; (vii) the authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus; (viii) the Registration Statement has become effective under the Act, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to the knowledge of such counsel, pending before or contemplated by the Commission; (ix) the statements under the captions "Management", "Certain Transactions", "Financing", "Description of Capital Stock" and "Shares Eligible for 17 Future Sale" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (x) neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge after due inquiry, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound; (xi) the execution, delivery and performance of this Agreement by the Company, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the Act or other securities or Blue Sky laws) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries, or any agreement, indenture or other instrument of which such counsel has knowledge to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective properties are bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company or any of its subsidiaries or their respective properties; (xii) after due inquiry, such counsel does not know of any legal or governmental proceeding pending or threatened to which the Company or any of its subsidiaries is a party or to which any of their respective property is subject which is required to be described in the Registration Statement or the Prospectus and is not so described, or of any contract or other document which is required to be described in the Registration Statement or the Prospectus or is 18 required to be filed as an exhibit to the Registration Statement which is not described or filed as required; (xiii) the Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (xiv) to the best of such counsel's knowledge, after due inquiry, no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company; and (xv) (1) the Registration Statement (including any Registration Statement and under Rule 462(b) of the Act, if any) and the Prospectus and any supplement or amendment thereto (except for financial statements and statistical data as to which no opinion need be expressed) comply as to form in all material respects with the Act, and (2) such counsel believes that (except for financial statements and statistical data, as aforesaid) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that the Prospectus, as amended or supplemented, if applicable (except for financial statements and statistical data, as aforesaid) does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In giving such opinion such counsel may rely as to factual matters on information in certificates of officers of the Company and public officials and, with respect to the matters covered in clause (xv), such counsel may state that their opinion and belief are based upon their participation in the preparation of 19 the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. The opinion of Bell, Boyd & Lloyd described in paragraph (d) shall be rendered to you at the request of the Company and shall so state therein. (e) You shall have received on the Closing Date an opinion, dated the Closing Date, of Sidley & Austin, counsel for the Underwriters, as to the matters referred to in clauses (v), (vi), (viii), (ix) (but only with respect to the statements under the caption "Description of Capital Stock" and adding an opinion in such form with respect to the opinion under the caption "Underwriting") and (xv) of the foregoing paragraph (d). In giving such opinion such counsel may rely as to factual matters on information in certificates of officers of the Company and public officials and, with respect to the matters covered by clause (xv) such counsel may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (f) You shall have received a letter on and as of the Closing Date, in form and substance satisfactory to you, from Coopers & Lybrand L.L.P., independent public accountants, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus and substantially in the form and substance of the letter delivered to you by Coopers & Lybrand L.L.P. on the date of this Agreement. 20 (g) The Company shall have delivered to you the agreements specified in Section 2 hereof. (h) The Company shall not have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. 9. Effective Date of Agreement and Termination. This Agreement shall become effective upon the later of (a) execution of this Agreement and (b) when notification of the effectiveness of the Registration Statement has been released by the Commission. This Agreement may be terminated at any time prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any adverse change or development involving a prospective adverse change in the condition, financial or otherwise, of the Company or any of its subsidiaries or the earnings, affairs, or business prospects of the Company or any of its subsidiaries, whether or not arising in the ordinary course of business, which would, in your judgment, make it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and would, in your judgment, make it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (iii) the suspension or material limitation of trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or limitation on prices for securities on any such exchange or National Market, (iv) the declaration of a banking moratorium by either federal or New York State authorities or (v) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. 21 If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the total number of Shares to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters with respect to such Closing Date or Option Closing Date, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date or on an Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or Additional Shares, as the case may be, and the aggregate number of Firm Shares or Additional Shares, as the case may be, with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date by all Underwriters and arrangements satisfactory to you and the Company for purchase of such Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date or the applicable Option Closing Date, as the case may be, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. 10. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (a) if to the Company, to Extended Stay America, Inc., 500 East Broward Avenue, Suite 950, Ft. Lauderdale, Florida 33394, with a copy to John T. McCarthy, Bell, Boyd & Lloyd, 70 W. Madison Street, Chicago, Illinois 60602, and (b) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities 22 Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, its officers and directors and of the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Company, the officers or directors of the Company or any controlling person of the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement or pursuant to the provisions of Section 9(i) of this Agreement, the Company agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) reasonably incurred by them. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 23 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, EXTENDED STAY AMERICA, INC. By: _______________________ George D. Johnson, Jr. President and CEO DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ALLEN & COMPANY INCORPORATED CS FIRST BOSTON CORPORATION SMITH BARNEY INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: --------------------------- Jeffrey Klein Managing Director 24 SCHEDULE I ---------- Number of Firm Shares Underwriters to be Purchased ------------ --------------------- Donaldson, Lufkin & Jenrette Securities Corporation Allen & Company Incorporated CS First Boston Corporation Smith Barney Inc. ---------------- Total 7,000,000 ================ 25 ANNEX I ------- Names of Stockholders Delivering Lockup Agreements -------------------------------------------------- 26 EX-5 3 OPINION OF BELL, BOYD & LLOYD [LETTERHEAD OF BELL, BOYD & LLOYD] May 24, 1996 Extended Stay America, Inc. 500 E. Broward Boulevard Ft. Lauderdale, Florida 33394 Ladies and Gentlemen: REGISTRATION STATEMENT ON FORM S-1 We have represented Extended Stay America, Inc., a Delaware corporation (the "Company"), in connection with the preparation of a registration statement on Form S-1 (the "Registration Statement"), filed under the Securities Act of 1933, as amended, for the purpose of registering 8,050,000 shares of common stock, $.01 par value (the "Common Stock"), of the Company (the "Shares") to be sold by the Company to a group of underwriters pursuant to an underwriting agreement (the "Underwriting Agreement"), which Shares include 1,050,000 shares of Common Stock which may be issued by the Company pursuant to an over-allotment option granted to the underwriters. In this connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate and other records, certificates and other papers as we deemed it necessary to examine for the purpose of this opinion, including the Registration Statement, the form of Underwriting Agreement and pertinent resolutions of the board of directors of the Company. Based upon such examination, it is our opinion that the Shares are legally authorized and, upon issuance and delivery thereof to the underwriters in accordance with the terms of the Underwriting Agreement and the receipt by the Company of the purchase price therefor, will be legally issued, fully paid and non-assessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the references made to us in the Prospectus forming a part of the Registration Statement. 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 Securities Act of 1933. Very truly yours, /s/ Bell, Boyd & Lloyd EX-10.15B 4 CREDIT FACILITY AGREEMENT CREDIT FACILITY AGREEMENT Between EXTENDED STAY AMERICA, INC. "ESA" --- and CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION "Lender" ------ Dated as of May 17, 1996 TABLE OF CONTENTS SECTION PAGE 1 DEFINITIONS AND ACCOUNTING TERMS....................................... 1 1.1 Defined Terms................................................... 1 1.2 Computation of Time Periods..................................... 17 1.3 Accounting Terms................................................ 17 1.4 Certain Terms................................................... 17 2 AMOUNTS AND TERMS OF THE LOANS......................................... 17 2.1 The Loans....................................................... 17 2.2 Making the Loans................................................ 17 2.3 Fees............................................................ 18 2.4 Repayment of the Loans.......................................... 19 2.5 Payment of Interest and Principal............................... 19 2.6 Capital Adequacy................................................ 19 2.7 Payments and Computations....................................... 20 2.8 Taxes........................................................... 20 2.9 Conversion Option............................................... 21 3 CONDITIONS OF LENDING.................................................. 22 3.1 Conditions Precedent to the First Loan.......................... 22 3.2 Conditions Precedent to Each Loan............................... 23 4 PROPERTY SPECIFIC CONDITIONS PRECEDENT................................. 26 4.1 Developed Hotel Properties - General Prerequisites.............. 26 4.2 Acquired Hotel Properties - General Prerequisites............... 29 4.3 Extended Approval Periods....................................... 29 5 COMPUTATION OF LOAN AMOUNTS............................................ 30 5.1 Amount of the Loan for a Developed Property..................... 30 5.2 Amount of the Loan.............................................. 30 5.3 Value........................................................... 30 6 REALLOCATION OF DEBT................................................... 30 7 REPRESENTATIONS AND WARRANTIES......................................... 31 7.1 Organization and Authority...................................... 31 7.2 Power........................................................... 31 7.3 Authorization of Borrowing...................................... 31 7.4 Other Agreements................................................ 32 i SECTION PAGE 7.5 Maintenance of Existence........................................ 32 7.6 Financial Requirements.......................................... 32 7.7 No Defaults..................................................... 33 7.8 Governmental Consents and Approvals............................. 34 7.9 Investment Company Act Status................................... 34 7.10 Compliance with Law............................................. 34 7.11 Financial Information........................................... 34 7.12 Federal Reserve Regulations..................................... 34 7.13 Pending Litigation.............................................. 35 7.14 Solvency; No Bankruptcy......................................... 35 7.15 Not Foreign Person.............................................. 35 7.16 Ownership of ESA; Subsidiaries.................................. 35 7.17 ERISA........................................................... 36 8 COVENANTS OF ESA....................................................... 36 8.1 Continuing Nature of Representations............................ 36 8.2 Financial Reports............................................... 37 8.3 Reporting Requirements.......................................... 38 8.4 Litigation...................................................... 39 8.5 No Further Indebtedness......................................... 39 8.6 Restricted Payments............................................. 40 8.8 Further Acts, Etc............................................... 40 8.9 Guaranty........................................................ 41 8.10 Plans, Pension Plans and ESOPs.................................. 41 9 FURTHER CONDITIONS PRECEDENT TO EACH LOAN; TERMINATION OF FACILITY................................................ 42 10 TRANSFER OR ENCUMBRANCE................................................ 43 10.1 Definition of Transfer.......................................... 43 10.2 No Transfer..................................................... 43 10.3 Permitted Assumption............................................ 43 11 ESTOPPEL CERTIFICATES.................................................. 44 12 EVENTS OF DEFAULT...................................................... 44 12.1 Events of Default............................................... 44 12.2 General Remedies............................................... 47 12.3 General Provisions Regarding Remedies........................... 48 13 PREPAYMENT............................................................. 48 ii SECTION PAGE 13.1 Fixed Rate Loans................................................ 48 13.2 Floating Rate Loans............................................. 48 13.3 Sub-Performing, Unseasoned Loans................................ 49 13.4 Conditions Precedent to Prepayment.............................. 49 13.5 Additional Required Prepayment.................................. 49 13.6 Fixed Rate Prepayment Premium................................... 50 13.7 Release of Lien for Prepaid Loan................................ 50 14 LENDER ASSIGNMENTS..................................................... 50 15 MISCELLANEOUS.......................................................... 51 15.1 Representations and Warranties of ESA and Lender................ 51 15.2 Amendments, Etc................................................. 52 15.3 Notices, Etc.................................................... 52 15.4 No Waiver; Remedies............................................. 53 15.5 Costs; Expenses; Indemnities.................................... 53 15.6 Right of Set-off................................................ 55 15.7 Binding Effect.................................................. 55 15.8 Governing Law; Severability..................................... 55 15.9 Submission to Jurisdiction; Service of Process.................. 56 15.10 Section Titles.................................................. 56 15.11 Execution in Counterparts....................................... 56 15.12 Entire Agreement................................................ 56 15.13 Confidentiality................................................. 56 15.14 Waiver of Jury Trial............................................ 57 15.15 Waiver of Notice................................................ 57 15.16 Actions and Proceedings......................................... 57 15.17 Usury Laws...................................................... 57 15.18 Remedies of ESA................................................. 58 15.19 Offsets, Counterclaims and Defenses............................. 58 15.20 Waiver of Statute of Limitations................................ 58 15.21 Advances........................................................ 58 15.22 Application of Default Rate Not a Waiver........................ 58 15.23 No Joint Venture or Partnership................................. 59 15.24 Time of the Essence............................................. 59 15.25 ESA's and Borrower's Obligations Absolute....................... 59 15.26 [RESERVED]...................................................... 59 15.27 [RESERVED]...................................................... 59 15.28 Securitization Opinions......................................... 59 15.29 Cooperation with Rating Agencies and Potential Investors........ 60 15.30 Securitization Financials....................................... 60 iii SECTION PAGE 15.31 Securitization Underwriting..................................... 60 15.32 Limitation of ESA Expenses...................................... 60 Schedule 7.16 Subsidiaries, Shareholder Agreements, and Stock Option Plans Schedule 12.1P Current Board of Directors of ESA Schedule 15.5A Limits on Third Party Expenses Exhibit 1.1A Form of Assignment Agreement Exhibit 1.2 Form of Mortgage Exhibit 1.3A Form of Fixed Rate Note Exhibit 1.3B Form of Floating Rate Note Exhibit 2.5 Calculation of Amortization Exhibit 3.1D-1 Form of ESA's counsel opinion Exhibit 3.1D-2 Form of ESA non-consolidation opinion (pre-securitization) Exhibit 3.2B Form of Property Loan Agreement Exhibit 3.2C(iv) Form of Loan opinion Exhibit 7.6H Form of Standstill Agreement Exhibit 15.28 Form of ESA non-consolidation opinion (post-securitization) INDEX OF DEFINED TERMS Acquired Hotel Property....................... 1 Acquired Hotel Statement...................... 29 Additional Required Prepayment................ 50 Advisory Fee.................................. 18 Affiliate..................................... 1 Agreement..................................... 1 Applicable Amortization Period................ 2 Applicable Loan Amount........................ 2 Applicable Loan Constant...................... 2 Applicable Loan Constant Amortization Period....................................... 2 Appraisal..................................... 2 Approved Hotel................................ 2 Approved Manager Standard..................... 2 Assignment Agreement.......................... 2 Assumed Rate.................................. 2 Bank.......................................... 2 Borrower...................................... 2 Business Day.................................. 3 Cash Flow Available for Debt Service.......... 3 Claim......................................... 14 Closing Date.................................. 3 Code.......................................... 3 Collateral.................................... 3 Collateral Documents.......................... 23 Commitment.................................... 3 Construction Budget........................... 27 Construction Costs............................ 3 Contingent Obligation......................... 3 Contractual Obligation........................ 4 Debt.......................................... 14 Debt Service.................................. 4 Debt Service Coverage......................... 4 Default....................................... 5 Default Rate.................................. 5 Default Rate Interest......................... 5 Developed Hotel Property...................... 5 Development Hotel Statement................... 28 Dollars....................................... 5 Environmental Report.......................... 27 ERISA......................................... 5 ERISA Affiliate............................... 5 iv ESA........................................... 1 ESA Cumulative Unapplied Losses............... 5 ESA Net Income................................ 5 ESOP.......................................... 5 Event of Default.............................. 44 Facility...................................... 17 Federal Release............................... 15 Final Borrowing Date.......................... 5 Fiscal Year................................... 5 Fixed Rate Base Rate.......................... 6 Fixed Rate Interest Rate...................... 6 Fixed Rate Loan............................... 6 Fixed Rate Lockout............................ 48 Fixed Rate or Fixed Rate Interest Rate........ 6 Fixed Rate Prepayment Premium................. 50 Fixed Rate Spread............................. 6 Floating Rate Base Rate....................... 6 Floating Rate Interest Rate................... 6 Floating Rate Loan............................ 6 Floating Rate Lockout......................... 48 Floating Rate or Floating Rate Interest Rate.. 6 Floating Rate Spread.......................... 6 GAAP.......................................... 6 Governmental Authority........................ 6 Hotel Property................................ 7 Identified Rate............................... 18 Indebtedness.................................. 7 Indemnitee.................................... 53 Independent................................... 8 Interest Period............................... 8 IRS........................................... 8 Leases........................................ 8 Legal Requirement............................. 8 Lender........................................ 1 Lending Office................................ 8 LIBOR......................................... 8 Lien.......................................... 9 Liquidity Reserve............................. 25 Liquidity Reserve Account..................... 25 Loan.......................................... 9 Loan Amount................................... 9 Loan Constant................................. 9 Loan Documents................................ 10 Loan Group.................................... 18 Loan Party.................................... 10 Loans......................................... 9 Management Agreement.......................... 10 Manager....................................... 10 Material Adverse Change....................... 10 Material Subsidiary........................... 10 Maturity Date................................. 10 Minimum Identified Rate Advance............... 18 Mortgages..................................... 10 Multiemployer Plan............................ 11 Net Operating Income.......................... 11 Net Proceeds.................................. 11 Net Worth..................................... 11 Note.......................................... 12 Notice of Borrowing........................... 17 Obligations................................... 12 Other Taxes................................... 21 Payment Date.................................. 12 PBGC.......................................... 12 Pension Plan.................................. 12 Permitted Encumbrances........................ 23 Person........................................ 12 Plan.......................................... 12 Plans......................................... 41 Prepayment.................................... 49 Principal Amount.............................. 13 Principal Payments............................ 13 Property Loan Agreement....................... 23 Proposed Hotel................................ 13 Rating Agency................................. 13 Realty........................................ 27 Recognized Appraiser.......................... 13 Rent.......................................... 13 Requirement of Law............................ 13 Responsible Officer........................... 14 Single Purpose Entity......................... 14 Solvent....................................... 14 Stated Maturity............................... 14 Stock......................................... 15 Stock Equivalents............................. 15 Stock Market Capitalization................... 15 Subsidiary.................................... 15 Tangible Net Worth............................ 15 Taxes......................................... 20 Title Insurance Policy........................ 24 Transfer...................................... 43 Treasury Rate................................. 15 Unrestricted Cash On Hand..................... 16 Unscheduled Payments.......................... 16 Value......................................... 30 Yield Maintenance Premium..................... 16 v CREDIT FACILITY AGREEMENT, dated as of the 17th day of May, 1996, between EXTENDED STAY AMERICA, INC., a Delaware corporation ("ESA"), having an address at 500 East Broward Boulevard, Suite 950, Fort Lauderdale, FL 33394-3073 and CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION, a Delaware corporation ("Lender"), having an address at 55 East 52nd Street, New York, NY 10055. W I T N E S S E T H : ------------------- WHEREAS, ESA has requested that Lender make loan advances to ESA's Subsidiaries of up to $300,000,000 in aggregate principal amount outstanding at any one time, for the purposes hereinafter specified; and WHEREAS, Lender is willing to make funds available for such purposes upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows: 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acquired Hotel Property" means a Hotel Property with a certificate of occupancy at the time of acquisition and at least 12 months of operating history. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have the meanings correlative to the foregoing. "Agreement" means this Credit Facility Agreement, together with all Exhibits and Schedules hereto, as the same may be amended, supplemented or otherwise modified from time to time. 1 "Applicable Amortization Period" means, for a Floating Rate Loan, twenty years and for a Fixed Rate Loan, fifteen years. "Applicable Loan Amount" means, an amount which would result in a Debt Service Coverage of 1.4, calculated as of the date of a Notice of Borrowing, using the Applicable Loan Constant. "Applicable Loan Constant" means, as of the date of the initial rate of a Loan is determined, the higher of: (a) the Loan Constant calculated using the Applicable Loan Constant Amortization Period and the Floating Rate Interest Rate or Fixed Rate Interest Rate, as applicable, and (b) 11.5%. "Applicable Loan Constant Amortization Period" means, for a Developed Hotel Property, twenty-five years and for an Acquired Hotel Property, twenty years. "Appraisal" means an appraisal using methodologies reasonably acceptable to Lender at the time such appraisal is or was made and performed by a Recognized Appraiser. "Approved Hotel" means any Hotel approved by Lender pursuant to Section 4.1 or Section 4.2 hereof. "Approved Manager Standard" means the standard of business operations, practices and procedures customarily employed by entities having a senior executive with at least seven (7) years' experience in the management of motels or residence hotels, it being agreed that ESA Management, Inc. satisfies the Approved Manager Standard on the date hereof. "Assignment Agreement" means, with respect to each Hotel Property, an Assignment of Leases and Rents and Security Deposits, substantially in the form of Exhibit 1.1A, to be given by the relevant Borrower to Lender. "Assumed Rate" means 9.9% per annum. "Bank" means Citibank, N.A., or any other bank hereafter selected by Lender. "Borrower" means a Single Purpose Entity, as approved by Lender, which shall be a corporation wholly owned (directly or indirectly) by ESA and over which ESA has control (as defined in the definition of Affiliate), that executes and delivers a Note for so long as such Note is outstanding and which is the owner of the Hotel Property which is collateral securing such Note. 2 "Business Day" means a day of the year on which banks are not required or authorized to close in New York City. "Cash Flow Available for Debt Service" means Net Operating Income for each Hotel Property less the annualized (or portion thereof) Recurring FF & E Monthly Amount, as such term is defined in the Property Loan Agreement, for such Hotel Property or in the case of a Developed Hotel, Net Operating Income less the annualized (or portion thereof) Recurring FF&E Monthly Amount, projected by a Loan Party and approved by Lender. "Closing Date" means the date on which any Loan is advanced. "Code" means the Internal Revenue Code of 1986, as amended and as it may be further amended from time to time, any successor statutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto. "Collateral" means all property and interests in property and proceeds thereof now owned or hereafter acquired by any Loan Party in or upon which a Lien is granted under any of the Collateral Documents. "Commitment" means that certain loan commitment letter dated May 7, 1996, by and among Lender, and ESA. "Construction Costs" means reasonable third-party out-of-pocket costs incurred by ESA or the applicable Borrower for the construction of an Approved Hotel, including: (i) the purchase price of the land, along with related title insurance and recording fees, (ii) the costs incurred to improve the land to a state upon which the building(s) can be constructed and operated, (iii) the costs incurred in making the required utilities available at the property, (iv) all survey, architect, environmental, and engineering fees, (v) all tap, impact, and similar fees, (vi) the costs incurred to construct and furnish the buildings, including the office, laundry, and storage areas, (vii) the cost of landscaping and signage, (viii) construction loan interest calculated at the lower of the actual interest rate or 10% per annum and construction loan fees calculated at the lower of the actual fees or 1% of the construction loan to the extent that such interest and fees are paid to a Person that is not an Affiliate of ESA or the Borrower, (ix) reasonable legal and professional fees incurred in pursuit of the preceding, (x) a development fee equal to 3.6% of the preceding items which may be paid to an Affiliate of the Borrower in lieu of corporate expenses and overhead, and (xi) a loan fee of 1% of the amount of the preceding which is financed by the Lender. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness or Contractual Obligation of another Person, if the purpose or intent of such Person in incurring 3 the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations of a Person include, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of an obligation of another Person, and (b) any liability of such Person for an obligation of another Person through any agreement (contingent or otherwise) to (i) purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) maintain the solvency or any balance sheet item, level of income or financial condition of another Person, (iii) purchase, sell or lease (as lessor or lessee) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such obligation or to assure the holder of such obligation against loss, or (iv) supply funds to or in any other manner invest in such other Person (including, without limitation, to pay for property or services irrespective of whether such property is received or such services are rendered), if in the case of any agreement described under subclause (i), (ii), (iii) or (iv) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any material agreement, instrument or undertaking to which such Person is a party or by which it or any of the property owned by it is bound. "Debt Service" means for any period, the amount of interest and principal payments due and payable in accordance with the relevant Note during an applicable period which interest, in respect of Floating Rate Loans, shall be computed at the Floating Rate Interest Rate applicable at the beginning of such period. "Debt Service Coverage" means the quotient obtained by dividing the Cash Flow Available for Debt Service for a Hotel Property by the Debt Service (for the applicable period) for such Hotel Property. 4 "Default" means any event that would constitute an Event of Default if all requirements in connection therewith for the giving of notice, the lapse of time, and the happening of any further condition, event or act, had been satisfied. "Default Rate" shall be a rate equal to four percent (4%) above the rate otherwise applicable, subject to Section 15.17 hereof. "Default Rate Interest" means, to the extent the Default Rate becomes applicable, interest in excess of the interest that would have accrued on (a) the Loans and (b) any accrued but unpaid interest, if the Default Rate was not applicable. "Developed Hotel Property" means a Hotel Property built by ESA or any Affiliate for use as an extended stay facility or an operating Hotel Property acquired by ESA or any Affiliate, which when acquired, had less than 12 months of operating history. "Dollars" and the sign "$" each mean the lawful money of the United States of America. "ERISA" means the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time and any regulations issued pursuant thereto, as may be amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control or treated as a single employer with any Loan Party within the meaning of Section 414 (b), (c), (m) or (o) of the Code. "ESA Cumulative Unapplied Losses" means the cumulative net losses of ESA, if any, for all Fiscal Years since the incorporation of ESA ending with the Fiscal Year prior to the Fiscal Year in which ESA Net Income is being calculated for the purpose of determining if a dividend is permitted to be paid in accordance with Section 8.6. "ESA Net Income" means the aggregate net income of ESA for the applicable period determined on a consolidated basis in conformity with GAAP. "ESOP" means any employee stock ownership plan or arrangement as defined in Section 407(d)(6) of ERISA or Code Section 4975(e)(7). "Final Borrowing Date" means May 17, 1999. "Fiscal Year" means the twelve month period commencing on January 1 and ending on December 31 during each year of the term of this Agreement, or such other fiscal year of 5 ESA or any Borrower as ESA or such Borrower may select from time to time with the prior written reasonable consent of Lender. "Fixed Rate Base Rate" means the Treasury Rate. "Fixed Rate or Fixed Rate Interest Rate" means the Fixed Rate Base Rate plus the Fixed Rate Spread. "Fixed Rate Loan" means a Loan that bears interest with reference to the Fixed Rate Interest Rate. "Fixed Rate Spread" means an amount calculated in the following manner for each Fixed Rate Loan; if prior to the advance of the applicable Loan for which the Fixed Rate Spread is being calculated, Lender has advanced Fixed Rate Loans in amounts (i) equal to or less than $75,000,000, then the Fixed Rate Spread for such Loan is 3.85% (385 basis points); (ii) equal to or greater than $75,000,001 but equal to or less than $150,000,000, then the Fixed Rate Spread for such Loan shall be 3.75% (375 basis points); (iii) equal to or greater than $150,000,001 but less than or equal to $225,000,000, then the Fixed Rate Spread for such Loan shall be 3.65% (365 basis points); (iv) equal to or greater than $225,000,001, then the Fixed Rate Spread for such Loan shall be 3.55% (355 basis points); it being understood that once a Fixed Rate Spread has been determined for a Loan, in no event shall it be reduced. "Floating Rate Base Rate" means LIBOR. "Floating Rate or Floating Rate Interest Rate" means the Floating Rate Base Rate plus the Floating Rate Spread. "Floating Rate Loan" means a Loan that bears interest with reference to the Floating Rate Interest Rate. "Floating Rate Spread" means an amount equal to 3% (300 basis points). "GAAP" means generally accepted accounting principles in the United States of America, as of the date of the applicable financial report, consistently applied. "Governmental Authority" means, with respect to any Person, any federal or state government or other political subdivision thereof and any entity, including any regulatory or administrative authority or court, exercising executive, legislative, judicial, regulatory or administrative or quasi- administrative functions of or pertaining to government, and any arbitration board or tribunal in each case, having jurisdiction over such applicable Person or 6 such Person's property and any stock exchange on which shares of capital stock of such Person are listed or admitted for trading. "Hotel Property" means each of the Approved Hotels financed or refinanced by a Borrower using the proceeds of a Loan or Loans made by Lender hereunder while the respective Loans are outstanding. "Indebtedness" of any Person means: (i) all indebtedness of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all capitalized lease obligations of such Person, (v) all Contingent Obligations of such Person, (vi) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any Stock or Stock Equivalents of such Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (vii) all obligations of such Person under interest rate swap or hedging contracts, (viii) all Indebtedness referred to in clause (i), (ii), (iii), (iv), (v), (vi) or (vii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and general intangibles) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (ix) in the case of ESA or any Borrower, the Obligations, and 7 (x) all liabilities of such Person that would be shown on a balance sheet of such Person prepared in conformity with GAAP. "Independent" means, when used with respect to any Person, a Person who (i) is in fact independent, (ii) does not have any direct financial interest or any material indirect financial interest in ESA, or in any Affiliate of ESA or any constituent partner, shareholder, member or beneficiary of ESA and (iii) is not connected with ESA or any Affiliate of ESA or any constituent partner, shareholder, member or beneficiary of ESA as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be provided, such opinion or certificate shall state that the Person executing the same has read this definition and is Independent within the meaning hereof. "Interest Period" shall mean for each Loan, the period commencing on the date of such Loan and thereafter commencing on each Payment Date, and ending on the day prior to the first Payment Date thereafter for each such Interest Period. "IRS" means the Internal Revenue Service, or any successor thereto. "Leases" means, with respect to ESA or any Borrower, all leases, licenses and other occupancy agreements affecting real property owned by ESA or any Subsidiary as such may be amended, supplemented or otherwise modified from time to time to the extent permitted by this Agreement. "Legal Requirement" means as to any Person, the certificate of incorporation and by-laws or other organization or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Lending Office" means, with respect to Lender, the office located at 55 East 52nd Street, New York, NY 10055-0186 or such other office of Lender (in the United States of America) as Lender may from time to time specify to ESA. "LIBOR" means the rate (expressed as a percentage per annum) for deposits in U.S. dollars, for a 30 day period, that appears on Telerate Page 3750 (or the successor thereto) as of 11:00 a.m., London, England time, on the related Determination Date. As used herein "Determination Date" shall mean the date two London business days prior to the first day of each Interest Period for a Loan. If such rate does not appear on Telerate Page 3750 as of 11:00 a.m., London, England time, on such Determination Date, LIBOR shall be the arithmetic mean of the offered rates (expressed as a percentage per annum) for deposits in 8 U.S. dollars for a 30 day period that appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London, England time, on such Determination Date, if at least two such offered rates so appear. If fewer than two such offered rates appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London, England time, on such Determination Date, Lender shall request the principal London, England office of any four major reference banks in the London interbank market selected by Lender to provide such bank's offered quotation (expressed as a percentage per annum) to prime banks in the London interbank for deposits in U.S. dollars for a 30 day period as of 11:00 a.m., London, England time, on such Determination Date for the amounts of not less than U.S. $1,000,000. If at least two such offered quotations are so provided, LIBOR shall be the arithmetic mean of such quotations. If fewer than two such offered quotations are so provided, Lender shall request any three major banks in New York City selected by Lender to provide such bank's rate (expressed as a percentage per annum) for loans in U.S. dollars to leading European banks for a 30 day period as of approximately 11:00 a.m., New York City time, on the applicable Determination Date for amounts of not less than U.S. $1,000,000. If at least two such rates are so provided, LIBOR shall be the arithmetic mean of such rates. If fewer than two such rates are so provided, then LIBOR shall be LIBOR as in effect prior to the applicable Determination Date. LIBOR shall be determined in accordance with this paragraph by Lender or its agent, whose determination shall be conclusive, absent manifest error. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever intended to secure payment of any Indebtedness or other obligation, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor (excluding precautionary filings). "Loan" or "Loans" means the Fixed Rate Loans and the Floating Rate Loans advanced or to be advanced by Lender to each Borrower pursuant to the terms hereof. "Loan Amount" means the total amount outstanding under the Loans or otherwise owing under the Notes or hereunder from time to time. "Loan Constant" means a number calculated by dividing: (x) the annualized equal monthly payments of principal and interest sufficient to completely amortize a loan over a given period at a given interest rate by (y) a given loan amount. 9 "Loan Documents" means, collectively, this Agreement, the Notes, the Collateral Documents and each certificate, agreement or document executed by a Loan Party and delivered to Lender in connection with or pursuant to any of the foregoing, as such agreements, documents or instruments may be amended, modified or supplemented from time to time. "Loan Party" means ESA and each Borrower. "Management Agreement" means an agreement relating to the operation and/or management of a Hotel Property between the appropriate Borrower and a Manager, substantially in a form as shall be approved by Lender, which approval shall not be unreasonably withheld or delayed. "Manager" means ESA Management, Inc., a wholly owned subsidiary of ESA, or such other manager meeting the Approved Manager Standard as shall be approved by Lender (which approval shall not be unreasonably withheld or delayed), as manager under the Management Agreement. "Material Adverse Change" means a material adverse change in (a) the condition (financial or otherwise), business, performance, prospects, operations or properties of ESA and its Subsidiaries taken as one enterprise or ESA and the Borrowers taken as one enterprise, (b) the legality, validity or enforceability of any Loan Document, (c) the perfection or priority of the Liens granted pursuant to the Collateral Documents, (d) the ability of any Borrower (or if then guaranteed by ESA, then the ability of ESA and such Borrower) to repay the Obligations or of any Loan Party to perform its material obligations under any Loan Document, or (e) the rights and remedies of Lender under the Loan Documents. "Material Subsidiary" means any Subsidiary which has ten million dollars or more of Indebtedness. "Maturity Date," when used with respect to each Note, means the Stated Maturity for the Loan evidenced by such Note or such other date pursuant to the Note on which the final payment of principal, and premium, if any, on which the Note becomes due and payable as therein or herein provided, whether at Stated Maturity or by declaration of acceleration, or otherwise. "Mortgages" means the valid and enforceable first priority mortgages or deeds of trust made or required herein to be made by each Borrower, substantially in the form of Exhibit 1.2 (but modified as required by Lender's local counsel to meet state-specific requirements 10 and customs), as such Mortgages may be amended, supplemented or otherwise modified from time to time. "Multiemployer Plan" means, as of any applicable date, a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, and to which any Loan Party, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, or within the six-year period ending at such date, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Operating Income" means in each Fiscal Year or portion thereof during the term hereof, Operating Income less Operating Expenses. Operating Income means, in each Fiscal Year or portion thereof during the term hereof, all revenue derived by a Borrower arising from the Hotel Property including, without limitation, Rent, and all other income (including laundry, vending, and other service income), adjusted to reflect the lesser of actual occupancy or 95%. Operating Expenses means, in each Fiscal Year or portion thereof during the term hereof, all expenses directly attributable to the operation, repair and maintenance of the Hotel Property including, without limitation, Impositions (as defined in the Mortgages), insurance premiums, management fees (calculated as 4% of gross revenues), satellite and cable television and telephone expenses, payments to third party suppliers, general and administrative and marketing expenses, utilities, housekeeping expenses, employee taxes and benefits. Operating Expenses shall also include reserves for Contingent Obligations (but shall exclude any payments made from such reserves). Operating Expenses shall not include interest, principal and premium, if any, due under the Notes or otherwise in connection with the Loans, income taxes, extraordinary capital improvements costs, or any non-cash charge or expense such as depreciation. "Net Proceeds" means the excess of (i)(x) the purchase price (at foreclosure or otherwise) actually received by Lender with respect to a Hotel Property as a result of the exercise by Lender of its rights, powers, privileges and other remedies after the occurrence of an Event of Default, or (y) in the event that Lender (or Lender's nominee) is the purchaser at foreclosure by credit bid, then the amount of such credit bid, in either case, over (ii) all costs and expenses, including, without limitation, all attorneys' fees (to the extent approved by the court in the case of judicial foreclosure) and disbursements and any brokerage fees, if applicable, incurred by Lender in connection with the exercise of such remedies, including the sale of such Hotel Property after a foreclosure against such Hotel Property. "Net Worth" of any Person means at any date the excess of (a) the total assets of such Person and its Subsidiaries at such date determined on a consolidated basis in conformity with GAAP over (b) all obligations which in conformity with GAAP would be included in 11 determining total liabilities as shown on the liabilities side of a consolidated balance sheet of such Person and its Subsidiaries at such date. "Note" means any of several promissory notes, made by each of the Borrowers owning the respective Hotel Property, payable to the order of Lender in a principal amount equal to the relevant Loan advance, substantially in the form of Exhibit 1.3A or Exhibit 1.3B, evidencing the Indebtedness of each Borrower to Lender resulting from the Loans made by Lender. "Obligations" means the Loans and all other advances, debts, liabilities, obligations, covenants and duties owing by ESA, Borrowers and all Subsidiaries to Lender, any Affiliate of Lender or any Indemnitee, of every type and description, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement or under any other Loan Document, whether or not for the payment of money, loan, guaranty, indemnification, or in any other manner, whether direct or indirect (including, without limitation, those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term "Obligations" includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum chargeable to ESA and all Subsidiaries under this Agreement or any other Loan Document. "Payment Date" means, with respect to each month, the first calendar day in such month, or if such day is not a Business Day, the next following Business Day. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" means a plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA or Code Section 412 and which any Loan Party, any of its Subsidiaries or any ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Person" means an individual, partnership, corporation (including, without limitation, a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a Governmental Authority. "Plan" means an employee benefit plan, as defined in Section 3(3) of ERISA, which any Loan Party or any of its Subsidiaries maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. 12 "Principal Amount" means the aggregate principal balance of any Loan as such amount may be increased or decreased from time to time pursuant to the terms of this Agreement, the Notes or the other Loan Documents. "Principal Payments" means all payments of principal made pursuant to the terms of the Notes. "Proposed Hotel" means any proposed Developed Hotel Property or proposed Acquired Hotel Property to be used for the purpose of offering extended stay hotel services or other mid-term lodging services that ESA desires to finance using the proceeds of a Loan made by Lender hereunder. "Rating Agency" means any nationally recognized statistical agency selected by Lender including, without limitation, Duff & Phelps Rating Co., Fitch Investors Services, Inc., Moody's Investors Services, Inc., and/or Standard and Poors Corporation, collectively, and any successor to any of them; provided, however, that at any time during which the Loan is an asset of a securitization, "Rating Agency" means the rating agency or rating agencies that from time to time rate the securities issued in connection with such securitization. "Recognized Appraiser" means a qualified and MAI certified professional appraiser as may be selected or approved by Lender, having at least five (5) years' prior experience in performing real estate appraisals in the geographic area where the property being appraised is located, having a recognized expertise in appraising properties operated as hotel or other lodging facilities. "Rent" means room charges, rental revenues (whether denominated as basic rent, additional rent, percentage rent, escalation payments, electrical payments, telephone charges or otherwise) and other fees and charges payable by guests or users, whether pursuant to Leases or otherwise in connection with the Hotel Property. "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and all federal, state and local laws, rules and regulations, including, without limitation, federal, state or local securities, antitrust and licensing laws, all food, health and safety laws, and all applicable trade laws and requirements, including, without limitation, all disclosure requirements of Environmental Laws, ERISA and all orders, judgments, decrees or other determinations of any Governmental Authority or arbitrator, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 13 "Responsible Officer" means, with respect to any Person, any of the principal executive officers or general partners of such Person. "Single Purpose Entity" means a Person, other than an individual, which is formed or organized solely for the purpose of holding, directly, an undivided 100% ownership interest in a Hotel Property (unless Lender, in its sole discretion, consents to the Single Purpose Entity owning more than one Hotel Property), does not engage in any business unrelated to the Hotel Property, does not have any assets other than those related to its interest in the Hotel Property or any indebtedness other than as permitted by this Agreement or the other Loan Documents, has its own separate books and records and has its own accounts, in each case that are separate and apart from the books and records and accounts of any other Person, holds itself out as being a Person, separate and apart from any other Person and meets Lender's reasonable requirements (including organizational and structural requirements) to establish that, after the guaranty of ESA as provided in Section 8.9 is terminated with respect to the applicable Loan pursuant to Section 8.9 and the obligations of ESA in Section 15.5 are terminated, such Person would not be consolidated with ESA for bankruptcy purposes. "Solvent" means, as to any Person, that (a) the sum of the assets of such Person, at a fair valuation, exceeds its liabilities, including contingent liabilities, (b) such Person has sufficient capital with which to conduct its business as presently conducted and as proposed to be conducted and (c) such Person has not incurred debts, and does not intend to incur debts, beyond its ability to pay such debts as they mature. For purposes of this definition, "debt" means any liability on a claim, and "claim" means (a) a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (b) a right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. With respect to any such contingent liabilities, such liabilities shall be computed in accordance with GAAP at the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stated Maturity," when used with respect to the Notes or any installment of interest and/or principal payment thereunder, means (i) with regard to any Fixed Rate Loan and all other amounts due hereunder (other than in regard to any Floating Rate Loan), the earlier of: (x) the date seven years and three months after the first Fixed Rate Loan is advanced hereunder or (y) May 17, 2004; and (ii) with regard to any Floating Rate Loan, May 17, 1999. 14 "Stock" means shares of capital stock, beneficial or partnership interests, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Stock Market Capitalization" means, on any given day, the market closing price, per share, of outstanding common and preferred shares of ESA multiplied by the respective number of authorized, issued and outstanding common and preferred shares of ESA. "Subsidiary" means, with respect to any Person, any corporation, partnership or other business entity of which an aggregate of 50% or more of the outstanding Stock having ordinary voting power to elect a majority of the board of directors, managers, trustees or other controlling persons, is, at the time, directly or indirectly, owned or controlled by such Person and/or one or more Subsidiaries of such Person (irrespective of whether, at the time, Stock of any other class or classes of such entity shall have or might have voting power by reason of the happening of any contingency). "Tangible Net Worth" of any Person means, at any date, the Net Worth of such Person at such date, excluding, however, from the determination of the total assets of such Person at such date, (i) all goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) deferred charges or unamortized debt discount and expense, (iii) all reserves carried and not deducted from assets, (iv) treasury stock and capital stock, obligations or other securities of, or capital contributions to, or investments in, any Subsidiary of such Person, (v) securities which are not readily marketable, (vi) cash held in a sinking or other analogous fund (other than funds held by Lender pursuant to this Agreement or any other Loan Document) established for the purpose of redemption, retirement, defeasance or prepayment of any stock or Indebtedness, (vii) any write-up in the book value of any asset resulting from a revaluation thereof, and (viii) any items not included in clauses (i) through (vii) above which are treated as intangibles in conformity with GAAP. "Treasury Rate" means, at the time of determination, a fixed rate equal to the linear interpolation of the yields of the five year and ten year U.S. Treasury Constant Maturities, as published in the most current Federal Reserve Statistical Release H.15-Selected Interest Rates (the "Federal Release"), approximating that of a hypothetical noncallable U.S. Treasury 15 obligation with a seven year maturity. In the event the Federal Release is no longer published, Lender shall select a comparable publication to determine the Treasury Rate. "Unrestricted Cash on Hand" means cash or cash equivalents held by ESA, at the time of determination, the use of which has not been restricted or pledged. "Unscheduled Payments" means (i) all Loss Proceeds (as defined in the Property Loan Agreement) that any Borrower has elected or is required to apply to the repayment of the Loans pursuant to this Agreement, the Notes or any other Loan Documents, (ii) any funds representing a voluntary or involuntary principal prepayment other than scheduled Principal Payments, (iii) any Net Proceeds and (iv) any amounts paid from the Curtailment Reserve Sub-Account (as defined in the Property Loan Agreement). "Yield Maintenance Premium" means the premium that shall be the product of (1) a fraction, the numerator of which is the positive excess, if any, of (i) the present value of all future payments of principal and interest on the Principal Amount, including the principal amount due at maturity, to be made on the relevant Notes before the prepayment in question, discounted at an interest rate per annum equal to the sum of (a) the Treasury Constant Maturity Yield Index published during the second full week preceding the date on which such premium is payable for instruments having a maturity coterminous with the remaining term of the Notes, and (b) fifty (50) basis points, over (ii) the Principal Amount immediately before such prepayment, and the denominator of which is the Principal Amount immediately prior to the prepayment, and (2) the Principal Amount being prepaid; provided, however, that if there is no Treasury Constant Maturity Yield Index for instruments having a maturity coterminous with the remaining term of the Notes, then the index referred to in (1) above shall be equal to the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). 16 1.2 Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including." 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. 1.4 Certain Terms. A. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, and not to any particular Article, Section, subsection or clause in this Agreement. References herein to an Exhibit, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit or Schedule to, or Article, Section, subsection or clause in this Agreement. B. The term "Lender" includes its successors and each assignee of Lender who becomes a party hereto pursuant to Article 14. 2 AMOUNTS AND TERMS OF THE LOANS 2.1 The Loans. A. On the terms and subject to the conditions contained in this Agreement, Lender agrees to make Loans to Borrowers from time to time on Business Days during the period from the date hereof through the Final Borrowing Date in an aggregate outstanding amount not to exceed THREE HUNDRED MILLION DOLLARS ($300,000,000) (the "Facility") to be used for the purpose of financing Approved Hotels. Amounts repaid or prepaid pursuant to each Loan may not be reborrowed, subject to reallocation of any Loan in accordance with Article 6. No Loans may be borrowed after the Final Borrowing Date. The Loans shall be evidenced by the Notes and secured by the Mortgages and the other Loan Documents. 2.2 Making the Loans. A. Each Loan shall be made on notice, given by ESA and the Borrower to Lender not later than 12:00 noon (New York City time) on the tenth (10th) Business Day prior to the date of the proposed Loan. Each such notice (a "Notice of Borrowing") shall 17 specify (i) the date of such proposed Loan, (ii) the amount of such proposed Loan, (iii) subject to Section 2.2D and 2.9C, the Identified Rate for the proposed Loan, (iv) the account or accounts to which the Loan should be made, (v) details of the Approved Hotel for which the proceeds of the proposed Loan shall be used and how the Loan proceeds will be applied and (vi) evidence satisfactory to Lender of the calculation of the Value and the Debt Service Coverage for the relevant Hotel Property and calculation of the amount of the Loan demonstrating that assuming such Loan was made on the date of the Notice of Borrowing, it complied with the limitations set forth in Section 5.1 or 5.2, as applicable. B. Upon fulfillment of the applicable conditions set forth in Articles 3 and 4, and subject to the restrictions in Section 5.1 or 5.2, as applicable, Lender shall on the date of the proposed Loan, make available to the relevant Borrower at the account or accounts specified in the Notice of Borrowing, in immediately available federal funds, the Loan. C. Each Notice of Borrowing shall be irrevocable and binding on ESA and the relevant Borrower. The Loan Party which gave the Notice of Borrowing shall indemnify Lender for the difference between the interest on the amount stated in the Notice of Borrowing at the applicable Fixed Rate Base Rate or Floating Rate Base Rate, as applicable, and Lender's actual cost of funds not advanced from time to time for the period of any delay (not to exceed the period until the date of the next draw or draws hereunder aggregating the amount of the sum not borrowed is reached), plus any cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Lender to fund any Loan to be made by Lender when such Loan, as a result of any failure (by any party other than Lender) to fulfill on or before the date specified in any Notice of Borrowing for a proposed Loan the applicable conditions set forth in Articles 3 and 4. D. Once ESA or any Borrower has selected the Fixed Rate Interest Rate or Floating Rate Interest Rate (the "Identified Rate"), any Notice of Borrowing must select the Identified Rate until Lender has advanced, in the aggregate, Loans using such Identified Rate in an amount equal to or greater than $50,000,000 (a "Minimum Identified Rate Advance", each such group of Loans consecutively made and aggregating to a Minimum Identified Rate Advance, a "Loan Group"). Upon reaching the Minimum Identified Rate Advance, for the next following Loan, ESA or any Borrower may select a new Identified Rate, which once selected, must remain the Identified Rate until the Minimum Identified Rate Advance is reached with respect to such Identified Rate. 2.3 Fees. ESA agrees to pay to Lender on behalf of the Borrowers on the date hereof, a non-refundable advisory fee in the sum of THREE MILLION ($3,000,000) (the "Advisory Fee"). 18 2.4 Repayment of the Loans. The Principal Amount of the respective Loans, together with all accrued and unpaid interest thereon and all other amounts due under the respective Notes and the other Loan Documents, shall be due and payable on the Maturity Date. Upon payment in full (as set forth above) of a respective Loan and of all other Loans maturing on the same Maturity Date, the Hotel Property of the relevant Borrower shall be released from the relevant mortgage and all other Collateral Documents. 2.5 Payment of Interest and Principal. Each Borrower shall pay on each Payment Date an amount consisting of a payment on account of interest plus a payment on account of principal, which amount in respect of interest shall equal the full amount of interest accrued on all Loans of such Borrower and in respect of principal shall equal the amount which would be the amount for such Payment Date on an amortization schedule based on equal monthly payments of principal and interest which, would be sufficient to completely amortize the Principal Amount over the Applicable Amortization Period at the Assumed Rate for Floating Rate Loans or the Fixed Rate Interest Rate for Fixed Rate Loans. Payments shall be made monthly, in arrears, on the first Payment Date and on each Payment Date thereafter until the date the Principal Amount is paid in full. Interest shall accrue at the following rates per annum: A. Subject to Section 15.17 hereof, for Floating Rate Loans, equal at all times during the applicable Interest Period for each Floating Rate Loan to the Floating Rate Interest Rate for such Interest Period in effect on the first day of such Interest Rate. B. Subject to Section 15.17 hereof, for Fixed Rate Loans, at a rate per annum equal at all times to the Fixed Rate, as determined on the date of the advance of such Fixed Rate Loan. Notwithstanding the forgoing, and subject to Section 15.17, after the occurrence of any Event of Default, the interest applicable to all of the Loans shall be the Default Rate. Lender shall give prompt notice to the Borrowers of the applicable interest rate determined by Lender. Examples of calculations made in conformity with this section are attached as Exhibit 2.5. 2.6 Capital Adequacy. If (i) the introduction of or any change in the interpretation of any law or regulation, (ii) compliance with any law or regulation, or (iii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by Lender or any corporation controlling Lender and Lender reasonably determines that such amount is based upon the existence of Lender's unfunded commitments under this Agreement and its other commitments of this type, then, upon demand by Lender, ESA shall pay to Lender, from time to time as specified by Lender, 19 additional amounts sufficient to compensate Lender for the cost of maintaining any excess capital in the light of such circumstances, to the extent that Lender reasonably determines such increase in capital to be allocable to the existence of the Lender's unfunded commitments hereunder to ESA. A certificate as to such amounts submitted to ESA by Lender shall be conclusive and binding for all purposes absent manifest error. 2.7 Payments and Computations. A. ESA and each Borrower shall make its required payments hereunder and under the Notes not later than 12:00 noon (New York City time) on the day when due, in Dollars, to Lender at its address referred to in Section 15.3 in immediately available funds without set-off, deduction or counterclaim, to be applied in accordance with the terms of this Agreement. Payments received by Lender after 12:00 noon (New York City time) shall be deemed to be received on the next Business Day. B. All computations of interest shall be made by Lender on the basis of a year of 360 days consisting of twelve 30-day months in the case of Fixed Rate Loans and actual days elapsed in the case of Floating Rate Loans. Each determination by Lender of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. C. Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of any Loan to be made in the next calendar month, such payment shall be made on the immediately preceding Business Day and such prepayment shall in such case be included in the computation of payment of interest or fee, as the case may be. 2.8 Taxes. A. Any and all payments by Borrowers under each Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes measured by Lender's income, and franchise taxes imposed on Lender, by the jurisdiction under the laws of which Lender is organized or doing business or any political subdivision thereof and taxes measured by Lender's net income, and franchise taxes imposed on Lender, by the jurisdiction of Lender's Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, "Taxes"). If Borrowers shall be required by law to deduct any 20 Taxes from or in respect of any sum payable hereunder to Lender (i) the sums payable shall be increased as may be necessary so that after making all required deductions (including, without limitation, deductions applicable to additional sums payable under this Section) Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrowers shall make such deductions, (iii) Borrowers shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, (iv) Borrowers shall deliver to Lender evidence of such payment to the relevant taxation or other authority and (v) Lender shall credit Borrowers against the indemnity obligations contained in this Section for any tax benefits derived by Lender as a result of tax payments made by Borrowers pursuant to this Section. B. In addition, Borrowers agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies of the United States or any political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made under any Loan Document or from the execution, delivery or registration of, or otherwise with respect to, any Loan Document (collectively, "Other Taxes"). C. Borrowers will indemnify Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by Lender and any liability (including, without limitation, for penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days after the date Lender makes written demand therefor. D. Upon request, within 30 days after the date of any payment of Taxes or Other Taxes, Borrowers will furnish to Lender, the original or a certified copy of a receipt evidencing payment thereof, if such receipt is given by the local authority. E. The agreements and obligations of the Borrowers contained in this Section shall survive the payment in full of the Obligations. 2.9 Conversion Option. Provided there is no Event of Default hereunder or under any other Loan Document, a Borrower shall have the option to convert Floating Rate Loans to Fixed Rate Loans in accordance with and subject to the following conditions: A. No Floating Rate Loan may be converted into a Fixed Rate Loan by any Borrower after it has been assigned or participated by Lender. 21 B. Borrowers may not convert any Floating Rate Loans to Fixed Rate Loans, if after giving effect to such conversion, Lender, in the aggregate, would have less than $50,000,000 but more than $0 in Floating Rate Loans outstanding. C. To the extent that Loans have been converted pursuant to Section 2.9B, the Identified Rate in any subsequent Notices of Borrowings must be the Fixed Rate until a Minimum Identified Rate Advance or an integral multiple thereof is satisfied. D. Any conversion must be made on a Payment Date. Borrower must give Lender at least 15 days notice of its intent to convert any Loans and pay all expenses of Borrower and Lender in connection with the conversion. E. In addition to the other requirements of this Section, a Loan may be converted only if it has a Debt Service Coverage, on the date Borrower gives Lender notice of the proposed conversion, of 1.25 using the Applicable Loan Constant for a Fixed Rate Loan. 3 CONDITIONS OF LENDING 3.1 Conditions Precedent to the First Loan. The obligation of Lender to make the first Loan is subject to satisfaction of the condition precedent that Lender shall have received, on the Closing Date with respect to such Loan, the following, each dated as of such Closing Date unless otherwise indicated, in form and substance reasonably satisfactory to Lender. A. Evidence, acceptable to Lender in its sole discretion, of the successful completion by ESA of an issuance of Stock valued, at the initial offering price multiplied by the number of shares of Stock issued, equal in amount to at least $100,000,000. B. Evidence, acceptable to Lender in its sole discretion, that ESA and any Affiliate have satisfied any and all obligations to draw on other lines of credit or sources of financing or received waivers thereof. C. [RESERVED]. D. Favorable opinions of either Johnson, Smith, Hibbard & Wildman Law Firm L.L.P. or Pedersen & Houpt, a professional corporation, counsel to ESA as to such matters as Lender may reasonably request (including nonconsolidation with respect to ESA and every Borrower), substantially in the form of Exhibits 3.1D-1 and 3.1D-2. 22 E. A certificate, signed by a Responsible Officer of ESA, stating that the representations and warranties set forth herein are true and correct on the Closing Date, after giving effect to the Loans being made on the Closing Date and no Default or Event of Default then exists or will exist from the Loan being made on such date. 3.2 Conditions Precedent to Each Loan. The obligation of Lender to make any Loan shall be subject to the further conditions precedent (in addition to the requirements enumerated in Section 3.1) that: A. ESA and Borrower shall have satisfied the conditions of Articles 4 and 9 and any other obligations or conditions precedent under any other Loan Document. B. Borrower and Lender shall have entered into a Property Loan Agreement (the "Property Loan Agreement"), substantially in the form of Exhibit 3.2B. C. Upon the date on which Lender shall make any Loan, ESA and the relevant Borrower, as applicable, shall have executed and delivered to Lender the following (together with any other document now or hereafter executed and delivered by a Loan Party granting a Lien on any of its property to secure payment of the Obligations, collectively, the "Collateral Documents") with respect to the Approved Hotel, each dated as of the date of such Loan, in form and substance reasonably satisfactory to Lender: i. The Note duly executed by the appropriate Borrower, payable to the order of Lender. ii. A Mortgage duly executed and acknowledged by the appropriate Borrower for the Hotel Property in connection with which the Loan is being advanced, which Mortgage shall secure (x) the Note referenced in Section 3.2C(i) and (y) all other Notes which shall have been or shall thereafter be executed and delivered to Lender in connection with the Loans; provided that said Mortgage shall not secure any obligation of ESA, ESA Management, Inc. or ESA Development, Inc. after securitization and further provided, that if the Hotel Property is located in a state with a mortgage recording tax and an additional mortgage recording tax would be payable as a result of Section 3.2C(ii)(y), then the maximum recoverable principal indebtedness under such Mortgage shall be 250% of the Value of such Hotel Property when such Loan is made. Said Mortgage shall be a valid, enforceable and perfected first lien on the Hotel Property, free and clear of all encumbrances, except for the items set forth as exceptions to or subordinate matters in the Title Insurance Policy (hereinafter defined), none of which, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided by the Mortgage or materially affect the value or marketability of the Hotel Property (such items, the "Permitted Encumbrances"). 23 iii. A paid and effective commitment for title insurance (a "Title Insurance Policy") issued by a title company acceptable to Lender, in such form and amounts as are reasonably acceptable to Lender, insuring that such Mortgage is a valid, first priority Lien on such Hotel Property subject only to (i) such exceptions to title which shall have been included in the title report delivered to Lender pursuant to Section 4.1A or 4.2A and which were not included in Lender's letter of acceptance pursuant to Section 4.1 or 4.2 as objections to title, (ii) such other exceptions to title as shall be acceptable to Lender in its reasonable discretion and containing such endorsements and affirmative insurance as Lender may reasonably require (including first loss, last dollar, tie-in and cluster endorsements) together and as are obtainable in the applicable jurisdiction together with co-insurance and re-insurance agreements and true copies of each document, instrument or certificate required by the terms of each such policy, or required to be, or have been, executed, filed, or recorded, in connection with such Mortgage and (iii) a zoning opinion or letter from the relevant Governmental Authority providing assurances as to zoning in form reasonably satisfactory to Lender provided, however, if the Property is located in a jurisdiction where a zoning endorsement is available, then Lender may require an zoning endorsement to the Title Insurance Policy, but ESA or Borrower's obligation to pay for such endorsement shall be limited to $600. iv. An opinion reasonably satisfactory to Lender of counsel and/or local counsel retained by Borrower with respect to the validity and enforceability of the Collateral Documents, substantially in the form of Exhibit 3.2C(iv). v. Duly executed UCC-1 Financing Statements under the applicable Uniform Commercial Code to be filed in connection with such Mortgage in form and substance reasonably satisfactory to Lender, to perfect the Lien created by the applicable Mortgage. vi. Payment of all title insurance premiums, and all documentary, stamp or intangible taxes, recording fees and mortgage taxes payable in connection with the recording of any of the Loan Documents or the issuance of the Title Insurance Policy. vii. An assignment of the Management Agreement, permits and contracts for the Hotel Property, duly executed by ESA or Borrower, as applicable, and Manager, and a copy of the Management Agreement in respect of the Hotel Property, certified by a Responsible Officer. viii. An Assignment Agreement, duly executed by the relevant Borrower. 24 D. Borrower shall have delivered to Lender evidence that the insurance required by the terms of the Mortgage is in full force and effect. E. [RESERVED]. F. The Hotel Property that shall be the subject of such Loan shall, on the date such Loan is proposed to be advanced, be wholly owned by a Borrower that is a Single Purpose Entity that is owned (directly or indirectly) by ESA. G. The following shall be true on the date of such Loan, before and after giving effect thereto and to the application of the proceeds therefrom (and the acceptance by Borrower of the proceeds of such Loan shall constitute a representation and warranty by Borrower that on the date of such Loan such statements are true): i. The representations and warranties of ESA contained in Article 7 and of each Loan Party in the other Loan Documents are correct on and as of such date as though made on and as of such date; and ii. No Default or Event of Default then exists or will result from the Loan being made on such date. H. The making of the Loans on such date does not violate any Requirement of Law and is not enjoined, temporarily, preliminarily or permanently. I. Borrower shall have furnished to Lender a certificate of the Secretary, Assistant Secretary or any other authorized officer of Borrower certifying (i) the resolutions of its Board of Trustees or Directors, as appropriate, approving each Loan Document to which it is a party, (ii) all documents evidencing other necessary trust or corporate action, as appropriate, and required governmental and third party approvals, licenses and consents with respect to each Loan Document to which it is a party and the transactions contemplated thereby, (iii) a copy of its certificates of incorporation and certificate of good standing (certified as of a recent date by the Secretary of State of the state of formation of Borrower) and its by-laws, and (iv) the names and true signatures of each of its officers who has been authorized to execute and deliver any Loan Document or other document required hereunder to be executed and delivered by or on behalf of such Person. J. All costs and accrued and unpaid fees and expenses (including, without limitation, legal fees and expenses) required to be paid to Lender on or before the Closing Date and all interest and principal then due and payable hereunder shall have then been paid. K. [RESERVED]. 25 L. At the closing of each Loan, the Borrower shall have funded a reserve (a "Liquidity Reserve") into an interest-bearing escrow account designated by Lender and in the name of Lender and as additional collateral for Lender (the "Liquidity Reserve Account") for the relevant Loan, which Liquidity Reserve shall be in an amount equal to four months' Debt Service for the relevant Hotel Property. ESA hereby grants Lender a security interest in the Liquidity Reserve Account. In the event that: (i) the Hotel Properties which are open and operating for 90 days or longer taken as a whole have achieved and maintained an aggregate average Debt Service Coverage equal to or greater than 1.25 during the most recent three consecutive months expiring on January 1, April 1, July 1 or October 1 and the relevant Hotel Property has achieved and maintained a Debt Service Coverage equal to or greater than 1.25 for the same period, (ii) no Event of Default exists and no event exists which but for the giving of notice or the passage of time, or both, would constitute an Event of Default, and (iii) provided the relevant Borrower delivers to Lender an certificate signed by a Responsible Officer evidencing, to Lender's reasonable satisfaction and confirmation, that such Debt Service Coverage tests have been met, then Lender shall refund or make available to the Borrower the amount by which the funds in the Liquidity Reserve Account which were deposited in connection with such Hotel Property exceed one month's Debt Service for the Loan then outstanding, provided that the Liquidity Reserve required to be deposited by Borrower with respect to subsequent Loans, shall nonetheless be in the initial amount equal to four month's Debt Service for the relevant Hotel Property. Interest earned on the Liquidity Reserve shall be paid to the relevant Borrower quarterly as long as there is no Event of Default hereunder. If an Event of Default shall occur hereunder, then without notice to ESA or to Borrower, Lender may withdraw and apply or cause to be applied any funds in the Liquidity Reserve Account to the Loans, in such order as Lender may elect. Upon the Maturity Date and the repayment and satisfaction of the Obligations in full, Lender shall refund any remaining funds in the Liquidity Reserve Account to the respective Borrower, as appropriate. M. All escrows required under the Property Loan Agreement have been funded. 4 PROPERTY SPECIFIC CONDITIONS PRECEDENT 4.1 Developed Hotel Properties - General Prerequisites. The obligation of Lender to make a Loan with respect to any Developed Hotel Property shall be subject to the following: A. prior to commencement of construction of the Proposed Hotel, ESA shall have delivered to Lender (and Lender shall have issued its approval of) the following, all in form and substance reasonably satisfactory to Lender: 26 i. details of the location of the Proposed Hotel, including the land thereunder, the existing, if any, and proposed improvements and fixtures thereon including any significant deviations from ESA's typical construction program and all easements and rights benefiting the Proposed Hotel, (collectively, the "Realty") and the interest to be acquired; ii. a written report of an investigation by an environmental consultant (the "Environmental Report"), reasonably acceptable to Lender, containing at least a Phase I site assessment (and, if appropriate, a Phase II assessment) and addressing any significant environmental, health and safety violations, hazards or liabilities to which the owner or operator of the Proposed Hotel may be subject, which report shall demonstrate, to the reasonable satisfaction of Lender, that the Proposed Hotel and the operations thereof are in compliance in all material respects with all applicable Environmental Statutes (as defined in the Mortgage) and are not subject to any material environmental liabilities and costs; iii. a construction budget (the "Construction Budget") of the anticipated Construction Costs which may include a 5% contingency; iv. plans and specifications of the Proposed Hotel, reasonably acceptable to a licensed engineer appointed by Lender; v. a pro-forma operating statement (based on information available to ESA after diligent inquiry that includes detailed line-item justification and explanations) including projected Net Operating Income of the Proposed Hotel for a twelve-month period; vi. pro forma balance sheets and the related consolidated statements of changes in owner's equity (deficit) in respect of such Proposed Hotel; vii. a detailed market analysis of the local and regional market in which the Proposed Hotel will operate, including aerial photos and descriptions of market "demand generators"; viii. a copy of the proposed form of Management Agreement, if any, reasonably acceptable to Lender; ix. [RESERVED]; x. such additional site-specific documents, information and material as Lender may reasonably require; and 27 xi. a current title report issued by a title company reasonably acceptable to Lender. Lender shall issue its acceptance (which acceptance may include, in the case of the title report issued pursuant to Section (xi), a list of such exceptions to title which are not acceptable to Lender) or rejection of the foregoing not later than the date which is 6 Business Days after receipt of items (iii), (iv), (v) and (vi) in final form as designated by Borrower, provided that all items other than (iii), (iv), (v) and (vi) were provided in final form and that items (iii), (v) and (vi) were provided in draft form no later than 15 Business Days prior to such response date. Lender's failure to deliver its acceptance or rejection of the foregoing items within such period shall be deemed its rejection thereof. Upon acceptance in accordance with this clause, the relevant Proposed Hotel shall be deemed an Approved Hotel. B. No later than 6 Business Days prior to a Notice of Borrowing for a requested Loan, ESA shall deliver to Lender a Developed Hotel Statement. For the purposes hereof, "Developed Hotel Statement" means a package containing each of the following in respect of any Proposed Hotel, all in form and content reasonably satisfactory to Lender: i. a letter from the consultant which prepared the Environmental Report stating that after due inquiry, it has no reason to believe that the current environmental, health and safety conditions at the Hotel Property are in any way worse than those indicated in the Environmental Report; ii. a current title report (including UCC searches in the jurisdictions as in the opinion of Lender may be necessary or appropriate), ALTA survey and surveyor's certification, issued by a title company/surveyor reasonably acceptable to Lender; iii. a written statement of an engineering consultant or architect reasonably acceptable to Lender confirming that the Hotel Property was constructed in accordance with the plans and specifications previously submitted to Lender; iv. the final certificate of occupancy (or its equivalent, if then being issued by appropriate Governmental Authorities) as issued for the Proposed Hotel as well as all certificates, licenses and permits necessary for the operation of the Hotel Property as determined in accordance with any Requirement of Law; v. a final Appraisal of the Approved Hotel; and 28 vi. documents evidencing the due formation of a Borrower as a wholly owned direct or indirect Subsidiary of ESA, which Borrower shall hold title to the Hotel Property and shall be a Single Purpose Entity; and vii. proof of ESA's actual Construction Costs, certified by an officer of ESA to Lender, including, but not limited to, a report, with supporting explanations, of any variance from the Construction Budget. viii. an updated pro-forma reconciled, with supporting explanations, to the pro-forma required in Section 4.1A(v). 4.2 Acquired Hotel Properties - General Prerequisites. The obligation of Lender to make a Loan with respect to any Acquired Hotel Property shall be subject to the following: A. No later than 6 Business Days prior to a Notice of Borrowing for a requested Loan, ESA shall deliver to Lender an Acquired Hotel Statement. For the purposes hereof, "Acquired Hotel Statement" means a package containing each of the following in respect of any Acquired Hotel, all in form and substance reasonably satisfactory to Lender: i. The items listed in Section 4.1A(i), (ii), (v), (x) and 4.1B(ii), (v), (vi), and, if applicable, 4.1B(vii) and, if available, 4.1A(iv). ii. Actual operating results for the Acquired Hotel for the previous one year or such longer period, if available. iii. Proof of ESA's costs of acquisition and redevelopment costs, certified by an Officer of ESA to Lender. Lender shall issue its acceptance within 6 Business Days (which acceptance may include, in the case of the title report issued pursuant to section (i), a list of such exceptions to title which are not acceptable to Lender) Lender's failure to deliver its acceptance or rejection of the foregoing items within such period shall be deemed its rejection thereof. Upon acceptance in accordance with this clause, the relevant Proposed Hotel shall be deemed an Approved Hotel. 4.3 Extended Approval Periods. Notwithstanding the foregoing, for the first four Proposed Hotels presented to Lender in accordance with Section 4, and in any event for at least one Hotel presented under Section 4.1 and one presented under Section 4.2, any period of time within which Lender is required to make a decision shall be doubled. 29 5 COMPUTATION OF LOAN AMOUNTS 5.1 Amount of the Loan for a Developed Property. Each Loan for a Developed Property shall be in an amount equal to the lowest of: A. the amount requested in the Notice of Borrowing; or B. sixty-five percent (65%) of the lesser of: i. the Construction Budget previously approved by Lender with respect to the applicable Developed Hotel; or ii. the Value of the applicable Developed Hotel; or C. the Applicable Loan Amount. 5.2 Amount of the Loan. Each Loan for an Acquired Hotel shall be in an amount equal to the lowest of: A. the amount requested in the Notice of Borrowing; or B. sixty-five percent (65%) of the Value of the Acquired Hotel; or C. the Applicable Loan Amount. 5.3 Value. For the purposes of this Agreement, "Value" shall mean the lower of (a) for a Developed Hotel Property, the Construction Costs or for an Acquired Hotel Property, the actual cost of acquisition of the land and improvements and redevelopment or renovation costs, and (b) the amount reflected in a current (current being within six months prior to the date of the proposed Loan advance) MAI appraisal of the completed Hotel Property issued by a Recognized Appraiser. 6 REALLOCATION OF DEBT As of the last day of the 18th or 24th full calendar month after the completion of a Loan Group, (or with respect to a partial Loan Group then on the last day of the 18th or 24th full calendar month after the first Loan in said partial Loan Group was advanced) Lender may reallocate among the Loans in a Loan Group prior to any securitization thereof, if any, in order to maintain a minimum Debt Service Coverage of 1.25 with respect to all such Loans in the Loan Group, as determined and designated by Lender in its sole discretion. If 30 requested by Lender, ESA shall, within ten (10) days after demand by Lender, cause the relevant Borrowers to execute an allonge to the relevant Note and an amendment to any Mortgage (and ESA or the relevant Borrowers shall pay all title insurance premiums and all documentary, stamp or intangible taxes, recording fees and mortgage recording tax payable in connection therewith) and any and all necessary or desirable documents necessary to reflect the increased Loan Amount allocated to the relevant Hotel Property. Any reallocation pursuant to this Section 6 shall be treated by the Lender and the Borrower as an extension of additional credit to the Borrower under any Loan which is increased and a prepayment (without penalty) by a Borrower under any Loan that is decreased thereby. In no event may Lender allocate Loans to ESA, ESA Management, Inc. or ESA Development, Inc. 7 REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, ESA represents, warrants and covenants to Lender as follows: 7.1 Organization and Authority. ESA (i) is a corporation, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and (ii) has all requisite power and authority and all necessary licenses and permits to carry on its business as now conducted and as presently proposed to be conducted. 7.2 Power. ESA has full power and authority to own its property and assets and to carry on its business and operations as now being conducted and as presently contemplated, to execute, deliver and perform, as applicable, the Loan Documents to which it is a party. 7.3 Authorization of Borrowing. The execution, delivery and performance of this Agreement, and the consummation of the Loans have been duly authorized by ESA by all requisite action (including, without limitation, approvals of shareholders) and will constitute the legal, valid and binding obligation of ESA, enforceable against ESA in accordance with its terms, except as enforcement may be stayed or limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in proceedings at law or in equity) and will not (i) violate any provision of its certificate of incorporation, by-laws, or, to its knowledge, any law, judgment, order, rule or regulation of any court, arbitration panel or other Governmental Authority, domestic or foreign, or other Person affecting or binding upon ESA or the Hotel Property, or (ii) violate any provision of any indenture, agreement, mortgage, contract or other instrument to which ESA is a party or by which any of its property, assets or revenues are bound, or be in conflict with, result in an acceleration of any obligation or a breach of or constitute (with notice or lapse of time or both) a default or require any payment or 31 prepayment under, any such indenture, agreement, mortgage, contract or other instrument, or (iii) result in the creation or imposition of any lien, except those in favor of Lender as provided in the Loan Documents to which it is a party. 7.4 Other Agreements. ESA is not a party to nor is otherwise bound by any agreement or instrument that is reasonably likely to result in a Material Adverse Change. ESA is not in violation of its corporate organizational documents or other restriction or any agreement or instrument by which it is bound, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or Governmental Authority, or any Legal Requirement, in each case, applicable to ESA or the Hotel Property, except for such violations that would not, individually or in the aggregate, have a Material Adverse Change. 7.5 Maintenance of Existence. A. ESA at all times since formation has complied, and will continue to comply, with the provisions of its certificate of incorporation and by-laws and the laws of its jurisdiction of formation relating to corporations. B. All statutory requirements regarding the existence of ESA have been observed at all times since its formation and will continue to be observed. C. ESA has at all times accurately maintained, and will continue to accurately maintain, financial statements, accounting records and other corporate documents separate from those of any other Person. ESA has at all times since its formation accurately maintained, and will continue to accurately maintain, its own bank accounts, payroll and separate books of account. D. ESA has at all times paid, and will continue to pay, its own liabilities from its own separate assets. 7.6 Financial Requirements. A. The Stock Market Capitalization of ESA is at least $300,000,000. B. ESA has been at all times, and will continue to be, adequately capitalized in light of the nature of its business. C. ESA has a Tangible Net Worth of not less than $50,000,000. D. ESA has Unrestricted Cash on Hand of at least $20,000,000. 32 E. ESA has a Book Debt/Total Capitalization Ratio (on a consolidated basis and otherwise as determined in accordance with GAAP) less than or equal to .7:1. F. ESA has and will maintain an aggregate debt service coverage of at least 1.4 on a consolidated basis and otherwise (as determined in accordance with GAAP). For the purposes of this section, Developed Hotel Properties (and Acquired Hotel Properties on which $1,000,000 of renovations were made and which were closed three weeks or more to complete such renovations) placed in service within the previous nine month period for which there is a Debt Service Coverage of less than 1.4 shall not be included in this calculation. G. Any liabilities incurred by ESA in connection with this Agreement do not and will not render ESA insolvent; ESA is not contemplating either the filing of a petition by it or a Borrower or a Material Subsidiary under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of its property, and ESA has no knowledge of any Person contemplating the filing of any such petition against it. H. ESA (a) is not engaged and will not engage in any business other than the ownership, management (including third party management) and operation of extended-stay lodging facilities, (b) will not enter into any contract or agreement with any Affiliate of ESA except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arm's-length basis with third parties other than an Affiliate, (c) has not made and will not make any loans or advances to any third party (including any Affiliate except as provided in clause (d) below), other than de minimis advances to customers, employees and suppliers not to exceed $35,000 for each Borrower and (d) will not make any loans to Affiliates which are Borrowers unless (i) the loan, together with any other loans from ESA to such Borrower which is then outstanding, does not exceed $100,000, (ii) ESA shall have delivered to Lender an executed subordination and standstill agreement which shall provide that such loan is not foreclosable and not subject to acceleration while any Obligations remain outstanding and such other terms as are set forth in Exhibit 7.6H, (iii) the terms of such loan shall provide that the loan shall automatically and without further act of ESA or the Borrower, be terminated if not fully repaid at least 10 days prior to the date that the applicable loan is to be included as an asset in a securitization, (iv) such loans are unsecured and (v) no Event of Default has occurred and is continuing. In connection with the securitization of a Loan affected by this provision, Lender will endeavor to give notice of such securitization to ESA 20 days prior to such securitization, but in no event will the failure of Lender to give such notice in any way affect ESA's obligations hereunder. 7.7 No Defaults. No Default or Event of Default has occurred and is continuing or would occur as a result of the consummation of the transactions contemplated by the Loan 33 Documents. ESA is not in default in the payment or performance of any of its Contractual Obligations to Lender in any respect and to any Person other than Lender which is reasonably likely to result in a Material Adverse Change. 7.8 Governmental Consents and Approvals. ESA has obtained or made all necessary (i) consents, approvals and authorizations, and registrations and filings of or with all Governmental Authorities and (ii) consents, approvals, waivers and notifications of partners, stockholders, creditors, lessors and other nongovernmental Persons, in each case, which are required to be obtained or made by ESA in connection with the execution and delivery of, and the performance by ESA of its obligations under, the Loan Documents. 7.9 Investment Company Act Status. ESA is not an "investment company," or a company "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 7.10 Compliance with Law. ESA is in compliance in all material respects with all Legal Requirements to which it is subject, including, without limitation, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act and ERISA. 7.11 Financial Information. All financial data that has been delivered by ESA to Lender (i) is complete and correct in all material respects, (ii) accurately represents the financial condition of the Persons covered thereby as of the date on which the same shall have been furnished and (iii) has been prepared in accordance with GAAP (or such other accounting basis as is reasonably acceptable to Lender) throughout the periods covered. As of the date hereof, ESA has no contingent liability, liability for taxes or other unusual or forward commitment not reflected in such financial statements delivered to Lender, since the date of the last financial statements delivered by ESA to Lender except as otherwise disclosed in such financial statements or notes thereto, there has been no change in the assets, liabilities or financial position of ESA or in the results of operations of ESA that would have a Material Adverse Change. ESA has not incurred any obligation or liability, contingent or otherwise not reflected in such financial statements that would have a Material Adverse Change. 7.12 Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any "margin stock" within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System or for any other purpose that would be inconsistent with such Regulations G, T, U or X or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of the Loan Documents. 34 7.13 Pending Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of ESA, threatened against or affecting ESA or any Hotel Property in any court or before any Governmental Authority that if adversely determined either individually or collectively has or is reasonably likely to have a Material Adverse Change. ESA is not in default with respect to any order of any court or Governmental Authority and the execution and delivery of, and the performance by ESA of its obligations under, each of the Loan Documents will not cause or result in any such default. 7.14 Solvency; No Bankruptcy. ESA and each Borrower and Material Subsidiary (i) is and has at all times been Solvent and will remain Solvent immediately upon the consummation of the transactions contemplated by the Loan Documents and (ii) is free from bankruptcy, reorganization or arrangement proceedings or a general assignment for the benefit of creditors. 7.15 Not Foreign Person. ESA and each Borrower is not a "foreign person" within the meaning of (S) 1445(f)(3) of the Code. 7.16 Ownership of ESA; Subsidiaries. A. As of the date hereof, the authorized capital stock of ESA consists of a single class of 200,000,000 common shares of beneficial interest, $0.01 par value per share, of which 22,853,092 shares are issued and outstanding, and a single class of 10,000,000 preferred shares of beneficial interest, $0.01 par value, of which no shares are issued and outstanding. There are no Stock Equivalents of ESA except as otherwise provided herein. No Stock of ESA is subject to any outstanding option, warrant, right of conversion or purchase or any similar right except as otherwise provided herein. All of the outstanding capital stock of ESA will be validly issued, fully paid and non- assessable. No authorized but unissued shares, no treasury shares and, to the best knowledge of ESA, no other outstanding shares of capital stock of ESA are subject to any option, warrant, right of conversion or purchase or any similar right except for employee and director stock option plans or agreements which, in the aggregate, do not at any time constitute more than 11% of the issued and outstanding shares of ESA. There are no agreements or understandings with respect to the voting, sale or transfer of any shares of capital stock of ESA, or to the best knowledge of ESA, any agreement restricting the transfer or hypothecation of any such shares other than shareholder agreements disclosed on Schedule 7.16. B. Set forth on Schedule 7.16 is a complete and accurate list showing, as of the date hereof, all Subsidiaries of ESA and, as to each such Subsidiary, the jurisdiction of its incorporation, the number of shares of each class of Stock authorized, the number outstanding on the date hereof and the percentage of the outstanding shares of each such class owned (directly or indirectly) by ESA. All Subsidiaries are wholly owned by ESA. No 35 Stock of any Subsidiary of ESA is subject to any outstanding option, warrant, right of conversion or purchase or any similar right except as disclosed on Schedule 7.16. All of the outstanding capital Stock of each such Subsidiary has been validly issued, is fully paid and non-assessable and is owned by ESA, free and clear of all Liens. Neither ESA nor any such Subsidiary is a party to, or has knowledge of, any agreement restricting the transfer or hypothecation of any shares of Stock of any such Subsidiary, other than the Loan Documents except as disclosed on Schedule 7.16. ESA does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity interest in, any Person other than such Subsidiaries. 7.17 ERISA. A. There is and there has not been any withdrawal from a Multiemployer Plan by ESA or any ESA ERISA Affiliate or to the best knowledge of ESA and any Subsidiary any Reorganization or Liquidation of a Multiemployer Plan as defined in Title IV of ERISA. B. Each Plan, Pension Plan and ESOP and any related trust intended to qualify under Code Sections 401, 409 or 501 has been determined by the IRS to be so qualified (or an application therefor has been timely made) and to the best knowledge of ESA nothing has occurred which would cause the loss of such qualification. C. Each Plan, Pension Plan and ESOP has been and is operated and administered in accordance with the terms and conditions governing those plans, all applicable laws and statutes, including, without limitation, ERISA and the Code. D. No obligation exists and no event has occurred, and to the best knowledge of ESA, any Subsidiary or ERISA Affiliate, no obligation is likely to arise and no event is likely to occur with respect to any Plan, Pension Plan, Multiemployer Plan or ESOP (including the establishment thereof) affecting ESA, any Subsidiary or ERISA Affiliate which either alone is, or in the aggregate are, reasonably likely to adversely affect ESA's, any Subsidiary's or ERISA Affiliate's, ability to comply with its duties and obligations under this Agreement or which would create or have a Material Adverse Change. 8 COVENANTS OF ESA 8.1 Continuing Nature of Representations. ESA shall do or take all actions necessary to cause all of the representations and warranties contained in Sections 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.12, 7.14, 7.15 and 7.17 to be and remain accurate at all times throughout the term of the Loan. 36 8.2 Financial Reports. A. ESA will keep and maintain or will cause to be kept and maintained on a fiscal year basis, in accordance with the accounting basis used for ESA's tax returns (or such other accounting basis reasonably acceptable to Lender) consistently applied, proper and accurate books, records and accounts reflecting all of the financial affairs of ESA and all items of income and expense in connection with the operation of each Hotel Property or in connection with any services, equipment or furnishings provided in connection with the operation thereof, whether such income or expense may be realized by ESA or by any other Person whatsoever affiliated with ESA or any Subsidiary, excepting lessees unrelated to and unaffiliated with ESA who have leased from ESA portions of the Realty for the purpose of occupying the same. Lender shall have the right from time to time at all times during normal business hours upon reasonable notice to examine such books, records and accounts at the office of ESA or other person maintaining such books, records and accounts and to make such copies or extracts thereof as Lender shall desire. After the occurrence of an Event of Default, ESA shall pay any costs and expenses incurred by Lender to examine ESA's accounting records with respect to each Hotel Property, as Lender shall determine to be necessary or appropriate in the protection of Lender's interest. B. ESA will furnish Lender annually, within 90 days following the end of each Fiscal Year of ESA, with a complete copy of ESA's financial statement audited by an Independent certified public accountant that is reasonably acceptable to Lender in accordance with GAAP (or such other accounting basis reasonably acceptable to Lender) consistently applied covering the operation of each Hotel Property for such Fiscal Year (and broken down by Hotel Property) and containing a statement of revenues and expenses (including Net Operating Income as defined herein), a statement of assets and liabilities and a statement of ESA's equity. Together with ESA's annual financial statements, ESA shall furnish to Lender an Officer's Certificate certifying as of the date thereof: i. that the annual financial statements accurately represent the results of operation and financial condition of ESA and the Hotel Property all in accordance with GAAP consistently applied, and ii. whether there exists an event or circumstance that constitutes, or that upon notice or lapse of time or both would constitute, a Default under the Notes or any other Loan Document executed and delivered by ESA, and if such event or circumstance exists, the nature thereof, the period of time it has existed and the action then being taken to remedy such event or circumstance. 37 C. ESA shall furnish to Lender, within 30 days after Lender's request therefor, with such further detailed information with respect to the operation of each Hotel Property and the financial affairs of ESA as may be reasonably requested by Lender. 8.3 Reporting Requirements. ESA shall furnish to Lender, all at ESA's sole cost and expense: A. as soon as available and in any event within 30 days prior to the end of each Fiscal Year, an annual budget of ESA and Borrowers for the succeeding Fiscal Year, displaying on a quarterly basis anticipated balance sheets, forecasted capital expenditures, working capital requirements, rent revenues, contributions to any FF&E reserves required under any Property Loan Agreement, interest income, net income, cash flow and sales, all on a consolidated basis; B. promptly and in any event within 30 days after ESA, any of its Subsidiaries or any ERISA Affiliate knows or has reason to know that (i) any event has occurred, or is reasonably likely to occur, with respect to any Plan, Pension Plan or Multiemployer Plan or the duties or obligations of ESA, any Subsidiary or ERISA Affiliate thereunder and which is reasonably likely to have or cause a Material Adverse Change or (ii) that a withdrawal has occurred or is reasonably likely to occur with respect to any Multiemployer Plan or to the best knowledge of ESA or any of its Subsidiaries any Multiemployer Plan is in Reorganization or Liquidation as defined in Title IV of ERISA, a written statement of the chief financial officer or other appropriate officer of ESA describing such event and the action, if any, which ESA, its Subsidiaries and ERISA Affiliates propose to take with respect thereto and a copy of any notice filed by or with the PBGC or the IRS pertaining thereto; C. promptly and in any event within 10 days after receipt thereof, a copy of any adverse notice, determination letter, ruling or opinion ESA, any of its Subsidiaries or any ERISA Affiliate receives from the PBGC, the United States Department of Labor or the IRS with respect to any Plan, other than those which, in the aggregate, do not have any reasonable likelihood of resulting in a Material Adverse Change; D. promptly after the commencement thereof, notice of all actions, suits and proceedings before any domestic or foreign Governmental Authority or arbitrator, affecting ESA, any of its Subsidiaries (subject to ESA having received notice or knowledge thereof), except those which in the aggregate, if adversely determined, would have no Material Adverse Change; E. promptly and in any event within 5 Business Days after ESA or any Borrower becomes aware of the existence of (i) any Default or Event of Default, (ii) any 38 breach or non-performance of, or any default under any Management Agreement, or any Contractual Obligation which is material to the business, prospects, operations or financial condition of ESA and its Subsidiaries taken as one enterprise, or (iii) any Material Adverse Change or any event, development or other circumstance which has reasonable likelihood of causing or resulting in a Material Adverse Change, telephonic or telecopied notice in reasonable detail specifying the nature of such Default, Event of Default, breach, non- performance, default, event, development or circumstance, including, without limitation, the anticipated effect thereof, which notice (if by telephone) shall be promptly confirmed in writing within 5 days; F. promptly after the sending or filing thereof, copies of all reports which ESA sends to its security holders generally, and copies of all reports and registration statements which ESA or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange or the National Association of Securities Dealers, Inc.; G. upon the request of Lender copies of all federal, state and local tax returns and reports filed by ESA or any of its Subsidiaries in respect of taxes measured by income (excluding sales, use and like taxes); H. written notice within 5 days of ESA or any Subsidiary learning of any proposed acquisition of stock, assets or real property, or any proposed leasing of property by ESA or any of its Subsidiaries, unless such action is not reasonably likely to have a Material Adverse Change; I. promptly, such additional information respecting the condition of ESA or any of its Subsidiaries or the status or condition of any real property owned or leased by ESA or its Subsidiaries, or the operation thereof which ESA is entitled to or can otherwise reasonably obtain, as Lender from time to time reasonably request; and J. such other information respecting the business, properties, condition, financial or otherwise, or operations of ESA or any of its Subsidiaries as Lender may from time to time reasonably request. 8.4 Litigation. ESA and the Borrowers will promptly notify Lender of any litigation or governmental proceedings pending or threatened (in writing) against ESA or any Borrower which might have a Material Adverse Change. 8.5 No Further Indebtedness. ESA and its Affiliates shall not incur any Indebtedness, other than as permitted under this Agreement, secured by any Hotel Property 39 after the Loan for such Hotel Property is made, provided, however, no Borrower shall incur any Indebtedness other than as permitted under the Property Loan Agreement. 8.6 Restricted Payments. ESA shall not and shall not permit any Borrower to (i) redeem any of its Stock, or (ii) declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account or in respect of any of its Stock or Stock Equivalents, other than dividends paid to ESA; provided, however, ESA may make aggregate dividend payments in any Fiscal Year in an amount not to exceed fifty percent (50%) of the excess, if any, of ESA Net Income for such Fiscal Year less ESA Cumulative Unapplied Losses. This Section 8.6 shall be null and void from and after the date that (i) Lender is no longer obligated to advance any Loans and (ii) all outstanding Loans are included as assets in a securitization. Nothing contained in this Section 8.6 shall prohibit ESA from issuing Stock upon the exercise of a stock option contained in an employee or director stock option plan or agreement, provided that such plans or agreements or the Stock Equivalents or other rights exercisable thereunder do not, when taken together in the aggregate, constitute more than 11% of the issued and outstanding shares of ESA. 8.7 Tax Filings. ESA and Borrowers have filed all federal, state and local tax returns required to be filed and have paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by ESA or any Borrower. ESA believes that its respective tax returns properly reflect the income and taxes of ESA for the periods covered thereby, subject only to reasonable adjustments required by the Internal Revenue Service or other applicable tax authority upon audit. 8.8 Further Acts, Etc. ESA will (or will cause Borrowers to), at the cost of ESA or of any Subsidiary, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, reasonably require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender the property and rights mortgaged by the Mortgages, given, granted, bargained, sold, alienated, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated, or which ESA may be or may hereafter become bound to convey or assign to Lender, or for carrying out or facilitating the performance of the terms of this Agreement or for filing, registering or recording this Agreement and, on demand, will execute and deliver and hereby authorizes Lender to execute in the name of ESA without the signature of ESA to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien hereof upon the Hotel Property. ESA grants to Lender an irrevocable power of attorney coupled with an interest to effect the intent hereof, all as fully and effectually as ESA might or could do, provided that ESA's obligations hereunder shall not be materially increased or altered; and ESA hereby ratifies all 40 that Lender shall lawfully do or cause to be done by virtue hereof consistent with the terms hereof. 8.9 Guaranty. ESA hereby unconditionally and irrevocably guaranties the full and prompt payment when due at the Maturity Date, and the performance of, all of the Obligations whether for principal, interest, fees, expenses or otherwise. The liability of ESA with respect to the Obligations shall be absolute and unconditional irrespective of (i) any change in any term of or increase in the amount of any Obligation, (ii) any exchange, release or nonperfection of any security for the Obligation, (iii) the absence of any attempt to collect any Obligation from the Borrower, and (iv) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Borrower or guarantor; provided, however, that the extent of ESA's guaranty of principal of the Loans under this Section shall be limited to twenty-five percent (25%) of the Loans outstanding at any time. ESA hereby (i) waives (A) any requirement that Lender protect, secure, perfect or insure any security interest in or other Lien on any property subject thereto or exhaust any right or take any action against the Borrower or any other Person or any Collateral, and (B) protest or notice with respect to nonpayment of all or any of the Obligations; and (ii) except as provided in this paragraph, covenants and agrees that its guaranty will not be discharged except by complete performance of the Obligations and any other obligations of ESA contained herein. All Obligations in connection with any Loan which is included as an asset in a securitization shall, effective on the date of such inclusion, be deemed excluded from the Obligations of ESA guaranteed under this paragraph. 8.10 Plans, Pension Plans and ESOPs. A. Except as required under Section 8.10B(iii) hereof, none of ESA, any Subsidiary or any ESA ERISA Affiliate will establish, amend or change any Plan, Pension Plan or ESOP (including, without prejudice to the generality of the foregoing, any defined benefit pension or benefit plan) the effect of which will, or will be reasonably likely to, create a Material Adverse Change in the capability of ESA, any Subsidiary or any ERISA Affiliate in complying with its duties and obligations under this Agreement. Notwithstanding any provision herein to the contrary, no Borrower will establish, amend or change any Plan, Pension Plan or ESOP, except as required under Section 8.10B(iii). B. In respect of each Plan, Pension Plan and ESOP, and in respect of any trust or other funding vehicle relating thereto, existing at the date hereof or to be established by ESA or any Subsidiary or any ESA ERISA Affiliate hereafter (collectively referred to below as the "Plans"): i. All contributions (including all employer contributions and employee salary reduction contributions) will be made in accordance with the terms and 41 conditions governing the Plans or by law (without regard to any waivers granted under Section 412 of the Code), to any funds or trusts established thereunder or in connection therewith and will be made by the due date thereof, and all contributions and premiums due to the Pension Benefit Guaranty Corporation will be promptly and timely made; ii. There will be no material violation of ERISA or the Code with respect to the filing of applicable reports, documents and notices regarding the Plans with the Secretary of Labor and the Secretary of the Treasury or the furnishing of such documents to the participants or beneficiaries of the Plans; iii. All amendments and actions required to keep the Plans in conformity in all material respects with all of the applicable provisions of ERISA and other applicable laws will be promptly and timely made or taken; iv. The Plans will be maintained, in all material respects, in accordance with their terms and with all provisions of ERISA (including rules and regulations thereunder) and other applicable federal and state laws and regulations, and none of ESA or any Subsidiary or any ESA ERISA Affiliate or "party in interest" or "disqualified person" with respect to the Plans will engage in a "prohibited transaction" within the meaning of Section 4975 of the Code or Section 406 of ERISA; and v. No fiduciary will incur liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any Plan. C. None of ESA, or any Subsidiary or ESA ERISA Affiliate will establish or maintain any retiree life or retiree health insurance plans which are "welfare benefit plans" within the meaning of Section 3(1) of ERISA and which provide for continuing benefits or coverage for any participant or any beneficiary of a participant, except as may be required under COBRA and at the sole expense of the participant or the participant's beneficiary. 9 FURTHER CONDITIONS PRECEDENT TO EACH LOAN; TERMINATION OF FACILITY 9.1 Lender's obligation to make any Loan is further conditioned upon ESA's continued compliance with Sections 7.6A, 7.6D, 7.6E and 7.6F. 9.2 In the event that ESA or any Affiliates incur indebtedness from a lender other than Lender secured by hotel properties (unless such indebtedness was rejected by Lender in accordance with the terms of this Agreement, incurred under a similar agreement dated 42 before the date of this Agreement or was construction financing with a term of less than one year) in the aggregate of more than $175,000,000 prior to Lender advancing Loans in the amount of at least $100,000,000, then Lender shall have the right to terminate any obligation to advance Loans under the Facility provided in this Agreement. 10 TRANSFER OR ENCUMBRANCE 10.1 Definition of Transfer. The term "Transfer" shall include any conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, whether or not for consideration or of record) of any legal or beneficial interest including, without limitation, an installment sales agreement. 10.2 No Transfer. Except as permitted by Section 10.3, ESA and its Subsidiaries, including but not limited to any and all Borrowers, shall not Transfer: A. any Hotel Property or any interest therein unless such Hotel Property or interest therein is released from Lender's Mortgage in accordance with the terms hereof; B. any or all of the interests in any Borrower; and shall not permit any Borrower to, (i) merge with any Person, or (ii) consolidate with any Person without the prior written consent of Lender in any such case, which consent Lender shall not unreasonably withhold or delay. 10.3 Permitted Assumption. Notwithstanding the foregoing, at any time after the securitization of a Loan, ESA or a Borrower may, provided that the Rating Agency reaffirms the rating of any securities issued in connection with the Loan, and upon the approval of the trustee and servicer of any securitization in which any of the Loans are included and further provided that ESA or the relevant Borrower complies with any requirements imposed by a Rating Agency, trustee or servicer, upon the payment of a transfer fee equal to one percent (1%) of the outstanding principal balance of the Loan, transfer the Hotel Property, in whole, but not in part, during the term of the Loan to an entity (i) that is a Single Purpose Entity, and (ii) that is acceptable to Lender, in its reasonable discretion, in all respects provided that such transferee executes and delivers to Lender an assumption of the Loan and all of the Loan Documents, together with all other documents reasonably requested by Lender and pays all legal fees, recording charges and other transactional costs incurred by Lender in connection with such transfer. 43 11 ESTOPPEL CERTIFICATES 11.1 After request by Lender, any Borrower, within 15 days and at its expense, will furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the amount of the original principal amount of the Note, and the unpaid principal amount of the Note, (ii) the rate of interest of the Note, (iii) the date payments of interest and/or principal were last paid, (iv) any offsets or defenses to the payment of the Loans, and if any are alleged, the nature thereof, (v) that the Note and this Agreement have not been modified or if modified, giving particulars of such modification and (vi) that there has not occurred and is then continuing no Default or Event of Default pursuant to the Note or this Agreement or any event or circumstance that, with the giving of notice or the passage of time, or both, would constitute a Default or Event of Default hereunder, or if such Default, Event of Default, event or circumstance exists, the nature thereof, the period of time it has existed, and the action being taken to remedy such Default, Event of Default, event or circumstance. 11.2 Within 15 days after written request by ESA, Lender shall furnish to ESA a written statement confirming the amount of the Loans, the maturity date of the Note, the date to which interest has been paid and the dates of any notices of Event of Default sent to ESA or any Borrower. 12 EVENTS OF DEFAULT 12.1 Events of Default. The Loans shall become immediately due at the option of Lender upon any one or more of the following events (each, an "Event of Default"): A. Any principal (including, without limitation, mandatory prepayments of principal) of, or interest on, any Note, any fee, any other amount due hereunder or under the other Loan Documents or other of the Obligations is not paid when the same becomes due and payable; or B. ESA or any Borrower shall fail to perform or observe any agreement or covenant contained in this Agreement or in any other Loan Document (other than those specified in Section 12.1A, C, O, P, or Q, which if ESA or any Borrower fails to observe shall be an Event of Default upon occurrence without notice) if such failure under this clause shall remain unremedied for 30 days after notice of such failure; or C. Any Event of Default shall occur under any Collateral Document or any Property Loan Agreement; or 44 D. [RESERVED]; E. Any material representation or warranty made or deemed made by any Loan Party in any Loan Document or by any Loan Party (or any of its officers) in writing in connection with any Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or F. Any Borrower shall cease to be a Single Purpose Entity; or G. Any Loan Party fails to pay any principal of or premium or interest on any Indebtedness of such Loan Party (excluding (i) Indebtedness evidenced by the Notes, (ii) Indebtedness to trade creditors incurred in the ordinary course of business and which failure to pay as aforesaid would not have a Material Adverse Change and in the case of ESA only, Indebtedness in principal amount of $10,000,000 or more) beyond the period of grace (not to exceed 30 days), if any, with respect thereto (whether the same becomes due and payable by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall become or be declared to be due and payable, or any Loan Party or any of its Subsidiaries shall be required to repurchase or offer to repurchase such Indebtedness, prior to the stated maturity thereof; or H. Except in the case where the Loan to such Loan Party has been repaid in full, any Loan Party shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against any Loan Party ESA Management, Inc., ESA Development, Inc. or any successor thereto, or a Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a custodian, receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against any Loan Party or any of its Subsidiaries (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceedings shall occur; or any Loan Party or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection or I. One or more judgments or orders for the payment of money in an aggregate amount in excess of $250,000 to the extent not fully covered by insurance shall be 45 rendered against any Loan Party or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or J. An event shall occur with respect to any Plan, Pension Plan or Multiemployer Plan and the duties and obligations of ESA, any Subsidiary or ERISA Affiliate thereunder which, in the reasonable determination of Lender, is reasonably likely to have a Material Adverse Change; or K. Any material provision of any Collateral Document after delivery thereof shall for any reason cease to be valid and binding on any Loan Party thereto, or any Loan Party shall so state in writing; provided, however, that if such provision was valid and binding at inception and ceased to be valid and binding through no act or omission of any Loan Party, then the relevant Loan Party shall have 14 days to cure such defect and if unable to do so, then the relevant Loan Party may prepay the affected Loan in accordance with Article 13 hereof within 14 days thereafter and no Event of Default shall arise hereunder upon such prepayment; or L. Any Collateral Document after delivery thereof shall, for any reason, cease to create a valid Lien on any of the Collateral purported to be covered thereby or such Lien shall cease to be a perfected and first priority Lien (except to the extent that the Lien of the Collateral Documents may be subordinate to Liens arising by operation of law and not constituting an Event of Default under the terms of the relevant Mortgage), or any Loan Party shall so state in writing; or M. There shall occur a Material Adverse Change or an event which is reasonably likely to have a Material Adverse Change, except for matters governed by Section 12.1K; or N. Any Manager shall default in the observance or performance of any material provision of a Management Agreement and such defaults, in the aggregate, are reasonably likely to have a Material Adverse Change, provided, however that if the Manager is a non-Affiliate, then the affected Loan Party shall have the right to cure such defaults within a reasonable period of time, not to exceed thirty days; or O. The breach of any provision of Article 10; or P. Either George D. Johnson, Jr. or H. Wayne Huzienga, or both, cease to be members of the Board of Directors unless such failure is due to their death or their adjudication as mentally incompetent or the current members of the Board of Directors of 46 ESA, as listed on Schedule 12.1P, shall at any time fail to constitute a majority of the board of directors of ESA without the consent of Lender, in its sole discretion. In the event that any Loan is securitized, then any Person succeeding to the interest of Lender shall have the same right to grant its consent to the foregoing; provided, however, that such consent may not be unreasonably withheld or delayed; or Q. If ESA or any of its Affiliates shall fail to observe or breach the covenants contained in Section 8.5 or 8.6 of this Agreement. 12.2 General Remedies. Upon the occurrence and during the continuance of any Event of Default, Lender may, in addition to any other rights or remedies available to it hereunder, under the Collateral Documents, at law or in equity, take such action, without notice or demand, as it reasonably deems advisable to protect and enforce its rights against ESA and in and to the Hotel Property or any one or more of them, including, but not limited to, the following actions, each of which may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine, in its sole discretion, without impairing or otherwise affecting any other rights and remedies of Lender hereunder, at law or in equity: A. declare all or any portion of the unpaid Obligations to be immediately due and payable and the obligation of Lender to make Loans to be terminated; provided, however, that upon the occurrence of any of the events specified in Section 12.1H, the entire Debt will be immediately due and payable and Lender's obligation to make Loans shall be terminated without notice or demand or any other declaration of the amounts due and payable; or B. pursue the remedies available under any and all of the Mortgages; or C. pursue any or all such other rights or remedies as Lender may have under applicable law or in equity; provided, however, that the provisions of this Section shall not be construed to extend or modify any of the notice requirements or grace periods provided for hereunder or under any of the other Loan Documents. D. In the event that a Loan shall be prepaid as a consequence of the occurrence of an Event of Default and the exercise of remedies by Lender, the relevant Borrower shall be required to pay to Lender a Yield Maintenance Payment with respect to such prepayments if (i) a Yield Maintenance Payment would otherwise be due in connection with a permitted prepayment hereunder or (ii) if a prepayment shall not have then been permitted under this Agreement. 47 12.3 General Provisions Regarding Remedies. A. Right to Terminate Proceedings. Lender may terminate or rescind any proceeding or other action brought in connection with its exercise of the remedies provided in Section 12.2 at any time before the conclusion thereof, as determined in Lender's sole discretion and without prejudice to Lender. B. No Waiver or Release. The failure of Lender to exercise any right, remedy or option provided in the Loan Documents shall not be deemed a waiver of such right, remedy or option or of any covenant or obligation secured by the Loan Documents. No acceptance by Lender of any payment after the occurrence of an Event of Default and no payment by Lender of any payment or obligation for which ESA or any Borrower is liable hereunder shall be deemed to waive or cure any Event of Default. No sale of all or any portion of the Hotel Property, no forbearance on the part of Lender, and no extension of time for the payment of the whole or any portion of the Loans or any other indulgence given by Lender to ESA or any other Person, shall operate to release or in any manner affect the interest of Lender in the Hotel Property or the liability of ESA to pay the Loans. No waiver by Lender shall be effective unless it is in writing and then only to the extent specifically stated. C. No Impairment; No Releases. Except to the extent thereof, the interests and rights of Lender under the Loan Documents shall not be impaired by any indulgence, including (i) any renewal, extension or modification that Lender may grant with respect to any of the Loans; (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Lender may grant with respect to the Hotel Property or any portion thereof; or (iii) any release or indulgence granted to any maker, endorser, guarantor or surety of any of the Loans. 13 PREPAYMENT 13.1 Fixed Rate Loans. No prepayment of any Fixed Rate Loans may be made in whole or in part except: (i) from and after the date which is five years after the relevant Fixed Rate Loan is made (the "Fixed Rate Lockout") or (ii) notwithstanding any applicable Fixed Rate Lockout, from and after the date six months before its Stated Maturity or (iii) in accordance with section 12.1K and as otherwise specifically set forth in this Article. 13.2 Floating Rate Loans. No prepayment of any Floating Rate Loans may be made in whole or in part except: (i) from and after the date which is one year after the relevant Floating Rate Loan is made (the "Floating Rate Lockout"), (ii) notwithstanding any Floating Rate Lockout, from and after the date six months before its Stated Maturity or 48 (iii) in accordance with Section 2.9 or 12.1K and as otherwise specifically set forth in this Article. 13.3 Sub-Performing, Unseasoned Loans. Notwithstanding Sections 13.1 and 13.2, within nine months of the advancement of any Loan, if the Debt Service Coverage for the relevant Hotel Property during the immediately preceding six consecutive months is less than 1.25 and no Event of Default then exists, the relevant Borrower may prepay such Loan, provided Borrower complies with Section 13.4A, informs Lender, in conjunction with ESA, of any other Loans that do not have a Debt Service Coverage of 1.25 over the same period as Borrower and pays to Lender a premium equal to 1% of the Loan. To the extent that more than one Borrower fails to have a Debt Service Coverage of 1.25, Lender, in its sole discretion, may select the Loan to be prepaid. 13.4 Conditions Precedent to Prepayment. A Borrower may prepay a Loan in whole or, from time to time, but not in part, on any Payment Date subsequent to the Fixed Rate Lockout or Floating Rate Lockout, as applicable, subject to the satisfaction of the following conditions (a "Prepayment"): A. Lender shall have received from the applicable Borrower, not less than 30 days', nor more than 90 days', prior written notice specifying the date proposed for such prepayment, the amount that is to be prepaid by Borrower; and B. The aggregate average Debt Service Coverage (on the basis of the 12-month period immediately preceding the date upon which the relevant Borrower notifies Lender of its intention to prepay) for the remaining Loans taken as a whole after giving effect to the prepayment is or would be equal to or greater than Debt Service Coverage without giving effect to the prepayment, and the aggregate average Debt Service Coverage (on the basis of the 12-month period immediately preceding the date upon which the relevant Borrower notifies Lender of its intention to prepay) for all Loans taken as a whole (including the Loan being prepaid) is no less than 1.55; and C. The relevant Borrower shall have paid to Lender: (i) all interest on the Loan being prepaid due through and including the relevant Payment Date on which such prepayment is being made, (ii) the Fixed Rate Prepayment Premium, if applicable, (iii) the Additional Required Principal Payment and (iv) any and all other amounts due and owing pursuant to the terms of the Note, this Agreement or the other Loan Documents relating to such Loan; and 13.5 Additional Required Prepayment. In the event a Prepayment is made pursuant to this Article 13, other than in accordance with Sections 13.1(ii), 13.1(iii), 13.2(ii), 13.2(iii) or 13.3, or there is an Involuntary Prepayment, the relevant Borrower shall be required to 49 pay to Lender on the date of such prepayment an additional principal payment (the "Additional Required Prepayment") equal to 15% of the maximum principal amount which shall have been outstanding at any time under the Loan which is then being prepaid, which Additional Required Prepayment Lender shall apply to any of the Loans then owing to Lender (whether or not then due and payable) in such order as Lender may elect in its sole discretion. 13.6 Fixed Rate Prepayment Premium. For the purposes of this Article 13, "Fixed Rate Prepayment Premium" shall mean, for a Loan prepaid between the first and twelfth Payment Date after the Fixed Rate Lockout, one percent (1%) of the Principal Amount; for a Loan prepaid between the thirteenth month and eighteenth month after the Fixed Rate Lockout, one-half of one percent (.5%) of the Principal Amount; and thereafter, zero. Notwithstanding the foregoing, if a Fixed Rate Loan is prepaid in accordance with Section 13.1(ii), then the Fixed Rate Prepayment Premium shall be zero. 13.7 Release of Lien for Prepaid Loan. Upon the prepayment in full of the amounts due under the relevant Loan and otherwise in accordance with the terms of this Article 13, Lender agrees to deliver to the relevant Borrower the necessary and proper satisfaction, release and termination documentation with respect to the relevant Note, Collateral Documents for such Hotel Property and, upon such release, the relevant Borrower shall then have the right to amend its certificate or articles of incorporation for the respective Borrower. 14 LENDER ASSIGNMENTS 14.1 Lender may sell, transfer, negotiate or assign to one or more other Persons the Loan Documents and any interest in the Notes held by it and a commensurate portion of its rights and obligations hereunder and under the other Loan Documents from and after the date the Lender no longer has any obligation to advance any Loans. The Lender also reserves the right at any time during the term of the Loans, in its sole and absolute discretion, to effect a so-called securitization of the Loans, with Lender as sole underwriter, in such a manner and on such terms and conditions as the Lender shall deem to be appropriate in its sole and absolute discretion and with such domestic or foreign banks, insurance companies, pension funds, trusts or other institutional lenders or governmental agencies or other persons, parties or investors (including, but not limited to, guarantor trusts, owner trusts, special purpose corporations, REMICs, real estate investment trusts or other similar or comparable investment vehicles) as may be selected by the Lender in its sole and absolute discretion. 14.2 Lender may sell participations (including blind and undisclosed participations and subparticipations) to one or more banks or other Persons in or to all or a portion of its 50 rights and obligations under the Loan Documents (including, without limitation, all or a portion of its commitment to make the Loans, the Loans owing to it and the Notes held by it). In the event of the sale of any participation by Lender, (i) Lender's obligations under the Loan Documents (including, without limitation, its commitment to make the Loans) shall remain unchanged, (ii) Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) Lender shall remain the holder of such Notes and Obligations for all purposes of this Agreement, and (iv) ESA and Borrowers shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations under this Agreement. 14.3 Each participant shall be entitled to the benefits of Section 2.7 as if it were a Lender; provided, however, that anything herein to the contrary notwithstanding, Borrower shall not, at any time, be obligated to pay to any participant of any interest of Lender, under Section 2.7, any sum in excess of the sum which Borrower would have been obligated to pay Lender in respect of such interest had such assignment not been effected or had such participation not been sold. 14.4 ESA and Borrowers shall cooperate with Lender, and any other party to whom Lender may assign or sell participations (or negotiate for such assignment or sale) in all or a portion of the commitment to make the Loans, the Loans owing to it and an interest in the Notes. Such cooperation on the part of ESA and the Borrowers shall include but shall not be limited to the execution and delivery of (i) amendments, modifications and/or supplements to one or more Loan Documents, in form and substance as may be required by Lender, and (ii) the execution and delivery of one or more additional promissory notes, provided, however, that such promissory notes, amendments, modifications and/or supplements do not materially increase the obligations of ESA or Borrowers or materially diminish the rights of ESA or Borrowers under the Loan Documents. 15 MISCELLANEOUS 15.1 Representations and Warranties of ESA and Lender. ESA and Lender each represents and warrants to the other that neither ESA nor Lender has dealt with any financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Each party shall indemnify and hold harmless the other from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from (i) a claim by any Person that such Person acted on behalf of the indemnifying party in connection with the transactions contemplated herein or (ii) any breach of the foregoing representation or any breach of Lender's payment obligation as aforesaid. The provisions of this subsection shall survive the repayment of the Loans. 51 15.2 Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by ESA or any Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by Lender, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15.3 Notices, Etc. Any notices, demand, statement, request or consent and other communications provided for hereunder shall be in writing and delivered personally or sent to the party to whom the notice, demand or request is being made by Express Mail, Federal Express or other nationally recognized overnight delivery service, as follows and shall be deemed given when personally delivered or one Business Day after being timely deposited with Federal Express or such other nationally recognized delivery service. If any notice date falls on a non-Business day, then the notice shall be due on the next succeeding Business Day. If to ESA, at the address first written above, with a copy to: Johnson, Smith, Hibbard & Wildman Law Firm, L.L.P. 220 N. Church St. Spartanburg, SC 29306 Attn: Donald B. Wildman, Esq. and to: Pedersen & Houpt, P.C. 161 North Clark St., Ste. 3100 Chicago, IL 60601-3224 Attn: Thomas J. Kelly, Esq. If to Lender, at its address first written above, Attn: Marc J. Warren with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Ave. New York, NY 10153 Attn: Managing Partner Real Estate Department (FW) 52 Any such address may be changed, or additional addresses (not to exceed two) added by notice given in the manner provided herein. Any notice or other communication may be given by counsel for the party giving the same. 15.4 No Waiver; Remedies. No failure on the part of Lender to exercise, and no delay in exercising, any right hereunder or under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 15.5 Costs; Expenses; Indemnities. A. ESA shall pay or cause to be paid on demand (i) all reasonable costs and expenses of Lender in connection with the preparation, execution, delivery, modification and amendment of this Agreement, each of the other Loan Documents and each of the other documents to be delivered hereunder and thereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel, accountants, appraisers, consultants or industry experts retained by Lender with respect thereto; but subject to certain limits of aggregate amounts to be paid by ESA and/or the Borrowers as specified in Schedule 15.5A and (ii) all costs and expenses of Lender (including, without limitation, the fees and out-of-pocket expenses of counsel, retained by Lender) in connection with the enforcement (whether through negotiation, legal proceedings or otherwise) of this Agreement and the other Loan Documents. ESA's obligations under this Section 15.5A with respect to a Loan that has been securitized shall be terminated as of the date of such securitization. B. ESA agrees to indemnify and hold harmless Lender and its Affiliates, and the directors, officers, employees, agents, attorneys, consultants and advisors of or to any of the foregoing (each of the foregoing, an "Indemnitee") from and against any and all claims, damages, liabilities, obligations, losses, penalties, actions, judgments, suits, costs, disbursements and expenses of any kind or nature (including, without limitation, fees and disbursements of counsel to any such Indemnitee and experts, engineers and consultants and the costs of investigation and feasibility studies) which may be imposed on, incurred by or asserted against any such Indemnitee in connection with or arising out of any investigation, litigation or proceeding, whether or not any such Indemnitee is a party thereto, whether direct, indirect, or consequential and whether based on any federal, state or local law or other statutory regulation, securities or commercial law or regulation, or under common law or in equity, or on contract, tort or otherwise, in any manner relating to or arising out of or based upon or attributable to this Agreement, any other Loan Document, any document delivered hereunder or thereunder, any Obligation, or any act, event or transaction related or attendant to any thereof arising out of or based upon anything relating to real property owned, leased or operated by ESA or any of its Subsidiaries and the facilities or operations; 53 provided, however, that ESA shall not have any obligation under this Section to an Indemnitee with respect to any of the foregoing matters caused by or resulting from the gross negligence or willful misconduct of that Indemnitee, as determined by a court of competent jurisdiction in a final non-appealable judgment or order, except that subsequent to a securitization of a Loan, ESA shall not be liable under this Section 15.5B for any claim, damage, obligation, liability, loss, penalty, action, judgment, suit, cost, disbursement or expenses arising from any Obligation, liability, negligence or property of any Borrower under a Loan that has been securitized. C. ESA agrees that any indemnification or other protection provided to any Indemnitee pursuant to this Agreement (including, without limitation, pursuant to this Section) or any other Loan Document shall (i) survive payment of the Obligations and (ii) inure to the benefit of any Person who was at any time an Indemnitee under this Agreement or any other Loan Document. D. The provisions of this Section shall survive any termination of this Agreement. In addition, and without limitation, to any other provision of this Agreement, ESA shall protect, indemnify and save harmless Lender and its successors and assigns, and each of their agents, employees, officers and directors, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, whether incurred within or outside the judicial process), imposed upon or incurred by or asserted against Lender and its assigns, or any of their agents, employees, officers or directors, by reason of (a) ownership of this Agreement, any Hotel Property or any part thereof or any interest therein or receipt of any Rents; (b) any accident, injury to or death of any person or loss of or damage to property occurring in, on or about any Hotel Property or any part thereof or on the adjoining sidewalks, curbs, parking areas, streets or ways; (c) any use, nonuse or condition in, on or about, or possession, alteration, repair, operation, maintenance or management of, Hotel Property or any part thereof or on the adjoining sidewalks, curbs, parking areas, streets or ways; (d) any failure on the part of ESA or any Borrower to perform or comply with any of the terms of this Agreement; (e) performance of any labor or services or the furnishing of any materials or other property in respect of any Hotel Property or any part thereof; (f) any claim by brokers, finders or similar Persons claiming to be entitled to a commission in connection with any Lease or other transaction involving any Hotel Property or any part thereof; (g) any Imposition (as defined in the Mortgages) including, without limitation, any Imposition attributable to the execution, delivery, filing, or recording of any Loan Document, Lease or memorandum thereof; (h) any lien or claim arising on or against any Hotel Property or any part thereof under any Legal Requirement or any liability asserted against Lender with respect thereto; or (i) the claims of any lessee or any Person acting through or under any lessee or otherwise arising under or as a consequence of any Lease, except that subsequent to a securitization of a Loan, ESA shall not be liable under this 54 Section 15.5D for any liability, obligation, claim, damage, penalty, cause of action, cost or expense arising from any Obligation, liability, negligence or property of any Borrower under any Loan that has been securitized. Notwithstanding the foregoing provisions of this Section to the contrary, ESA shall have no obligation to indemnify Lender pursuant to this Section for liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses relative to the foregoing that result from Lender's, and its successors' or assigns', willful misconduct or gross negligence. Any amounts payable to Lender by reason of the application of this Section shall constitute a part of the Loans secured by this Agreement and other Loan Documents and shall become immediately due and payable and shall bear interest at the Default Rate from the date loss or damage is sustained by Lender, as applicable, until paid. 15.6 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of ESA or any Borrower against any and all of the Obligations now or hereafter existing whether or not Lender shall have made any demand under this Agreement or any Note or any other Loan Document and although such Obligations may be unmatured. Lender agrees promptly to notify ESA and relevant Borrower after any such set-off and application made by Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section are in addition to the other rights and remedies (including, without limitation, other rights of set- off) which Lender may have. 15.7 Binding Effect. This Agreement shall become effective when it shall have been executed by ESA and Lender and thereafter shall be binding upon and inure to the benefit of ESA and Lender and their respective successors and assigns, except that ESA shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Lender. 15.8 Governing Law; Severability. This Agreement and the Notes and the rights and obligations of the parties hereto and thereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 55 15.9 Submission to Jurisdiction; Service of Process. A. Any legal action or proceeding with respect to this Agreement or the Notes or any document related thereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, ESA hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. B. ESA irrevocably consents to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the borrower at its address provided herein. C. Nothing contained in this Section shall affect the right of Lender or any holder of the Notes to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against ESA in any other jurisdiction. 15.10 Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 15.11 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 15.12 Entire Agreement. This Agreement, together with all of the other Loan Documents and all certificates and documents delivered hereunder or thereunder embody the entire agreement of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. 15.13 Confidentiality. Lender agrees to keep information obtained by it pursuant hereto and the other Loan Documents confidential in accordance with Lender's customary practices and agrees that it will only use such information in connection with the transactions contemplated by this Agreement and not disclose any of such information other than (i) to Lender's employees, representatives and agents who are or are expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement and who are advised of the confidential nature of such information, (ii) to the 56 extent such information presently is or hereafter becomes available to Lender, as the case may be, on a nonconfidential basis from a source other than ESA, (iii) to the extent disclosure is required by law, regulation or judicial order or requested or required by bank regulators or auditors, or (iv) to assignees or participants or potential assignees or participants who agree to be bound by the provisions of this sentence. 15.14 Waiver of Jury Trial. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, or arising out of, under or in connection with this Agreement or any other Loan Document, or any course of conduct, course of dealing, verbal or written statement or action of any party hereto. 15.15 Waiver of Notice. ESA shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to ESA and except with respect to matters for which ESA is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. 15.16 Actions and Proceedings. After an Event of Default, Lender may appear in and defend any action or proceeding brought with respect to the Hotel Property in its own name or, if required by Legal Requirements or, if in Lender's reasonable judgment, it is necessary, in the name and on behalf of ESA or any Borrower, which Lender believes will adversely affect the Hotel Property or the Mortgages and to bring any action or proceedings, in its name or in the name and on behalf of ESA or any Borrower, which Lender, in its discretion, decides should be brought to protect its interest in the Hotel Property. 15.17 Usury Laws. This Agreement and the Notes are subject to the express condition, and it is the expressed intent of the parties, that at no time shall any Borrower be obligated or required to pay interest on the principal balance due under the Notes at a rate which could subject the holder of the Notes to either civil or criminal liability as a result of being in excess of the maximum interest rate that such Borrower is permitted by law to contract or agree to pay. If by the terms of this Agreement or the Notes, any Borrower is at any time required or obligated to pay interest on the principal balance due under the Notes at a rate in excess of such maximum rate, such rate of interest shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the relevant Note. No application to the principal balance of any Note pursuant to this Section shall give rise to any requirement to pay any prepayment premium due hereunder, if any, including, without limitation, Yield Maintenance Premium. 57 15.18 Remedies of ESA. Under no circumstances shall Lender be liable for any punitive, consequential or incidental damages suffered by, awarded to or claimed by ESA, any Affiliate or third party. In the event that a claim or adjudication is made that Lender has acted unreasonably or unreasonably delayed acting in any case where by law or under this Agreement, it has an obligation to act reasonably or promptly, Lender shall only be liable for ESA's actual damages, if it is determined that Lender intentionally and in bad faith acted unreasonably or unreasonably delayed acting. In all other cases, Lender shall not be liable for any monetary damages, and ESA's remedies shall be limited to injunctive relief or declaratory judgment. 15.19 Offsets, Counterclaims and Defenses. Any assignee of this Agreement and the Notes shall take the same free and clear of all offsets, counterclaims or defenses that are unrelated to the Notes or this Agreement that ESA or any Borrower may otherwise have against any assignor of this Agreement and the Notes and no such unrelated counterclaim or defense shall be interposed or asserted by ESA or any Borrower in any action or proceeding brought by any such assignee upon this Agreement or the Notes and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by ESA. 15.20 Waiver of Statute of Limitations. The pleadings of any statute of limitations as a defense to any and all obligations secured by the Mortgages are hereby waived to the full extent permitted by Legal Requirements. 15.21 Advances. This Agreement shall cover any and all advances made pursuant to the Loan Documents, rearrangements and renewals of the Loans and all extensions in the time of payment thereof, even though such advances, extensions or renewals be evidenced by new promissory notes or other instruments hereafter executed and irrespective of whether filed or recorded. Likewise, the execution of this Agreement shall not impair or affect any other security that may be given to secure the payment of the Loans, and all such additional security shall be considered as cumulative. The taking of additional security, execution of partial releases of the security, or any extension of time of payment of the Loans shall not diminish the force, effect or lien of the Mortgages and shall not affect or impair the liability of ESA or any Borrower and shall not affect or impair the liability of any maker, surety, or endorser for the payment of the Loans. 15.22 Application of Default Rate Not a Waiver. Application of the Default Rate shall not be deemed to constitute a waiver of any Default or Event of Default or any rights or remedies of Lender under this Agreement, any other Loan Document or applicable Legal Requirements, or a consent to any extension of time for the payment or performance of any obligation with respect to which the Default Rate may be invoked. 58 15.23 No Joint Venture or Partnership. ESA and Lender intend that the relationship created hereunder be solely that of mortgagor and mortgagee or borrower and lender, as the case may be. Nothing herein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between ESA and Lender nor to grant Lender any interest in the Hotel Property other than that of mortgagee or lender. 15.24 Time of the Essence. Time shall be of the essence in the performance of all obligations of ESA and any Borrower hereunder. 15.25 ESA's and Borrower's Obligations Absolute. Except as set forth to the contrary in the Loan Documents, all sums payable by ESA or any Borrower hereunder shall be paid without notice or demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of ESA or any Borrower hereunder shall in no way be released, discharged, or otherwise affected (except as expressly provided herein) by reason of: (a) any damage to or destruction of or any taking (by condemnation or lawful exercise of the power of eminent domain) of the Hotel Property or any portion thereof; (b) any restriction or prevention of or interference with any use of the Hotel Property or any portion thereof; (c) any title defect or encumbrance or any eviction from the Realty or any portion thereof by title paramount or otherwise; (d) any bankruptcy proceeding relating to ESA or any Borrower, or any guarantor or indemnitor, or any action taken with respect to this Agreement or any other Loan Document by any trustee or receiver of ESA or any guarantor or indemnitor, or by any court, in any such proceeding; (e) any claim that ESA or any Borrower has or might have against Lender; (f) any default or failure on the part of Lender to perform or comply with any of the terms hereof or of any other agreement with ESA or any Borrower; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not ESA or Borrower shall have notice or knowledge of any of the foregoing. 15.26 [RESERVED]. 15.27 [RESERVED]. 15.28 Securitization Opinions. In the event the Loan becomes the subject of a securitization underwritten by Lender or any of its Affiliates, ESA shall, within 15 Business Days after Lender's written request therefor, deliver at ESA's sole cost and expense a 10(b)(5) opinion and a nonconsolidation opinion with respect to ESA and every Borrower, each opinion to be in form and substance and delivered by Pedersen & Houpt, P.C. or other counsel reasonably acceptable to Lender and the Rating Agency, as may be reasonably required by Lender and/or the Rating Agency in connection with such securitization. ESA's and Borrower's failure to deliver the opinions required hereby within such fifteen (15) Business Day period shall constitute an Event of Default hereunder. 59 15.29 Cooperation with Rating Agencies and Potential Investors. ESA covenants and agrees that in the event Lender decides to include the Loan as an asset of a securitization, ESA shall (a) gather any environmental information reasonably required by the Rating Agency and potential investors in connection with such a securitization, (b) at Lender's request, meet with representatives of the Rating Agency and potential investors to discuss the business and operations of the Hotel Property and conduct site visits, if requested, (c) ESA shall undertake all actions with respect to every Borrower (including structural reorganization, if appropriate), and (d) cooperate with the reasonable requests of the Rating Agency and potential investors in connection with all of the foregoing. ESA also covenants and agrees that in the event Lender decides to include the Loan or any interest thereon as an asset of a securitization, if and to the extent requested by Lender, ESA shall take all actions (subject to the receipt of any consents from Persons other than the Loan Parties, which consent, ESA shall use best efforts to obtain) necessary to ensure that the cross collateralization and cross default provisions of the Loan Documents are modified in order to make them acceptable to Lender and the Rating Agency and to provide that Hotel Properties included in the securitization are cross collateralized and cross defaulted only with other Hotel Properties in such securitization. 15.30 Securitization Financials. ESA covenants and agrees that, upon Lender's written request therefor in connection with a securitization in which the Loan is to be included as an asset, ESA shall promptly deliver audited financial statements and related documentation prepared by an Independent certified public accountant that satisfy securities laws and requirements for use in a public registration statement (which may include up to three (3) years (but no period prior to the date hereof) of historical audited financial statements). 15.31 Securitization Underwriting. ESA covenants and agrees to offer to Lender the right of first refusal to securitize any refinancing of the Floating Rate Loans. Lender shall notify ESA within 6 Business Days of notice thereof, of its intentions to exercise or reject such right of first refusal. Lender agrees that ESA's obligations under this Section 15.31 shall be subject to Lender's fees being competitive at the time of ESA's offer to it as determined with reference to deals of similar size, complexity and other relevant factors. 15.32 Limitation of ESA Expenses. To the extent that ESA or its Affiliates have agreed to pay costs and expenses in relation to the securitization or participation of any Loan incurred after the date the Loan is advanced, ESA and its Affiliates' maximum liability for such costs shall be $1,500 per Loan so affected. Lender shall be separately responsible for costs of securitization counsel, rating agencies, trustees, printers, prospectus accountants and ESA shall be separately responsible for costs of rating agency presentations (if any) and property tours. 60 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. EXTENDED STAY AMERICA, INC. By:_____________________________________________________ Name:______________________________________________ Title:_____________________________________________ CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION By:_____________________________________________________ Name:______________________________________________ Title:_____________________________________________ 61 Schedule 7.16 1) ESA is in the process of offering for sale to the public up to 8,000,000 shares of its common stock. 2) SUBSIDIARIES OF EXTENDED STAY AMERICA, INC. AS OF 5/17/96
TOTAL COMPANY DATE INC AUTHORIZED ISSUED STATE INC ESA DEVELOPMENT, INC. 19-Apr-95 60,000 50,000 DELAWARE FORMERLY ESA MIDWEST, INC. ESA MANAGEMENT, INC. 11-Jul-95 50,000 100 DELAWARE ESA PROPERTIES, INC. 18-Jan-95 50,000 100 DELAWARE ESA-NORCROSS INC. 26-Jan-96 1,000 100 GA ESA 0100, INC. 08-Apr-96 1,000 100 SC ESA 0115, INC. 08-Apr-96 1,000 100 SC ESA 0140, INC. 11-Apr-96 1,000 100 VA ESA 0145, INC. 29-Feb-96 1,000 100 AR ESA 0175, INC. 18-Apr-96 1,000 100 VA ESA 0180, INC. 08-Apr-96 1,000 100 SC ESA 0280, INC. 15-Apr-96 1,000 100 NC ESA 0295, INC. 23-Apr-96 1,000 100 KY ESA 0305, INC. 22-Feb-96 1,000 100 TN ESA 0325, INC. 19-Apr-96 1,000 100 KY ESA 0370, INC. 15-Apr-96 1,000 100 NC ESA 0480, INC. 18-Apr-96 1,000 100 VA ESA 0501, INC. 26-Mar-96 1,000 100 NY ESA 0510, INC. 25-Mar-96 1,000 100 IL ESA 0525, INC. 14-Mar-96 1,000 100 IL ESA 0530, INC. 23-Feb-96 1,000 100 IL ESA 0555, INC. 19-Apr-96 1,000 100 OH ESA 0565, INC. 06-Mar-96 1,000 100 OH ESA 0675, INC. 17-Apr-96 1,000 100 MI ESA 0680, INC. 17-Apr-96 1,000 100 MI ESA 0765, INC. 28-Mar-96 1,000 100 NY ESA 0992, INC. 22-Feb-96 1,000 100 GA
TOTAL COMPANY DATE INC AUTHORIZED ISSUED STATE INC ESA 0993, INC. 22-Feb-96 1,000 100 GA ESA 0995, INC. 02-May-96 1,000 100 KS
2 Schedule 12.1P - -------------- Directors of Extended Stay America, Inc. ---------------------------------------- H. Wayne Huizenga George D. Johnson, Jr. Donald F. Flynn Stewart H. Johnson John J. Melk Peer Pedersen Schedule 15.5 A. Caps on Fees and Expenses ------------------------- The aggregate responsibility of ESA and its Affiliates for third-party expenses will be capped at the following amounts for each Loan:
Service Amount ------- ------ Lender's Legal Fees $7,500 plus out-of-pocket expenses. Engineering Fees and Market $7,100 plus out-of-pocket expenses. Study Fees Servicer Fees $1,500 plus out-of-pocket expenses.
EXHIBIT 1.1.A - ------------- SUBJECT TO LOCAL COUNSEL COMMENTS ASSIGNMENT OF LEASES & RENTS FROM [EXTENDED STAY AMERICA, INC. SUBSIDIARY], AS ASSIGNOR TO CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION, AS ASSIGNEE DATED: , 199___ PREPARED BY AND RECORD & RETURN TO: WEIL, GOTSHAL & MANGES 767 FIFTH AVE. NEW YORK, NY 10153 ATT: MANAGING PARTNER - REAL ESTATE (FW) ASSIGNMENT OF RENTS AND LEASES ------------------------------ This Assignment of Rents and Leases (this "Agreement") is executed as of _______, 199_ by [ESA Subsidiary], a _______________________, whose address for notice is ___________________________________________, Attention:___________ ("Assignor"), to CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION, whose address for notice is 55 East 52nd Street, New York, N.Y. 10055, Attn: Marc Warren, Esq. ("Assignee"). AGREEMENT: For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee agree as follows: 1. Absolute Assignment. Assignor unconditionally and absolutely assigns to Assignee all of Assignor's right, title and interest in and to: (a) all leases, subleases, occupancy agreements, licenses, usufructs, rental contracts and other agreements now or hereafter existing relating to the use or occupancy of the project located on the real property described in Exhibit A hereto (the "Property"), together with all guarantees, modifications, extensions and renewals of thereof (collectively, the "Leases"); and (b) all rents, issues, profits, income and proceeds due or to become due from tenants, guests or other users of the Property, including rentals and all other payments of any kind under the Leases, together with all deposits (including security deposits) of tenants thereunder (collectively, the "Rents"). This Agreement is an absolute assignment to Assignee and not an assignment as security for the performance of the obligations under the Loan Documents (defined below), or any other indebtedness. 2. Rights of Assignee. Subject to the provisions of Section 6 below, Assignee shall have the right, power and authority to: (a) notify any person that the Leases have been assigned to Assignee and that all Rents are to be paid directly to Assignee, whether or not Assignee has commenced or completed foreclosure or taken possession of the Property; (b) settle, compromise, release, extend the time of payment of, and make allowances, adjustments and discounts of any Rents or other obligations under the Leases; (c) enforce payment of Rents and other rights under the Leases, prosecute any action or proceeding, and defend against any claim with respect to Rents and Leases; (d) enter upon, take possession of and operate the property regardless of the presence of any manager; (e) lease all or any part of the Property; and/or (f) perform any and all obligations of Assignor under the Leases or any other agreement affecting the Property and exercise any and all 1 rights of Assignor therein contained to the full extent of Assignor's rights and obligations thereunder, with or without the bringing of any action or the appointment of a receiver. At Assignee's request, Assignor shall deliver a copy of this Agreement to each tenant under a Lease and to each manager and managing agent or operator of the Property. Assignor irrevocably directs any tenant, manager, managing agent, or operator of the Property, without any requirement for notice or to consent by Assignor, to comply with all demands of Assignee under this Agreement and to turn over to Assignee on demand all Rents which it receives. 3. No Obligation. Notwithstanding Assignee's rights hereunder, Assignee shall not be obligated to perform, and Assignee does not undertake to perform, any obligation, duty or liability with respect to the Leases, Rents or Property on account of this Agreement. Assignee shall have no responsibility on account of this Agreement for control, care, maintenance or repair of the Property, for any waste committed on the Property, for any dangerous or defective condition of the Property, or for any negligence of the management upkeep, repair or control of the Property. 4. Enforcement or Defense. Assignee shall have the right, but not the obligation, to use and apply any Rents received hereunder in such order and such manner as Assignee may determine for: (a) Enforcement or Defense. The payment of costs and expenses of enforcing or defending the terms of this Agreement or the rights of Assignee hereunder, and collecting any Rents; (b) Loan Payments. Interest, principal or other amounts payable pursuant to (1) the Property Loan Agreement of even date between Assignee and Assignor (the "Property Loan Agreement"); (2) the Promissory Note [dated ____________, 199_/of even date herewith] in the stated principal amount of $______, subject to increase as provided in the Note executed by Assignor, bearing interest and being payable to the order of Assignee (the "Note"); (3) the [Mortgage/Deed of Trust], Security Agreement and Fixture Filing, of even date, executed by Assignor for the benefit of Assignee and relating to the Property (the "Mortgage"); (4) the obligations of Assignor or any Borrower under the Credit Facility Agreement between CS First Boston Mortgage Capital Corporation and Extended Stay America, Inc., dated as of May __, 1996 (the "ESA Loan Agreement"); and all other documents and instruments evidencing, governing and securing the loan evidenced by 2 the Note (the "Loan") and any and all modifications, amendments or extensions thereof or replacements or substitutions therefor (the Property Loan Agreement, the Note, the Mortgage, the ESA Loan Agreement such other documents and instruments, and such modifications, amendments, extensions, replacements, and substitutions thereof being herein collectively called the "Loan Documents") but not any obligation of ESA, ESA Management, Inc. or ESA Development, Inc.; and (c) Operating Expenses. Payment of costs and expenses of the operation and maintenance of the property, including (1) rentals and other charges payable by Assignor under any ground lease or other agreement affecting the Property; (2) electricity, telephone, water and other utility costs, taxes, assessments, water charges and sewer rents and other utility and governmental charges levied, assessed or imposed against the Property; (3) insurance premiums; (4) costs and expenses with respect to any litigation affecting the Property, the Leases or the Rents; (5) wages and salaries of employees, commissions of agents and attorneys' fees and expenses; and (6) all other carrying costs, fees, charges, reserves, and expenses whatsoever relating to the Property. After the payment of all such costs and expenses and after Assignee has established such reserves as it, in its sole discretion, deems necessary for the proper management of the Property, Assignee shall apply all remaining Rents received by it to the reduction of the Loan. 5. No Waiver. The exercise or non-exercise by Assignee of the rights granted in this Agreement or the collection and application of Rents by Assignee or its agent shall not be a waiver of any default by Assignor under this Agreement or any other Loan Document. No action or failure to act by Assignee with respect to any obligations of Assignor under the Loan Documents, or any security or guaranty given for the payment or performance thereof, shall in any manner affect, impair or prejudice any of Assignee's rights and privileges under this Agreement, or discharge, release or modify any of Assignor's duties or obligations hereunder. 6. Revocable License. Notwithstanding that this Agreement is an absolute assignment of the Rents and Leases and not merely the collateral assignment of, or the grant of a lien or security interest in the Rents and Leases, Assignee grants to Assignor a revocable license to collect and receive the Rents and to retain, use and enjoy such Rents as such 3 retention, use and enjoyment are governed by the Property Loan Agreement. Such license may be revoked by Assignee upon the occurrence of any Event of Default (as defined in the Property Loan Agreement or the ESA Loan Agreement). Assignor shall apply any Rents which it receives to the payment of debt service on the Note and other payments due under the Property Loan Agreement and the ESA Loan Agreement, taxes, assessments, water charges, sewer rents and other governmental charges levied, assessed or imposed against the Property, insurance premiums, operation and maintenance charges relating to the Property, and other obligations of lessor under the Leases before using such proceeds for any other purpose. 7. Term. This Agreement shall continue in full force and effect until: (a) all amounts due under the Loan Documents are paid in full, and (b) all other obligations of Assignor under the Loan Documents are fully satisfied or when the Mortgage is otherwise released. 8. Appointment. Assignor irrevocably appoints Assignee its true and lawful attorney in fact, which appointment is coupled with an interest, to execute any or all of the rights or powers described herein with the same force and effect as if executed by Assignor, and Assignor ratifies and confirms any and all acts done or omitted to be done by Assignee, its agents, servants, employees or attorneys in, to or about the Property. 9. Remedies of Assignor. In the event that a claim or adjudication is made that Assignee has acted unreasonably or unreasonably delayed acting in any case where by law or under this Agreement it has an obligation to act reasonably or promptly, Assignee shall not be liable for any punitive, consequential or incidental damages. 10. Indemnification. Assignor shall indemnify, defend and hold harmless Assignee from and against all liability, loss, damage, cost or expense which it may incur under this Agreement or under any of the Leases, including any claim against Assignee by reason of any alleged obligation, undertaking, action, or inaction on its part to perform or discharge any terms, covenants or conditions of the Leases or with respect to Rents, and including attorneys' fees and expenses, but excluding any claim to the extent caused by Assignee's gross negligence or willful misconduct. Any amount covered by this indemnity shall be payable on demand, and shall bear interest from the date of demand until the same is paid by Assignor to Assignee at a rate equal to the Default Rate (as defined in the ESA Loan Agreement). 4 11. Modification. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of such change is sought. 12. Successors and Assigns. This Agreement shall inure to the benefit of Assignee and its successors and assigns and shall be binding on Assignor and its successors and assigns. 13. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of _____. 14. Conflict. If any conflict or inconsistency exists between the absolute assignment of the Rents and the Leases in this Agreement and the assignment of the Rents and Leases as security in the Mortgage, the terms of this Agreement shall control. Executed as of the date first written above. _______________________________________________________ a _____________________________________________________ By: __________________________________________________ a ________________________________________________ By: ______________________________________________ a __________________________________________ 5 STATE OF ___________) ) COUNTY OF __________) This instrument was acknowledged before me on _, 1996_, by _______________, __________ of _______________, a __________ and the _______________ of ________ __, a _______________, on behalf of said __________ and _______________. ____________________________________ Notary Public, State of _________ 6 EXHIBIT A --------- [DESCRIPTION OF REAL PROPERTY] ------------------------------ 7 Exhibit 1.2 Subject To Local Counsel Comments FIRST DEED OF TRUST AND SECURITY AGREEMENT from [EXTENDED STAY AMERICA, INC., SUBSIDIARY] Grantor to ______________________________ Trustee for the use and benefit of CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION [THE MAXIMUM INDEBTEDNESS OR OBLIGATIONS SECURED BY THIS INSTRUMENT IS $____________________.] THE INDEBTEDNESS AND OBLIGATIONS SECURED BY THIS INSTRUMENT MATURE NOT LATER THAN ________, ____. Dated __________ ___, 19__ Prepared by, and record and return to: Weil, Gotshal & Manges 767 Fifth Ave. New York, NY 10153 Attn: Managing Partner - Real Estate (FW) FIRST DEED OF TRUST AND SECURITY AGREEMENT TABLE OF CONTENTS ----------------- ARTICLE PAGE - ------- ---- 1 DEFINITIONS AND ACCOUNTING TERMS....................................... 5 1.1 Defined Terms................................................... 5 1.2 Computation of Time Periods..................................... 15 1.3 Accounting Terms................................................ 15 1.4 Certain Terms................................................... 15 2 REPRESENTATIONS AND WARRANTIES......................................... 16 2.1 Lien Priority................................................... 16 2.2 Title........................................................... 16 2.3 Taxes and Impositions........................................... 16 2.4 Casualty; Flood Zone............................................ 17 2.5 Completion; Encroachment........................................ 17 2.6 Subdivision..................................................... 17 2.7 Use............................................................. 17 2.8 Licenses and Permits............................................ 17 2.9 Property Proceedings............................................ 18 2.10 Utilities....................................................... 18 2.11 Mechanics' Liens................................................ 18 2.12 Insurance....................................................... 18 2.13 Leases.......................................................... 19 2.14 Property Agreements............................................. 19 2.15 Personal Property............................................... 20 2.16 Leasing Brokerage and Management Fees........................... 20 2.17 Representations Generally....................................... 20 3 COVENANTS OF GRANTOR................................................... 21 3.1 Repayment of the Loan........................................... 21 3.2 Removal of Liens................................................ 21 3.3 Cost of Defending and Upholding this Deed of Trust Lien......... 22 3.4 Further Acts, Etc............................................... 22 3.5 Recording of Deed of Trust, Etc................................. 23 4 TRANSFER OR ENCUMBRANCE OF THE PROPERTY; ASSUMABILITY.................. 23 4.1 Definition of Transfer.......................................... 23 4.2 No Transfer..................................................... 23 i ARTICLE PAGE - ------- ---- 5 EVENTS OF DEFAULT...................................................... 24 5.1 Events of Default............................................... 24 5.2 Remedies........................................................ 26 5.3 Payment of Debt After Default................................... 31 5.4 Possession of the Property...................................... 32 5.5 Interest After Default.......................................... 32 5.6 Grantor's Actions After Default................................. 32 5.7 Control by Beneficiary After Default............................ 32 5.8 Right to Cure Defaults.......................................... 33 5.9 Recovery of Sums Required to Be Paid............................ 33 5.10 Marshalling and Other Matters................................... 34 5.11 Tax Reduction Proceedings....................................... 34 5.12 General Provisions Regarding Remedies........................... 34 6 INSURANCE AND CASUALTY RESTORATION..................................... 35 6.1 Maintenance of Insurance Policies............................... 35 6.2 Casualty Restoration............................................ 35 7 CONDEMNATION........................................................... 35 7.1 Notice of Condemnation.......................................... 35 7.2 Application of Condemnation Awards.............................. 36 8 SECURITY AGREEMENT UNDER UNIFORM COMMERCIAL CODE....................... 36 9 NO WAIVERS, ETC........................................................ 37 10 COMPLIANCE WITH REQUIREMENTS........................................... 37 10.1 Compliance with Legal Requirements.............................. 37 10.2 Compliance with Recorded Documents.............................. 38 11 ENVIRONMENTAL COMPLIANCE............................................... 38 11.1 Covenants, Representations and Warranties....................... 38 11.2 Environmental Indemnification................................... 41 12 WAIVERS BY GRANTOR...................................................... 43 13 FAILURE TO CONSENT...................................................... 43 14 SUBSTITUTION OR RESIGNATION OF TRUSTEE.................................. 44 15 CONVEYANCE BY TRUSTEE/DEFEASANCE........................................ 44 ii ARTICLE PAGE - ------- ---- 16 ENFORCEABILITY........................................................ 45 16.1 Inconsistency with the Loan Documents.......................... 45 17 MISCELLANEOUS......................................................... 45 17.1 Amendments, Etc................................................ 45 17.2 Notices, Etc................................................... 45 17.3 No Waiver; Remedies............................................ 46 17.4 Right of Set-off............................................... 46 17.5 Binding Effect................................................. 47 17.6 Severability................................................... 47 17.7 Submission to Jurisdiction; Service of Process................. 47 17.8 Section Titles................................................. 48 17.9 Execution in Counterparts...................................... 48 17.10 Entire Agreement............................................... 48 17.11 Confidentiality................................................ 48 17.12 Waiver of Jury Trial........................................... 48 17.13 Waiver of Notice............................................... 48 17.14 Actions and Proceedings........................................ 48 17.15 Usury Laws..................................................... 49 17.17 Offsets, Counterclaims and Defenses............................ 49 17.18 Waiver of Statute of Limitations............................... 50 17.19 Advances....................................................... 50 17.20 Application of Default Rate Not a Waiver....................... 50 17.21 No Joint Venture or Partnership................................ 50 17.22 Time of the Essence............................................ 50 17.23 Grantor's Obligations Absolute................................. 50 18 ADDITIONAL PROVISIONS................................................. 51 Exhibit A Legal Description Exhibit B Additional Provisions Schedule 2.2 Outstanding Options or Rights of First Refusal INDEX OF DEFINED TERMS Additional Mortgages......... 2 Affiliate.................... 6 Aggregate Debt............... 2 Applicable Rate.............. 6 Appraisal.................... 6 Award........................ 36 Beneficiary.................. 1 Buildings.................... 3 Business Day................. 6 Casualty..................... 35 CERCLA....................... 8 Closing Date................. 6 iii Collateral................... 6 Condemnation................. 35 Contract..................... 6 Contractual Obligation....... 6 Debt......................... 2 Default...................... 6 Default Rate................. 6 Default Rate Interest........ 7 Definition of Transfer....... 23 Development Laws............. 7 Dollars...................... 7 Environmental Problem........ 7 Environmental Statute........ 7 EPA.......................... 40 ESA.......................... 1 ESA Loan Agreement........... 1 ESA Subsidiaries............. 1 Event of Default............. 24 Fiscal Year.................. 8 Fixtures..................... 4 Fraudulent Conveyance Laws... 2 GAAP......................... 8 Governmental Authority....... 8 Grantor...................... 1 Hazardous Material........... 8 Impositions.................. 9 Indebtedness................. 9 Independent.................. 10 Insurance Requirements....... 10 Land......................... 3 Leases....................... 4 Legal Requirement............ 10 Lien......................... 11 Loan......................... 1 Loan Documents............... 3 Loan Party................... 11 Material Adverse Change...... 11 Maturity Date................ 11 Net Proceeds................. 11 Note......................... 1 Obligations.................. 2 Other Subsidiary Notes....... 2 Payment Date................. 11 Permitted Encumbrances....... 16 Person....................... 12 Principal Amount............. 12 Principal Payments........... 12 Property..................... 3 Property Agreements.......... 12 Property Loan Agreement...... 1 Rating Agency................ 12 Real Estate.................. 4 Recognized Appraiser......... 12 Release...................... 12 Remedial Action.............. 12 Rents........................ 4 Requirement of Law........... 13 Responsible Officer.......... 13 Single Purpose Entity........ 13 Stock........................ 13 Stock Equivalents............ 13 Subsidiary................... 14 Taking....................... 14 Title Insurance Policy....... 14 Transfer..................... 23 Trustee...................... 1 Unscheduled Payments......... 14 Use Requirements............. 14 Yield Maintenance Premium.... 15 iv FIRST DEED OF TRUST AND SECURITY AGREEMENT ------------------------------------------ THIS FIRST DEED OF TRUST AND SECURITY AGREEMENT, made as of the ____ day of ________, 19__, among [Extended Stay America, Inc., subsidiary], a __________________ corporation having an office at _________________________ ("Grantor"), to _________________, having an address at ______________________ ("Trustee") and CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION, a ______________ Corporation, having an address at 55 East 52nd Street, New York, NY 10055 ("Beneficiary"). W I T N E S S E T H : ------------------- WHEREAS, pursuant to a Credit Facility Agreement (as the same may be amended, the "ESA Loan Agreement"), dated May __, 1996, between Beneficiary and Extended Stay America, Inc. ("ESA"), Beneficiary has agreed to make loans to various wholly-owned (directly and indirectly) subsidiaries of ESA (the "ESA Subsidiaries") in a total aggregate amount not to exceed $300,000,000, including a certain loan in the amount of $____________________ (the "Loan"), to Grantor, which Loan is evidenced by that certain promissory note, dated the date hereof (as the same may be amended, the "Note") given by Grantor, as maker, to Beneficiary, as holder; and WHEREAS, certain terms and conditions of the Loan are set forth in that certain Property Loan Agreement (as the same may be amended, the "Property Loan Agreement"), dated the date hereof, between Grantor and Beneficiary; and WHEREAS, all things necessary to make this Deed of Trust the valid and legally binding obligation of Grantor in accordance with its terms, for the uses and purposes herein set forth, have been done and performed; and WHEREAS, Grantor and Beneficiary intend these recitals to be a material part of this Deed of Trust. NOW THEREFORE, to secure: (i) the payment of the principal amount of the Loan, prepayment premium (if any) and interest in accordance with the terms of the Note and all other obligations, liabilities or sums due or to become due from Borrower under this Deed of Trust, the Note or any other Loan Document executed in connection with the Loan, including, without limitation, all future advances evidenced by 1 amendments to the Note, interest and fees on said obligations, liabilities or sums (said principal, premium, interest and other sums, the "Debt"); and (ii) the payment of the principal, prepayment premium (if any) and interest on notes made by Affiliates of Grantor in connection with the ESA Loan Agreement , including any future advances evidenced thereby, (as the same may be amended, the "Other Subsidiary Notes", the Debt and all amounts and obligations, liabilities and other sums due or to become due under the Other Subsidiary Notes, collectively, the "Aggregate Debt"); provided, however, the amount of Other Subsidiary Notes secured hereby shall be limited to a maximum aggregate amount equal to the largest sum that would not render Grantor's obligations hereunder subject to avoidance as a fraudulent conveyance under Section 548 of Title 11 of the United States Code or any comparable state law fraudulent conveyance statutes (collectively, the "Fraudulent Conveyance Laws"), in each case after giving effect to all other liabilities of Grantor that are permitted to be incurred in accordance with this Deed of Trust prior to an Event of Default and are relevant under the Fraudulent Conveyance Laws (excluding intercompany indebtedness and other intercompany liabilities) and after giving effect to all assets of Grantor, contingent or otherwise, including without limitation, all rights of subrogation, contribution and similar or comparable rights. (This proviso shall be construed with the goal of maximizing the amount of indebtedness secured hereunder without rendering Grantor insolvent, leaving it with unreasonably small capital or unable to pay its debts as they become due (if and to the extent limited or prohibited by the Fraudulent Conveyance Laws)); and (iii) the performance of all of the terms, covenants, conditions, agreements, obligations and liabilities of Grantor or any ESA Subsidiary but not ESA, ESA Management, Inc. or ESA Development, Inc., for the benefit of Beneficiary (collectively, the "Obligations") under (i) this Deed of Trust, (ii) the ESA Loan Agreement, (iii) the Property Loan Agreement, (iv) any deeds of trust or mortgages in addition to this Deed of Trust now or hereafter made by Grantor or any ESA Subsidiary for the benefit of Beneficiary to secure the Aggregate Debt (such additional deeds of trust and mortgages, as they may hereafter be amended, supplemented or modified from time to time, collectively, the "Additional Mortgages"), (v) any supplemental agreements, undertakings, instruments, documents or other writings executed by Grantor as a condition to advances under the Note or otherwise in connection with the ESA Loan Agreement, (vi) all chattel mortgages, pledges, powers of attorney, consents, assignments, notices, leases and financing statements heretofore, now or hereafter executed by or on behalf of Grantor or any other Person (hereinafter 2 defined) and/or delivered to Beneficiary in connection with the Note or the transactions contemplated thereby, and (vii) any extensions, renewals, replacements or modifications of any of the foregoing (this Deed of Trust, the ESA Loan Agreement, the Property Loan Agreement, the Additional Mortgages and any other supplemental agreements, undertakings, instruments, documents or other writings executed in connection with any of the foregoing, together with (x) the foregoing powers of attorney, consents, assignments, notices, leases and financing statements, (y) any guarantees of the Aggregate Debt and the Obligations and (z) any security agreements or assignments now or hereafter made to secure the Aggregate Debt and the Obligations (all of the foregoing documents, collectively, the "Loan Documents"). The maximum amount secured by this Deed of Trust shall be limited to the lesser of: (x) in a state without a mortgage recording tax, or in a state where the maximum recording tax payable is met or exceeded by clause (y), $300,000,000 or (y) $____________, which is agreed to be 250% of the Value of the Property on the date hereof; and (iv) and in consideration of Ten Dollars ($10.00), in hand paid, the receipt and legal sufficiency of which are hereby acknowledged, Grantor does hereby mortgage, give, grant, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, hypothecate, deposit, pledge, grant a security interest, set over and confirm unto Trustee, and to its successors and assigns in trust, forever, the following described real and other property and all substitutions for and all replacements, reversions and remainders of such property, whether now owned or held or hereafter acquired by Grantor (collectively, the "Property"): All those plots, pieces or parcels of land more particularly described in Exhibit A annexed hereto and made a part hereof together with the right, title and interest of Grantor, if any, in and to the streets and in and to the land lying in the bed of any streets, roads or avenues, open or proposed, public or private, in front of, adjoining or abutting said land to the center line thereof, the air space and development rights pertaining to said land and the right to use such air space and development rights, all rights of way, privileges, liberties, tenements, hereditaments and appurtenances belonging to, or in any way appertaining to, said land, all easements now or hereafter benefitting said land and all royalties and rights appertaining to the use and enjoyment of said land, including, but without limiting the generality of the foregoing, all alley, vault, drainage, mineral, water, oil, coal, gas, timber and other similar rights (collectively, the "Land"); TOGETHER with the buildings and other improvements now or hereafter erected on the Land (the buildings and other improvements, collectively, the "Buildings"); 3 TOGETHER with all and singular the reversion or reversions, remainder or remainders, rents, issues, profits and revenues of the Real Estate (hereinafter defined) and all of the estate, right, title, interest, dower and right of dower, curtesy and right of curtesy, property, possession, claim and demand whatsoever, both in law and at equity, of Grantor of, in and to the Real Estate and of, in and to every part and parcel thereof, with the appurtenances, at any time belonging or in any way appertaining thereto; TOGETHER with all of the fixtures, systems, machinery, apparatus, equipment and fittings of every kind and nature whatsoever and all appurtenances and additions thereto and substitutions or replacements thereof now owned or hereafter acquired by Grantor and now or hereafter attached or affixed to, or constituting a part of, the Real Estate or any portion thereof (collectively, the "Fixtures," and together with the Buildings and the Land collectively, the "Real Estate"), including, but without limiting the generality of the foregoing, all heating, electrical, mechanical, lighting, lifting, plumbing, ventilating, air conditioning and air-cooling fixtures, systems, machinery, apparatus and equipment, refrigerating, incinerating and power fixtures, systems, machinery, apparatus and equipment, loading and unloading fixtures, systems, machinery, apparatus and equipment, escalators, elevators, boilers, communication systems, switchboards, sprinkler systems and other fire prevention and extinguishing fixtures, systems, machinery, apparatus and equipment, and all engines, motors, dynamos, machinery, wiring, pipes, pumps, tanks, conduits and ducts constituting a part of any of the foregoing, it being understood and agreed that all of the Fixtures are appropriated to the use of the Real Estate and, for the purposes of this Deed of Trust, shall be deemed conclusively to be Real Estate and conveyed hereby; TOGETHER with all drainage, mineral, water, oil, gas, timber and sewer pipes, conduits and wires, and other facilities furnishing utility or other services and other similar rights now or hereafter benefitting the Real Estate or any portion thereof or appertaining thereto; TOGETHER with Grantor's right, title and interest in, to and under all leases, subleases, underlettings, concession agreements, licenses and other occupancy agreements which now or hereafter may affect the Real Estate or any portion thereof and under any and all guarantees, modifications, renewals and extensions thereof (collectively, the "Leases"), and in and to any and all deposits made or hereafter made as security under the Leases, subject to the prior legal rights under the Leases of the lessees making such deposits, together with any and all of the room charges, other fees and charges payable by guests or users, benefits, revenues, income, rents, issues and profits due or to become due or to which Grantor is now or hereafter may become entitled arising out of the Leases or the Real Estate or any portion thereof (collectively, the "Rents"); 4 TOGETHER with the Insurance Proceeds and the Condemnation Proceeds to the extent of the entire amount of the Debt outstanding as of the date of Beneficiary's receipt of any such Insurance Proceeds or Condemnation Proceeds, notwithstanding that the entire amount of the Debt may not then be due and payable, and also to the extent of reasonable attorneys' fees, costs and disbursements incurred by Trustee in connection with the collection of any such Insurance Proceeds or Condemnation Proceeds. Grantor hereby assigns to Trustee and Beneficiary, and Beneficiary is hereby authorized to collect and receive, all Insurance Proceeds and Condemnation Proceeds and to give proper receipts and acquittances therefor and to apply the same toward the Debt as herein set forth notwithstanding that the entire amount of the Debt may not then be due and payable. Grantor hereby agrees to make, execute and deliver, from time to time, upon demand, such further documents, instruments or assurances as may be requested by Trustee or Beneficiary to confirm the assignment of the Insurance Proceeds and the Condemnation Proceeds to Trustee, free and clear of any interest of Grantor whatsoever therein and free and clear of any other liens, claims or encumbrances of any kind or nature whatsoever; TOGETHER with all right, title and interest of Grantor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Real Estate, and in each such case, the foregoing shall be deemed a part of the Real Estate and shall become subject to the lien of this Deed of Trust as fully and completely, and with the same priority and effect, as though now owned by Grantor and specifically described herein, without any further deed of trust, mortgage, conveyance, assignment or other act by Grantor; TOGETHER with all of Grantor's rights to further encumber the Property for debt. TO HAVE AND TO HOLD the Property, and the rights and privileges hereby deeded or intended so to be unto Trustee and its successors and assigns for the uses and purposes herein set forth, until the Debt is fully paid and the Obligations are fully performed in accordance with the provisions set forth herein and in the other Loan Documents. Grantor, for itself and its successors and assigns, further represents, warrants, covenants and agrees with Trustee and Beneficiary as follows: 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Deed of Trust, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural 5 forms of the terms defined). All capitalized terms used herein and not defined herein shall have the meanings ascribed thereto in the Property Loan Agreement. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have the meanings correlative to the foregoing. "Appraisal" means an appraisal using methodologies reasonably acceptable to Beneficiary at the time such appraisal is or was made and performed by a Recognized Appraiser. "Applicable Rate" means, for any period, the rate per annum specified in the Note. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City. "Closing Date" means the date hereof. "Collateral" means the Property and all other property and interests in property and proceeds thereof now owned or hereafter acquired by any Loan Party in or upon which a Lien is granted under any of the Collateral Documents, as such term is defined in the ESA Loan Agreement. "Contract" means any contract, agreement, undertaking, indenture, note, bond, loan, instrument, lease, conditional sales contract, mortgage, deed of trust, license, franchise, insurance policy, commitment or other arrangement or agreement. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of the property owned by it is bound. "Default" means any event that would constitute an Event of Default if all requirements in connection therewith for the giving of notice, the lapse of time, and the happening of any further condition, event or act, had been satisfied. "Default Rate" shall be a rate equal to four percent (4%) above the rate otherwise applicable, subject to Section 17.15 hereof. 6 "Default Rate Interest" means, to the extent the Default Rate becomes applicable, interest in excess of the interest that would have accrued on (a) the Loan and (b) to the extent permitted by law, any accrued but unpaid interest, if the Default Rate was not applicable. "Development Laws" means all applicable subdivision, zoning, environmental protection, wetlands protection, or land use laws or ordinances, and any and all applicable rules and regulations of any Governmental Authority promulgated thereunder or related thereto. "Dollars" and the sign "$" each mean the lawful money of the United States of America. "Environmental Problem" means any of the following: (a) the presence of any Hazardous Material on, in, under, or above all or any portion of the Property; (b) the release of any Hazardous Material from or onto the Property; (c) the violation of any Environmental Statute with respect to the Property; or (d) the failure to obtain or to abide by the terms or conditions of any permit or approval required under any Environmental Statute with respect to the Property. A condition described above shall be an Environmental Problem regardless of whether or not any Governmental Authority has taken any action in connection with the condition and regardless of whether that condition was in existence on or before the date hereof. Notwithstanding the foregoing, this definition of Environmental Problem shall not include use and storage for use of heating oil, ordinary cleaning fluids and pesticides and other substances customarily used in the operation of properties that are being used for the same purposes as the Property is presently being used, provided such use and/or storage for use is in compliance with Legal Requirements, the requirements hereof and the other Loan Documents and does not give rise to liability under applicable Legal Requirements or be the basis for a lien against the Property or any part thereof. "Environmental Statute" means any effective, applicable or relevant federal, state or local statute, ordinance, rule or regulation, any judicial or administrative order (whether or not on consent) or judgment applicable to Grantor, including, without limitation, any judgment or settlement based on common law theories, and any provisions or condition of any permit, license or other authorization binding on Grantor relating to (a) the protection of 7 the environment, the safety and health of persons (including employees) or the public welfare from actual or potential exposure (or effects of exposure) to any actual or potential release, discharge, disposal or emission (whether past or present) of any Hazardous Materials or (b) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Materials, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S)9601 et seq., the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. (S)6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. (S)1251 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. (S)2601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. (S)1101 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. (S)7401 et seq., the National Environmental Policy Act of 1975, 42 U.S.C. (S)4321, the Rivers and Harbours Act of 1899, 33 U.S.C. (S)401 et seq., the Endangered Species Act of 1973, as amended, 16 U.S.C. (S)1531 et seq., the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. (S)651 et seq., and the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. (S)300(f) et seq., and all rules, regulations and guidance documents promulgated or published thereunder. "Fiscal Year" means the twelve month period commencing on January 1 and ending on December 31 during each year of the term of this Deed of Trust or such other fiscal year of Grantor as Grantor may select from time to time with the prior written reasonable consent of Beneficiary. "GAAP" means generally accepted accounting principles in the United States of America, as of the date of the applicable financial report, consistently applied. "Governmental Authority" means, with respect to any Person, any federal or state government or other political subdivision thereof and any entity, including any regulatory or administrative authority or court, exercising executive, legislative, judicial, regulatory or administrative or quasi- administrative functions of or pertaining to government, and any arbitration board or tribunal in each case, having jurisdiction over such applicable Person or such Person's property and any stock exchange on which shares of capital stock of such Person are listed or admitted for trading. "Hazardous Material" means any flammable, explosive or radioactive material, hazardous material or waste, hazardous or toxic substance, pollutants or related material, asbestos or any material containing asbestos, or any other substance or material as defined in or regulated by any Environmental Statutes. 8 "Impositions" means all taxes (including, without limitation, all ad valorem, sales (including those imposed on lease rentals), use, single business, gross receipts, value added, intangible transaction privilege, privilege or license or similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not commenced or completed within the term of this Deed of Trust, ground rents, water, sewer or other rents and charges, excises, levies, fees (including, without limitation, license, permit, 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 Property and/or any rents, common area charges, reciprocal easement fees and other payments (including all interest and penalties thereon), which at any time prior to, during or in respect of the term hereof may be assessed or imposed on or in respect of or be a lien upon (a) Grantor (including, without limitation, all franchise, single business or other taxes imposed on Grantor for the privilege of doing business in the jurisdiction in which the Property is located) or Beneficiary, (b) the Property or any part thereof or any rents, common area charges, reciprocal easement fees and other payments 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 Property, or any part thereof, or the leasing or use of the Property, or any part thereof, or the acquisition or financing of the acquisition of the Property, or any part thereof, by Grantor. "Indebtedness" of any Person means: (i) all indebtedness of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all capitalized lease obligations of such Person, (v) all Contingent Obligations of such Person, 9 (vi) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any Stock or Stock Equivalents of such Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (vii) all obligations of such Person under interest rate swap or hedging contracts, (viii) all Indebtedness referred to in clause (i), (ii), (iii), (iv), (v), (vi) or (vii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and general intangibles) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (ix) in the case of Grantor, the Obligations, and (x) all liabilities of such Person that would be shown on a balance sheet of such Person prepared in conformity with GAAP. "Independent" means, when used with respect to any Person, a Person who (i) is in fact independent, (ii) does not have any direct financial interest or any material indirect financial interest in Grantor, or in any Affiliate of Grantor or any constituent partner, shareholder, member or beneficiary of Grantor and (iii) is not connected with Grantor or any Affiliate of Grantor or any constituent partner, shareholder, member or beneficiary of Grantor as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be provided, such opinion or certificate shall state that the Person executing the same has read this definition and is Independent within the meaning hereof. "Insurance Requirements" means all terms of any insurance policy required by this Deed of Trust, all requirements of the issuer of any such policy, and all regulations and then current standards applicable to or affecting the Property or any use or condition thereof, which may, at any time, be recommended by the Board of Fire Underwriters, if any, having jurisdiction over the Property, or such other Person exercising similar functions. "Legal Requirement" means as to any Person, the certificate of incorporation and by-laws or other organization or governing documents of such Person, and any law, treaty, rule or regulation (including, without limitation, Environmental Statutes, Development Laws and Use Requirements) or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 10 "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever intended to secure payment of any Indebtedness or other obligation, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capitalized lease, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor (excluding precautionary filings). "Loan Party" means Grantor, ESA and each Affiliate of Grantor or ESA that executes and delivers a Loan Document. "Material Adverse Change" means a material adverse change in (a) the condition (financial or otherwise), business, performance, prospects, operations or properties of ESA and its Subsidiaries taken as one enterprise or ESA and the Borrowers taken as one enterprise, (b) the legality, validity or enforceability of any Loan Document, (c) the perfection or priority of the Liens granted pursuant to the Collateral Documents, (d) the ability of Grantor to repay the Obligations or of any Loan Party to perform its material obligations under any Loan Document, or (e) the rights and remedies of Beneficiary under the Loan Documents. "Maturity Date," means the maturity date set forth in the Note or such other date pursuant to which the Note becomes due and payable, whether at stated maturity or by declaration of acceleration, or otherwise. "Net Proceeds" means the excess of (i)(x) the purchase price (at foreclosure or otherwise) actually received by Beneficiary with respect to the Property as a result of the exercise by Beneficiary of its rights, powers, privileges and other remedies after the occurrence of an Event of Default, or (y) in the event that Beneficiary (or Beneficiary's nominee) is the purchaser at foreclosure by credit bid, then the amount of such credit bid, in either case, over (ii) all costs and expenses, including, without limitation, all attorneys' fees (to the extent approved by the court in the case of a judiciary foreclosure) and disbursements and any brokerage fees, if applicable, incurred by Beneficiary in connection with the exercise of such remedies, including the sale of such Property after a foreclosure against the Property. "Payment Date" means, with respect to each month, the first calendar day in such month, or if such day is not a Business Day, the next following Business Day. 11 "Person" means an individual, partnership, corporation (including, without limitation, a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a Governmental Authority. "Principal Amount" means the principal amount of the debt as such amount may be increased or decreased from time to time pursuant to the terms of this Deed of Trust, the Note or the other Loan Documents. "Principal Payments" means all payments of principal made pursuant to the terms of the Note. "Property Agreements" means all agreements, grants of easements and/or rights-of-way, reciprocal easement agreements, permits, declarations of covenants, conditions and restrictions, disposition and development agreements, planned unit development agreements, management or parking agreements, party wall agreements or other instruments affecting the Property, but not including any brokerage agreements, management agreements, service contracts, Leases or the Loan Documents. "Rating Agency" means any nationally recognized statistical agency selected by Beneficiary including, without limitation, Duff & Phelps Rating Co., Fitch Investors Services, Inc., Moody's Investors Services, Inc., and/or Standard and Poors Corporation, collectively, and any successor to any of them; provided, however, that at any time during which the Loan is an asset of a securitization, "Rating Agency" means the rating agency or rating agencies that from time to time rate the securities issued in connection with such securitization. "Recognized Appraiser" means a qualified and MAI certified professional appraiser as may be selected or approved by Beneficiary, having at least five (5) years' prior experience in performing real estate appraisals in the geographic area where the property being appraised is located and having a recognized expertise in appraising properties operated as hotel or other lodging facilities. "Release" means any release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the indoor or outdoor environment or into or out of the Real Estate. "Remedial Action" means all actions including, without limitation, any capital expenditures, required or voluntarily undertaken to (i) clean up, remove, treat or in any other way address any Hazardous Material or other substance in the indoor or outdoor environment, (ii) prevent the Release or threat of Release, or minimize the further Release, of any Hazardous Material or other substance so it does not migrate or endanger or threaten 12 to endanger public health or welfare or the indoor or outdoor environment, (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (iv) bring facilities on any property owned, leased or operated by Grantor into compliance with all Environmental Laws and Environmental Permits. "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and all federal, state and local laws, rules and regulations, including, without limitation, federal, state or local securities, antitrust and licensing laws, all food, health and safety laws, and all applicable trade laws and requirements, including, without limitation, all disclosure requirements of Environmental Statutes, ERISA and all orders, judgments, decrees or other determinations of any Governmental Authority or arbitrator, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer" means, with respect to any Person, any of the principal executive officers or general partners of such Person. "Single Purpose Entity" means a Person, other than an individual, which is formed or organized solely for the purpose of holding, directly, an undivided 100% ownership interest in a Hotel Property (unless Lender, in its sole discretion consents to the Single Purpose Entity owning more than one Hotel Property), does not engage in any business unrelated to the Hotel Property, does not have any assets other than those related to its interest in the Hotel Property or any indebtedness other than as permitted by this Deed of Trust or the other Loan Documents, has its own separate books and records and has its own accounts, in each case that are separate and apart from the books and records and accounts of any other Person, holds itself out as being a Person separate and apart from any other Person, and meets Beneficiary's reasonable requirements (including organizational and structural requirements) to establish that, after the guaranty of ESA as provided in the ESA Loan Agreement is terminated with respect to the Loan pursuant to Section 8.9 of the ESA Loan Agreement and the Indemnification obligations of ESA pursuant to Section 15.5 of the ESA Loan Agreement are terminated, such Person would not be consolidated with ESA for bankruptcy purposes. "Stock" means shares of capital stock, beneficial or partnership interests, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. 13 "Subsidiary" means, with respect to any Person, any corporation, partnership or other business entity of which an aggregate of 50% or more of the outstanding Stock having ordinary voting power to elect a majority of the board of directors, managers, trustees or other controlling persons, is, at the time, directly or indirectly, owned or controlled by such Person and/or one or more Subsidiaries of such Person (irrespective of whether, at the time, Stock of any other class or classes of such entity shall have or might have voting power by reason of the happening of any contingency). "Taking" means a condemnation or taking pursuant to the lawful exercise of the power eminent domain. "Title Insurance Policy" means a paid and effective commitment for title insurance issued by a title company acceptable to Beneficiary, in such form and amounts as are reasonably acceptable to Beneficiary, insuring that this Deed of Trust is a valid, first priority Lien on the Property subject only to such Permitted Encumbrances (except to the extent there is a material change in the Permitted Encumbrance, in which case Beneficiary shall exercise its reasonable discretion in determining if the previously permitted encumbrance shall remain a Permitted Encumbrance) and such other exceptions to title as shall be acceptable to Beneficiary in its reasonable discretion and containing such endorsements and affirmative insurance as Beneficiary may reasonably require and as are obtainable in the applicable jurisdiction (it being understood that Beneficiary shall not require a zoning endorsement if it shall receive a zoning opinion or letter from the relevant Governmental Authority providing similar assurances, in form reasonably satisfactory to Beneficiary), and true copies of each document, instrument or certificate required by the terms of each such policy, or required to be, or have been, executed, filed, or recorded, in connection with this Deed of Trust. "Unscheduled Payments" means (i) all Loss Proceeds (as defined in the Property Loan Agreement) that Grantor has elected or is required to apply to the repayment of the Loan pursuant to this Deed of Trust, the Note or any other Loan Documents, (ii) any funds representing a voluntary or involuntary principal prepayment other than scheduled Principal Payments, (iii) any Net Proceeds and (iv) any amounts paid from the Curtailment Reserve Sub-Account pursuant to the Property Loan Agreement. "Use Requirements" means any and all building codes, permits, certificates of occupancy or compliance, laws, regulations, or ordinances (including, without limitation, health, pollution, fire protection, medical and day-care facilities, waste product and sewage disposal regulations), restrictions of record, easements, reciprocal easements, declarations or other agreements affecting the use of the Property or any part thereof. 14 "Yield Maintenance Premium" means the premium that shall be the product of (1) a fraction, the numerator of which is the positive excess, if any, of (i) the present value of all future payments of principal and interest on the Principal Amount, including the principal amount due at maturity, to be made on the Note before the prepayment in question, discounted at an interest rate per annum equal to the sum of (a) the Treasury Constant Maturity Yield Index published during the second full week preceding the date on which such premium is payable for instruments having a maturity coterminous with the remaining term of the Note, and (b) fifty (50) basis points, over (ii) the Principal Amount immediately before such prepayment, and the denominator of which is the Principal Amount immediately prior to the prepayment, and (2) the Principal Amount being prepaid; provided, however, that if there is no Treasury Constant Maturity Yield Index for instruments having a maturity coterminous with the remaining term of the Note, then the index referred to in (1) above shall be equal to the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). 1.2 Computation of Time Periods. In this Deed of Trust, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including." 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. 1.4 Certain Terms. A. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Deed of Trust as a whole, and not to any particular Article, 15 Section, subsection or clause in this Deed of Trust. References herein to an Exhibit, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit or Schedule to, or Article, Section, subsection or clause in this Deed of Trust. B. The term "Beneficiary" includes its successors and each assignee of Beneficiary who becomes a party hereto pursuant to the Property Loan Agreement. 2 REPRESENTATIONS AND WARRANTIES To induce Beneficiary to enter into this Deed of Trust, Grantor represents, warrants and covenants to Beneficiary as follows: 2.1 Lien Priority. This Deed of Trust is a valid and enforceable first lien on the Property, free and clear of all encumbrances and liens having priority over the lien of this Deed of Trust, except for the items set forth as exceptions to or subordinate matters in the Title Insurance Policy insuring the lien of this Deed of Trust, none of which, individually or in the aggregate, materially interfere with the benefits of the security intended to be provided hereby or materially affect the value or marketability of the Property (such items, the "Permitted Encumbrances"). 2.2 Title. Grantor owns the Property including the Real Estate and subject only to the Permitted Encumbrances, Grantor has good, insurable and marketable fee simple title to and has the right to mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign and hypothecate the Property. Grantor will preserve its interest in and title to the Property and will forever warrant and defend the same to Beneficiary against any and all claims made by, through or under Grantor and will forever warrant and defend the validity and priority of the lien and security interest created herein against the claims of all Persons whomsoever claiming by, through or under Grantor. The foregoing warranty of title shall survive the foreclosure of this Deed of Trust and shall inure to the benefit of and be enforceable by Beneficiary in the event Beneficiary acquires title to the Property pursuant to any foreclosure. Except as disclosed on Schedule 2.2 attached hereto, as of the date hereof there are no outstanding options or rights of first refusal to purchase the Property or Grantor's ownership thereof. 2.3 Taxes and Impositions. All taxes and other Impositions and governmental assessments due and owing in respect of, and affecting, the Property have been paid. Grantor has paid all Impositions that constitute special governmental assessments in full, except for those assessments that are permitted by applicable Legal Requirements to be paid in installments, in which case all installments that are due and payable have been paid in full. There are no pending, or to Grantor's best knowledge, proposed special or other assessments 16 for public improvements or otherwise affecting the Property, nor are there any contemplated improvements to the Property that may result in such special or other assessments. 2.4 Casualty; Flood Zone. The Real Estate is in good repair and free and clear of any damage, destruction or casualty (whether or not covered by insurance) that would materially affect the value of the Property or the use for which the Property was intended. No portion of any building or operating system located on the Real Estate is located in an "area of special flood hazard," as that term is defined in the regulations of the Federal Insurance Administration, Department of Housing and Urban Development, under the National Flood Insurance Act of 1968, as amended (24 CFR (S) 1909.1) or Grantor has obtained the flood insurance required under the Property Loan Agreement. The Real Estate either does not lie in a 100 year flood plain that has been identified by the Secretary of Housing and Urban Development or any other Governmental Authority or, if it does, Grantor has obtained the flood insurance required under Section 6.1.E. 2.5 Completion; Encroachment. All Buildings necessary for the efficient use and operation of the Property that were included for purposes of determining the appraised value of the Property in the Appraisal delivered pursuant to the ESA Loan Agreement have, except as otherwise disclosed in writing to Beneficiary, been completed and none of the Buildings lie outside the boundaries and building restriction lines of the Real Estate. Except as set forth in the Title Insurance Policy insuring the lien of this Deed of Trust, or the survey delivered to Beneficiary and approved by Beneficiary, no improvements on adjoining properties encroach upon the Real Estate. 2.6 Subdivision. The Real Estate is or will be taxed separately without regard to any other real estate, and the Property constitutes a legally subdivided lot under all applicable Legal Requirements (or, if not subdivided, no subdivision or platting of the Property is required under applicable Legal Requirements), and for all purposes may be mortgaged, conveyed or otherwise dealt with as an independent parcel. 2.7 Use. The existence of all Buildings, the present use and operation thereof and the access of the Property to all of the utilities and other items referred to in Section 2.10 hereof are in compliance in all material respects with all Leases, if any, affecting the Property and all applicable Legal Requirements, including, without limitation, Environmental Statutes, Development Laws and Use Requirements. Grantor has not received any notice from any Governmental Authority alleging any uncured violation relating to the Property of any applicable Legal Requirements. 2.8 Licenses and Permits. Grantor currently holds and will continue to hold all certificates of occupancy, licenses, registrations, permits, consents, franchises and approvals of any Governmental Authority or any other Person that are material for the lawful 17 occupancy and operation of the Real Estate or which are material to the ownership or operation of the Property or the conduct of Grantor's business. All such certificates of occupancy, licenses, registrations, permits, consents, franchises and approvals are current and in full force and effect. 2.9 Property Proceedings. There are no actions, suits or proceedings pending or, to the best of Grantor's knowledge, threatened, in any court or before any Governmental Authority or arbitration board or tribunal (i) relating to (A) the zoning of the Real Estate or any part thereof, (B) any certificates of occupancy, licenses, registrations, permits, consents or approvals issued with respect to the Property or any part thereof, (C) the condemnation of the Property or any part thereof, or (D) the condemnation or relocation of any roadways abutting the Real Estate required for access or the denial or limitation of access to the Property or any part thereof from any point of access to the Property, (ii) asserting that (A) any such zoning, certificates of occupancy, licenses, registrations, permits, consents and/or approvals do not permit the operation of any material portion of the Real Estate as presently being conducted, (B) any material improvements located on the Property or any part thereof cannot be located thereon or operated with their intended use or (C) the operation of the Property or any part thereof is in violation in any material respect of any Environmental Statutes, Development Laws or other Legal Requirements or Leases or Property Agreements or (iii) that (A) might affect the validity or priority of any Loan Document or (B) have a Material Adverse Change. Grantor is not aware of any facts or circumstances that may give rise to any actions, suits or proceedings described in the preceding sentence. 2.10 Utilities. The Real Estate has all necessary legal access to water, gas and electrical supply, storm and sanitary sewerage facilities, other required public utilities (with respect to each of the aforementioned items, by means of either a direct connection to the source of such utilities or through connections available on publicly dedicated roadways directly abutting the Real Estate or through permanent insurable easements benefiting the Real Estate) fire and police protection, parking, and means of direct access between the Real Estate and public highways over recognized curb cuts (or such access to public highways is through private roadways that may be used for ingress and egress pursuant to permanent insurable easements). 2.11 Mechanics' Liens. The Real Estate is free and clear of any mechanics' liens or liens in the nature thereof, and no rights are outstanding that under law could give rise to any such liens, any of which liens are or may be prior to, or equal with, the lien of this Deed of Trust, except those that are insured against by the Title Insurance Policy. 2.12 Insurance. The Property is insured in accordance with the requirements set forth in Article 6 hereof. 18 2.13 Leases. Except as disclosed to and approved in writing by Beneficiary on the date of this Deed of Trust, there are no Leases. 2.14 Property Agreements. A. Grantor has delivered to Beneficiary true, correct and complete copies of all Property Agreements. B. Except for Permitted Encumbrances, no Property Agreement provides any party with the right to obtain a lien or encumbrance upon the Property superior to the lien of this Deed of Trust. C. No default exists or, to the best knowledge of Grantor, with the passing of time or the giving of notice or both would exist under any Property Agreement that would, in the aggregate, have a Material Adverse Change. D. Grantor has not received or given any written communication which alleges that a default exists or, with the giving of notice or the lapse of time, or both, will exist under the provisions of any Property Agreement. E. No condition exists whereby Grantor or any future owner of the Property may be required to purchase any other parcel of land that is subject to any Property Agreement or that gives any Person a right to purchase, or right of first refusal with respect to, the Property except as disclosed in advance in writing to Beneficiary and approved by Beneficiary either at the time of presentation of any property as a Proposed Hotel in accordance with the ESA Loan Agreement or, if subsequent to that date but prior to the date hereof, as of the date hereof. F. To the best knowledge of Grantor, no offset or any right of offset exists respecting continued contributions to be made by any party to any Property Agreement except as expressly set forth therein. Except as previously disclosed to Beneficiary in writing, no material exclusions or restrictions on the utilization, leasing or improvement of the Property (including non-compete agreements) exists in any Property Agreement. G. To the best knowledge of Grantor, all "pre-opening" requirements contained in all Property Agreements (including, but not limited to, all off-site and on-site construction requirements), if any, have been fulfilled, and, to the best of Grantor's knowledge, no condition now exists which would permit any party to any such Property Agreement to refuse to honor its obligations thereunder. 19 H. To the best knowledge of Grantor, all work, if any, to be performed by Grantor or by the seller under the purchase agreement under each of the Property Agreements has been substantially performed, all contributions to be made by Grantor to any party to such Property Agreements have been made, and all other conditions to such party's obligations thereunder have been satisfied. 2.15 Personal Property. Grantor has delivered to Beneficiary a true, correct and complete schedule of all personal property, if any, owned by Grantor and located upon the Property or that is material to the use or operation of the Property and Grantor represents that it has good and marketable title to all such owned personal property, free and clear of any liens, except for liens created under the Loan Documents and any other Permitted Indebtedness, as defined in the Property Loan Agreement. Grantor represents and warrants to Beneficiary that (i) there are no fixtures, machinery, apparatus, tools, equipment or articles of personal property attached or appurtenant to, or located on, or used in connection with the management, operation or maintenance of the Property, except for the equipment leased by Grantor purchased by Grantor under installment contracts owned by Grantor or by Manager for the management, operation or maintenance of the Property in accordance with the Loan Documents; (ii) the equipment and the leased equipment constitutes all of the fixtures, machinery, apparatus, tools, equipment and articles of personal property necessary to the proper operation and maintenance of the Property; and (iii) all of the owned equipment is free and clear of all liens, except for the lien of this Deed of Trust and the Permitted Encumbrances. 2.16 Leasing Brokerage and Management Fees. There are no brokerage fees or commissions payable by Grantor with respect to the leasing of space or the renting of rooms at the Property and there are no management fees payable by Grantor with respect to the management of the Property, except as contemplated by the Management Agreement. 2.17 Representations Generally. The representations and warranties contained in this Deed of Trust, or the review and inquiry made on behalf of Grantor therefor, have all been made by Persons having the requisite expertise and knowledge to provide such representations and warranties. No statement of fact made by or on behalf of Grantor in this Deed of Trust or in any certificate, document or schedule furnished to Beneficiary pursuant hereto, contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained therein or herein not misleading (which may be to Grantor's best knowledge where so provided herein). There is no fact presently known to Grantor that has not been disclosed to Beneficiary that would constitute a Material Adverse Change. 20 3 COVENANTS OF GRANTOR 3.1 Repayment of the Loan. Grantor shall repay the Debt at the time and in the manner provided in the Note, the Loan Agreement and the other Loan Documents, all in lawful money of the United States of America. 3.2 Removal of Liens. A. Grantor shall, at its expense, maintain this Deed of Trust as a first lien on the Property and shall keep the Property free and clear of all liens of any kind and nature other than the Permitted Encumbrances. Grantor shall, within 30 days following the filing thereof, promptly discharge of record, by bond or otherwise, any such liens and, promptly upon request by Beneficiary, shall deliver to Beneficiary evidence reasonably satisfactory to Beneficiary of the discharge thereof (or in states in which such liens cannot be removed of record by other than payment in full, insuring over such lien). B. Without limitation to the provisions of Section 3.2.A hereof, Grantor shall (i) pay, from time to time when the same shall become due, all claims and demands of mechanics, materialmen, laborers and others that, if unpaid, might result in, or permit the creation of, a lien on the Property or any part thereof, or on the revenues, rents, issues, income or profits arising therefrom, (ii) cause to be removed of record (by payment or posting of bond or settlement or otherwise) any mechanics' or other lien on the Property, or any part thereof, or on the revenues, rents, issues, income or profit arising therefrom, and (iii) in general, do or cause to be done, without expense to Beneficiary, everything reasonably necessary to preserve in full the lien of this Deed of Trust. If Grantor fails to comply with the requirements of this Section, then, upon 5 Business Days' prior notice to Grantor, Beneficiary may, but shall not be obligated to, pay any such lien, and Grantor shall, within 5 Business Days after Beneficiary's demand therefor, reimburse Beneficiary for all sums so expended, together with interest thereon at the Default Rate from the date advanced, all of which shall be deemed part of the Loan. Nothing contained herein shall be deemed a consent or request of Beneficiary, express or implied, by inference or otherwise, to the performance of any alteration, repair or other work by any contractor, subcontractor or laborer or the furnishing of any materials by any materialmen in connection therewith. C. Notwithstanding the foregoing, Grantor may contest any lien of the type set forth in subparagraph 3.2.B.i or 3.2.B.ii provided that, following prior notice to Beneficiary (i) Grantor is contesting the validity of such lien with due diligence and in good faith and by appropriate proceedings, without cost or expense to Beneficiary or any of its agents, employees, officers, or directors, (ii) Grantor shall preclude the collection of, or other realization upon, any contested amount from the Property or any interest in the Property, (iii) neither the Property nor any part thereof nor interest therein, shall be in any 21 practical danger of being sold, forfeited or lost by reason of such contest by Grantor, (iv) such contest by Grantor shall not affect the ownership, use or occupancy of the Property, (v) such contest by Grantor shall not subject Beneficiary or Grantor to the risk of civil or criminal liability (other than the civil liability of Grantor for the amount of the bond in question), (vi) Grantor has given Beneficiary prompt notice of the bonding (or the appropriate method of removing such lien of record (or in states in which such liens cannot be removed of record by other than payment in full, insuring over such lien) of such lien by Grantor and, upon request by Beneficiary from time to time, notice of the status of such contest by Grantor and/or confirmation of the continuing satisfaction of the conditions set forth in clauses (i) through (vi) of this sub-section, (vii) Grantor shall promptly pay the obligation secured by such lien upon a final determination of Grantor's liability therefor, and (viii) unless such lien shall have been bonded or removed of record or insured over, if not bonded as noted above, Grantor shall deliver to Beneficiary cash, a bond or other security acceptable to Beneficiary equal to 110% of the contested amount pursuant to collateral arrangements reasonably satisfactory to Beneficiary. 3.3 Cost of Defending and Upholding this Deed of Trust Lien. If any action or proceeding is commenced to which Beneficiary is made a party relating to the Loan Documents and/or the Property or Beneficiary's interest therein or in which it becomes necessary to defend or uphold the lien of this Deed of Trust or any other Loan Document, Grantor shall, on demand, reimburse Beneficiary for all expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by Beneficiary in connection therewith, and such sum, together with interest thereon at the Default Rate from and after such demand until fully paid, shall constitute a part of the Debt. 3.4 Further Acts, Etc. Grantor will, at the cost of Grantor, and without expense to Beneficiary, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Beneficiary shall, from time to time, reasonably require, for the better assuring, conveying, assigning, transferring, and confirming unto Beneficiary the Property and rights mortgaged hereby, given, granted, bargained, sold, alienated, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated, or which Grantor may be or may hereafter become bound to convey or assign to Beneficiary, or for carrying out or facilitating the performance of the terms of this Deed of Trust or for filing, registering or recording this Deed of Trust and, on demand, will execute and deliver and hereby authorizes Beneficiary to execute in the name of Grantor or without the signature of Grantor to the extent Beneficiary may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien hereof upon the Property. Grantor grants to Beneficiary an irrevocable power of attorney coupled with an interest for the purpose of protecting, perfecting, preserving and realizing upon the interests granted pursuant to this Deed of Trust (after notice to Grantor, if practicable under the circumstances) and to effect the intent 22 hereof, all as fully and effectually as Grantor might or could do, provided that Grantor's obligations hereunder shall not be materially increased or altered; and Grantor hereby ratifies all that Beneficiary shall lawfully do or cause to be done by virtue hereof consistent with the terms hereof. 3.5 Recording of Deed of Trust, Etc. Grantor forthwith upon the execution and delivery of this Deed of Trust and thereafter, from time to time, will cause this Deed of Trust, and any security instrument creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully protect the lien or security interest hereof upon, and the interest of Beneficiary in, the Property. Grantor will pay all filing, registration or recording fees, and all expenses incident to the preparation, execution and acknowledgment of this Deed of Trust, any security instrument with respect to the Property and any instrument of further assurance, and all federal, state, county and municipal, taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Deed of Trust, any security instrument with respect to the Property or any instrument of further assurance, except where prohibited by law to do so, in which event Beneficiary may declare the Loan to be immediately due and payable. Grantor shall hold harmless and indemnify Beneficiary, and its successors and assigns, against any liability incurred as a result of the imposition of any tax on the making and recording of this Deed of Trust or any other Loan Document. 4 TRANSFER OR ENCUMBRANCE OF THE PROPERTY; ASSUMABILITY 4.1 Definition of Transfer. The term "Transfer" shall include any conveyance, assignment, sale, mortgaging, encumbrance, pledging, hypothecation, granting of a security interest in, granting of options with respect to, or other disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, whether or not for consideration or of record) any legal or beneficial interest including, without limitation, an installment sales agreement; an agreement by Grantor leasing all or a substantial part of the Property to one or more Persons pursuant to a single or related transaction (excluding space leases to third party tenants entered in the normal course of Grantor's business and in compliance with the terms of this Deed of Trust) or a sale, assignment or other transfer of, or the grant of a security interest in, Grantor's right, title and interest in and to any Leases or any Rent. 4.2 No Transfer. Except as provided in the Management Agreement and any other guest lodging agreement approved in advance in writing by Beneficiary, Grantor shall not Transfer: 23 A. the Property or any interest therein unless such Property or interest herein is released from this Deed of Trust in accordance with the terms hereof; B. any or all of the interests in Grantor; and shall not, (i) merge with any Person, or (ii) consolidate with any Person without the prior written consent of Beneficiary in any such case, which consent Beneficiary may withhold in its sole and absolute discretion. Notwithstanding the foregoing, Grantor may, provided that the Rating Agency reaffirms the rating of any securities issued in connection with the Loan and upon the approval of the trustee and servicer of any securitization in which the Loan is included and further provided Grantor complies with any requirements imposed by a Rating Agency, trustee or servicer, upon the payment of a transfer fee equal to one percent (1%) of the outstanding principal balance of the Loan, Transfer the Property, in whole, but not in part, or any interest in Grantor, during the term of the Loan to an entity (i) that is a Single Purpose Entity, and (ii) that is acceptable to Beneficiary, in its reasonable discretion, in all respects provided that such transferee executes and delivers to Beneficiary an assumption of the Loan and all of the Loan Documents, together with all other documents reasonably requested by Beneficiary and pays all legal fees, recording charges and other transactional costs incurred by Beneficiary in connection with such transfer. 5 EVENTS OF DEFAULT 5.1 Events of Default. The Loan shall become immediately due at the option of Beneficiary upon any one or more of the following events (each, an "Event of Default"): A. Grantor shall fail to pay any principal (including, without limitation, mandatory prepayments of principal and any prepayment premium) or interest on, the Note, any fee, any other amount due hereunder or under the other Loan Documents or other of the Obligations when the same becomes due and payable; or B. Any material representation or warranty made or deemed made hereunder or in connection with any Loan Document or by any Loan Party (or any of its officers) in writing shall prove to have been incorrect in any material respect when made or deemed made; or C. Grantor shall fail to perform or observe any term, covenant or agreement contained in this Deed of Trust or in any other Loan Document if such failure under this clause shall remain unremedied for 30 days after the date on which written notice thereof shall have been given to Grantor or the other person entitled thereto by Beneficiary; or 24 D. Any Loan Party or any of its Subsidiaries shall fail to pay any principal or premium or interest on any Indebtedness of such Loan Party or Subsidiary (excluding (i) Indebtedness evidenced by the Notes, (ii) Indebtedness to trade creditors incurred in the ordinary course of business and which failure to pay as aforesaid would not have a Material Adverse Change and in the case of ESA only, Indebtedness in principal amount of $10,000,000 or more) beyond the period of grace (not to exceed 30 days), if any, with respect thereto (whether the same becomes due and payable by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall become or be declared to be due and payable, or any Loan Party or any of its Subsidiaries shall be required to repurchase or offer to repurchase such Indebtedness, prior to the stated maturity thereof; or E. An Event of Default shall occur with respect to any loan to an ESA Subsidiary or with respect to the ESA Loan Agreement or under any other Loan Document; or F. Grantor shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against any Loan Party or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a custodian, receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against any Loan Party or any of its Subsidiaries (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceedings shall occur; or any Loan Party or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection; or G. One or more judgments or orders for the payment of money in an aggregate amount in excess of $250,000 to the extent not fully covered by insurance shall be rendered against Grantor and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or H. An event shall occur with respect to any Plan, Pension Plan or Multiemployer Plan and the duties and obligations of Grantor, or any ERISA Affiliate 25 thereunder, which in the reasonable determination of Beneficiary, is reasonably likely to have a Material Adverse Change; or I. Grantor shall have entered into any consent or settlement decree or agreement or similar arrangement with a Governmental Authority or any judgment, order, decree or similar action shall have been entered against Grantor, in any case based on or arising from the violation of or pursuant to any Environmental Law, or the generation, storage, transportation, treatment, disposal or Release of any Hazardous Material and such judgment, order, decree or similar action is reasonably likely to have a Material Adverse Change; or J. Any material provision of this Deed of Trust or any Loan Document after delivery thereof which is not controlled by Section 5.1K, shall for any reason cease to be valid and binding on any Loan Party thereto, or any Loan Party shall so state in writing; or K. The Deed of Trust or any Loan Document after delivery thereof shall, for any reason, cease to create a valid Lien on any of the collateral purported to be covered thereby or such Lien shall cease to be a perfected and first priority Lien, or any Loan Party shall so state in writing; provided; however; that if such provision was valid and binding at inception and ceased to be valid and binding through no act or omission of Grantor, then Grantor shall have 14 days to attempt cure such defect and if unable to do so, then Grantor shall prepay the Loan in accordance with Article 13 of the ESA Loan Agreement within 14 days thereafter and no Event of Default shall arise hereunder upon such prepayment; or L. There shall occur a Material Adverse Change or an event which is reasonably likely to have a Material Adverse Change; or M. Manager shall default in the observance or performance of any material provision of a Management Agreement and such defaults, in the aggregate, are reasonably likely to have a Material Adverse Change; or N. The breach of any part of Section 4.2 hereof. 5.2 Remedies. A. Upon the occurrence and during the continuance of any Event of Default, Beneficiary may, in addition to any other rights or remedies available to it hereunder, under the other Collateral Documents, at law or in equity, take such action, without notice or demand, as it reasonably deems advisable to protect and enforce its rights against Grantor and in and to the Property or any one or more of them, including, but not 26 limited to, the following actions, each of which may be pursued singly, concurrently or otherwise, at such time and in such order as Beneficiary may determine, in its sole discretion, without impairing or otherwise affecting any other rights and remedies of Beneficiary hereunder, at law or in equity: i. declare all or any portion of the unpaid Aggregate Debt to be immediately due and payable and the obligation of Beneficiary to make any further advances of money to Grantor to be terminated; provided, however, that upon the occurrence of any of the events specified in Section 5.1.F, the entire Aggregate Debt will be immediately due and payable and Beneficiary's obligation to make further advances of money to Grantor shall be immediately terminated without notice or demand or any other declaration of the amounts due and payable; or ii. bring an action to foreclose this Deed of Trust and without applying for a receiver for the Rents, but subject to the rights of the tenants under any Leases, enter into or upon the Property or any part thereof, either personally or by its agents, nominees or attorneys, and dispossess Grantor and its agents and servants therefrom, and thereupon Beneficiary may (A) use, operate, manage, control, insure, maintain, repair, restore and otherwise deal with all and every part of the Property and conduct the business thereat, (B) make alterations, additions, renewals, replacements and improvements to or on the Property or any part thereof, (C) exercise all rights and powers of Grantor with respect to the Property or any part thereof, whether in the name of Grantor or otherwise, including, without limitation, the right to make, cancel, enforce or modify leases, obtain and evict tenants, and demand, sue for, collect and receive all earnings, revenues, rents, issues, profits and other income of the Property and every part thereof, and (D) apply the receipts from the Property or any part hereof to the payment of the Aggregate Debt, after deducting therefrom all expenses (including, without limitation, reasonable attorneys' fees and disbursements) reasonably incurred in connection with the aforesaid operations and all amounts necessary to pay the Impositions, insurance and other charges in connection with the Property or any part thereof, as well as just and reasonable compensation for the services of Beneficiary's third-party agents; or iii. have an appraisal or other valuation of the Property or any part thereof performed by a Recognized Appraiser (and Grantor covenants and agrees it shall cooperate in causing any such valuation or appraisal to be performed) and any cost or expense incurred by Beneficiary in connection therewith shall constitute a portion of the Debt and be secured by this Deed of Trust and shall be immediately due and payable to Beneficiary with interest, at the Default Rate, until the date of receipt by Beneficiary; or 27 iv. sell the Property or institute proceedings for the complete foreclosure of this Deed of Trust, or take such other action as may be allowed pursuant to Legal Requirements, at law or in equity, for the enforcement of this Deed of Trust in which case the Property or any part thereof may be sold for cash or credit in one or more parcels; or v. with or without entry, and to the extent permitted and pursuant to the procedures provided by applicable Legal Requirements, institute proceedings for the partial foreclosure of this Deed of Trust, or take such other action as may be allowed pursuant to Legal Requirements, at law or in equity, for the enforcement of this Deed of Trust for the portion of the Debt or Aggregate Debt then due and payable, subject to the lien of this Deed of Trust continuing unimpaired and without loss of priority so as to secure the balance of the Loan not then due; or vi. sell the Property or any part thereof and any or all estate, claim, demand, right, title and interest of Grantor therein and rights of redemption thereof, pursuant to power of sale or otherwise, at one or more sales, in whole or in parcels, in any order or manner, at such time and place, upon such terms and after such notice thereof as may be required or permitted by law, at the discretion of Beneficiary, and in the event of a sale, by foreclosure or otherwise, of less than all of the Property, this Deed of Trust shall continue as a lien on the remaining portion of the Property; or vii. institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained in the Loan Documents, or any of them; or viii. recover judgment on the Note or any guaranty either before, during or after (or in lieu of) any proceedings for the enforcement of this Deed of Trust; or ix. require, at Beneficiary's option, Grantor to pay monthly in advance to Beneficiary, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupation of any portion of the Property occupied by Grantor and may require Grantor to vacate and surrender possession to Beneficiary of the Property or to such receiver and Grantor may be evicted by summary proceedings or otherwise; or x. without notice to Grantor (A) apply all or any portion of the cash collateral in the Basic Carrying Costs Sub-Account (as defined in the Property Loan Agreement), including any interest and/or earnings therein, to carry out the 28 obligations of Grantor under this Deed of Trust and the other Loan Documents, to protect and preserve the Property and for any other purpose permitted under this Deed of Trust and the other Loan Documents and/or (B) have all or any portion of such cash collateral immediately paid to Beneficiary to be applied against the Loan in the order and priority set forth in the Note; or xi. pursue any or all such other rights or remedies as Beneficiary may have under applicable law or in equity including, all rights and remedies of the beneficiary or mortgagee under the Additional Mortgages; provided, however, that the provisions of this Section shall not be construed to extend or modify any of the notice requirements or grace periods provided for hereunder or under any of the other Loan Documents. Grantor hereby waives, to the fullest extent permitted by Legal Requirements, any defense Grantor might otherwise raise or have by the failure to make any tenants parties defendant to a foreclosure proceeding and to foreclose their rights in any proceeding instituted by Beneficiary. B. Upon the occurrence and during the continuance of an Event of Default Beneficiary shall have the power to sell the Property or any part thereof at public auction, in such manner, at such time and place, upon such terms and conditions, and upon such public notice as Beneficiary may deem best for the interest of Beneficiary, or as may be required or permitted by applicable Legal Requirements, consisting of advertisement in a newspaper of general circulation in the jurisdiction and for such period as applicable law may require and at such other times and by such other methods, if any, as may be required by law to convey the Property in fee simple by Beneficiary's deed with special warranty of title to and at the cost of the purchaser, who shall not be liable to see to the application of the purchase money. The proceeds or avails of any sale made under or by virtue of this Section, together with any other sums that then may be held by Beneficiary under this Deed of Trust, whether under the provisions of this Section or otherwise, shall be applied as follows: First: To the payment of the third-party costs and expenses reasonably incurred in connection with any such sale and to advances, fees and expenses, including, without limitation, reasonable fees and expenses of Beneficiary's legal counsel as applicable, and of any judicial proceedings wherein the same may be made, and of all expenses, liabilities and advances reasonably made or incurred by Beneficiary under this Deed of Trust, together with interest as provided herein on all such advances made by Beneficiary, and all Impositions, except any Impositions or other charges subject to which the Property shall have been sold; Second: To the payment of the whole amount then due, owing and unpaid under the Note for principal and interest thereon, with interest on such unpaid principal at the 29 Default Rate from the date of the occurrence of the earliest Event of Default that formed a basis for such sale until the same is paid; Third: To the payment of any other portion of the Aggregate Debt required to be paid by Grantor pursuant to any provision of this Deed of Trust, the Note, or any of the other Loan Documents; and Fourth: The surplus, if any, to Grantor unless otherwise required by Legal Requirements. Beneficiary and any receiver or custodian of the Property or any part thereof shall be liable to account for only those rents, issues, proceeds and profits actually received by it. C. Beneficiary may adjourn from time to time any sale by it to be made under or by virtue of this Deed of Trust by announcement at the time and place appointed for such sale or for such adjourned sale or sales and, except as otherwise provided by any applicable provision of Legal Requirements, Beneficiary, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. D. Upon the completion of any sale or sales made by Beneficiary under or by virtue of this Section, Beneficiary, or any officer of any court empowered to do so, shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, granting, conveying, assigning and transferring all of the estate, right, title and interest in and to the property and rights sold. Beneficiary is hereby irrevocably appointed the true and lawful attorney-in-fact of Grantor (coupled with an interest), in its name and stead, to make all necessary conveyances, assignments, transfers and deliveries of the property and rights so sold and for that purpose Beneficiary may execute all necessary instruments of conveyance, assignment, transfer and delivery, and may substitute one or more persons with like power, Grantor hereby ratifying and confirming all that its said attorney- in-fact or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, Grantor, if so requested by Beneficiary, shall ratify and confirm any such sale or sales by executing and delivering to Beneficiary, or to such purchaser or purchasers all such instruments as may be advisable, in the sole judgement of Beneficiary, for such purpose, and as may be designated in such request. Any such sale or sales made under or by virtue of this Section, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or a judgment or decree of foreclosure and sale, shall operate to divest all the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of Grantor in and to the property and rights so sold, and shall, to the fullest extent permitted under Legal Requirements, be a perpetual bar, both at law and 30 in equity against Grantor and against any and all Persons claiming or who may claim the same, or any part thereof, from, through or under Grantor. E. In the event of any sale made under or by virtue of this Section (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or a judgment or decree of foreclosure and sale), the entire Aggregate Debt immediately thereupon shall, anything in the Loan Documents to the contrary notwithstanding, become due and payable. F. Upon any sale made under or by virtue of this Section (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or a judgment or decree of foreclosure and sale), Beneficiary may bid for and acquire the Property or any part thereof and in lieu of paying cash therefor may make settlement for the purchase price by crediting upon the Loan the net sales price after deducting therefrom the expenses of the sale and the reasonable costs of the action. G. No recovery of any judgment by Beneficiary and no levy of an execution under any judgment upon the Property or any part thereof or upon any other property of Grantor shall release the lien of this Deed of Trust upon the Property or any part thereof, or any liens, rights, powers or remedies of Beneficiary hereunder, but such liens, rights, powers and remedies of Beneficiary shall continue unimpaired until all amounts due under the Note, this Deed of Trust and the other Loan Documents are paid in full. 5.3 Payment of Debt After Default. If following the occurrence and during the continuance of any Event of Default, Grantor shall tender payment of an amount sufficient to satisfy the Aggregate Debt or any other debt secured hereby including the other Subsidiary Notes, in whole or in part, at any time prior to a foreclosure sale of the Property, and if at the time of such tender prepayment of the principal balance of the Note is not permitted by the Note, Grantor shall, in addition to the entire Aggregate Debt, and any other debt secured hereby including the other Subsidiary Notes, also pay to Beneficiary a sum equal to interest that would have accrued on the principal balance of the Note at the Applicable Rate from the date of such tender to the earlier of (a) the Maturity Date or (b) the first day of the period during which prepayment of the principal balance of the Note would have been permitted together with a prepayment consideration equal to the prepayment consideration which would have been payable as of the first day of the period during which prepayment would have been permitted. If at the time of such tender, prepayment of the principal balance of the Note is permitted, such tender by Grantor shall be deemed to be a voluntary prepayment of the principal balance of the Note, and Grantor shall, in addition to the entire Aggregate Debt, also pay to Beneficiary the applicable prepayment consideration specified in the Note and this Deed of Trust. 31 5.4 Possession of the Property. Upon the occurrence and during the continuance of any Event of Default hereunder and the acceleration of the Loan or any portion thereof, Grantor, if an occupant of the Property or any part thereof, upon demand of Beneficiary, shall immediately surrender possession of the Property (or the portion thereof so occupied) to Beneficiary, and if Grantor is permitted to remain in possession, the possession shall be as a month-to- month tenant of Beneficiary and, on demand, Grantor shall pay to Beneficiary monthly, in advance, a reasonable rental for the space so occupied and in default thereof Grantor may be dispossessed. The covenants herein contained may be enforced by a receiver of the Property or any part thereof. Nothing in this Section shall be deemed to be a waiver of the provisions of this Deed of Trust making the Transfer of the Property or any part thereof without Beneficiary's prior written consent an Event of Default. 5.5 Interest After Default. If any amount due under the Note, this Deed of Trust or any of the other Loan Documents is not paid within any applicable notice and grace period after same is due, whether such date is the stated due date, any accelerated due date or any other date or at any other time specified under any of the terms hereof or thereof, then, in such event, Grantor shall pay interest on the amount not so paid from and after the date on which such amount first becomes due at the Default Rate; and such interest shall be due and payable at such rate until the earlier of the cure of all Events of Default or the payment of the entire amount due to Beneficiary, whether or not any action shall have been taken or proceeding commenced to recover the same or to foreclose this Deed of Trust. All unpaid and accrued interest shall be secured by this Deed of Trust as part of the Loan. Nothing in this Section or in any other provision of this Deed of Trust shall constitute an extension of the time for payment of the Loan. 5.6 Grantor's Actions After Default. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceedings by Beneficiary to obtain judgment on the Loan, or of any other nature in aid of the enforcement of the Loan Documents, Grantor will (a) after receipt of notice of the institution of any such action, waive the issuance and service of process and enter its voluntary appearance in such action, suit or proceeding, and (b) if required by Beneficiary, consent to the appointment of a receiver or receivers of the Property or any part thereof and of all the earnings, revenues, rents, issues, profits and income thereof. 5.7 Control by Beneficiary After Default. Notwithstanding the appointment of any custodian, receiver, liquidator or trustee of Grantor, or of any of its property, or of the Property or any part thereof, to the extent permitted by Legal Requirements, after an Event of Default Beneficiary shall be entitled to obtain possession and control of all property now and hereafter covered by this Deed of Trust in accordance with the terms hereof. 32 5.8 Right to Cure Defaults. A. Upon the occurrence and during the continuation of any Event of Default, Beneficiary or its agents may, but without any obligation to do so and without notice to or demand on Grantor and without releasing Grantor from any obligation hereunder, remedy such Event of Default in such manner and to such extent as Beneficiary may deem necessary to protect the security hereof. Beneficiary and its agents are authorized to enter upon the Property or any part thereof for such purposes, or appear in, defend, or bring any action or proceedings to protect Beneficiary's interest in the Property or any part thereof or to foreclose this Deed of Trust or collect the Loan, and the cost and expense thereof (including reasonable attorneys' fees to the extent permitted by law), with interest as provided in this paragraph, shall constitute a portion of the Loan and shall be immediately due and payable to Beneficiary upon demand. All such costs and reasonable expenses incurred by Beneficiary or its agents in remedying such Event of Default or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate, for the period from the date so demanded to the date of payment to Beneficiary. All such costs and expenses incurred by Beneficiary or its agents together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by the Deed of Trust. B. If Beneficiary makes any payment or advance that Beneficiary is authorized by this Deed of Trust to make in the place and stead of Grantor (i) relating to the Impositions or tax liens asserted against the Property, Beneficiary may do so according to any bill, statement or estimate procured from the appropriate public office upon which Beneficiary has reasonably relied in good faith without inquiry into the accuracy of the bill, statement or estimate or into the validity of any of the Impositions or the tax liens or claims thereof; (ii) relating to any apparent or threatened adverse title, lien, claim of lien, encumbrance, claim or charge, Beneficiary will be the sole judge of the legality or validity of same, provided Beneficiary has acted in good faith; or (iii) relating to any other purpose authorized by this Deed of Trust but not enumerated in this Section, Beneficiary may do so whenever, in its reasonable judgment and discretion, the payment or advance seems necessary or desirable to protect the Property and the full security interest intended to be created by this Deed of Trust. In connection with any payment or advance made pursuant to this Section, Beneficiary has the option and is authorized, but in no event shall be obligated, to obtain a continuation report of title prepared by a title insurance company. The payments and the advances made by Beneficiary pursuant to this paragraph and the cost and expenses of said title report will be due and payable by Grantor on demand, together with interest at the Default Rate, and will be secured by this Deed of Trust. 5.9 Recovery of Sums Required to Be Paid. After an Event of Default, Beneficiary shall have the right from time to time to take action to recover any sum or sums 33 that constitute a part of the Debt as the same become due and payable hereunder (after the expiration of any grace period or the giving of any notice herein provided, if any), without regard to whether or not the balance of the Loan shall be due, and without prejudice to the right of Beneficiary thereafter to bring an action of foreclosure, or any other action, for a default or defaults by Grantor existing at the time such earlier action was commenced. 5.10 Marshalling and Other Matters. Grantor hereby waives, to the fullest extent permitted by law, the benefit of all appraisement, valuation, stay, extension, reinstatement, redemption (both equitable and statutory) and homestead laws now or hereafter in force and all rights of marshalling in the event of any sale hereunder of the Property or any part thereof or any interest therein. Further, Grantor hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of this Deed of Trust on behalf of Grantor, whether equitable or statutory and on behalf of each and every Person acquiring any interest in or title to the Property or any part thereof subsequent to the date of this Deed of Trust and on behalf of all Persons to the fullest extent permitted by applicable law. 5.11 Tax Reduction Proceedings. After an Event of Default, Grantor shall be deemed to have appointed Beneficiary as its attorney-in-fact to seek a reduction or reductions in the assessed valuation of the Property for real property tax purposes or for any other purpose and to prosecute any action or proceeding in connection therewith. This power, being coupled with an interest, shall be irrevocable for so long as any part of the Aggregate Debt remains unpaid and any Event of Default shall be continuing. 5.12 General Provisions Regarding Remedies. A. Right to Terminate Proceedings. Beneficiary may terminate or rescind any proceeding or other action brought in connection with its exercise of the remedies provided in Section 5.2 at any time before the conclusion thereof, as determined in Beneficiary's sole discretion and without prejudice to Beneficiary. B. No Waiver or Release. The failure of Beneficiary to exercise any right, remedy or option provided in the Loan Documents shall not be deemed a waiver of such right, remedy or option or of any covenant or obligation secured by the Loan Documents. No acceptance by Beneficiary of any payment after the occurrence of an Event of Default and no payment by Beneficiary of any payment or obligation for which Grantor is liable hereunder shall be deemed to waive or cure any Event of Default. No sale of all or any portion of the Property, no forbearance on the part of Beneficiary, and no extension of time for the payment of the whole or any portion of the Debt or the Aggregate Debt or any other indulgence given by Beneficiary to Grantor or any other Person, shall operate to release or in any manner affect the interest of Beneficiary in the Property or the liability of 34 Grantor to pay the Debt or the Aggregate Debt. No waiver by Beneficiary shall be effective unless it is in writing and then only to the extent specifically stated. C. No Impairment; No Releases. The interests and rights of Beneficiary under the Loan Documents shall not be impaired by any indulgence, including (i) any renewal, extension or modification that Beneficiary may grant with respect to the Debt or the Aggregate Debt; (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Beneficiary may grant with respect to the Property or any portion thereof; or (iii) any release or indulgence granted to any maker, endorser, guarantor or surety of the Loan. 6 INSURANCE AND CASUALTY RESTORATION 6.1 Maintenance of Insurance Policies. Grantor, at its sole cost and expense, for the mutual benefit of Grantor and Beneficiary, shall obtain and maintain during the entire term of this Deed of Trust policies of insurance against loss or damage by fire and lightning and against loss or damage by all other risks and hazards as required and in accordance with the terms and provisions of Article 6 of the Property Loan Agreement. 6.2 Casualty Restoration. If the Real Estate shall be damaged or destroyed, in whole or in part, by fire or other casualty (a "Casualty"), Grantor shall give prompt written notice thereof to Beneficiary. Following the occurrence of a Casualty, Grantor, regardless of whether insurance proceeds are available, shall promptly proceed to restore, repair, replace or rebuild the Property to be of at least equal value and of substantially the same character as existed prior to such damage or destruction, all to be effected in accordance with any Requirements of Law. 7 CONDEMNATION 7.1 Notice of Condemnation. Grantor shall promptly give Beneficiary written notice of the actual or threatened commencement of any condemnation or eminent domain proceeding against the Real Estate or the Buildings or any part thereof (a "Condemnation") and shall deliver to Beneficiary copies of any and all papers served in connection with such Condemnation. Following the occurrence of a Condemnation, Grantor, regardless of whether an Award (as hereinafter defined) is available, shall promptly proceed to restore, repair, replace or rebuild the Real Estate to the extent practicable to be of at least equal value and of substantially the same character as prior to such Condemnation, all to be effected in accordance with applicable law. 35 7.2 Application of Condemnation Awards. Beneficiary is hereby irrevocably appointed as Grantor's attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain any award or payment ("Award") for any taking accomplished through a Condemnation and to make any compromise or settlement in connection with such Condemnation, subject to the provisions of this Deed of Trust. Notwithstanding any taking in connection with a Condemnation by any public or quasi-public authority (including, without limitation, any transfer made in lieu of or in anticipation of such a Condemnation), Grantor shall continue to pay the Debt at the time and in the manner provided for in the Note, the Property Loan Agreement, this Deed of Trust and the other Loan Documents and the Loan shall not be reduced unless and until any Award shall have been actually received and applied by Beneficiary to expenses of collecting the Award and to discharge of the Loan. Beneficiary shall not be limited to the interest paid on the Award by the condemning authority but shall be entitled to receive out of the Award interest at the rate or rates provided in the Note. All amounts to be paid in connection with a Condemnation shall be governed by the terms and provisions of the Property Loan Agreement. 8 SECURITY AGREEMENT UNDER UNIFORM COMMERCIAL CODE This Deed of Trust shall constitute a Security Agreement within the meaning of the Uniform Commercial Code of the State in which the Property is located. Notwithstanding the filing of a financing statement covering any of the Property in the records normally pertaining to personal property, all of the Property, for all purposes and in all proceedings, legal or equitable, shall be regarded, at Beneficiary's option (to the extent permitted by law), as part of the Real Estate whether or not any such item is physically attached to the Real Estate or serial numbers are used for the better identification of certain items. The mention in any such financing statement of any of the Property shall never be construed in any way as derogating from or impairing this declaration and hereby stated intention of Grantor, Trustee and Beneficiary that such mention in the financing statement is hereby declared to be for the protection of Beneficiary in the event any court shall at any time hold that notice of the priority of this Deed of Trust, to be effective against any third party, including the Federal government or any authority or agency thereof, must be filed in the Uniform Commercial Code records. Pursuant to the provisions of the Uniform Commercial Code, Grantor hereby authorizes Beneficiary without the signature of Grantor to execute and file financing and continuation statements if Beneficiary shall determine, in its sole discretion, that such financing or continuation statements are necessary or advisable in order to preserve or perfect its security interest in the Fixtures covered by this Deed of Trust and Grantor shall pay to Beneficiary on demand, any expenses incurred by Beneficiary in connection with the preparation, execution and filing of such statements that may be filed by Beneficiary. 36 9 NO WAIVERS, ETC. A failure by Beneficiary to insist upon the strict performance by Grantor of any of the terms and provisions of this Deed of Trust shall not be deemed to be a waiver of any of the terms, covenants, conditions and provisions hereof and Trustee and Beneficiary, notwithstanding any such failure, shall have the right thereafter to insist upon the strict performance by Grantor of any and all of the terms, covenants, conditions and provisions of this Deed of Trust to be performed by Grantor. Beneficiary may release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate lien on the Property, any part of the security held for payment of the Debt or any portion thereof or for the performance of the Obligations secured by this Deed of Trust without, as to the remainder of the security, in any manner whatsoever, impairing or affecting the lien of this Deed of Trust or the priority of the lien of this Deed of Trust over any subordinate lien. Beneficiary may resort for the payment of the Aggregate Debt secured by this Deed of Trust to any other security therefor held by Trustee or Beneficiary in such order and manner as Beneficiary may elect. 10 COMPLIANCE WITH REQUIREMENTS 10.1 Compliance with Legal Requirements. A. Grantor shall promptly comply with all present and future Legal Requirements, foreseen and unforeseen, ordinary and extraordinary, whether requiring structural or nonstructural repairs or alterations including, without limitation, all zoning, subdivision, building, safety, land use and development Legal Requirements, all Legal Requirements that may be applicable to the curbs adjoining the Property or to the use or manner of use thereof, and all rent control, rent stabilization and all other similar Legal Requirements relating to rents charged and/or collected in connection with the Leases. Grantor represents and warrants that, to the best of its knowledge after making due inquiry, the Property is in compliance in all respects with all Legal Requirements as of the date hereof, no notes or notices of violations of any Legal Requirements have been entered or received by Grantor and that Grantor reasonably believes there is no basis for the entering of such note or notices. B. Grantor shall have the right to contest by appropriate legal proceedings diligently conducted in good faith, without cost or expense to Beneficiary, the validity or application of any Legal Requirement and to suspend compliance therewith if permitted under applicable Legal Requirements, provided (i) failure to comply therewith may not subject Beneficiary to any civil or criminal liability; (ii) prior to and during such contest, Grantor shall furnish to Beneficiary security reasonably satisfactory to Beneficiary, in its discretion, 37 against loss or injury by reason of such contest or non-compliance with such Legal Requirement; (iii) no Event of Default shall exist during such proceedings and such contest shall not otherwise violate any of the provisions of any of the Loan Documents; (iv) such contest shall not (unless Grantor shall comply with the provisions of clause (ii) of this Section) subject the Property to any lien or encumbrance the enforcement of which is not suspended or otherwise affect the priority of the lien of this Deed of Trust; (v) such contest shall not affect the ownership, use or occupancy of the Property; (vi) the Property or any part thereof or any interest therein shall not be in any practical danger of being sold, forfeited or lost by reason of such contest by Grantor; (vii) Grantor shall give Beneficiary prompt notice of the commencement of such proceedings and, upon request by Beneficiary, notice of the status of such proceedings and/or confirmation of the continuing satisfaction of the conditions set forth in clauses (i)-(vi) of this Section; and (viii) upon a final determination of such proceeding, Grantor shall take all steps necessary to comply with any requirements arising therefrom. C. Grantor shall at all times comply with all applicable Legal Requirements with respect to the construction, use and maintenance of any vaults adjacent to the Property. If by reason of the failure to pay taxes, assessments, charges, permit fees, franchise taxes or levies of any kind or nature, the continued use of the vaults adjacent to Property or any part thereof is discontinued, Grantor nevertheless shall, with respect to any vaults that may be necessary for the continued use of the Property, take such steps (including the making of any payment) to insure the continued use of vaults or replacements. 10.2 Compliance with Recorded Documents. Grantor shall promptly perform and observe or cause to be performed and observed, all of the terms, covenants and conditions of all Property Agreements and all things necessary to preserve intact and unimpaired any and all appurtenances or other interests or rights affecting the Property. 11 ENVIRONMENTAL COMPLIANCE 11.1 Covenants, Representations and Warranties. A. Except as set forth in the Environmental Report (as defined in the ESA Loan Agreement), Grantor has not, at any time, and, to Grantor's best knowledge after due inquiry and investigation, no other Person has at any time, handled, buried, stored, retained, refined, transported, processed, manufactured, generated, produced, spilled, allowed to seep, leak, escape or leach, or pumped, poured, emitted, emptied, discharged, injected, dumped, transferred or otherwise disposed of Hazardous Materials on, to or from the Real Estate or any other real property owned and/or occupied by Grantor, and Grantor does not intend to and shall not use the Property or any part thereof or any such other real property for the 38 purpose of handling, burying, storing, retaining, refining, transporting, processing, manufacturing, generating, producing, spilling, seeping, leaking, escaping, leaching, pumping, pouring, emitting, emptying, discharging, injecting, dumping, transferring or otherwise disposing of Hazardous Materials, except for use and storage for use of heating oil and ordinary chemicals and cleaning fluids and pesticides and other substances customarily used in the operation of properties that are being used for the same purposes as the Property is presently being used, provided such use and/or storage for use is in compliance with the requirements hereof and the other Loan Documents and does not give rise to liability under applicable Legal Requirements or Environmental Statutes or become the basis for a lien against the Property or any part thereof. B. Grantor knows of no seepage, leak, escape, leach, discharge, injection, release, emission, spill, pumping, pouring, emptying or dumping of Hazardous Materials into waters on, under or adjacent to the Property or any part thereof or any other real property owned and/or occupied by Grantor, or onto lands from which such Hazardous Materials might seep, flow or drain into such waters, except as disclosed in the Environmental Report and has no reason to believe that the Environmental Report contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein or herein, in light of the circumstances under which such statements were made, not misleading in any material respect. C. Grantor shall not permit any Hazardous Materials to be handled, buried, stored, retained, refined, transported, processed, manufactured, generated, produced, spilled, allowed to seep, leak, escape or leach, or to be pumped, poured, emitted, emptied, discharged, injected, dumped, transferred or otherwise disposed of or dealt with on, under, to or from the Property or any portion thereof at any time, except for use and storage for use of heating oil, ordinary cleaning fluids and pesticides and other substances customarily used in the operation of properties that are being used for the same purposes as the Property is presently being used, provided such use and/or storage for use is in compliance with the requirements hereof and the other Loan Documents and does not give rise to liability under applicable Legal Requirements or become the basis for a lien against the Property or any part thereof. D. Grantor represents and warrants that no actions, suits, or proceedings have been commenced, or are pending, or to the best knowledge of Grantor, are threatened with respect to any Legal Requirement governing the use, manufacture, storage, treatment, transportation, or processing of Hazardous Materials with respect to the Property or any part thereof. Except as disclosed in the Environmental Report, Grantor has received no notice of, and, except as disclosed in the Environmental Report, after due inquiry, has no knowledge of any fact, condition, occurrence or circumstance that with notice or passage of time or both would give rise to a claim under or pursuant to any Environmental Statute pertaining to 39 Hazardous Materials on, in, under or originating from the Property or any part thereof or any other real property owned or occupied by Grantor or arising out of the conduct of Grantor, including, without limitation, pursuant to any Environmental Statute. E. [Reserved] F. In the event that there shall be filed a lien against the Property or any part thereof pursuant to any Environmental Statute pertaining to Hazardous Materials, Grantor shall, within 90 days or, in the event that the applicable Governmental Authority has commenced steps to cause the Real Estate or any part thereof to be sold pursuant to the lien, within 30 days, from the date that Grantor receives notice of such lien, either (i) pay the claim and remove the lien from the Property, or (ii) furnish (A) a bond satisfactory to Beneficiary in the amount of the claim out of which the lien arises, (B) a cash deposit in the amount of the claim out of which the lien arises, or (C) other security reasonably satisfactory to Beneficiary in an amount sufficient to discharge the claim out of which the lien arises. G. Grantor represents and warrants that (i) except as disclosed in the Environmental Report, Grantor has no knowledge of any violation of any Environmental Statute or any Environmental Problem in connection with the Property, nor has Grantor been requested or required by any Governmental Authority to perform any remedial activity or other responsive action in connection with any Environmental Problem and (ii) neither the Property nor any other property owned by Grantor is included or, to Grantor's best knowledge, after due inquiry and investigation, proposed for inclusion on the National Priorities List issued pursuant to CERCLA by the United States Environmental Protection Agency (the "EPA") or on the inventory of other potential "Problem" sites issued by the EPA and has not otherwise been identified by the EPA as a potential CERCLA site or included or, to Grantor's knowledge, after due inquiry and investigation, proposed for inclusion on any list or inventory issued pursuant to any other Environmental Statute, if any, or issued by any other Governmental Authority. Grantor covenants that Grantor will comply with all Environmental Statutes and any other federal, state or local environmental statute, regulation or common law affecting or imposed upon Grantor or the Property. H. Grantor represents and warrants that, to Grantor's knowledge, all paint and painted surfaces existing within the interior or on the exterior of the Property do not contain lead or are maintained in a condition that prevents exposure of young children to lead-based paint, as of the date hereof. To Grantor's knowledge, there have been no claims for adverse health effects from exposure on the Property to lead-based paint or requests for the investigation, assessment or removal of lead-based paint at the Property. I. Grantor represents and warrants that, to Grantor's knowledge, except in accordance with all applicable Environmental Statutes or as disclosed in the Environmental 40 Report, (i) no underground treatment or storage tanks or pumps or water, gas, or oil wells are or have been located at the Property, (ii) no PCBs or transformers, capacitors, ballasts or other equipment that contain dielectric fluid containing PCBs are located about the Property, (iii) no insulating material containing urea formaldehyde is located about the Property and (iv) no asbestos-containing material is located about the Property. J. Except with respect to the presence of de minimis amounts of Hazardous Materials in compliance with Legal Requirements, Grantor covenants that it shall notify Beneficiary in writing within 5 days of any circumstance or event that would constitute a change in the representation and warranties contained in Sections 11.1.A through 11.1.I, including, without limitation, any request for information or any inspection of the Property or any part thereof by any Governmental Authority with respect to any Hazardous Materials or any other Environmental Problem and provide Beneficiary with copies of such request and any response to any such request or inspection. K. Grantor covenants that it shall where required by appropriate governmental authority, in compliance with applicable Legal Requirements, conduct and complete all investigations, studies, sampling and testing (and promptly shall provide Beneficiary with copies of any such studies and the results of any such test) and all remedial, removal and other actions necessary to clean up and remove all Hazardous Materials (except as permitted by Section 11.1.C), notifying Beneficiary of same in writing within 5 Business Days, in, on, over, under, from or affecting the Property or any part thereof in accordance with all such Legal Requirements applicable to the Property or any part thereof to the reasonable satisfaction of Beneficiary. L. Following the occurrence and during the continuation of an Event of Default hereunder, and without regard to whether Beneficiary shall have taken possession of the Property or a receiver has been requested or appointed or any other right or remedy of Beneficiary has or may be exercised hereunder, Beneficiary shall have the right (but not the obligation), upon 5 days prior notice to Grantor, to conduct such investigations, studies, sampling and/or testing of the Property or any part thereof as Beneficiary may, in its reasonable discretion, determine to conduct, relative to Hazardous Materials. All reasonable costs and expenses incurred in connection therewith including, without limitation, consultants' fees and disbursements and laboratory fees, shall constitute a part of the Loans and shall, upon demand by Beneficiary, be immediately due and payable and shall bear interest at the Default Rate from the date so demanded by Beneficiary until reimbursed. 11.2 Environmental Indemnification. Grantor shall defend, indemnify and hold harmless Beneficiary, and its successors and assigns, and its employees, agents, officers and directors from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, known or unknown, contingent or 41 otherwise, whether incurred or imposed within or outside the judicial process, including, without limitation, reasonable attorneys' and consultants' fees and disbursements and investigations and laboratory fees arising out of, or in any way related to any Environmental Problem occurring or existing (or for which contributing causes occurred or existed) prior to the date Beneficiary has taken over possession or management control of the Property, including, without limitation: A. the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threat of release of any Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof whether or not disclosed by the Environmental Report relative to the Property; B. any personal injury (including wrongful death, disease or other health condition related to or caused by, in whole or in part, any Hazardous Materials) or property damage (real or personal) arising out of or related to any Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof whether or not disclosed by the Environmental Report relative to the Property; C. any action, suit or proceeding brought or threatened, settlement reached, or order of any Governmental Authority relating to such Hazardous Material whether or not disclosed by the Environmental Report relative to the Property; and/or D. any violation of the provisions, covenants, representations or warranties of Section 11.1 hereof or of any Legal Requirement that is based on or in any way related to any Hazardous Materials in, on, over, under, from or affecting the Property or any part thereof including, without limitation, the cost of any work performed and materials furnished in order to comply therewith whether or not disclosed by the Environmental Report relative to the Property. Notwithstanding the foregoing provisions of this Section to the contrary, Grantor shall have no obligation to indemnify Beneficiary for liabilities, claims, damages, penalties, causes of action, costs and expenses relative to the foregoing that result directly from Beneficiary's willful misconduct or gross negligence. Any amounts payable to Beneficiary by reason of the application of this Section shall be secured by this Deed of Trust and shall, upon demand by Beneficiary, become immediately due and payable and shall bear interest at the Default Rate from the date so demanded by Beneficiary until paid. 42 12 WAIVERS BY GRANTOR 12.1 Grantor hereby waives all errors and imperfections in any proceedings instituted by Trustee or Beneficiary under this Deed of Trust, the ESA Loan Agreement, the Property Loan Agreement or any other Loan Document and all benefit of any present or future statute of limitations or any other present or future statute, law, stay, moratorium, appraisal or valuation law, regulation or judicial decision which, nor shall Grantor at any time insist upon or plead, or in any manner whatsoever, claim or take any benefit or advantage of any such statute, law, stay, moratorium, regulation or judicial decision which (i) provides for the valuation or appraisal of the Property prior to any sale or sales thereof which may be made pursuant to any provisions herein or pursuant to any decree, judgment or order of any court of competent jurisdiction, (ii) exempts any of the Property or any other property, real or personal, or any part of the proceeds arising from any sale thereof from attachment, levy or sale under execution, (iii) provides for any stay of execution, moratorium, marshalling of assets, exemption from civil process, redemption or extension of time for payment, (iv) requires Trustee or Beneficiary to institute proceedings prior to any sale of the Property or prior to exercising any other remedy afforded Trustee or Beneficiary hereunder in the event of a Default, (v) affects any of the terms, covenants, conditions or provisions of this Deed of Trust, or (vi) conflicts with or may affect, in a manner which may be adverse to Trustee or Beneficiary, any provision, covenant, condition or term of this Deed of Trust, the ESA Loan Agreement or any other Loan Document, nor shall Grantor at any time after any sale or sales of the Property pursuant to any provision herein claim or exercise any right under any present or future statute, law, stay, moratorium, regulation or judicial decision to redeem the Property or the portion thereof so sold. 12.2 Grantor hereby waives the right, if any, to require any sale to be made in parcels, or the right, if any, to select parcels to be sold, and there shall be no requirement for marshalling of assets. 13 FAILURE TO CONSENT If Grantor shall seek the approval by, or the consent of, either Beneficiary or Trustee hereunder or under any other Loan Document, and either Beneficiary or Trustee shall fail to refuse to give such consent or approval, Grantor shall not be entitled to any damages for any withholding or delay of such consent by either Beneficiary or Trustee, it being intended that Grantor's sole remedy shall be to bring an action for an injunction or specific performance, which remedy of an injunction or specific performance shall be available only in those cases in which either Beneficiary or Trustee has expressly agreed hereunder or under any other Loan Document not to unreasonably withhold or delay its consent or approval. 43 14 SUBSTITUTION OR RESIGNATION OF TRUSTEE 14.1 Beneficiary may, without notice or cause and in Beneficiary's sole discretion, substitute a successor or successors to any Trustee named herein or acting hereunder to execute this Deed of Trust or may fill a vacancy in the position of Trustee hereunder. Upon such appointment, and without conveyance to the successor Trustee, the latter shall be vested with all title, powers and duties conferred upon any Trustee herein named or acting hereunder. Each such appointment and substitution shall be made by written instrument executed and acknowledged by Beneficiary, containing reference to this Deed of Trust and its place of record, which, when recorded in the office in which this Deed of Trust is recorded, shall be conclusive proof of the proper appointment of such successor Trustee. 14.2 Trustee may resign by written instrument executed by Trustee, containing reference to this Deed of Trust and its place of record, which, when recorded in the office in which this Deed of Trust is recorded, and when delivered to Beneficiary in accordance with Section 17.2 hereof, shall be conclusive proof of the resignation of Trustee. Upon such resignation, Beneficiary may appoint a successor Trustee in accordance with Paragraph 14.1 hereof. 15 CONVEYANCE BY TRUSTEE/DEFEASANCE Upon receipt by Trustee of written notice from Beneficiary that the Debt shall have been fully paid pursuant to the terms hereof and the other Loan Documents and the Obligations fully performed in accordance with the provisions hereof and the other Loan Documents or when a release is required under the ESA Loan Agreement, Trustee shall reconvey the Property, without warranty, to Grantor or such person or persons lawfully entitled thereto. Any act which Trustee or Beneficiary is permitted to perform under this Deed of Trust, the ESA Loan Agreement, the Property Loan Agreement or any other Loan Document may be performed at any time and from time to time by Trustee or Beneficiary or by any person or entity designated by Trustee or Beneficiary, as the case may be. Any lease of the Property permitted under this Deed of Trust shall be made subject to the Deed of Trust, the ESA Loan Agreement, the Property Loan Agreement and any other Loan Document. Each appointment of Beneficiary as attorney-in-fact for Grantor under this Deed of Trust, the ESA Loan Agreement, the Property Loan Agreement or any other Loan Document shall be irrevocable and coupled with an interest. Beneficiary shall have the right to refuse to grant its consent, approval or acceptance or to indicate its satisfaction whenever such consent, approval, acceptance or satisfaction shall be required under any of the Loan Documents. 44 16 ENFORCEABILITY This Deed of Trust shall be governed by, and construed in accordance with, the laws of the State in which the Property is located without regard to principles of conflicts of laws, except that the laws of the State of New York (without regard to principles of conflicts of laws) shall govern the resolution of issues arising under the ESA Loan Agreement to the extent that such resolution is necessary to the interpretation of this Deed of Trust. Whenever possible, each provision of this Deed of Trust shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Deed of Trust shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Deed of Trust. 16.1 Inconsistency with the Loan Documents. If there shall be any inconsistencies between the terms, covenants, conditions and provisions set forth in this Deed of Trust and the terms, covenants, conditions and provisions set forth in the ESA Loan Agreement and/or the Property Loan Agreement, then, unless this Deed of Trust expressly provides otherwise, the terms, covenants, conditions and provisions of the ESA Loan Agreement shall prevail over the Property Loan Agreement and this Deed of Trust and if the ESA Loan Agreement does not control, then the conditions and provisions of the Property Loan Agreement shall prevail over this Deed of Trust. 17 MISCELLANEOUS 17.1 Amendments, Etc. No amendment or waiver of any provision of this Deed of Trust nor consent to any departure by Grantor therefrom shall in any event be effective unless the same shall be in writing and signed by Beneficiary, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 17.2 Notices, Etc. Any notices, demand, statement, request or consent and other communications provided for hereunder shall be in writing and delivered personally or sent to the party to whom the notice, demand or request is being made by Federal Express or other nationally recognized overnight delivery service, as follows and shall be deemed given when personally delivered or one Business Day after being timely deposited with Federal Express or such other nationally recognized delivery service. If any notice date falls on a non- Business Day, then the notice shall be due on the next succeeding Business Day. 45 If to Grantor, at the address first written above, with a copy to: Johnson, Smith, Hibbard & Wildman Law Firm LLP 220 N. Church St. Spartanburg, SC 29306 Attn: Donald B. Wildman, Esq. and to: Pedersen & Houpt, P.C. 161 North Clark St., Ste. 3100 Chicago, IL 60601-3224 Attn: Thomas J. Kelly, Esq. If to Beneficiary, at 55 East 52nd Street, New York, NY 10055, Attn: Marc J. Warren, with a copy to: Weil Gotshal & Manges LLP 767 Fifth Ave. New York, NY 10153 Attn: Managing Partner - Real Estate (FW) Any such address may be changed, or additional address (not to exceed two) added by notice given in the manner provided herein. Any notice or other communication may be given by counsel for the party giving the same. 17.3 No Waiver; Remedies. No failure on the part of Beneficiary to exercise, and no delay in exercising, any right hereunder or under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 17.4 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, Beneficiary is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Beneficiary to or for the credit or the account of Grantor against any and all of the Obligations now or hereafter existing whether or not Beneficiary shall have made any 46 demand under this Deed of Trust or any Note or any other Loan Document and although such Obligations may be unmatured. Beneficiary agrees promptly to notify Grantor after any such set-off and application made by Beneficiary; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Beneficiary under this Section are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which Beneficiary may have. 17.5 Binding Effect. This Deed of Trust shall become effective when it shall have been executed by Grantor and Beneficiary and thereafter shall be binding upon and inure to the benefit of Grantor and Beneficiary and their respective successors and assigns, except that Grantor shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Beneficiary. 17.6 Severability. Wherever possible, each provision of this Deed of Trust shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Deed of Trust. 17.7 Submission to Jurisdiction; Service of Process. A. Any legal action or proceeding with respect to this Deed of Trust or the Note or any document related thereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Deed of Trust, Grantor hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. B. Grantor irrevocably consents to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to Grantor at its address provided herein. C. Nothing contained in this Section shall affect the right of Beneficiary or any holder of the Note to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against Grantor in any other jurisdiction. 47 17.8 Section Titles. The Section titles contained in this Deed of Trust are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 17.9 Execution in Counterparts. This Deed of Trust may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 17.10 Entire Agreement. This Deed of Trust, together with all of the other Loan Documents and all certificates and documents delivered hereunder or thereunder embody the entire agreement of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. 17.11 Confidentiality. Beneficiary agrees to keep information obtained by it pursuant hereto and the other Loan Document confidential in accordance with Beneficiary's customary practices and agrees that it will only use such information in connection with the transactions contemplated by this Deed of Trust and not disclose any of such information other than (i) to Beneficiary's employees, representatives and agents who are or are expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Deed of Trust and who are advised of the confidential nature of such information, (ii) to the extent such information presently is or hereafter becomes available to Beneficiary, as the case may be, on a non- confidential basis from a source other than Grantor, (iii) to the extent disclosure is required by law, regulation or judicial order or requested or required by bank regulators or auditors, or (iv) to assignees or participants or potential assignees or participants who agree to be bound by the provisions of this sentence. 17.12 Waiver of Jury Trial. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, or arising out of, under or in connection with this Deed of Trust or any other Loan Document, or any course of conduct, course of dealing, verbal or written statement or action of any party hereto. 17.13 Waiver of Notice. Grantor shall not be entitled to any notices of any nature whatsoever from Beneficiary except with respect to matters for which this Deed of Trust specifically and expressly provides for the giving of notice by Beneficiary to Grantor and except with respect to matters for which Grantor is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. 17.14 Actions and Proceedings. After an Event of Default, Beneficiary may appear in and defend any action or proceeding brought with respect to the Property in its own name or, if required by Legal Requirements or, if in Beneficiary's reasonable judgment, it is 48 necessary, in the name and on behalf of Grantor, which Beneficiary believes will adversely affect the Property or this Deed of Trust and to bring any action or proceedings, in its name or in the name and on behalf of Grantor, which Beneficiary, in its discretion, decides should be brought to protect its interest in the Property. 17.15 Usury Laws. This Deed of Trust and the Note are subject to the express condition, and it is the expressed intent of the parties, that at no time shall Grantor be obligated or required to pay interest on the principal balance due under the Note at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate that Grantor is permitted by law to contract or agree to pay. If by the terms of this Deed of Trust or the Note, Grantor is at any time required or obligated to pay interest on the principal balance due under the Note at a rate in excess of such maximum rate, such rate of interest shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Note. No application to the principal balance of the Note pursuant to this Section shall give rise to any requirement to pay any prepayment premium due hereunder, if any, including, without limitation, Yield Maintenance Premium. 17.16 Remedies of Grantor. Under no circumstances shall Beneficiary be liable for any punitive, consequential or incidental damages suffered by, awarded to or claimed by Grantor, any Affiliate or third party. In the event that a claim or adjudication is made that Beneficiary has acted unreasonably or unreasonably delayed acting in any case where by law or under this Deed of Trust, it has an obligation to act reasonably or promptly, Beneficiary shall only be liable for Grantor's actual damages, if it is determined that Beneficiary intentionally and in bad faith acted unreasonably or unreasonably delayed acting. In all other cases, Beneficiary shall not be liable for any monetary damages, and Grantor's remedies shall be limited to injunctive relief or declaratory judgment. 17.17 Offsets, Counterclaims and Defenses. Any assignee of this Deed of Trust and the Note shall take the same free and clear of all offsets, counterclaims or defenses that are unrelated to the Note or this Deed of Trust that Grantor may otherwise have against any assignor of this Deed of Trust and the Note and no such unrelated counterclaim or defense shall be interposed or asserted by Grantor in any action or proceeding brought by any such assignee upon this Deed of Trust or the Note and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Grantor. 49 17.18 Waiver of Statute of Limitations. The pleadings of any statute of limitations as a defense to any and all obligations secured by this Deed of Trust are hereby waived to the full extent permitted by Legal Requirements. 17.19 Advances. This Deed of Trust shall cover any and all advances made pursuant to the Loan Documents, rearrangements and renewals of the Loan and all extensions in the time of payment thereof, even though such advances, extensions or renewals be evidenced by new promissory notes or other instruments hereafter executed and irrespective of whether filed or recorded. Likewise, the execution of this Deed of Trust shall not impair or affect any other security that may be given to secure the payment of the Loan, and all such additional security shall be considered as cumulative. The taking of additional security, execution of partial releases of the security, or any extension of time of payment of the Loan shall not diminish the force, effect or lien of this Deed of Trust and shall not affect or impair the liability of Grantor and shall not affect or impair the liability of any maker, surety, or endorser for the payment of the Loan. 17.20 Application of Default Rate Not a Waiver. Application of the Default Rate shall not be deemed to constitute a waiver of any Default or Event of Default or any rights or remedies of Beneficiary under this Deed of Trust, any other Loan Document or applicable Legal Requirements, or a consent to any extension of time for the payment or performance of any obligation with respect to which the Default Rate may be invoked. 17.21 No Joint Venture or Partnership. Grantor and Beneficiary intend that the relationship created hereunder be solely that of mortgagor and mortgagee or Grantor and lender, as the case may be. Nothing herein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Grantor and Beneficiary nor to grant Beneficiary any interest in the Property other than that of mortgagee or lender. 17.22 Time of the Essence. Time shall be of the essence in the performance of all obligations of Grantor hereunder. 17.23 Grantor's Obligations Absolute. Except as set forth to the contrary in the Loan Documents, all sums payable by Grantor hereunder shall be paid without notice or demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Grantor hereunder shall in no way be released, discharged, or otherwise affected (except as expressly provided herein) by reason of: (a) any damage to or destruction of or any Taking of the Property or any portion thereof; (b) any restriction or prevention of or interference with any use of the Property or any portion thereof; (c) any title defect or encumbrance or any eviction from the Real Estate or any portion thereof by title paramount or otherwise; (d) any bankruptcy proceeding relating to Grantor, any general partner of any Grantor, or any guarantor or 50 indemnitor, or any action taken with respect to this Deed of Trust or any other Loan Document by any trustee or receiver of Grantor or any such general partner, guarantor or indemnitor, or by any court, in any such proceeding; (e) any claim that Grantor has or might have against Beneficiary; (f) any default or failure on the part of Beneficiary to perform or comply with any of the terms hereof or of any other agreement with Grantor; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Grantor shall have notice or knowledge of any of the foregoing. 18 ADDITIONAL PROVISIONS Exhibit B annexed hereto and made a part hereof contains additional provisions that are necessary or appropriate under the laws of the State in which the Property is located. 51 IN WITNESS WHEREOF, Grantor has caused this Deed of Trust to be duly executed and acknowledged under seal the day and year first above written. (Corporate Seal) Grantor: _________________________________________ Signed, Sealed and By: ______________________________________________ Delivered in our Presence: Name: ______________________________________ Title: _____________________________________ _______________________ Attest: __________________________________________ _______________________ [Add appropriate acknowledgment for the State] 52 Exhibit 1.3 FORM OF FIXED RATE PROMISSORY NOTE --------------- ____________ 199_ New York, New York FOR VALUE RECEIVED, the undersigned ___________________ a _________________ corporation, (the "Borrower") hereby unconditionally promises to pay to the order of CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION, a __________ corporation having an address at 55 East 52nd Street, New York, NY 10055 (together with its successors and assigns, the "Lender"), without any counterclaim, setoff or deduction whatsoever, at 55 East 52nd Street, New York, New York 10055 or at such other place as may be designated from time to time in writing by the holder of this Note, in lawful money of the United States of America and in immediately available funds (i) the principal sum of ________________________ ($______) DOLLARS (the "Loan Amount") or so much of such principal sum as may be outstanding, which principal sum shall be payable in monthly principal payments as and when required in the Loan Agreement with a final payment of the then unpaid principal balance on _______________________ 199_ (the "Maturity Date"); together with interest on the unpaid principal balance from time to time computed from the date hereof until paid in full at the interest rate of ______ % per annum (the "Fixed Rate") to be computed on the basis of a 360-day year consisting of twelve (12) thirty (30) day months, which interest shall be payable in arrears at such times as are hereinafter set forth; provided, that if not sooner paid, all interest accrued and unpaid computed at the aforesaid rate, plus all other sums due and payable hereunder, if any, shall be due and payable on the Maturity Date. This Note is issued pursuant to that certain Credit Facility Agreement dated as of May 17, 1996, between Extended Stay of America, Inc. ("ESA") and Lender (the "Loan Agreement") and is secured by that certain [First Deed of Trust and Security Agreement] dated as of the date hereof (as the same may be amended, modified or supplemented, the "Mortgage") from Borrower to Lender and the other Loan Documents. All capitalized terms, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement. 1. PAYMENTS AND LOAN TERMS. A. Interest and Amortization Payments. On the first Payment Date, all accrued interest on the unpaid principal amount of the Loan Amount computed at the Fixed Rate shall be due and payable. Commencing on the second Payment Date, and on each payment date thereafter until this Note is paid in full on the Maturity Date or otherwise, an amount equal to $ ____ (the "Monthly Debt Service Payment") shall be due and payable, which amount includes a payment of principal in an amount equal to that which is required to fully amortize the Loan based upon a level (15) year amortization schedule, together with a monthly payment of interest on the Loan Amount, which Monthly Debt Service Payment shall be due and payable as aforesaid, irrespective of whether or not voluntary or involuntary prepayments of principal have been made. 2. APPLICATION OF PAYMENTS. A. Each and every payment (a "Payment") made by Borrower to Lender in accordance with the terms of this Note and/or the terms of any one or more of the other Loan Documents and all other proceeds received by Lender with respect to the principal sum outstanding and all interest accrued thereon shall be applied, except as otherwise provided in the Loan Agreement, as follows: (x) first, to all interest (other than Default Rate Interest) that shall be due and payable with respect to the principal sum outstanding under this Note pursuant to the terms hereof as of the date the Payment is received (including any interest shortfalls and interest thereon to the extent permitted by applicable law), (y) second, to all Late Charges (as hereinafter defined), Yield Maintenance Premium, Default Rate Interest or other premiums and, (z) third, other sums payable hereunder or under the other Loan Documents owing by Borrowers (other than those sums included in clauses (x) and (y) of this Section) in such order and priority as determined by Lender in its sole discretion, taking into account the respective date of such Payments. B. To the extent that Borrower makes a Payment or Lender receives any Payment or proceeds for Borrower's benefit, which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the obligations of Borrower hereunder intended to be satisfied shall be revived and continue as if such Payment or proceeds had not been received by Lender. 3. PREPAYMENTS. The principal sum of this Note may not be prepaid, in whole or in part, except as set forth in Article 13 of the Loan Agreement. 4. DEFAULTS A. Events of Default. This Note is executed pursuant to the Loan Agreement and is secured by, among other things, the Mortgage each of which specifies various Events of Default, upon the happening of which all or portions of the sums owing under this Note may be declared immediately due and payable as more specifically provided 2 therein. Each Event of Default under the Mortgage, the Loan Agreement, or any one or more of the other Loan Documents shall be an "Event of Default" hereunder. B. Remedies. In addition to any Late Charges which may be due under this Note, if an Event of Default shall occur hereunder or under the Mortgage, the Loan Agreement or under any other Loan Document, interest on the principal outstanding under this Note and, to the extent permitted by applicable law, all accrued but unpaid interest on the principal indebtedness shall, commencing on the date of the occurrence of such Event of Default, at the option of Lender, immediately and without notice to Borrower, accrue interest at the Default Rate until such Event of Default is cured. The foregoing provision shall not be construed as a waiver by Lender of its right to pursue any other remedies available to it under the Mortgage, the Loan Agreement or any other instrument evidencing or securing the Loan, nor shall it be construed to limit in any way the application of the Default Rate. If there is more than one Borrower under this Note, then the undersigned parties shall each be jointly and severally liable to pay the entire principal indebtedness, all interest accrued thereto and all other sums becoming due hereunder or under the other Loan Documents. C. Late Charge. If all or any portion of the indebtedness, whether of principal, interest, additional interest or other sum (if any) payable under this Note is not paid within ten (10) days after the date on which it is due, the Borrower shall pay to the Lender on demand an amount equal to 4% of such unpaid portion as a late payment charge. It is hereby expressly agreed that such late charge is to compensate the Lender for costs incurred in connection with the administration of such default, and does not constitute a penalty. 5. MISCELLANEOUS A. Further Assurances. Borrower shall execute and acknowledge (or cause to be executed and acknowledged) and deliver to Lender all documents, and take all actions reasonably required by Lender from time to time to confirm the rights created or now or hereafter intended to be created under this Note and the other Loan Documents to protect and further the validity, priority and enforceability of this Note and the other Loan Documents, to subject to the Loan Documents any property of Borrower intended by the terms of any one or more of the Loan Documents to be encumbered by the Loan Documents, or otherwise carry out the purposes of the Loan Documents and the transactions contemplated thereunder; provided, however, that no such further actions, assurances and confirmations shall increase Borrower's obligations under this Note. B. Modification, Waiver in Writing. No modification, amendment, extension, discharge, termination or waiver (a "Modification") of any provision of this Note, the 3 Mortgage or any one or more of the other Loan Documents, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose given. Except as otherwise expressly provided herein or in the Property Loan Agreement, no notice to, or demand on, Borrower shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances. Lender does not hereby agree to, nor does Lender hereby commit itself to, enter into any Modification. However, in the event Lender does ever agree to a Modification, such Modification shall only be upon the terms and conditions set forth in the Modification. C. Costs of Collection. Borrower agrees to pay all costs and expenses of collection incurred by Lender, in addition to principal, interest and late or delinquency charges (including, without limitation, reasonable attorneys' fees and disbursements) and including all costs and expenses incurred in connection with the pursuit by Lender of any of its rights or remedies referred to in Section 4 hereof or its rights or remedies referred to in any of the Loan Documents or the protection of or realization of collateral or in connection with any of Lender's collection efforts, whether or not suit on this Note, on any of the other Loan Documents or any foreclosure proceeding is filed, and all such costs and expenses shall be payable on demand, together with interest at the Default Rate thereon, and also shall be secured by the Mortgage and all other collateral at any time held by Lender as security for Borrower's obligations to Lender. D. Usury Laws. This Note is subject to the express condition, and it is the expressed intent of the Lender and Borrower, that at no time shall the Borrower be obligated or required to pay interest on the principal balance due under this Note at a rate which could subject the holder of this Note to either civil or criminal liability as a result of being in excess of the maximum interest rate that borrowers are permitted by law to contract or agree to pay. If by the terms of this Note, Borrowers are at any time required or obligated to pay interest on the principal balance due under this Note at a rate in excess of such maximum rate, such rate of interest shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of this Note. E. Waivers. Borrower hereby expressly and unconditionally waives presentment, demand, protest, notice of protest or notice of any kind, including, without limitation, any notice of intention to accelerate and notice of acceleration, except as expressly provided herein, and in connection with any suit, action or proceeding brought by Lender on this Note, any and every right it may have to (a) a trial by jury, (b) interpose any counterclaim therein (other than a counterclaim that can only be asserted in the suit, action or proceeding brought 4 by Lender on this Note and cannot be maintained in a separate action) and (c) have the same consolidated with any other or separate suit, action or proceeding. F. Governing Law. This Note and the obligations arising hereunder shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and performed in such State and any applicable law of the United States of America. G. Headings. The section headings in this Note are included herein for convenience of reference only and shall not constitute a part of this Note for any other purpose. H. Severability. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. IN WITNESS WHEREOF, this Note has been duly executed by the Borrower the day and year first written above. [EXTENDED STAY AMERICA, INC. SUBSIDIARY], Borrower By:__________________________________________________ Name: __________________________________________ Title: _________________________________________ 5 EXAMPLE FOR SECTION 2.5(B)
FLOATING FIXED -------- ----- ASSUMPTIONS - ----------- NOI $850,000 $850,000 Minimum DSC Ratio 1.40X 1.40X Index (Libor/7 yr. T's) 5.451% 6.500% Spread +3.000% +3.850% ------- ------- Interest Rate 8.451% 10.350% LOAN SIZING - ----------- Amortization Period/1/ 25 years 25 years Calculated Loan Constant 9.623% 11.202% Actual Loan Constant 11.500%/2/ /3/ 11.500%/3/ Calculated Loan Amount $5,279,503 $5,279,503 PAYMENT CALCULATIONS - -------------------- Actual Amortization 20 years 15 years Relevant Interest Rate 9.899% 10.350% To Calculate Principal Payments Monthly Payment Actual interest based on $57,869.58 then-current monthly rates plus principal payment per the attached Exhibit.
- ---------------- /1/ Assumes each is a Developed Property (20 years for an Acquired Property). /2/ Minimum constant for Floating Rate Loans. /3/ Minimum constant to be used in sizing all Loans. Loan Amortization Extended Stay Amount 5,279,503 Amortization 20 Loan Constant 11.50% Assumed Interest 9.8989% 11.50%
Beginning Balance Payment Interest Principal Ending Balance Month 1 5,279,503 50,595 43,551 7,044 5,272,459 Month 2 5,272,459 50,595 43,493 7,102 5,265,357 Month 3 5,265,357 50,595 43,434 7,161 5,256,196 Month 4 5,256,196 50,595 43,375 7,220 5,250,976 Month 5 5,250,976 50,595 43,316 7,279 5,243,696 Month 6 5,243,696 50,595 43,256 7,340 5,236,357 Month 7 5,236,357 50,595 43,195 7,400 5,228,967 Month 8 5,228,967 50,595 43,134 7,461 5,221,496 Month 9 5,221,496 50,595 43,073 7,523 5,213,973 Month 10 5,213,973 50,595 43,011 7,565 5,206,388 Month 11 5,206,388 50,595 42,946 7,647 5,196,741 Month 12 5,196,741 50,595 42,885 7,710 5,191,031 Month 13 5,191,031 50,595 42,821 7,774 5,183,257 Month 14 5,183,257 50,595 42,757 7,838 5,175,419 Month 15 5,175,419 50,595 42,692 7,903 5,167,516 Month 16 5,167,516 50,595 42,627 7,968 5,159,548 Month 17 5,159,548 50,595 42,562 8,034 5,151,514 Month 18 5,151,514 50,595 42,495 8,100 5,143,414 Month 19 5,143,414 50,595 42,428 8,167 5,135,248 Month 20 5,135,248 50,595 42,361 8,234 5,127,013 Month 21 5,127,013 50,595 42,293 8,302 5,118,711 Month 22 5,118,711 50,595 42,225 8,371 5,110,341 Month 23 5,110,341 50,595 42,156 8,440 5,101,901 Month 24 5,101,901 50,595 42,086 8,509 5,093,382 Month 25 5,093,382 50,595 42,016 8,579 5,084,813 Month 26 5,064,813 50,595 41,945 8,650 5,078,163 Month 27 5,078,163 50,595 41,874 8,722 5,067,441 Month 28 5,067,441 50,595 41,802 8,793 5,058,646 Month 29 5,058,646 50,595 41,729 8,856 5,049,782 Month 30 5,049,782 50,595 41,655 8,930 5,040,842 Month 31 5,040,842 50,595 41,582 9,013 5,031,830 Month 32 5,031,830 50,595 41,508 9,067 5,022,742 Month 33 5,022,742 50,595 41,433 9,162 5,013,580 Month 34 5,013,580 50,595 41,357 9,238 5,004,342 Month 35 5,004,342 50,595 41,281 9,314 4,995,028 Month 36 4,995,028 50,595 41,204 9,391 4,985,638 Month 37 4,985,638 50,595 41,127 9,468 4,976,169 Month 38 4,976,169 50,595 41,049 9,546 4,968,623 Month 39 4,968,623 50,595 40,970 9,625 4,956,998 Month 40 4,956,998 50,595 40,891 9,705 4,947,293 Month 41 4,947,293 50,595 40,811 9,785 4,937,508 Month 42 4,937,508 50,595 40,730 9,865 4,927,643 Month 43 4,927,643 50,595 40,649 9,947 4,917,697 Month 44 4,917,697 50,595 40,567 10,029 4,907,668 Month 45 4,907,668 50,595 40,484 10,111 4,897,567 Month 46 4,897,567 50,595 40,400 10,195 4,887,382 Month 47 4,887,382 50,595 40,316 10,279 4,877,083 Month 48 4,877,083 50,595 40,231 10,364 4,866,719 Month 49 4,866,719 50,595 40,146 10,449 4,856,270 Month 50 4,856,270 50,595 40,060 10,535 4,845,734 Month 51 4,845,734 50,595 39,973 10,622 4,835,112 Month 52 4,835,112 50,595 39,885 10,710 4,824,402 Month 53 4,824,402 50,595 39,797 10,798 4,813,604 Month 54 4,813,604 50,595 39,708 10,867 4,802,716 Month 55 4,802,716 50,595 39,618 10,977 4,791,739 Month 56 4,791,739 50,595 39,527 11,068 4,780,671 Month 57 4,780,671 50,595 38,435 11,150 4,769,512 Month 58 4,769,512 50,595 39,344 11,251 4,758,261 Month 59 4,758,261 50,595 39,251 11,344 4,746,917 Month 60 4,746,917 50,595 39,158 11,437 4,735,480 Month 61 4,735,480 50,595 39,063 11,532 4,723,948 Month 62 4,723,948 50,595 38,968 11,627 4,712,321 Month 63 4,712,321 50,595 38,872 11,723 4,700,598 Month 64 4,700,598 50,595 38,775 11,820 4,686,778 Month 65 4,686,778 50,595 38,678 11,917 4,676,861 Month 66 4,676,861 50,595 38,580 12,015 4,664,846 Month 67 4,664,846 50,595 38,481 12,115 4,652,731 Month 68 4,652,731 50,595 38,381 12,214 4,640,517 Month 69 4,640,517 50,595 38,280 12,315 4,628,202 Month 70 4,628,202 50,595 38,178 12,417 4,615,785 Month 71 4,615,785 50,595 38,076 12,519 4,603,266 Month 72 4,603,266 50,595 37,973 12,622 4,590,643 Month 73 4,590,643 50,595 37,869 12,727 4,577,917 Month 74 4,577,917 50,595 37,764 12,832 4,565,085
Page 1 [S] [C] [C] [C] [C] [C] Month 75 4,565,085 50,595 37,658 12,937 4,552,148 Month 76 4,552,148 50,595 37,551 13,044 4,539,104 Month 77 4,538,104 50,595 37,443 13,152 4,525,962 Month 78 4,525,952 50,595 37,335 13,280 4,512,691 Month 79 4,512,691 50,595 37,226 13,370 4,498,322 Month 80 4,498,322 50,595 37,115 13,480 4,485,842 Month 81 4,485,842 50,595 37,004 13,591 4,472,251 Month 82 4,472,251 50,595 36,892 13,703 4,458,548 Month 83 4,458,548 50,595 36,779 13,816 4,444,731 Month 84 4,444,731 50,595 36,665 13,930 4,430,801 Month 85 4,430,801 50,595 36,550 14,045 4,416,756 Month 86 4,416,756 50,595 36,434 14,161 4,402,595 Month 87 4,402,595 50,595 36,317 14,278 4,388,317 Month 88 4,388,317 50,595 36,200 14,395 4,373,921 Month 89 4,373,921 50,595 36,081 14,514 4,358,407 Month 90 4,358,407 50,595 35,961 14,634 4,344,773 Month 91 4,344,773 50,595 35,840 14,755 4,330,018 Month 92 4,330,018 50,595 35,719 14,877 4,315,142 Month 93 4,315,142 50,595 35,596 14,999 4,300,142 Month 94 4,300,142 50,595 35,472 15,123 4,285,019 Month 95 4,285,019 50,595 35,348 15,248 4,269,772 Month 96 4,269,772 50,595 35,222 15,374 4,254,398 Month 97 4,254,398 50,595 35,095 15,500 4,236,896 Month 98 4,238,896 50,595 34,967 15,628 4,223,270 Month 99 4,223,270 50,595 34,838 15,757 4,207,512 Month 100 4,207,512 50,595 34,708 15,887 4,191,625 Month 101 4,191,625 50,595 34,577 16,018 4,175,607 Month 102 4,175,607 50,595 34,445 16,150 4,159,457 Month 103 4,150,457 50,595 34,312 16,284 4,143,173 Month 104 4,143,173 50,595 34,177 16,418 4,126,756 Month 105 4,126,758 50,595 34,042 16,553 4,110,202 Month 106 4,110,202 50,595 33,905 16,680 4,083,512 Month 107 4,083,512 50,595 33,786 16,827 4,076,685 Month 108 4,076,685 50,595 33,629 16,966 4,059,719 Month 109 4,059,719 50,595 33,489 17,106 4,042,612 Month 110 4,042,612 50,595 33,348 17,247 4,025,365 Month 111 4,025,365 50,595 33,206 17,390 4,007,975 Month 112 4,007,975 50,595 33,062 17,533 3,990,442 Month 113 3,990,442 50,595 32,918 17,678 3,972,765 Month 114 3,972,765 50,595 32,772 17,824 3,954,941 Month 115 3,954,941 50,595 32,625 17,971 3,936,970 Month 116 3,936,970 50,595 32,476 18,119 3,918,852 Month 117 3,918,852 50,595 32,327 18,268 3,900,583 Month 118 3,900,583 50,595 32,176 18,419 3,862,164 Month 119 3,862,104 50,595 32,024 18,571 3,863,503 Month 120 3,863,583 50,595 31,871 18,724 3,844,869 Month 121 3,844,889 50,595 31,717 18,879 3,825,991 Month 122 3,825,991 50,595 31,561 19,034 3,806,957 Month 123 3,806,957 50,595 31,404 19,191 3,787,785 Month 124 3,787,785 50,595 31,246 19,350 3,768,416 Month 125 3,768,415 50,595 31,086 19,508 3,748,906 Month 126 3,748,906 50,595 30,925 19,670 3,729,236 Month 127 3,729,236 50,595 30,763 19,832 3,708,404 Month 128 3,708,404 50,595 30,599 19,996 3,688,408 Month 129 3,688,408 50,595 30,434 20,161 3,669,247 Month 130 3,669,247 50,595 30,288 20,327 3,648,919 Month 131 3,648,919 50,595 30,100 20,495 3,628,424 Month 132 3,628,424 50,595 29,931 20,664 3,607,780 Month 133 3,607,780 50,595 29,761 20,836 3,586,926 Month 134 3,586,926 50,595 29,589 21,006 3,585,920 Month 135 3,565,920 50,595 29,416 21,180 3,544,740 Month 136 3,544,740 50,595 29,241 21,354 3,523,385 Month 137 3,523,385 50,595 29,065 21,531 3,501,855 Month 138 3,501,855 50,595 28,887 21,708 3,480,147 Month 139 3,480,147 50,595 28,708 21,867 3,458,270 Month 140 3,458,270 50,595 28,527 22,068 3,436,192 Month 141 3,436,192 50,595 28,345 22,250 3,413,942 Month 142 3,413,942 50,595 28,162 22,433 3,391,508 Month 143 3,391,504 50,595 27,977 22,618 3,358,890 Month 144 3,368,890 50,595 27,790 22,806 3,346,086 Month 145 3,346,086 50,595 27,602 22,993 3,323,092 Month 146 3,323,092 50,595 27,412 23,183 3,299,910 Month 147 3,299,910 50,595 27,221 23,374 3,276,536 Month 148 3,276,536 50,595 27,028 23,567 3,252,969 Month 149 3,252,969 50,595 26,834 23,761 3,229,208 Month 150 3,229,208 50,595 26,636 23,957 3,205,250 Month 151 3,205,250 50,595 26,440 24,155 3,181,096 Month 152 3,181,096 50,595 26,241 24,354 3,156,741 Month 153 3,156,741 50,595 26,040 24,555 3,132,186 Month 154 3,132,186 50,595 25,838 24,758 3,107,429 Month 155 3,107,429 50,595 25,633 24,962 3,082,467 Month 156 3,062,467 50,595 25,426 25,168 3,057,299 Month 157 3,057,299 50,595 25,220 25,375 3,031,924 Month 158 3,031,924 50,595 25,011 25,585 3,006,340 Month 159 3,008,340 50,595 24,800 25,795 2,980,544 Page 2 Month 160 2,980,544 50,595 24,587 26,008 2,954,535 Month 161 2,954,536 50,595 24,372 26,223 2,928,312 Month 162 2,928,312 50,595 24,156 26,439 2,901,873 Month 163 2,901,873 50,595 23,938 26,657 2,875,216 Month 164 2,875,216 50,595 23,718 26,877 2,848,338 Month 165 2,848,338 50,595 23,496 27,099 2,821,239 Month 166 2,821,239 50,595 23,273 27,323 2,793,917 Month 167 2,793,917 50,595 23,047 27,548 2,766,369 Month 168 2,766,369 50,595 22,820 27,775 2,738,593 Month 169 2,738,593 50,595 22,591 28,004 2,710,589 Month 170 2,710,589 50,595 22,360 28,235 2,682,354 Month 171 2,682,354 50,595 22,127 28,468 2,653,886 Month 172 2,653,886 50,595 21,892 28,703 2,625,182 Month 173 2,625,182 50,595 21,655 28,940 2,596,243 Month 174 2,596,243 50,595 21,417 29,179 2,567,064 Month 175 2,567,064 50,595 21,176 29,419 2,537,645 Month 176 2,537,645 50,595 20,933 29,662 2,507,963 Month 177 2,507,963 50,595 20,689 29,907 2,478,076 Month 178 2,478,076 50,595 20,442 30,153 2,447,923 Month 179 2,447,923 50,595 20,193 30,402 2,417,521 Month 180 2,417,521 50,595 19,942 30,653 2,386,868 Month 181 2,386,868 50,595 19,689 30,906 2,365,962 Month 182 2,365,962 50,595 19,435 31,161 2,324,801 Month 183 2,324,801 50,595 19,177 31,416 2,293,383 Month 184 2,293,383 50,595 18,918 31,677 2,261,707 Month 185 2,261,707 50,595 18,657 31,938 2,229,768 Month 186 2,229,768 50,595 18,394 32,202 2,197,567 Month 187 2,197,567 50,595 18,128 32,467 2,165,099 Month 188 2,165,099 50,595 17,860 32,735 2,132,364 Month 189 2,132,364 50,595 17,590 33,005 2,099,359 Month 190 2,099,359 50,595 17,318 33,277 2,066,062 Month 191 2,066,062 50,595 17,043 33,552 2,032,530 Month 192 2,032,530 50,595 16,767 33,828 1,998,701 Month 193 1,998,701 50,595 16,487 34,108 1,954,593 Month 194 1,954,593 50,595 16,206 34,389 1,930,204 Month 195 1,930,204 50,595 15,922 34,673 1,895,531 Month 196 1,895,531 50,595 15,636 34,959 1,860,572 Month 197 1,860,572 50,595 15,348 35,247 1,825,325 Month 198 1,825,325 50,595 15,057 35,538 1,789,787 Month 199 1,789,787 50,595 14,764 35,831 1,753,956 Month 200 1,753,956 50,595 14,469 36,127 1,717,829 Month 201 1,717,829 50,595 14,171 36,425 1,681,405 Month 202 1,681,405 50,595 13,870 36,725 1,644,679 Month 203 1,644,679 50,595 13,567 37,028 1,607,651 Month 204 1,607,651 50,595 13,362 37,334 1,570,318 Month 205 1,570,318 50,595 12,954 37,642 1,532,676 Month 206 1,532,676 50,595 12,643 37,952 1,494,724 Month 207 1,494,724 50,595 12,330 38,265 1,456,459 Month 208 1,456,459 50,595 12,014 38,581 1,417,878 Month 209 1,417,878 50,595 11,696 38,899 1,378,979 Month 210 1,378,979 50,595 11,375 39,220 1,339,759 Month 211 1,339,759 50,595 11,052 39,543 1,300,216 Month 212 1,300,216 50,595 10,726 39,870 1,260,345 Month 213 1,260,345 50,595 10,397 40,199 1,220,148 Month 214 1,220,148 50,595 10,065 40,530 1,179,618 Month 215 1,179,618 50,595 9,731 40,864 1,136,753 Month 216 1,136,753 50,595 9,394 41,202 1,097,551 Month 217 1,097,551 50,595 9,054 41,541 1,056,010 Month 218 1,056,010 50,595 8,711 41,884 1,014,126 Month 219 1,014,126 50,595 8,366 42,230 971,896 Month 220 971,896 50,595 8,017 42,578 929,318 Month 221 929,318 50,595 7,666 42,929 886,389 Month 222 886,389 50,595 7,312 43,283 843,106 Month 223 843,106 50,595 6,955 43,640 799,485 Month 224 799,465 50,595 6,595 44,000 755,465 Month 225 755,485 50,595 6,232 44,363 711,102 Month 226 711,102 50,595 5,866 44,729 666,372 Month 227 666,372 50,595 5,497 45,098 621,274 Month 228 621,274 50,595 5,125 45,470 575,804 Month 229 575,804 50,595 4,750 45,845 529,958 Month 230 529,958 50,595 4,372 46,224 483,735 Month 231 483,735 50,595 3,990 46,605 437,130 Month 232 437,130 50,595 3,606 46,989 390,141 Month 233 390,141 50,595 3,218 47,377 342,764 Month 234 342,764 50,595 2,827 47,768 294,996 Month 235 294,996 50,595 2,433 48,162 246,834 Month 236 246,834 50,595 2,036 48,559 196,275 Month 237 196,275 50,595 1,636 48,960 149,316 Month 238 149,316 50,595 1,232 49,364 99,952 Month 239 99,952 50,595 825 49,771 50,181 Month 240 50,181 50,595 414 50,181 (0)
Page 3 Exhibit 3.2B Subject to Local Counsel Comments Note: Refinancing Obligations of Borrower only apply to Fixed Rate Loans PROPERTY LOAN AGREEMENT Between [EXTENDED STAY AMERICA, INC. SUBSIDIARY] "Borrower" -------- and ---------------------- "Lender" ------ Dated as of _____________ ___, 199__ 1 DEFINITIONS AND ACCOUNTING TERMS............................... 2 1.1 Defined Terms........................................... 2 1.2 Computation of Time Periods............................. 11 1.3 Accounting Terms........................................ 12 1.4 Certain Terms........................................... 12 2 AGREEMENT SUBJECT TO ESA LOAN AGREEMENT........................ 12 3 [RESERVED]..................................................... 12 4 REPRESENTATIONS AND WARRANTIES................................. 12 4.1 Organization and Authority.............................. 13 4.2 Power................................................... 13 4.3 Authorization of Borrowing.............................. 13 4.4 Interest Rate........................................... 14 4.5 Other Agreements........................................ 14 4.6 Maintenance of Existence................................ 14 4.7 No Defaults............................................. 15 4.8 Governmental Consents and Approvals..................... 16 4.9 Investment Company Act Status........................... 16 4.10 Compliance with Law..................................... 16 4.11 Financial Information................................... 16 4.12 Federal Reserve Regulations............................. 16 4.13 Pending Litigation...................................... 17 4.14 Solvency; No Bankruptcy................................. 17 4.15 Not Foreign Person...................................... 17 4.16 Ownership of Borrower; Subsidiaries..................... 17 4.17 ERISA................................................... 18 4.18 Management Agreement.................................... 18 5 COVENANTS OF BORROWER.......................................... 19 5.1 Continuing Nature of Representations.................... 19 5.2 [RESERVED].............................................. 19 5.3 Use and Maintenance of the Property..................... 19 5.4 Financial Reports....................................... 21 5.5 Reporting Requirements.................................. 23 5.6 Refinancing............................................. 25 5.7 Appraisals and other Valuations......................... 25 i 5.8 Other Indebtedness....................................... 25 5.9 Investments.............................................. 26 5.10 Independence Covenants................................... 26 5.11 Modification of Material Agreements...................... 27 5.12 Tax Filings.............................................. 27 5.13 Further Acts, etc........................................ 27 5.14 Recording of Mortgage, etc............................... 28 6 INSURANCE AND CASUALTY RESTORATION.............................. 28 6.1 Insurance Coverage....................................... 28 6.2 Manager's Fidelity Insurance............................. 30 6.3 Policy Terms............................................. 30 6.4 Assignment of Policies................................... 31 6.5 Casualty Restoration..................................... 33 6.6 Compliance with Insurance Requirements................... 37 6.7 Default During Restoration............................... 38 6.8 Application of Proceeds to Debt Reduction................ 39 7 IMPOSITIONS..................................................... 39 7.2 Deduction from Value..................................... 40 7.3 No Joint Assessment...................................... 40 7.4 Right to Contest......................................... 40 7.5 No Credits on Account of the Loan........................ 41 8 CONDEMNATION.................................................... 42 9 CENTRAL CASH MANAGEMENT......................................... 44 9.1 Cash Flow................................................ 44 9.2 Establishment of Sub-Accounts............................ 45 9.3 Permitted Investments of Central Account Funds........... 46 9.4 Monthly Funding of Sub-Accounts.......................... 47 9.5 Payment of Basic Carrying Costs.......................... 49 9.6 Debt Service Payment Sub-Account......................... 49 9.7 Recurring FF&E Sub-Account............................... 50 9.8 Operations and Maintenance Expense Sub-Account........... 50 9.9 Curtailment Reserve Sub-Account.......................... 51 9.10 Loss Proceeds............................................ 52 10 PROPERTY MANAGEMENT............................................. 53 ii 11 EVENTS OF DEFAULT.............................................. 54 11.1 Events of Default....................................... 54 11.2 Remedies................................................ 54 11.3 General Provisions Regarding Remedies................... 54 12 [RESERVED]..................................................... 55 13 [RESERVED]..................................................... 55 14 ESTOPPEL CERTIFICATES.......................................... 55 15 LENDER ASSIGNMENTS............................................. 56 16 MISCELLANEOUS.................................................. 57 16.1 Representations and Warranties of Borrower and Lender... 57 16.2 Costs; Expenses; Indemnities............................ 57 16.3 [RESERVED].............................................. 59 16.4 [RESERVED].............................................. 59 16.5 Securitization Opinions................................. 59 16.6 Cooperation with Rating Agencies........................ 60 16.7 Securitization Financials............................... 60 16.8 Amendments, Etc......................................... 60 16.9 Notices, Etc............................................ 60 16.10 No Waiver; Remedies..................................... 61 16.11 Right of Set-off........................................ 62 16.12 Binding Effect.......................................... 62 16.13 Severability............................................ 62 16.14 Submission to Jurisdiction; Service of Process.......... 62 16.15 Section Titles.......................................... 63 16.16 Execution in Counterparts............................... 63 16.17 Entire Agreement........................................ 63 16.18 Confidentiality......................................... 63 16.19 Waiver of Jury Trial.................................... 63 16.20 Waiver of Notice........................................ 64 16.21 Actions and Proceedings................................. 64 16.22 Usury Laws.............................................. 64 16.23 Remedies of Borrower.................................... 64 16.25 Waiver of Statute of Limitations........................ 65 16.26 Advances................................................ 65 iii 16.27 Application of Default Rate Not a Waiver................ 65 16.28 No Joint Venture or Partnership......................... 65 16.29 Time of the Essence. 65 16.30 Borrower's Obligations Absolute......................... 66 16.31 Recourse 66 17 ADDITIONAL PROVISIONS.......................................... 66 Exhibit A Legal Description Exhibit B Additional Provisions Exhibit 5.4 Form of Cash Flow Statement Index of Defined Terms ---------------------- ACH..................................... 45 Affiliate Loans......................... 1 Approved Manager Standard............... 2 Architect............................... 34 Bank.................................... 2 Basic Carrying Costs.................... 2 Basic Carrying Costs Monthly Installment............................ 2 Basic Carrying Costs Sub-Account........ 2 Borrower................................ 1 Business Day............................ 2 Cash Flow Available for Debt Service................................ 3 Central Account......................... 3 Claim................................... 11 Closing Date............................ 3 Code.................................... 3 Collection Account...................... 3 Condemnation Proceeds................... 52 Contingent Obligation................... 3 Current Month........................... 47 Curtailment Reserve Sub-Account......... 4 Debt Service............................ 4 Debt Service Payment Sub-Account........ 4 Default Rate............................ 4 Eligible Account........................ 4 Engineer................................ 34 ERISA................................... 4 ERISA Affiliate......................... 5 ESA..................................... 1 ESA Loan Agreement...................... 1 ESA Subsidiaries........................ 1 Event of Default........................ 54 Excess Rent............................. 48 Fiscal Year............................. 5 GAAP.................................... 5 Governmental Authority.................. 5 Indemnitee.............................. 58 Independent Director.................... 26 Initial FF&E Recurring Installments..... 10 Institutional Lender.................... 5 Insurance Proceeds...................... 52 Insurance Requirements.................. 6 IRS..................................... 6 Legal Requirement....................... 6 Lender.................................. 1 Limitation on Costs..................... 66 Loan.................................... 1 Loan Amount............................. 1 Loss Proceeds........................... 53 iv Management Agreement.................... 6 Manager................................. 6 Manager Certification................... 23 Manager Control Notice.................. 53 Material Adverse Change................. 6 Mortgage................................ 1 Multiemployer Plan...................... 6 Net Operating Income.................... 7 Note.................................... 1 Notice Date............................. 48 O&M Operative Period.................... 7 Operations and Maintenance Expense Monthly Installment........................... 7 Operations and Maintenance Expense Sub-Account................... 7 PBGC.................................... 10 Pension Plan............................ 8 Permitted Indebtedness.................. 25 Permitted Investments................... 8 Plan.................................... 10 Property................................ 1 Recurring FF&E Expenditures............. 10 Recurring FF&E Monthly Amount........... 10 Recurring FF&E Sub-Account.............. 10 Refinance Notification Date............. 25 Refinancing Commitment.................. 10 Rent Account............................ 10 Required Debt Service Payment........... 10 Retention Amount........................ 36 Security Deposit Account................ 45 Single Purpose Entity................... 11 Solvent................................. 11 Sub-Account............................. 46 Sub-Accounts............................ 46 Substantial Casualty.................... 33 Substantial Taking...................... 42 Void Commitment Date.................... 11 Work.................................... 33 v PROPERTY LOAN AGREEMENT THIS PROPERTY LOAN AGREEMENT, made as of the __ day of ________, 199_, by and between CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION, a _________ Delaware corporation having an address at 55 East 52nd Street, New York, NY 10055 ("Lender") and by [Extended Stay America, Inc., subsidiary], a __________________ corporation having an office at _________________ ("Borrower"). W I T N E S S E T H : ------------------- WHEREAS, pursuant to a Credit Facility Agreement (the "ESA Loan Agreement") dated as of May 17, 1996 between Lender and Extended Stay America, Inc. ("ESA"), Lender has agreed to make loans (the "Affiliate Loans") to various Subsidiaries of ESA (the "ESA Subsidiaries") in a total aggregate amount (when added to the Loan) not to exceed $300,000,000; WHEREAS, pursuant to the ESA Loan Agreement, Lender has authorized a loan (the "Loan") to Borrower, which Loan is evidenced by that certain promissory note, dated the date hereof (the "Note") given by Borrower, as maker, to Lender, as holder and secured by a first mortgage in favor of Lender (the "Mortgage"), in the property described on Exhibit A annexed hereto ( the "Property") as security for Borrower's obligations to Lender from time to time pursuant to the Note, the Mortgage and the other Loan Documents (hereinafter defined); WHEREAS, Borrower and Lender intend these recitals to be a material part of this Agreement; and WHEREAS, all things necessary to make this Agreement the valid and legally binding obligation of Borrower in accordance with its terms, for the uses and purposes herein set forth, have been done and performed. NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows: 1 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Approved Manager Standard" means the standard of business operations, practices and procedures customarily employed by entities having a senior executive with at least seven (7) years' experience in the management of motels or residence hotels, it being agreed that ESA Management, Inc. satisfies the Approved Manager Standard on the date hereof. "Bank" means Citibank, N.A., or any successor bank hereafter selected by Lender. "Basic Carrying Costs" means the sum of the following costs associated with the Property: (a) Impositions and (b) insurance premiums. "Basic Carrying Costs Monthly Installment" means Lender's reasonable estimate of one twelfth (1/12th) of the annual amount for Basic Carrying Costs. "Basic Carrying Costs Monthly Installment" shall also include, if reasonably required by Lender, a sum of money that, together with such monthly installments, would be sufficient to make the payment of each such Basic Carrying Cost at least thirty (30) days prior to the date initially due. Should such Basic Carrying Costs not be ascertainable at the time any monthly deposit is required to be made, the Basic Carrying Costs Monthly Installment shall be determined by Lender in its reasonable discretion on the basis of the aggregate Basic Carrying Costs for the prior Fiscal Year or month or the prior payment period for such cost. As soon as the Basic Carrying Costs are fixed for the then current fiscal year, month or period, the next ensuing Basic Carrying Costs Monthly Installment shall be adjusted to reflect any deficiency or surplus in prior monthly payments. If at any time during the term of the Loan, Lender, in its reasonable discretion, determines that there will be insufficient funds in the Basic Carrying Costs Sub-Account to make payments when they become due and payable, Lender shall have the right to adjust the Basic Carrying Costs Monthly Installment such that there will be sufficient funds to make such payments. "Basic Carrying Costs Sub-Account" means the Sub-Account of the Central Account established pursuant to Section 9.2 hereof and maintained pursuant to Section 9.4 hereof. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City or in the jurisdiction where the Property is located. 2 "Cash Flow Available for Debt Service" shall mean Net Operating Income for the Hotel Property less the annual (or portion thereof) Recurring FF & E Monthly Amount. "Central Account" means an Eligible Account, maintained at the Bank, in the name of Lender or its successors or assigns as may be designated by Lender. "Closing Date" means the date hereof. "Code" means the Internal Revenue Code of 1986, as amended and as it may be further amended from time to time, any successor statutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto. "Collection Account" means an account designated by Lender, which shall be an Eligible Account, to which payments of the Loan are transferred. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness or Contractual Obligation of another Person, if the purpose or intent of such Person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations of a Person include, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of an obligation of another Person, and (b) any liability of such Person for an obligation of another Person through any agreement (contingent or otherwise) to (i) purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) maintain the solvency or any balance sheet item, level of income or financial condition of another Person, (iii) purchase, sell or lease (as lessor or lessee) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such obligation or to assure the holder of such obligation against loss, or (iv) supply funds to or in any other manner invest in such other Person (including, without limitation, to pay for property or services irrespective of whether such property is received or such services are rendered), if in the case of any agreement described under subclause (i), (ii), (iii) or (iv) of 3 this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Curtailment Reserve Sub-Account" means the Sub-Account established pursuant to Section 9.2 hereof and maintained pursuant to Section 9.9 hereof for the purpose of holding certain Excess Rent. "Debt Service" means for any period, the amount of interest and principal payments due and payable in accordance with the relevant Note during an applicable period. "Debt Service Payment Sub-Account" means the Sub-Account of the Central Account established and maintained pursuant to Section 9.2 hereof and maintained pursuant to Section 9.6 hereof for the purposes of making Required Debt Service Payments. "Default Rate" shall be a rate equal to four percent (4%) above the rate otherwise applicable, subject to Section 16.22 hereof. "Eligible Account" means a segregated account held by and at the Bank or an account that is either: (a) maintained with a depository institution or trust company the long-term unsecured debt obligations of which (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the long-term unsecured debt obligations of such holding company) have been rated by the Rating Agencies in one of their two highest rating categories or the short-term commercial paper of which is rated by the Rating Agencies in their highest rating category at the time of any deposit therein; (b) an account or accounts maintained with a federal or state chartered depository institution or trust company with trust powers acting in its fiduciary capacity provided that any such state chartered institution or trust company shall be subject to regulations regarding fiduciary funds on deposit substantially similar to federal regulation 12 CFR (S) 910(b); or (c) such other account maintained at a bank or institution having aggregate deposits in an amount not less than $100,000,000 and otherwise acceptable to Lender. The title of each Eligible Account shall indicate that funds held therein are held in trust for the uses and purposes set forth herein. "ERISA" means the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time and any regulations issued pursuant thereto, as may be amended from time to time. 4 "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control or treated as a single employer with any Loan Party within the meaning of Section 414 (b), (c), (m) or (o) of the Code. "Fiscal Year" means the twelve month period commencing on January 1 and ending on December 31 during each year of the term of this Agreement, or such other fiscal year of Borrower as Borrower may select from time to time with the prior written reasonable consent of Lender. "GAAP" means generally accepted accounting principles in the United States of America, as of the date of the applicable financial report, consistently applied. "Governmental Authority" means, with respect to any Person, any federal or state government or other political subdivision thereof and any entity, including any regulatory or administrative authority or court, exercising executive, legislative, judicial, regulatory or administrative or quasi- administrative functions of or pertaining to government, and any arbitration board or tribunal in each case, having jurisdiction over such applicable Person or such Person's property and any stock exchange on which shares of capital stock of such Person are listed or admitted for trading. "Institutional Lender" means any of the following Persons: (a) a bank, savings and loan association, savings institution, trust company or national banking association, acting for its own account or as agent or in a fiduciary capacity, (b) a charitable foundation, (c) an insurance company or pension and/or annuity company, (d) a fraternal benefit society, (e) a pension, retirement or profit sharing trust or fund within the meaning of Title I of ERISA or for which any bank, trust company, national banking association or investment adviser registered under the Investment Advisers Act of 1940, as amended, is acting as trustee or agent, (f) an investment company or business development company, as defined in the Investment Company Act of 1940, as amended, (g) a small business investment company licensed under the Small Business Investment Act of 1958, as amended, (h) a broker or dealer registered under the Securities and Exchange Act of 1934, or an investment adviser registered under the Investment Adviser Act of 1940, as amended, (i) a government, a public employees' pension or retirement system, or any other government agency supervising the investment of public funds, (j) a mortgage conduit that is in the business of originating loans for securitization in the capital markets, or (k) another entity all of the equity owners of which are Institutional Lenders; provided that each of said Persons shall have net assets equal to or greater than $500,000,000, be in the business of making commercial mortgage loans, secured by properties of like type, size and value as the Property and have a long term credit rating that is not less than investment grade. 5 "Insurance Requirements" means all terms of any insurance policy required by this Agreement, all requirements of the issuer of any such policy, and all regulations and then current standards applicable to or affecting the Property or any use or condition thereof, which may, at any time, be recommended by the Board of Fire Underwriters, if any, having jurisdiction over the Property, or such other Person exercising similar functions. "IRS" means the Internal Revenue Service, or any successor thereto. "Legal Requirement" means as to any Person, the certificate of incorporation and by-laws or other organization or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Management Agreement" means an agreement relating to the operation and/or management of a Hotel Property between the appropriate Borrower and Manager, substantially in a form as shall be approved by Lender, which approval shall not be unreasonably withheld or delayed. "Manager" means ESA Management, Inc., a wholly owned subsidiary of ESA, or such other manager meeting the Approved Manager Standard as shall be approved by Lender (which approval shall not be unreasonably withheld or delayed), as manager under the Management Agreement. "Material Adverse Change" means a material adverse change in (a) the condition (financial or otherwise), business, performance, prospects, operations or properties of any ESA and its Subsidiaries taken as one enterprise or ESA and the Borrowers taken as one enterprise, (b) the legality, validity or enforceability of any Loan Document, (c) the perfection or priority of the Liens granted pursuant to the Mortgage or any other Loan Document, (d) the ability of Borrower (or if then guaranteed by ESA, then the ability of ESA and such Borrower) to repay the Obligations or of any Loan Party to perform its material obligations under any Loan Document, or (f) the rights and remedies of Lender under the Loan Documents. "Multiemployer Plan" means, as of any applicable date, a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, and to which any Loan Party, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, or within the six-year period ending at such date, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. 6 "Net Operating Income" means in each Fiscal Year or portion thereof during the term hereof, Operating Income less Operating Expenses. Operating Income means, in each Fiscal Year or portion thereof during the term hereof, all revenue derived by a Borrower arising from the Hotel Property including, without limitation, Rent, and all other income (including laundry, vending, and other service income). Operating Expenses means, in each Fiscal Year or portion thereof during the term hereof, all expenses directly attributable to the operation, repair and maintenance of the Hotel Property including, without limitation, Impositions (as defined in the Mortgage), insurance premiums, management fees, satellite and cable television and telephone expenses, payments to third party suppliers, general and administrative and marketing expenses, utilities, housekeeping expenses, employee taxes and benefits. Operating Expenses shall also include reserves for Contingent Obligations (but shall exclude any payments made from such reserves). Operating Expenses shall not include interest, principal and premium, if any, due under the Notes or otherwise in connection with the Loans, income taxes, extraordinary capital improvements costs, or any non-cash charge or expense such as depreciation. "O&M Operative Period" means (i) if Borrower fails to provide Lender with a Refinancing Commitment on or prior to the Refinance Notification Date, the period commencing on the Refinance Notification Date and ending on the date the Loan has been paid in full and (ii) if Borrower provides Lender with a Refinancing Commitment on or prior to the Refinance Notification Date and the Void Commitment Date occurs, the period commencing on the Void Commitment Date and ending on the date the Loan has been paid in full; provided, however, that if Borrower provides Lender with a Refinancing Commitment on or before the Refinance Notification Date and the Void Commitment Date does not occur, there shall be no O&M Operative Period hereunder. In the event that the Loan is not a Fixed Rate Loan, then "O&M Operative Period" shall have no meaning. "Operations and Maintenance Expense Monthly Installment" means with respect to each Current Month in which funds are required to be allocated or distributed pursuant to the terms of Section 9.4.D, or if an Event of Default has occurred and be continuing, the lesser of (a) all amounts remaining in the Central Account after the distributions made pursuant to clauses (A) through (E) of Section 9.4 or (b), an amount equal to 1/12 of the product of (i) 1.05 and (ii) the actual Operating Expenses (exclusive of Impositions and insurance premiums) for the immediately preceding calendar year. "Operations and Maintenance Expense Sub-Account" means the Sub-Account of the Central Account established pursuant to Section 9.2 hereof and maintained pursuant to 7 Section 9.8 hereof relating to the payment of Operating Expenses (exclusive of Impositions and insurance premiums). "Pension Plan" means a plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA or Code Section 412 and which any Loan Party, any of its Subsidiaries or any ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Permitted Investments" means any one or more of the following obligations or securities acquired at a purchase price of not greater than par, including those issued by Lender, its successors or assigns, or any of their respective Affiliates: . direct obligations of, or obligations fully guaranteed as to payment of principal and interest by, (a) the United States or any agency or instrumentality thereof provided such obligations are backed by the full faith and credit of the United States of America, or (b) FHLMC, FNMA, the Federal Farm Credit System or the Federal Home Loan Banks provided such obligations at the time of purchase or contractual commitment for purchase are qualified by the Rating Agencies as a Permitted Investment hereunder as evidenced in writing; . fully FDIC-insured demand and time deposits in or certificates of deposit of, or bankers' acceptances issued by, any bank or trust company, savings and loan association or savings bank, provided that the commercial paper and long-term unsecured debt obligations of such depository institution or trust company have the highest rating available for such securities by the Rating Agencies, or such lower rating as is consented to in writing by Lender; . repurchase obligations with respect to any security described in clause (a) above entered into with a depository institution or trust company (acting as principal) described in clause (b) above; . general obligations of or obligations guaranteed by any State of the United States or the District of Columbia receiving the highest long-term unsecured debt rating available for such securities by the Rating Agencies, or such lower rating as is consented to in writing by Lender; . securities bearing interest or sold at a discount that are issued by any corporation incorporated under the laws of the United States of America or any state thereof or the District of Columbia and is rated by the Rating Agencies in their highest long- 8 term unsecured rating categories at the time of such investment or contractual commitment providing for such investment; provided, however, that securities issued by any such corporation will not be Permitted Investments to the extent that investment therein will cause the then outstanding principal amount of securities issued by such corporation and held as part of the Central Account to exceed 20% of the amount held in such account; . commercial or finance company paper (including both non-interest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than one year after the date of issuance thereof) that is rated by the Rating Agencies in their highest short-term unsecured debt rating available at the time of such investment or contractual commitment providing for such investment, and is issued by a corporation the outstanding senior long-term debt obligations of which are then rated by the Rating Agencies in their highest short-term and long-term unsecured debt ratings, or such lower rating as is consented to in writing by Lender; . guaranteed reinvestment agreements acceptable to the Rating Agencies issued by any bank, insurance company or other corporation rated in the highest long-term unsecured rating levels available to such issuers by the Rating Agencies throughout the duration of such agreements, or such lower rating as is consented to in writing by Lender; . units of taxable money market funds, which funds are regulated investment companies, seek to maintain a constant net asset value per share and invest solely in obligations backed by the full faith and credit of the United States, which funds have been designated in writing by the Rating Agencies as Permitted Investments with respect to this definition; . the direct costs of acquisition of Realty and the Construction Costs of the Real Estate; and . any other demand, money market or time deposit, or any other obligation, security or investment, that may be consented to in writing by Lender; provided, however, that no instrument or security shall be a Permitted Investment if (y) such instrument or security evidences a right to receive only interest payments or (z) the right to receive principal and interest payments derived from the underlying investment provides a yield to maturity in excess of 120% of the yield to maturity at par of such underlying investment. 9 "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Plan" means an employee benefit plan, as defined in Section 3(3) of ERISA, which any Loan Party or any of its Subsidiaries maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Recurring FF&E Expenditures" means expenditures with respect to furniture, fixtures and equipment actually incurred from time to time. "Recurring FF&E Monthly Amount" means with respect to the Property the amount per month equal to the greater of: (a) 5% of Operating Income for the Property for the previous month, and (b) $20.83 per rentable unit of the Property (the "Initial FF&E Recurring Installments") until the first (1st) anniversary of the date hereof and an amount per month in each subsequent Loan Year or portion thereof occurring prior to the Maturity Date equal to the product of (i) the Initial FF&E Recurring Installments and (ii) a fraction, the numerator of which is the CPI for the month of August of the calendar year immediately preceding the year with respect to which the determination is being made and the denominator of which is the CPI for the month of July 1995, but in no event shall the Recurring FF&E Monthly Amount as calculated above be decreased in any year below $20.83. "Recurring FF&E Sub-Account" means the Sub-Account of the Central Account established pursuant to Section 9.2 hereof and maintained pursuant to Section 9.7 hereof relating to the payment of expenditures. "Refinancing Commitment" means a written commitment for the refinancing of a Fixed Rate Loan, as defined in the ESA Loan Agreement, from an Institutional Lender. "Rent Account" means an Eligible Account maintained at the Bank or another bank reasonably acceptable to Lender in the name of Lender or such other name as may be acceptable to Lender, and over which Rent Account Borrower shall be granted signing and withdrawal privileges until revoked by Lender. "Required Debt Service Payment" means, as of any Payment Date, the amount of interest and principal then due and payable pursuant to the Note, together with any other sums due thereunder, including, without limitation, any prepayments required to be made or 10 for which notice has been given under this Agreement, Default Rate Interest and premium, if any, made in accordance therewith. "Single Purpose Entity" means a Person, other than an individual, which is formed or organized solely for the purpose of holding, directly, an undivided 100% ownership interest in a Hotel Property (unless Lender, in its sole discretion, consents to the Single Purpose Entity owning more than one Hotel Property), does not engage in any business unrelated to the Hotel Property, does not have any assets other than those related to its interest in the Hotel Property or any indebtedness other than as permitted by this Agreement or the other Loan Documents, has its own separate books and records and has its own accounts, in each case that are separate and apart from the books and records and accounts of any other Person, holds itself out as being a Person separate and apart from any other Person, and meets Lender's reasonable requirements (including organizational and structural requirements) to establish that, after the guaranty of ESA as provided in the ESA Loan Agreement is terminated with respect to the Loan pursuant to Section 8.9 of the ESA Loan Agreement and ESA's obligations in Section 15.5 of the ESA Loan Agreement are terminated, such Person would not be consolidated with ESA for bankruptcy purposes. "Solvent" means, as to any Person, that (a) the sum of the assets of such Person, at a fair valuation, exceeds its liabilities, including contingent liabilities, (b) such Person has sufficient capital with which to conduct its business as presently conducted and as proposed to be conducted and (c) such Person has not incurred debts, and does not intend to incur debts, beyond its ability to pay such debts as they mature. For purposes of this definition, "debt" means any liability on a claim, and "claim" means (a) a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (b) a right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. With respect to any such contingent liabilities, such liabilities shall be computed in accordance with GAAP at the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can reasonably be expected to become an actual or matured liability. "Void Commitment Date" means the date, if any, upon which the Refinancing Commitment lapses, terminates or is otherwise withdrawn. 1.2 Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from 11 and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including." 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. 1.4 Certain Terms. A. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, and not to any particular Article, Section, subsection or clause in this Agreement. References herein to an Exhibit, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit or Schedule to, or Article, Section, subsection or clause in this Agreement. Capitalized terms not defined herein are defined in the ESA Loan Agreement or the Mortgage. B. The term "Lender" includes its successors and each assignee of Lender who becomes a party hereto pursuant to Article 16. 2 AGREEMENT SUBJECT TO ESA LOAN AGREEMENT This Agreement is made subject to the ESA Loan Agreement and should be read in conjunction with the same. To the extent that there is a conflict of terms among these two agreements, the ESA Loan Agreement should govern. 3 [RESERVED] 4 REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, Borrower represents, warrants and covenants to Lender as follows: 12 4.1 Organization and Authority. Borrower (i) is a corporation, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) has all requisite power and authority and all necessary licenses and permits to own and operate the Property and to carry on its business as now conducted and as presently proposed to be conducted and (iii) is duly qualified, authorized to do business and in good standing in the jurisdiction where the Property is located and in each other jurisdiction where the conduct of its business or the nature of its activities makes such qualification necessary. 4.2 Power. Borrower has full power and authority to own its property and assets and to carry on its business and operations as now being conducted and as presently contemplated, to execute, deliver and perform, as applicable, this Agreement and the other Loan Documents to which it is a party, to make the borrowings hereunder, to execute and deliver the Note and to grant to Lender the Mortgage as a first, prior, perfected and continuing lien on and security interest in the Property, subject only to the Permitted Encumbrances (as defined in the ESA Loan Agreement). 4.3 Authorization of Borrowing. The execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party, the making of the borrowings thereunder, the execution and delivery of the Note, the granting of the liens on the Property pursuant to the Loan Documents to which it is a party and the consummation of the Loan have been duly authorized by Borrower by all requisite action (including, without limitation, approvals of shareholders) and will constitute the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their terms, except as enforcement may be stayed or limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in proceedings at law or in equity) and will not (i) violate any provision of its articles of incorporation or by-laws, as applicable, or, to its knowledge, any law, judgment, order, rule or regulation of any court, arbitration panel or other Governmental Authority, domestic or foreign, or other Person affecting or binding upon Borrower or the Property, or (ii) violate any provision of any indenture, agreement, mortgage, contract or other instrument to which Borrower is a party or by which any of its property, assets or revenues are bound, or be in conflict with, result in an acceleration of any obligation or a breach of or constitute (with notice or lapse of time or both) a default or require any payment or prepayment under, any such indenture, agreement, mortgage, contract or other instrument, or (iii) result in the creation or imposition of any lien, except those in favor of Lender as provided in the Loan Documents to which it is a party. 13 4.4 Interest Rate. The rate of interest paid under the Note and the method and manner of the calculation thereof do not violate any usury or other law or applicable Legal Requirement. 4.5 Other Agreements. Borrower is not a party to nor is otherwise bound by any agreement or instrument that is reasonably likely to have a Material Adverse Change. Borrower is not in violation of its corporate organizational documents or other restriction or any agreement or instrument by which it is bound, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or Governmental Authority, or any Legal Requirement, in each case, applicable to Borrower or the Property, except for such violations that would not, individually or in the aggregate, have a Material Adverse Change. 4.6 Maintenance of Existence. A. Borrower at all times since formation has been duly formed and existing. As of the date hereof, Borrower has been duly formed and is validly existing as a Single Purpose Entity and shall preserve and keep in full force and effect its existence as a Single Purpose Entity. B. Borrower at all times since formation has complied, and will continue to comply, with the provisions of its articles of incorporation and by- laws and the laws of its jurisdiction of formation relating to corporations. Borrower will not, nor will Borrower permit any constituent party of Borrower to, amend, modify or otherwise change the articles of incorporation and bylaws or other organizational documents of Borrower or such constituent party without the prior written consent of Lender. C. All statutory requirements regarding the existence of Borrower have been observed at all times since its formation and will continue to be observed. D. Borrower has at all times accurately maintained, and will continue to accurately maintain, financial statements, accounting records and other corporate documents separate from those of any other Person. Borrower has not at any time since formation commingled, and will not commingle, its assets with those of any other Person. Borrower has at all times since its formation accurately maintained, and will continue to accurately maintain, its own bank accounts, payroll and separate books of account. E. Borrower has at all times paid, and will continue to pay, its own liabilities from its own separate assets. 14 F. Borrower has at all times identified itself, and will continue to identify itself, in all dealings with the public, under its own name and as a separate and distinct entity. Borrower has not at any time identified itself, and will not identify itself, as being a division of any other Person, provided that the foregoing shall not apply with respect to the naming of the Property. G. Borrower has been at all times, and will continue to be, adequately capitalized in light of the nature of its business. H. Any borrowings made by Borrower in connection with this Agreement do not and will not render Borrower insolvent; Borrower is not contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of its property, and Borrower has no knowledge of any Person contemplating the filing of any such petition against it. I. Borrower (a) does not own and will not own without the consent of Lender any encumbered asset other than the Property (other than assets encumbered pursuant to Permitted Indebtedness which is secured solely by the relevant asset other than the Property pursuant to which the Person to whom the indebtedness is owing has delivered to Borrower an undertaking that it will not institute against, or join any other person in instituting against Borrower any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, until one year and one day after the Loan is paid in full, or look to any other property or assets of Borrower in respect of such obligations and that such obligations shall not constitute a claim against Borrower in the event that the encumbered asset is insufficient to pay in full such obligations), (b) is not engaged and will not engage in any business other than the ownership, management and operation of the Property, (c) will not enter into any contract or agreement with any Affiliate of Borrower except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arm's-length basis with third parties other than an Affiliate, (d) has not incurred and will not incur any indebtedness, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than the Loan or any Permitted Indebtedness, and (e) has not made and will not make any loans or advances to any third party (including any Affiliate) (other than de minimis advances to customers, employees and suppliers which do not exceed $35,000). 4.7 No Defaults. No Default or Event of Default has occurred and is continuing or would occur as a result of the consummation of the transactions contemplated by the Loan Documents. Borrower is not in default in the payment or performance of any of its Contractual Obligations in any respect. 15 4.8 Governmental Consents and Approvals. Borrower has obtained or made all necessary (i) consents, approvals and authorizations, and registrations and filings of or with all Governmental Authorities and (ii) consents, approvals, waivers and notifications of partners, stockholders, creditors, lessors and other nongovernmental Persons, in each case, which are required to be obtained or made by Borrower in connection with the execution and delivery of, and the performance by Borrower of its obligations under, the Loan Documents. 4.9 Investment Company Act Status. Borrower is not an "investment company," or a company "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 4.10 Compliance with Law. Borrower is in compliance in all material respects with all Legal Requirements to which it or the Property is subject, including, without limitation, all Environmental Statutes, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act and ERISA. 4.11 Financial Information. All financial data that has been delivered by Borrower to Lender (i) is complete and correct in all material respects, (ii) accurately represents the financial condition of the Persons covered thereby as of the date on which the same shall have been furnished, and (iii) has been prepared in accordance with GAAP (or such other accounting basis as is reasonably acceptable to Lender) throughout the periods covered. As of the date hereof, Borrower has no contingent liability, liability for taxes or other unusual or forward commitment not reflected in such financial statements delivered to Lender, except for guaranties of Permitted Indebtedness disclosed to Lender; since the date of the last financial statements delivered by Borrower to Lender except as otherwise disclosed in such financial statements or notes thereto, there has been no change in the assets, liabilities or financial position of Borrower or in the results of operations of Borrower that would have a Material Adverse Change. Borrower has not incurred any obligation or liability, contingent or otherwise not reflected in such financial statements that would have a Material Adverse Change. 4.12 Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any "margin stock" within the meaning of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System or for any other purpose that would be inconsistent with such Regulations G, T, U or X or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of the Loan Documents. 16 4.13 Pending Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of Borrower, threatened against or affecting Borrower or the Property in any court or before any Governmental Authority that if adversely determined either individually or collectively have or are reasonably likely to have a Material Adverse Change. Borrower is not in default with respect to any order of any court or Governmental Authority and the execution and delivery of, and the performance by Borrower of its obligations under, each of the Loan Documents will not cause or result in any such default. 4.14 Solvency; No Bankruptcy. Borrower (i) is and has at all times been Solvent and will remain Solvent immediately upon the consummation of the transactions contemplated by the Loan Documents and (ii) is free from bankruptcy, reorganization or arrangement proceedings or a general assignment for the benefit of creditors. 4.15 Not Foreign Person. Borrower is not a "foreign person" within the meaning of (S) 1445(f)(3) of the Code. 4.16 Ownership of Borrower; Subsidiaries. A. As of the date hereof, the authorized capital stock of Borrower consists of a single class of ___________ common shares of beneficial interest, $0.01 par value per share, of which _________ shares are issued and outstanding, and no preferred shares of beneficial interest. There are no Stock Equivalents of Borrower. No Stock of Borrower is subject to any outstanding option, warrant, right of conversion or purchase or any similar right. All of the outstanding capital stock of Borrower is now validly issued, fully paid and non- assessable. No authorized but unissued shares, no treasury shares and, to the best knowledge of Borrower, no other outstanding shares of capital stock of Borrower are subject to any option, warrant, right of conversion or purchase or any similar right. There are no agreements or understandings with respect to the voting, sale or transfer of any shares of capital stock of Borrower, or to the best knowledge of Borrower, any agreement restricting the transfer or hypothecation of any such shares. Borrower has no subsidiaries. B. Borrower does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity interest in, any Person including any Subsidiaries. 17 4.17 ERISA. A. There is not and there has not been any withdrawal from a Multiemployer Plan or, to the best knowledge of Borrower, any Reorganization or Liquidation of a Multiemployer Plan as defined in Title IV of ERISA. B. Each Plan and Pension Plan and any related trust intended to qualify under Code Section 401 or 501 has been determined by the IRS to be so qualified (or an application therefor has been timely made) and to the best knowledge of Borrower nothing has occurred which would cause the loss of such qualification, and each Plan or Pension Plan has been and is operated and administered in accordance with the terms and conditions governing those plans, all applicable laws and statutes, including without limitation, ERISA and the Code and regulations thereunder. C. No obligation exists and no event has occurred, and to the best knowledge of Borrower, no obligation is likely to arise and no event is likely to occur with respect to any Plan, Pension Plan or Multiemployer Plan affecting Borrower, any Subsidiary or ERISA Affiliate which either alone is, or in the aggregate are, reasonably likely to adversely affect Borrower's ability to comply with its duties and obligations under this Agreement or which would have a Material Adverse Change. 4.18 Management Agreement. The Management Agreement is in full force and effect and is a legally valid and binding obligation of Borrower and the other parties thereto, subject to such exceptions which are not reasonably likely to result in, in the aggregate, a Material Adverse Change. The Management Agreement is not mortgaged, pledged or otherwise encumbered and Borrower has not encumbered any of its rights thereunder including, without limitation, its right to obtain rental, interest or other payments under the Management Agreement, other than by way of such mortgages, pledges or encumbrances in favor of Lender. All rent and other sums and charges payable by any Manager are current, no notice of default or termination under any such Management Agreement is outstanding, to the knowledge of Borrower no termination event or condition or uncured default on the part of Manager exists under any Management Agreement, and to the knowledge of Borrower no event of default has occurred which, with the giving of notice or the lapse of time or both, would constitute such a default or termination event or condition or uncured default on the part of Borrower, subject to such exceptions that are not reasonably likely to result in, in the aggregate, a Material Adverse Change. 18 5 COVENANTS OF BORROWER 5.1 Continuing Nature of Representations. Borrower shall do or take all actions necessary to cause all of the representations and warranties contained in Sections 4.1, 4.6, 4.8, 4.9, 4.10, 4.12, 4.14, 4.15 and 4.17 to be and remain accurate at all times throughout the term of the Loan. 5.2 [RESERVED]. 5.3 Use and Maintenance of the Property. A. Borrower will use, or cause to be used, the Property as an extended-stay guest lodging facility in accordance with the use as is permitted pursuant to applicable Legal Requirements including, without limitation, under the certificate of occupancy applicable to the Property, and as required by the Loan Documents. Borrower shall not suffer or permit the Property or any portion thereof to be used by the public, any tenant, or any Person not subject to a Lease, in a manner as is reasonably likely to impair Borrower's title to the Property, or in such manner as may give rise to a claim or claims of adverse usage or adverse possession by the public, or of implied dedication of the Property or any part thereof. B. Borrower shall not (i) desert or abandon the Property; (ii) consent to or seek any lowering of the zoning classification, or greater zoning restriction affecting the Property; or (iii) take any steps whatsoever to convert the Property, or any portion thereof, to a condominium or cooperative form of ownership. C. Borrower shall, at its expense, (i) take good care of the Property including grounds generally, and utility systems and sidewalks, roads, alleys, and curbs therein, and shall keep the same in good, safe and insurable condition and in compliance with all applicable Legal Requirements, (ii) promptly make all repairs to the Property, above grade and below grade, interior and exterior, structural and nonstructural, ordinary and extraordinary, unforeseen and foreseen, and maintain the Property in a manner appropriate for the facility and (iii) not commit or suffer to be committed any waste of the Property or do or suffer to be done anything that will increase the risk of fire or other hazard to the Property or impair the value thereof. All repairs made by Borrower shall be made with first-class materials, in a good and workmanlike manner, shall be equal or better in quality and class to the original work and shall comply with all applicable Legal Requirements and Insurance Requirements. Borrower shall permit Lender and its agents, at all reasonable times and without prior notice, to enter upon the Property for the purpose of inspecting and 19 appraising the Property or any portion thereof. To the extent any of the above obligations are obligations of tenants under Leases or other Persons under Property Agreements, Borrower may fulfill its obligations hereunder by causing such tenants or other Persons, as the case may be, to perform their obligations thereunder. As used herein, the terms "repair" and "repairs" shall be deemed to include all necessary replacements. D. Borrower shall not demolish, remove, construct, or, except as otherwise expressly provided herein, restore, or alter the Property or any portion thereof in a manner that could foreseeably diminish the value of the Property; nor consent to or permit any such demolition, removal, construction, restoration, addition or alteration that would diminish the value of the Property without Lender's prior written consent in each instance, which consent shall not be unreasonably withheld or delayed. E. All rights, title and interest of Borrower in and to all extensions, improvements, betterment, renewals, and appurtenances to the Property hereafter acquired by, or released to, Borrower or constructed, assembled or placed by Borrower in the Property (except for leased equipment), and all changes and substitutions of the security constituted thereby, shall be and, in each such case, without any further mortgage, conveyance, assignment or other act by Lender or Borrower, shall become subject to the lien and security interest of the Mortgage as fully and completely, and with the same effect, as though now owned by Borrower and specifically described in the Mortgage. Notwithstanding the foregoing, at any and all times Borrower shall execute and deliver to Lender any documents Lender may reasonably deem necessary or appropriate for the purpose of specifically subjecting the same to the lien and security interest of the Mortgage. F. Borrower shall not by any act or omission permit any building or other improvement located on any property which is not subject to the lien of the Mortgage to rely upon the Real Estate or any portion thereof or any interest therein to fulfill any Legal Requirement, other than pursuant to a Permitted Encumbrance, and Borrower hereby assigns to Lender any and all rights to give consent for all or any portion of the Real Estate or any interest therein to be so used. The Real Estate is zoned as one or more lots separate and apart from all other premises and Borrower shall not, by any act or omission, impair the integrity of the Real Estate as such lot or lots or initiate or join in any zoning change, private easement or any other modification of the zoning regulating the Real Estate. Borrower shall not (i) impose any restrictive covenants or encumbrances upon the Real Estate, execute or file any subdivision plot affecting the Real Estate or consent to the annexation of the Real Estate to any municipality or (ii) permit or suffer the Real Estate to be used by the public or any Person in such manner as might make possible a claim of adverse usage or possession or 20 of any implied deduction or easement. Any act or omission by Borrower which would result in a violation of any of the provisions of this Article shall be null and void. G. Notwithstanding the provisions of the Mortgage to the contrary, Borrower shall have the right, at any time and from time to time, to remove and dispose of equipment which may have become obsolete or unfit for use or which is no longer useful in the management, operation or maintenance of the Property. Borrower shall promptly replace any such equipment so disposed of or removed with other equipment of equal or greater value and utility, free of any security interest or superior title, liens or claims; except that, if by reason of technological or other developments, replacement of the equipment so removed or disposed of is not necessary or desirable for the proper management, operation or maintenance of the Property, Borrower shall not be required to replace the same. All such replacements or additional equipment shall be deemed to constitute Fixtures and shall be covered by the security interest granted in connection herewith. 5.4 Financial Reports. A. Borrower will keep and maintain or will cause to be kept and maintained on a fiscal year basis, in accordance with the accounting basis used for Borrower's tax returns (or such other accounting basis reasonably acceptable to Lender) consistently applied, proper and accurate books, records and accounts reflecting all of the financial affairs of Borrower and all items of income and expense in connection with the operation of the Property or in connection with any services, equipment or furnishings provided in connection with the operation thereof, whether such income or expense may be realized by Borrower or by any other Person whatsoever affiliated with Borrower, ESA or any subsidiary of ESA, excepting lessees unrelated to and unaffiliated with Borrower who have leased from Borrower portions of the Property for the purpose of occupying the same. Lender shall have the right from time to time at all times during normal business hours upon reasonable notice to examine such books, records and accounts at the office of Borrower or other person maintaining such books, records and accounts and to make such copies or extracts thereof as Lender shall desire. After the occurrence of an Event of Default, Borrower shall pay any costs and expenses incurred by Lender to examine Borrower's accounting records with respect to the Property, as Lender shall determine to be necessary or appropriate in the protection of Lender's interest. B. Borrower will furnish Lender annually, within 90 days following the end of each Fiscal Year of Borrower, with a complete copy of Borrower's financial statement audited by an Independent certified public accountant that is reasonably acceptable to Lender in accordance with GAAP (or such other accounting basis reasonably acceptable to Lender) 21 consistently applied covering the operation of the Property for such Fiscal Year and containing a statement of revenues and expenses (including Net Operating Income as defined herein), a statement of assets and liabilities and a statement of Borrower's equity. Together with Borrower's annual financial statements, Borrower shall furnish to Lender an Officer's Certificate certifying as of the date thereof: i that the annual financial statements accurately represent the results of operation and financial condition of Borrower and the Property all in accordance with GAAP consistently applied, and ii whether there exists an event or circumstance that constitutes, or that upon notice or lapse of time or both would constitute, a Default under the Note or any other Loan Document executed and delivered by Borrower, and if such event or circumstance exists, the nature thereof, the period of time it has existed and the action then being taken to remedy such event or circumstance. C. Borrower will furnish Lender monthly, within 15 business days following the end of each month, with a true, complete and correct: i cash flow statement with respect to the Property in the form attached hereto as Exhibit 5.4 and made a part hereof, showing (i) all cash receipts of any kind whatsoever and all cash payments and disbursements, and (ii) year-to-date summaries of such cash receipts, payments and disbursements together with a certification of Manager stating that such cash flow statement is true, complete and correct, and ii in the event there are any Leases to commercial tenants, (x) a rent roll thereof for the Property, including a list of which tenants are in default under their respective Leases, dated as of the date of Lender's request, identifying each tenant, the monthly rent and additional rent, if any, payable by such tenant, the expiration date of such tenant's Lease, the security deposit, if any, held by Borrower under the Lease, the space covered by the Lease, and the arrearages for such tenant, if any and (y) an Officer's Certificate, dated as of the date of the delivery of such rent roll and security deposit schedule, certifying that same are true, correct and complete in all material respects as of its date. D. A schedule of Lease security deposits, if any, showing any activity in the Security Deposit Account for such month, together with a certification of Manager as to 22 the balance in such Security Deposit Account and that such Lease security deposits are being held in accordance with all Legal Requirements. E. Borrower will furnish Lender monthly, within 30 days following the end of each month, with a certification of Manager stating that all Operating Expenses with respect to the Property that had accrued as of the last day of the month preceding the delivery of the cash flow statement referred to in clause (C) above have been fully paid or otherwise reserved or provided for by Manager (any such certification or any certification furnished by Manager pursuant to clause (C) above, a "Manager Certification"). F. Borrower shall furnish to Lender, within 30 days after Lender's request therefor, with such further detailed information with respect to the operation of the Property and the financial affairs of Borrower as may be reasonably requested by Lender. G. Borrower will furnish Lender annually, within 90 days after the end of each Fiscal Year, with a report setting forth (i) the average occupancy rate of the Property during such Fiscal Year, (ii) the capital repairs, replacements and improvements performed at the Property during such Fiscal Year and the aggregate Recurring FF&E Expenditures made in connection therewith, and (iii) the balance contained in each of the Sub-Accounts as of the end of such Fiscal Year (which balance Lender shall provide upon Borrower's written request therefor). 5.5 Reporting Requirements. Borrower shall furnish to Lender, all at Borrower's sole cost and expense: A. as soon as available and in any event within 30 days prior to the end of each Fiscal Year, an annual budget of Borrower for the succeeding Fiscal Year, displaying on a quarterly basis anticipated balance sheets, forecasted capital expenditures, working capital requirements, rent revenues, contributions to any Recurring FF&E Reserves Sub-Account, interest income, net income, cash flow and sales, all on a consolidated basis; B. promptly and in any event within 30 days after Borrower or any ERISA Affiliate knows or has reason to know that (i) any event has occurred, or is reasonably likely to occur with respect to any Plan, Pension Plan or Multiemployer Plan or the duties or obligations of Borrower, any Subsidiary or ERISA Affiliate thereunder and which is reasonably likely to have or cause a Material Adverse Change, (ii) a withdrawal has occurred or is reasonably likely to occur with respect to any Multiemployer Plan by ESA or any ESA ERISA Affiliate or, to the best knowledge of ESA or any of its Subsidiaries, any Multiemployer Plan is in Reorganization or Liquidation as defined in Title IV of ERISA, a 23 written statement of the chief financial officer or other appropriate officer of Borrower describing such event and the action, if any, which Borrower and its ERISA Affiliates propose to take with respect thereto and a copy of any notice filed by or with the PBGC or the IRS pertaining thereto; C. promptly and in any event within 10 days after receipt thereof, a copy of any adverse notice, determination letter, ruling or opinion Borrower or any ERISA Affiliate receives from the PBGC, the United States Department of Labor or the IRS with respect to any Plan, other than those which, in the aggregate, do not have any reasonable likelihood of resulting in a Material Adverse Change; D. promptly after the commencement thereof, notice of all actions, suits and proceedings before any domestic or foreign Governmental Authority or arbitrator, affecting Borrower, except those which in the aggregate, if adversely determined, would have no Material Adverse Change; E. promptly and in any event within 5 Business Days after Borrower becomes aware of the existence of (i) any Default or Event of Default, (ii) any breach or non-performance of, or any default under the Management Agreement, or any Contractual Obligation which is material to the business, prospects, operations or financial condition of Borrower, or (iii) any Material Adverse Change or any event, development or other circumstance which has reasonable likelihood of causing or resulting in a Material Adverse Change, telephonic or telecopied notice in reasonable detail specifying the nature of such Default, Event of Default, breach, non-performance, default, event, development or circumstance, including, without limitation, the anticipated effect thereof, which notice (if by telephone) shall be promptly confirmed in writing within 5 days; F. promptly after the sending or filing thereof, copies of all reports which Borrower sends to its security holders generally, and copies of all reports and registration statements which Borrower files with the Securities and Exchange Commission or any national securities exchange or the National Association of Securities Dealers, Inc.; G. upon the request of Lender copies of all federal, state and local tax returns and reports filed by Borrower in respect of taxes measured by income (excluding sales, use and like taxes); H. written notice within 5 days of Borrower learning of any proposed acquisition of stock, assets or real property, or any proposed leasing of property by Borrower, unless such action is not reasonably likely to have a Material Adverse Change; 24 I. promptly, such additional information respecting the condition of Borrower or the status or condition of any real property owned or leased by Borrower, or the operation thereof which Borrower is entitled to or can otherwise reasonably obtain, as Lender from time to time reasonably request; and J. such other information respecting the business, properties, condition, financial or otherwise, or operations of Borrower as Lender may from time to time reasonably request. 5.6 Refinancing. If and only if the Loan is a Fixed Rate Loan, as that term is defined in the ESA Loan Agreement, Borrower shall deliver to Lender a Refinancing Commitment on or before the date that is six (6) months prior to the Maturity Date for a Fixed Rate Loan (the "Refinance Notification Date"). 5.7 Appraisals and other Valuations. From time to time during the term of this Agreement, Lender may, in its sole discretion, order an Appraisal of the Properties. Any such Appraisal shall be at Lender's cost, except if an Event of Default has occurred, in which case it shall be at Borrower's cost. 5.8 Other Indebtedness. A. Borrower shall not create, incur or suffer to exist, any Indebtedness, or incur, assume, endorse, be or become liable for, or guarantee, directly or indirectly, or permit or suffer to exist, any Contingent Obligation, except the following ("Permitted Indebtedness"): i Indebtedness and Contingent Obligations in respect of the Obligations or evidenced by a Loan Document or required in connection with the Loan; ii current liabilities in respect of taxes, assessments and governmental charges or levies incurred, or claims for labor, materials, inventory, services, supplies and rentals incurred, or for goods or services purchased, in the ordinary course of business consistent with the past practice of Borrower or as permitted under the ESA Loan Agreement; or iii subordinate debt that is not secured by the Property and that is subject to stand-still subordination agreements acceptable to Lender and otherwise acceptable to Lender in its sole discretion; loans secured only by a right to 25 distributions, income or profit, and not by any partnership interest in Borrower; loans in the nature of conditional sales or installment sales with respect to equipment or fixtures, only. B. Borrower shall not cancel any claim or Indebtedness owed to it except for adequate consideration and in the ordinary course of business. 5.9 Investments. Borrower shall not, directly or indirectly, make or maintain any loan or advance to any Person (other than de minimis advances to customers, employees and suppliers which do not exceed $35,000) or own, purchase or otherwise acquire any Stock, Stock Equivalents, other equity interest, obligations or other securities of, or all or substantially all of the assets of, any Person or all or substantially all of the assets constituting the business of a division, branch or other unit operation of any Person, or enter into any joint venture or partnership with, or make or maintain, any capital contribution to, or otherwise invest in, any Person. 5.10 Independence Covenants. A. Borrower shall at all times cause there to be at least one duly appointed member of the board of directors (an "Independent Director") of Borrower reasonably satisfactory to Lender who shall not have been at the time of such individual's initial appointment, and may not have been at any time during the preceding five years, and shall not be at any time while serving as a director either (i) a shareholder of, or an officer, director, partner or employee of, Borrower or any of its shareholders, partners, subsidiaries or Affiliates, (ii) a customer of, or supplier to, Borrower or any of its shareholders, partners, subsidiaries or Affiliates, (iii) a person or other entity controlling or under common control with any such shareholder, officer, director, partner, employee, supplier or customer, or (iv) a member of the immediate family of any such shareholder, officer, director, partner, employee, supplier or customer. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policy of a person or entity, whether through ownership of voting securities, by contract or otherwise. B. Borrower shall not cause or permit the board of directors of Borrower to take any action which, under the terms of any articles of incorporation, bylaws or any voting trust agreement with respect to any common stock, requires a vote of the board of directors of Borrower unless at the time of such action there shall be at least one member who is an Independent Director. 26 5.11 Modification of Material Agreements. Borrower shall not alter, amend, modify, rescind, terminate, supplement or waive any of its respective rights under, or fail to comply in all material respects with, any of its material obligations arising under any Management Agreement; provided, however, that, with respect to any such failure to comply with any such obligations, Borrower shall not be deemed in default of this Section if all such failures in the aggregate would have no Material Adverse Change; and provided, further, that in the event of any material breach or event of default by a Person other than Borrower, Borrower shall promptly notify Lender of any such breach or event of default and take all such action as may be reasonably necessary in order to endeavor to avoid having such breach or event of default have a Material Adverse Change. 5.12 Tax Filings. Borrower has filed all federal, state and local tax returns required to be filed and has paid or made adequate provision for the payment of all federal, state and local taxes, charges and assessments payable by Borrower. Borrower believes that its respective tax returns properly reflect the income and taxes of Borrower for the periods covered thereby, subject only to reasonable adjustments required by the Internal Revenue Service or other applicable tax authority upon audit. 5.13 Further Acts, etc. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, reasonably require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender the Property and rights mortgaged hereby, given, granted, bargained, sold, alienated, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out or facilitating the performance of the terms of this Agreement or any other Loan Document or for filing, registering or recording the Mortgage and, on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien hereof upon the Property. Borrower grants to Lender an irrevocable power of attorney coupled with an interest for the purpose of protecting, perfecting, preserving and realizing upon the interests granted pursuant to this Agreement or the Mortgage (after notice to Borrower, if practicable under the circumstances) and to effect the intent hereof, all as fully and effectually as Borrower might or could do, provided that Borrower's obligations hereunder shall not be materially increased or altered; and Borrower hereby ratifies all that Lender shall lawfully do or cause to be done by virtue hereof consistent with the terms hereof. 27 5.14 Recording of Mortgage, etc. Borrower forthwith upon the execution and delivery of the Mortgage and thereafter, from time to time, will cause the Mortgage and any security instrument creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully protect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all filing, registration or recording fees, and all expenses incident to the preparation, execution and acknowledgment of the Mortgage, any security instrument with respect to the Property and any instrument of further assurance, and all federal, state, county and municipal, taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Mortgage, any security instrument with respect to the Property or any instrument of further assurance, except where prohibited by law to do so, in which event Lender may declare the Loan to be immediately due and payable. Borrower shall hold harmless and indemnify Lender, and its successors and assigns, against any liability incurred as a result of the imposition of any tax on the making and recording of the Mortgage or any other Loan Document. 6 INSURANCE AND CASUALTY RESTORATION 6.1 Insurance Coverage. Borrower shall, at its expense, maintain the following insurance coverages with respect to the Property during the term of this Agreement: A. Insurance against loss or damage by fire, casualty and other hazards included in an "all-risk" extended coverage endorsement or its equivalent, with such endorsements as Lender may from time to time reasonably require and that are customarily required by Institutional Lenders of similar properties similarly situated, covering the Property in an amount not less than the greater of (A) 100% of the insurable replacement value of the Property (exclusive of the footings and foundations) and (B) such other amount as is necessary to prevent any reduction in such policy by reason of and to prevent Borrower, Lender or any other insured thereunder from being deemed to be a co- insured. Not less frequently than once every three years, Borrower, at its option, shall either (A) have the cost approach to valuation in the Appraisal updated or obtain a new appraisal of the Property, (B) have a valuation of the Property made by or for its insurance carrier conducted by an Appraiser experienced in valuing properties of similar type to that of the Property that are in the geographical area in which the Property is located or (C) provide such other evidence as will, in Lender's reasonable judgment, enable Lender to determine whether there shall have been an increase in the insurable value of the Property and Borrower shall deliver such updated Appraisal, new appraisal, insurance valuation or other evidence acceptable to 28 Lender, as the case may be, and, if such updated Appraisal, new appraisal, insurance valuation, or other evidence acceptable to Lender reflects an increase in the insurable value of the Property, the amount of insurance required hereunder shall be increased accordingly and Borrower shall deliver evidence satisfactory to Lender that such policy has been so increased. B. Comprehensive general liability insurance against claims for personal and bodily injury and/or death to one or more persons or property damage, occurring on, in or about the Property (including the adjoining streets, sidewalks and passageways therein) in such amounts as Lender may from time to time reasonably require (but in no event shall Lender's requirements increase more frequently than once during each twelve (12) month period) and that are customarily required by Institutional Beneficiaries for similar properties similarly situated, but not less than $10,000,000. C. Business interruption insurance with loss payable to Lender, covering all risks required to be covered by the insurance provided for in Section 6.1.A and in such amounts and to such standards as may be required by a Rating Agency sufficient to maintain the desired rating from a Rating Agency in connection with a securitization. The amount of such insurance shall be determined upon the execution of this Agreement, and not more frequently than once each calendar year thereafter based on Borrower's reasonable estimate for the next succeeding twelve (12) months. In the event the Property shall be damaged or destroyed, Borrower shall and hereby does assign to Lender all payment of claims under the policies of such insurance, and all amounts payable thereunder, and all net amounts, shall be collected by Lender under such policies and shall be applied in accordance with this Agreement; provided, however, that nothing herein contained shall be deemed to relieve Borrower of its obligations to timely pay all amounts due under the Loan Documents, except to the extent such amounts are actually paid out of the proceeds of such insurance. D. Insurance against loss or damages from (i) leakage of sprinkler systems and (ii) explosion of steam boilers, air conditioning equipment, pressure vessels or similar apparatus now or hereafter installed at the Property, in such amounts as Lender may from time to time reasonably require and that are then customarily required by Institutional Beneficiaries of similar properties similarly situated. E. Flood insurance in an amount equal to the full insurable value of the Property or the maximum amount available, whichever is less, if any building or operating system on the Property is located in an area designated by the Secretary of Housing and Urban Development as being "an area of special flood hazard" under the National Flood 29 Insurance Program (i.e., having a one percent or greater chance of flooding), and if flood insurance is available under the National Flood Insurance Act. F. Worker's compensation insurance or other similar insurance that may be required by Governmental Authorities or Legal Requirements. G. Such other insurance as may from time to time reasonably be required by Lender and that is then customarily required by Institutional Lenders for similar properties similarly situated, against other insurable hazards, including, but not limited to, malicious mischief, vandalism, windstorm or earthquake, which at the time are commonly insured against and generally available in the case of properties similarly situated, due regard to be given to the size and type of the Land, Building and Fixtures and their location, construction and use. 6.2 Manager's Fidelity Insurance. If requested by Lender, Borrower shall cause any Manager of the Property to maintain fidelity insurance in an amount equal to or greater than the Operating Income of the Property for the one (1) month period immediately preceding the date on which the premium for such insurance is due and payable or such lesser amount as Lender shall approve. 6.3 Policy Terms. A. All insurance required by this Article shall be in the form (other than with respect to sub-sections 6.1.E and 6.1.F above when insurance in those two sub-sections is placed with a governmental agency or instrumentality on such agency's forms) and amount and with deductibles as, from time to time, shall be reasonably acceptable to Lender, under valid and enforceable policies issued by financially responsible insurers authorized to do business in the State, with a general policyholder's service rating of not less than "A2" or "A" and a financial rating of not less than "IX" as rated in the most currently available Best's Insurance Reports (or the equivalent, if such rating system shall hereafter be altered or replaced) and shall have a claims paying ability rating of not less than "A2" or "A" from a Rating Agency or, if not rated by a Rating Agency, then a claims paying ability rating of "A2" or "A" from at least two nationally recognized statistical rating agencies. Lender hereby acknowledges that Borrower shall be entitled to satisfy its obligations under this Article by procuring a blanket or umbrella policy with Affiliates of Borrower. Originals or certified copies of all insurance policies shall be delivered to and held by Lender. All such policies (except policies for worker's compensation) shall name Lender as an additional named insured, shall (except for liability) provide for loss payable to Lender and shall contain (or have attached): (i) standard "non-contributory mortgagee" endorsement or its 30 equivalent relating, inter alia, to recovery by Lender notwithstanding the negligent or willful acts or omissions of Borrower; (ii) a waiver of subrogation endorsement as to Lender; (iii) an endorsement indicating that neither Lender nor Borrower shall be or be deemed to be a co-insurer with respect to any casualty risk insured by such policies and shall provide for a deductible per loss of an amount not more than that which is customarily maintained by owners of similar properties similarly situated; and (iv) a provision that such policies shall not be canceled or amended, including, without limitation, any amendment reducing the scope or limits of coverage, without the insurer's endeavoring to provide at least 30 days prior written notice to Lender in each instance. Not less than 30 days prior to the expiration dates of the insurance policies obtained pursuant to this Agreement, originals or certified copies of renewals of such policies (or certificates evidencing such renewals) bearing notations evidencing the payment of premiums or accompanied by other reasonable evidence of such payment (which premiums shall not be paid by Borrower through or by any financing arrangement that would entitle an insurer to terminate a policy) shall be delivered by Borrower to Lender. Borrower shall not carry separate insurance, concurrent in kind or form or contributing in the event of loss, with any insurance required under this Article. B. If Borrower fails to maintain and deliver to Lender the original policies or certificates of insurance required by this Agreement, or if there are insufficient funds in the Basic Carrying Costs Sub-Account to pay the premiums for same, Lender may, at its option, procure such insurance, and Borrower shall pay, or as the case may be, reimburse Lender for, all premiums thereon promptly, upon demand by Lender, with interest thereon at the Default Rate from the date paid by Lender to the date of repayment and such sum shall constitute a part of the Loan. C. Borrower shall notify Lender of the renewal premium of each insurance policy and Lender may pay such amount on behalf of Borrower from the Basic Carrying Costs Sub-Account. With respect to insurance policies that require periodic payments (i.e., monthly or quarterly) of premiums, Lender may pay such amounts 15 days (or such lesser number of days as Lender shall determine) prior to the respective due dates of such installments. 6.4 Assignment of Policies. A. Borrower hereby assigns to Lender the proceeds of all insurance (other than liability insurance) obtained pursuant to this Agreement, all of which proceeds shall be payable to Lender as collateral and further security for the payment of the Loan and the performance of Borrower's obligations hereunder and under the other Loan Documents, and Borrower hereby authorizes and directs the issuer of any such insurance to make payment of 31 such proceeds directly to Lender. Except as otherwise expressly provided in Section 6.5 or elsewhere in this Article, Lender shall have the option, in its discretion, and without regard to the adequacy of its security, to apply all or any part of the proceeds it may receive pursuant to this Article in such manner as Lender may elect to any one or more of the following: (i) the payment of the Loan, whether or not then due, in any proportion or priority as Lender, in its discretion, may elect, (ii) the repair or restoration of the Property, (iii) the cure of any Default or Event of Default or (iv) the reimbursement of the costs and expenses of Lender incurred pursuant to the terms hereof in connection with the recovery of the proceeds. Nothing herein contained shall be deemed to excuse Borrower from repairing or maintaining the Property as provided in this Agreement or restoring all damage or destruction to the Property, regardless of the sufficiency of the proceeds, and the application or release by Lender of any proceeds shall not cure or waive any Default or Event of Default or notice of Default. B. In the event of the foreclosure of this Agreement or any other transfer of title or assignment of all or any part of the Property in extinguishment, in whole or in part, of the Loan, all right, title and interest of Borrower in and to all policies of insurance required by this Agreement shall inure to the benefit of the successor in interest to Borrower or the purchaser of the Property. If, prior to the receipt by Lender of any proceeds, the Property or any portion thereof shall have been sold on foreclosure of the Deed of Trust or by deed in lieu thereof or otherwise, or any claim under such insurance policy arising during the term of this Agreement is not paid until after the extinguishment of the Loan, and Lender shall not have received the entire amount of the Loan outstanding at the time of such extinguishment, whether or not a deficiency judgment on the Deed of Trust shall have been sought or recovered or denied, then, the proceeds of any such insurance to the extent of the amount of the Loan not so received, together with interest on the deficiency at the Default Rate, shall be paid to and be the property of Lender, and the reasonable attorney's fees, costs and disbursements incurred by Lender in connection with the collection of the proceeds that, provided there shall not exist an Event of Default, shall be paid to Lender and Borrower hereby assigns, transfers and sets over to Lender all of Borrower's right, title and interest in and to such proceeds. Notwithstanding any provisions of this Agreement to the contrary, Lender shall not be deemed to be a trustee or other fiduciary with respect to its receipt of any such proceeds, that may be commingled with any other monies of Lender; provided, however, that Lender shall use such proceeds for the purposes and in the manner permitted by this Agreement. Any proceeds deposited with Lender shall be held by Lender in an interest-bearing account, but Lender makes no representation or warranty as to the rate or amount of interest, if any, which may accrue on such deposit and shall have no liability in connection therewith. Interest accrued, if any, on the proceeds shall be deemed to constitute a part of the proceeds for purposes of this Agreement. The provisions of this Section shall 32 survive the termination of the Deed of Trust by foreclosure, deed in lieu thereof or otherwise as a consequence of the exercise of the rights and remedies of Lender hereunder after a Default. 6.5 Casualty Restoration. A. In the event of any damage to or destruction of the Property, Borrower shall give prompt written notice to Lender (which notice shall set forth Borrower's good faith estimate of the cost of repairing or restoring such damage or destruction, or if Borrower cannot reasonably estimate the anticipated cost of restoration, Borrower shall nonetheless give Lender prompt notice of the occurrence of such damage or destruction, and will diligently proceed to obtain estimates to enable Borrower to quantify the anticipated cost and time required for such restoration, whereupon Borrower shall promptly notify Lender of such good faith estimate) and, provided that restoration does not violate any Legal Requirements, Borrower shall promptly commence and diligently prosecute to completion the repair, restoration or rebuilding of the Property so damaged or destroyed to a condition such that the Property shall be at least equal in value to that immediately prior to the damage to the extent practicable, in full compliance with all Legal Requirements and the provisions of all Leases (if any), and in accordance with Section 6.5.B below (such repair, restoration or rebuilding of the Property collectively, the "Work"). i Borrower shall not adjust, compromise or settle any claim for insurance proceeds without the prior written consent of Lender, which shall not be unreasonably withheld or delayed; provided, however, that, except during the continuance of an Event of Default, Lender's consent shall not be required with respect to the adjustment, compromising or settlement of any claim for insurance proceeds in an amount less than $100,000. ii So long as no monetary Event of Default shall have occurred and be continuing hereunder, then Lender shall apply any insurance proceeds that it may receive towards the Work in accordance with the applicable sections of this Article and any applicable Lease then in effect. Notwithstanding the foregoing, except to the extent that restoration is required pursuant to the terms of Leases then in effect, if (A) Lender is not reasonably satisfied that the Debt Service Coverage, after substantial completion of the Work, will be at least equal to the Required Debt Service Coverage or (B) more than seventy-five percent (75%) of the reasonably estimated aggregate insurable value of the Property is damaged or destroyed (collectively, a "Substantial Casualty"), Lender shall have the option, in its sole discretion to apply any insurance proceeds it may receive pursuant to this Agreement 33 (less any cost to Lender of recovering and paying out such proceeds incurred pursuant to the terms hereof and not otherwise reimbursed to Lender, including, without limitation, reasonable attorneys' fees and expenses) to the payment of the Loan, without any prepayment fee or charge of any kind, including, without limitation, Yield Maintenance Premium, or to allow such proceeds to be used for the Work pursuant to the terms and subject to the conditions of the applicable sections of this Article. iii In the event that Lender elects or is obligated hereunder to allow insurance proceeds to be used for the Work, any excess proceeds remaining after completion of such Work shall be applied to the payment of the Loan without any prepayment fee or charge of any kind, including, without limitation, Yield Maintenance Premium. B. If any condemnation award, in accordance with Section 8.3, or any insurance proceeds, in accordance with Section 6.5.A, are to be applied to the repair, restoration or rebuilding of the Property, then such proceeds shall be deposited into the Central Account (hereinafter defined), held by Lender, and shall be paid out from time to time to Borrower as the Work progresses (less any cost to Lender of recovering and paying out such proceeds, including, without limitation, reasonable attorneys' fees and costs allocable to inspecting the Work and the plans and specifications therefor but without duplication of expenditures between Borrower or Lender) subject to Section 9.10 and to all of the following conditions: i An architect or engineer selected by Borrower and reasonably acceptable to Lender (an "Architect" or "Engineer"), or a Person otherwise reasonably acceptable to Lender, shall have delivered to Lender a certificate estimating the cost of completing the Work, and, if the amount set forth therein is more than the sum of the amount of insurance proceeds then being held by Lender in connection with a casualty and amounts agreed to be paid as part of a final settlement under the insurance policy upon or before completion of the Work, Borrower shall have delivered to Lender (A) cash collateral in an amount equal to such excess, (B) an unconditional, irrevocable, clean sight draft letter of credit, in form, substance and issued by a bank reasonably acceptable to Lender, in the amount of such excess and draws on such letter of credit shall be made by Lender to make payments pursuant to this Article following exhaustion of the insurance proceeds therefor or (C) a completion bond in form, substance and issued by a surety company reasonably acceptable to Lender. 34 ii If the cost of the Work is reasonably estimated by an Architect or Engineer in a certification reasonably acceptable to Lender to be equal to or to exceed ten percent (10%) of the Loan, such Work shall be performed under the supervision of an Architect or Engineer, it being understood that the plans and specifications with respect thereto shall provide for Work so that, upon completion thereof, the Property shall be at least equal in replacement value and general utility to the Property prior to the damage or destruction. iii Each request for payment shall be made on not less than 10 days' prior notice to Lender and shall be accompanied by a certificate of an Architect or Engineer, or, if the Work is not required to be supervised by an Architect or Engineer, by a certificate of an officer of Borrower, stating (A) that payment is for Work completed in compliance with the plans and specifications, if required under clause (ii) above, (B) that the sum requested is required to reimburse Borrower for payments by Borrower to date, or is due to the contractor, subcontractors, materialmen, laborers, engineers, architects or other Persons rendering services or materials for the Work (giving a brief description of such services and materials), and that when added to all sums previously paid out by Lender does not exceed the value of the Work done to the date of such certificate, (C) if the sum requested is to cover payment relating to repair and restoration of personal property required or relating to the Property, that title to the personal property items covered by the request for payment is vested in Borrower (unless Borrower leases such personal property or is purchasing such personal property on an installment sale basis), and (D) that the insurance proceeds and other amounts deposited by Borrower and held by Lender after such payment is more than the estimated remaining cost to complete such Work; provided, however, that if such certificate is given by an Architect or Engineer, such Architect or Engineer shall certify as to clause (A) above, and such officer shall certify as to the remaining clauses above and provided further that Lender shall not be obligated to disburse such funds if Lender determines, in Lender's reasonable discretion, that Borrower shall not be in compliance with Section 6.5.B.viii hereof. Additionally, each request for payment shall contain a statement signed by Borrower stating that the requested payment is for Work satisfactorily done to date. iv Each request for payment shall be accompanied by waivers of liens (which may be subject to payment), in customary form and substance, covering that part of the Work for which payment or reimbursement is being requested and, if required by Lender, a search prepared by a title company or licensed abstractor, or by other evidence satisfactory to Lender that there has not been filed with respect to the Property any mechanic's or other lien or instrument for retention of title relating 35 to any part of the Work not discharged of record. Additionally, as to any personal property covered by the request for payment, Lender shall be furnished with evidence of having incurred a payment obligation therefor and such further evidence reasonably satisfactory to assure Lender that UCC filings therefor provide a valid first lien on the personal property. v Lender shall have the right to inspect the Work at all reasonable times upon reasonable prior notice and may condition any disbursement of proceeds upon satisfactory compliance by Borrower with the provisions hereof. Neither the approval by Lender of any required plans and specifications for the Work nor the inspection by Lender of the Work shall make Lender responsible for the preparation of such plans and specifications, or the compliance of such plans and specifications of the Work, with any applicable law, regulation, ordinance, covenant or agreement. vi Proceeds shall not be disbursed more frequently than once every 30 days. vii Until such time as the Work has been substantially completed, Lender shall be entitled to retain up to ten percent (10%) of the cost of the Work (the "Retention Amount") to Borrower. Upon substantial completion of the Work, Borrower shall send notice thereof to Lender and, subject to the conditions of Section 6.5.B.i-iv, Lender shall disburse one-half of the Retention Amount to Borrower; provided, however, that the remaining one-half of the Retention Amount shall be disbursed to Borrower when Lender shall have received copies of any and all final certificates of occupancy or their equivalent or other certificates, licenses and permits required for the ownership, occupancy and operation of the Property in accordance with all Legal Requirements. Borrower covenants to diligently seek to obtain any such certificates, licenses and permits. viii Upon failure on the part of Borrower promptly (after adjustment of proceeds, if applicable) to commence the Work or to proceed diligently and continuously to completion of the Work, which failure shall continue after notice for 30 days, Lender may apply any such insurance or condemnation proceeds it then or thereafter holds to the payment of the Loan in accordance with the provisions of the Note; provided, however, that Lender may apply at any time all or any portion of the insurance proceeds it then holds to the extent necessary to cure any Event of Default under this Agreement, the Note or any other Loan Document. 36 C. If Borrower (i) within 120 days after the occurrence of any damage to the Property or any portion thereof (or such shorter period as may be required under any Lease) shall fail to submit to Lender for approval plans and specifications (if required pursuant to Section 6.5.B.ii hereof) for the Work (approved by the Architect and by all Governmental Authorities whose approval is required), (ii) after any such plans and specifications are approved by all Governmental Authorities, the Architect and Lender, shall fail to promptly commence such Work or (iii) shall fail to diligently prosecute such Work to completion, then, in addition to all other rights available hereunder, at law or in equity, Lender, or any receiver of the Property or any portion thereof, upon 15 days prior notice to Borrower (except in the event of emergency in which case no notice shall be required), may (but shall have no obligation to) perform or cause to be performed such Work, and may take such other steps as it reasonably deems advisable. Borrower hereby waives any claim, other than for gross negligence or willful misconduct, against Lender and any receiver arising out of any act or omission of Lender or to such receiver pursuant hereto, and Lender may apply all or any portion of the proceeds of insurance (without the need to fulfill any other requirements of this Section) to reimburse Lender and such receiver, for all costs not reimbursed to Lender or such receiver upon demand together with interest thereon at the Default Rate from the date such amounts are advanced until the same are paid to Lender or the receiver. D. Except with respect to de minimis proceeds of up to $20,000 paid prior to the occurrence of any Event of Default hereunder, Borrower hereby irrevocably appoints Lender as its attorney-in-fact, coupled with an interest, to collect and receive any insurance proceeds paid with respect to any portion of the Property or the insurance policies required to be maintained hereunder, and to endorse any checks, drafts or other instruments representing any insurance proceeds whether payable by reason of loss thereunder or otherwise. 6.6 Compliance with Insurance Requirements. Borrower promptly shall comply with, and shall cause the Property to comply with, all Insurance Requirements, even if such compliance requires structural changes or improvements or would result in interference with the use or enjoyment of the Property or any portion thereof provided Borrower shall have a right to contest in good faith and with diligence such Insurance Requirements provided (a) no Default or Event of Default shall exist during such contest and such contest shall not subject the Property or any portion thereof to any lien or affect the priority of the lien of the Deed of Trust/Mortgage, (b) failure to comply with such Insurance Requirements will not subject Lender or any of its agents, employees, officers or directors to any civil or criminal liability, (c) such contest will not cause any reduction in insurance coverage, (d) such contest shall not affect the ownership, use or occupancy of the Property, (e) the Property or any part thereof 37 or any interest therein shall not be in any practical danger of being sold, forfeited or lost by reason of such contest by Borrower, (f) Borrower has given Lender prompt notice of such contest and, upon request by Lender from time to time, notice of the status of such contest by Borrower and/or information of the continuing satisfaction of the conditions set forth in clauses (a) through (e) of this Section; (g) upon a final determination of such contest, Borrower shall promptly comply with the requirements thereof, and (h) prior to and during such contest, Borrower shall furnish to Lender security satisfactory to Lender, in its reasonable discretion, against loss or injury by reason of such contest or the non-compliance with such Insurance Requirement (and if such security is cash, Lender shall deposit the same in an interest-bearing account and interest accrued thereon, if any, shall be deemed to constitute a part of such security for purposes of this Agreement, but Lender (i) makes no representation or warranty as to the rate or amount of interest, if any, which may accrue thereon and shall have no liability in connection therewith and (ii) shall not be deemed to be a trustee or fiduciary with respect to its receipt of any such security and any such security may be commingled with other monies of Lender). If Borrower shall use the Property or any portion thereof in any manner that could permit the insurer to cancel any insurance required to be provided hereunder, Borrower immediately shall obtain a substitute policy that shall satisfy the requirements of this Agreement and that shall be effective on or prior to the date on which any such other insurance policy shall be canceled. Borrower shall not by any action or omission invalidate any insurance policy required to be carried hereunder unless such policy is replaced as aforesaid, or materially increase the premiums on any such policy above the normal premium charged for such policy. Borrower shall cooperate with Lender in obtaining for Lender the benefits of any insurance proceeds lawfully or equitably payable to Lender in connection with the transaction contemplated hereby. 6.7 Default During Restoration. Notwithstanding anything to the contrary contained in this Agreement including, without limitation, the provisions of this Article, if, at the time of any casualty affecting the Property or any part thereof, or at any time during any Work, or at any time that Lender is holding or is entitled to receive any proceeds of any insurance pursuant to this Agreement, a monetary Event of Default exists and is continuing, Lender shall then have no obligation to make such proceeds available for Work and Lender shall have the right and option, to be exercised in its sole and absolute discretion and election, with respect to the proceeds of any such insurance, either to retain and apply such proceeds in reimbursement for the actual costs, fees and expenses incurred by Lender in accordance with the terms hereof in connection with the adjustment of the loss and any balance toward payment of the Loan in such priority and proportions as Lender, in its sole discretion, shall deem proper, or towards the Work, upon such terms and conditions as Lender shall determine, or to cure such Event of Default, or to any one or more of the foregoing as Lender, in its sole and absolute discretion, may determine. If Lender shall 38 receive and retain such insurance proceeds, the lien of the Deed of Trust shall be reduced only by the amount thereof received, after reimbursement to Lender of expenses of collection, and actually applied by Lender in reduction of the principal sum payable under the Note in accordance with the Note. 6.8 Application of Proceeds to Debt Reduction. No damage to the Property, or any part thereof, by fire or other casualty whatsoever, whether such damage be partial or total, shall relieve Borrower from its liability to pay in full the Loan and to perform its obligations under this Agreement and the other Loan Documents except to the extent any rent (business interruption) insurance is paid to Lender and applied to the Loan. If any insurance proceeds are applied to reduce the Loan, Lender shall apply the same in accordance with the provisions of the Note. 7 IMPOSITIONS 7.1 Payment of Impositions, Utilities and Taxes, etc. A. Borrower shall pay or cause to be paid all Impositions on or prior to the date upon which any fine, penalty, interest or cost for nonpayment is imposed, and furnish to Lender, upon request, receipted bills of the appropriate taxing authority or other documentation reasonably satisfactory to Lender evidencing the payment thereof. If Borrower shall fail to pay any Imposition in accordance with this Section and is not contesting or causing a contesting of such Imposition in accordance with Section 7.4 hereof, or if there are insufficient funds in the Basic Carrying Costs Sub-Account to pay any Imposition, Lender shall have the right, but shall not be obligated, to pay that Imposition, and Borrower shall repay to Lender, on demand, any amount paid by Lender, with interest thereon at the Default Rate from the date of the advance thereof to the date of repayment, and such amount shall constitute a portion of the Loan secured by the Mortgage. B. Borrower shall, prior to the date upon which any fine, penalty, interest or cost for nonpayment is imposed, pay or cause to be paid all charges for electricity, power, gas, water and other services and utilities in connection with the Property, and shall, upon request, deliver to Lender receipts or other documentation reasonably satisfactory to Lender evidencing payment thereof. If Borrower shall fail to pay any amount required to be paid by Borrower pursuant to this Section and is not contesting such charges in accordance with Section 7.4 hereof, Lender shall have the right, but shall not be obligated, to pay that amount, and Borrower will repay to Lender, on demand, any amount paid by Lender with 39 interest thereon at the Default Rate from the date of the advance thereof to the date of repayment, and such amount shall constitute a portion of the Loan secured by the Mortgage. C. Borrower shall pay all taxes, charges, filing, registration and recording fees, excises and levies imposed upon Lender by reason of or in connection with its ownership of any Loan Document or any other instrument related thereto, or resulting from the execution, delivery and recording of, or the lien created by, or the obligation evidenced by, any of them, other than income, franchise and other similar taxes imposed on Lender and shall pay all corporate stamp taxes, if any, and other taxes, required to be paid on the Loan Documents. If Borrower shall fail to make any such payment within 10 days after written notice thereof from Lender, Lender shall have the right, but shall not be obligated, to pay the amount due, and Borrower shall reimburse Lender therefor, on demand, with interest thereon at the Default Rate from the date of the advance thereof to the date of repayment, and such amount shall constitute a portion of the Loan secured by the Mortgage. 7.2 Deduction from Value. In the event of the passage after the date of this Agreement of any Legal Requirement deducting from the value of the Property for the purpose of taxation, any lien thereon or changing in any way the Legal Requirements now in force for the taxation of this Agreement and/or the Loan for federal, state or local purposes, or the manner of the operation of any such taxes so as to adversely affect the interest of Lender, or impose any tax or other charge on any Loan Document, then Borrower will pay such tax, with interest and penalties thereon, if any, within the statutory period. In the event the payment of such tax or interest and penalties by Borrower would be unlawful, or taxable to Lender or unenforceable or provide the basis for a defense of usury, then in any such event, Lender shall have the option, by written notice of not less than 90 days, to declare the Loan immediately due and payable, with no prepayment penalty, including without limitation, Yield Maintenance Premium. 7.3 No Joint Assessment. Borrower shall not consent to or initiate the joint assessment of the Real Estate (a) with any other real property constituting a separate tax lot and Borrower represents and covenants that after the Real Estate has become a separate tax lot it shall remain a separate tax lot and (b) with any portion of the Property that may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes that may be levied against such personal property shall be assessed or levied or charged to the Property as a single lien. 7.4 Right to Contest. Borrower shall have the right, after prior notice to Lender, at its sole expense, to contest by appropriate legal proceedings diligently conducted in good faith, without cost or expense to Lender or any of its agents, employees, officers or 40 directors, the validity, amount or application of any Imposition or any charge described in Section 7.1, provided that (a) no Default or Event of Default shall exist during such proceedings and such contest shall not (unless Borrower shall comply with clause (d) of this Section) subject the Property or any portion thereof to any lien or affect the priority of the lien of the Mortgage, (b) failure to pay such Imposition or charge will not subject Lender or any of its agents, employees, officers or directors to any civil or criminal liability, (c) the contest suspends enforcement of the Imposition (unless Borrower first pays the Imposition or charge), (d) prior to and during such contest, Borrower shall furnish to Lender security satisfactory to Lender, in its reasonable discretion, against loss or injury by reason of such contest or the non-payment of such Imposition or charge (and if such security is cash, Lender may deposit the same in an interest-bearing account and interest accrued thereon, if any, shall be deemed to constitute a part of such security for purposes of this Agreement, but Lender (i) makes no representation or warranty as to the rate or amount of interest, if any, which may accrue thereon and shall have no liability in connection therewith and (ii) shall not be deemed to be a trustee or fiduciary with respect to its receipt of any such security and any such security may be commingled with other monies of Lender), (e) such contest shall not affect the ownership, use or occupancy of the Property, (f) the Property or any part thereof or any interest therein shall not be in any danger of being sold, forfeited or lost by reason of such contest by Borrower, (g) Borrower has given Lender notice of the commencement of such contest and upon request by Lender, from time to time, notice of the status of such contest by Borrower and/or confirmation of the continuing satisfaction of clauses (a) through (f) of this Section, and (h) upon a final determination of such contest, Borrower shall promptly comply with the requirements thereof. Upon completion of any contest, Borrower shall immediately pay the amount due, if any, and deliver to Lender proof of the completion of the contest and payment of the amount due, if any, following which, Lender shall return the security, if any, deposited with Lender pursuant to clause (d) of this Section. Borrower shall not pay any Imposition in installments unless permitted by applicable Legal Requirements, and shall, upon the request of Lender, deliver copies of all notices relating to any Imposition or other charge covered by this Article to Lender. 7.5 No Credits on Account of the Loan. Borrower will not claim or demand or be entitled to any credit or credits on account of the Loan for any part of the Impositions assessed against the Property or any part thereof and no deduction shall otherwise be made or claimed from the taxable value of the Property, or any part thereof, by reason of this Agreement or the Loan. In the event such claim, credit or deduction shall be required by Legal Requirements and Borrower shall not pay such claim, credit or deduction, Lender shall have the option, by written notice of not less than 90 days, to declare the Loan immediately due and payable. 41 8 CONDEMNATION 8.1 Borrower shall notify Lender promptly of the commencement or threat of any Taking of the Property or any portion thereof. Lender is hereby irrevocably appointed as Borrower's attorney-in-fact, coupled with an interest, with exclusive power to collect, receive and retain the proceeds of any such Taking and to make any compromise or settlement in connection with such proceedings (subject to Borrower's reasonable approval, except after the occurrence of an Event of Default, in which event Borrower's approval shall not be required), subject to the provisions of this Agreement; provided, however, that Borrower may participate in any such proceedings and shall be authorized and entitled to compromise or settle any such proceedings with respect to Condemnation Proceeds in an amount less than five percent (5%) of the outstanding principal sum of the Loan. Borrower shall execute and deliver to Lender any and all instruments reasonably required in connection with any such proceeding promptly after request therefor by Lender. Except as set forth above, Borrower shall not adjust, compromise, settle or enter into any agreement with respect to such proceedings without the prior consent of Lender. All proceeds of any Taking, or purchase in lieu thereof, of the Property or any portion thereof are hereby assigned to and shall be paid to Lender. With respect to Condemnation Proceeds in an amount in excess of five percent (5%) of the outstanding principal sum of the Loan, Borrower hereby authorizes Lender to compromise, settle, collect and receive such Condemnation Proceeds, and to give proper receipts and acquittance therefor. Except as otherwise provided herein, Lender shall apply such Condemnation Proceeds (less any cost to Lender of recovering and paying out such proceeds, including, without limitation, reasonable attorneys' fees and costs allocable to inspecting any repair, restoration or rebuilding work and the plans and specifications therefor) toward the reduction of the Loan. If the proceeds are used to reduce the Loan, they shall be applied in accordance with the provisions of the Note without any prepayment fee or charge of any kind, including, without limitation, Yield Maintenance Premium. Borrower shall promptly execute and deliver all instruments requested by Lender for the purpose of confirming the assignment of the Condemnation Proceeds to Lender. 8.2 "Substantial Taking" shall mean a Taking of such portion of the Property that would leave a remaining balance of the Property that would not under then current economic conditions, applicable zoning laws, building regulations and other applicable Legal Requirements, permit the restoration of the Property so as to constitute a complete, rentable facility of the same sort as existed prior to the Taking, having adequate ingress and egress to the Property, capable of producing a projected Net Operating Income (calculated in accordance with the next sentence) yielding a projected Debt Service Coverage (with a reduction of the Debt by an amount equal to the projected amount of the Condemnation Proceeds in the determination of projected Debt Service Coverage) therefrom for the next 42 three years of at least 1.25. The average Net Operating Income produced by the Property during the three (3) year period immediately preceding such Taking, as adjusted for the portion remaining after a Taking, shall be deemed to constitute the projected Net Operating Income. 8.3 In the case of a Substantial Taking, if (i) a monetary Event of Default shall have occurred and be continuing or (ii) subject to any contrary provision in any Lease, an Event of Default shall have occurred and be continuing, Lender shall have the option, in its sole discretion, to apply the Condemnation Proceeds after payment of all necessary and proper expenses incurred in the collection of such award, in reduction of the Loan but without any prepayment fee or charge of any kind, including, without limitation, Yield Maintenance Premium, or to allow such Condemnation Proceeds to be used for the Work pursuant to the terms and subject to the conditions of the applicable sections of this Article. In all other instances, the Condemnation Proceeds will be used for the Work pursuant to the terms and subject to the conditions of the applicable sections of this Article. If subsequent to payment of the Loan in full, Lender shall receive payment of any subsequent Condemnation Proceeds, then such Condemnation Proceeds shall be paid to Borrower. Borrower agrees to execute any and all documents that may be reasonably required in order to facilitate collection by Lender of such awards. 8.4 In the event of a Taking that is less than a Substantial Taking, Borrower at its sole cost and expense (whether or not the award shall have been received or shall be sufficient for restoration), shall proceed diligently to restore, or cause the restoration of, the remaining Building not so taken, to maintain a complete, rentable, self-contained and fully operational facility of the same sort as existed prior to the Taking in as good a condition as existed prior to the Taking. In the event of such a Taking, Lender shall receive the Condemnation Proceeds and shall pay over the same: A. first, to Borrower to the extent of any portion of the award as may be necessary to pay the reasonable cost of restoration (including soft costs) of the Building remaining including costs of the collection, compromise or settlement (including, without limitation, reasonable attorney fees), and B. second, to Lender in reduction of the Loan without any prepayment fee or charge of any kind, including, without limitation, Yield Maintenance Premium. If one or more Takings in the aggregate create a Substantial Taking, then, in such event, the above sections of this Article applicable to Substantial Takings shall apply. 43 8.5 In the event Lender is obligated to or elects to make Condemnation Proceeds available for the restoration or rebuilding of the Property, such proceeds shall be disbursed in the manner and subject to the conditions set forth in Section 6.5 hereof as though such proceeds were Insurance Proceeds. Borrower shall promptly execute and deliver all instruments requested by Lender for the purpose of confirming the assignment of the Condemnation Proceeds to Lender. Application of all or any part of the Condemnation Proceeds shall also be made in accordance with the provisions of Section 6.5 hereof as though such proceeds were Insurance Proceeds. No application of the Condemnation Proceeds or payment in lieu thereof to the reduction of the Loan shall have the effect of releasing the lien of the Mortgage (except as to the portion taken) until the remainder of the Loan has been paid in full except to the extent the Property is taken by the condemning authority. In the case of any Taking, Lender, as a first priority out of any award, shall be entitled to reimbursement for all costs of collection, compromise or settlement, (including, without limitation, reasonable attorneys' fees and costs allocable to inspecting any repair, restoration or rebuilding work and the plans and specifications therefor) incurred in connection with any award. All awards deposited with Lender pursuant to this Article, until expended or applied as provided herein, shall constitute additional security for the payment of the Loan and the payment and performance of Borrower's obligations under the Loan Documents. All awards so deposited with Lender shall be held by Lender in the Loss Proceeds Account, but Lender makes no representation or warranty as to the rate or amount of interest, if any, which may accrue on any such deposit and shall have no liability in connection therewith. For purposes hereof, any reference to the Condemnation Proceeds shall be deemed to include interest, if any, which has accrued thereon. 9 CENTRAL CASH MANAGEMENT 9.1 Cash Flow. Borrower acknowledges and agrees that the Operating Income derived from the Property and Loss Proceeds shall be utilized, to the extent required, to: A. fund the Basic Carrying Costs Sub-Account, B. pay all amounts to become due and payable under the Note by funding the Debt Service Payment Sub-Account, C. fund the Recurring FF&E Sub-Account, D. fund the Operations and Maintenance Expense Sub-Account to the extent required pursuant to Section 9.4.D hereof, and 44 E. fund the Curtailment Reserve Sub-Account to the extent required pursuant to Section 9.4.E hereof. Borrower shall cause Manager to collect, and shall deliver to Manager, all of the Operating Income and deposit such funds (other than security deposits from tenants under valid Leases, which shall be held by Manager, as agent for Borrower, in accordance with applicable law and in a segregated bank account (the "Security Deposit Account") at Citibank, N.A. or such other commercial or savings bank or banks as may be reasonably satisfactory to Lender within one (1) Business Day after receipt thereof in the Rent Account established for the Loan (it being understood that Operating Income may be deposited daily into a local account in the name of Borrower, provided that all funds in such account are automatically swept daily and deposited into the Rent Account pursuant to an irrevocable written instruction of Borrower). Provided that (x) no Event of Default has occurred and is continuing, and (y) if applicable, Borrower has provided Lender with a Refinancing Commitment on or before the Refinance Notification Date, Borrower may withdraw, or cause Manager to withdraw, funds on deposit in the Rent Account. Borrower shall cause Manager to give to the bank in which the Rent Account is located an irrevocable written instruction that all funds deposited in such account shall be automatically transferred through automated clearing house funds ("ACH") or by Federal wire to the Central Account on the Business Day immediately preceding each Notice Date, up to an amount equal to that which is required to be allocated to each of the Sub-Accounts pursuant to Section 9.4 hereof. Such irrevocable notice shall also provide that, in the event that such bank receives a written notification from Lender that the conditions set forth in clauses (x)-(y) of this Section have not been met, (i) Borrower and Manager may not withdraw any funds on deposit in the Rent Account, (ii) Lender shall have the sole right to withdraw funds on deposit in the Rent Account and (iii) all funds deposited in the Rent Account shall be automatically transferred through ACH or by Federal wire to the Central Account on a daily basis. Lender may elect to change the financial institution in which the Central Account shall be maintained; however, Lender shall give Borrower and the bank in which the Rent Account is located not fewer than 5 Business Days' prior notice of such change. Neither Borrower nor Manager shall change the bank holding the Rent Account without the prior written reasonable consent of Lender. All reasonable fees and charges of the bank(s) in which the Rent Account and the Central Account is located shall be paid by Borrower. 9.2 Establishment of Sub-Accounts. Lender has established the Central Account and the Rent Account in the name of Lender. The Central Account shall be under the sole dominion and control of Lender. Except as otherwise provided in this Section or Section 9.1 hereof, the Rent Account shall be under the sole dominion and control of Lender. Borrower understands that Lender or Lender's agent or servicer shall withdraw funds from the Rent 45 Account, and deposit into and withdraw funds from the Central Account, all in accordance with the terms and conditions of Section 9.1. Borrower shall have no right of withdrawal in respect of the Rent Account or the Central Account except as specifically provided herein. Each transfer of funds to be made hereunder shall be made only to the extent that funds are on deposit in the Rent Account, the Central Account or the affected Sub-Account, and Lender shall have no responsibility to make additional funds available in the event that funds on deposit are insufficient. The Central Account shall consist of the aggregate funds of the Basic Carrying Costs Sub-Account, the Debt Service Payment Sub- Account, the Recurring FF&E Sub-Account, the Operations and Maintenance Expense Sub-Account (to the extent applicable) and the Curtailment Reserve Sub-Account (to the extent applicable), each of which accounts shall be Eligible Accounts (each a "Sub-Account" and collectively, the "Sub-Accounts") to which certain funds shall be allocated and from which disbursements shall be made pursuant to the terms of this Agreement. 9.3 Permitted Investments of Central Account Funds. A. Upon the written request of Borrower, Lender shall direct the Bank to invest and reinvest any balance in the Central Account from time to time in Permitted Investments as instructed by Borrower (which instruction may be made no more than one time per month), provided that (a) if Borrower fails to so instruct Lender, or upon the occurrence of a Default or Event of Default, Lender may direct the Bank to invest and reinvest such balance in Permitted Investments as Lender shall determine in its sole discretion, (b) the maturities of the Permitted Investments on deposit in the Central Account shall, to the extent such dates are ascertainable, be selected and coordinated to become due not later than the day before any disbursements from the applicable Sub-Accounts must be made, (c) all such Permitted Investments shall be held in the name and be under the sole dominion and control of Lender, and (d) no Permitted Investment shall be made unless Lender shall retain a perfected first priority lien in such Permitted Investment securing the Debt and all filings and other actions necessary to ensure the validity, perfection, and priority of such lien have been taken. It is the intention of the parties hereto that the entire amounts deposited in the Central Account (or as much thereof as Lender may reasonably arrange to invest) shall at all times be invested in Permitted Investments, and that the Central Account shall be a so-called "zero balance" account. All funds in the Central Account that are invested in a Permitted Investment are deemed to be held in the Central Account for all purposes of this Agreement and the other Loan Documents. Lender shall not have any liability for any loss in investments of funds in the Central Account that are invested in Permitted Investments whether Borrower or Lender selected such Permitted Investment in accordance herewith and no such loss shall affect Borrower's obligation to fund, or liability for funding, the Central Account and each Sub- Account, as the case may be. Borrower agrees that Borrower shall include all such earnings 46 on the Central Account as income of Borrower (and, if Borrower is a partnership or other pass-through entity, the partners, members or beneficiaries of Borrower, as the case may be) for federal and applicable state and local tax purposes. B. All interest paid or other earnings on the Permitted Investments of funds deposited into the Central Account made hereunder shall be deposited into the Central Account and shall be allocated to the Sub-Account that contained the funds with respect to which such interest was paid or other earnings earned. All such interest and earnings, once so allocated, shall be treated as Operating Income allocated to such Sub-Account except that, provided no Event of Default has occurred hereunder, on a quarterly basis, Borrower shall have the option to transfer the interest earned and allocated to the Basic Carrying Costs Sub-Account and the Recurring FF&E Sub-Account to the Rent Account. All interest paid or other earnings on the Permitted Investments of funds deposited into the Rent Account (i.e., those funds not transferred to the Central Account) made hereunder shall be deposited into the Rent Account and shall be treated as Operating Income deposited into such account as of the day such interest and earnings are deposited therein. 9.4 Monthly Funding of Sub-Accounts. On each Payment Date during the term of the Loan, commencing on the first Payment Date after the month in which the Loan is initially funded (each, a "Current Month"), Lender shall allocate all funds transferred or deposited into the relevant Central Account among the Sub- Accounts as follows and in the following priority: A. first, to the Basic Carrying Costs Sub-Account, until an amount equal to the Basic Carrying Costs Monthly Installment for such Current Month has been allocated to the Basic Carrying Costs Sub-Account; B. second, except as otherwise provided in this Section, to the Debt Service Payment Sub-Account, until an amount equal to the Required Debt Service Payment for such Payment Date has been allocated to the Debt Service Payment Sub-Account; C. third, to the Recurring FF&E Sub-Account, until an amount equal to the sum of (x) an amount equal to the Recurring FF&E Monthly Amount for such month plus (y) the amount, if any, deducted therefrom during any preceding month to pay any amounts due pursuant to clauses (A) or (B) above, to the extent not previously reimbursed to such Sub-Account, has been allocated to the Recurring FF&E Sub-Account; 47 D. fourth, during an O&M Operative Period, if applicable, or after the occurrence of and during the continuance of an Event of Default, to the Operations and Maintenance Expense Sub-Account, until an amount equal to the amount, if any, deducted therefrom during any preceding month to pay any amounts due pursuant to clauses (A) or (B) or (C) above, to the extent not previously reimbursed to such Sub-Account and then until an amount equal to the Operations and Maintenance Expense Monthly Installment has been allocated to such Sub-Account; E. fifth, with respect to any Current Month for which funds are to be allocated to the Curtailment Reserve Sub-Account pursuant to Section 9.9 hereof, all Excess Rent shall be allocated to the Curtailment Reserve Sub- Account. As used herein, "Excess Rent" means the amounts available in the Rent Account in any Current Month after the allocations under clauses (A) through (D) above have been made. After the occurrence, and during the continuance, of an Event of Default, no funds held in the various Rent Accounts, and no funds held in the various Central Accounts, shall be distributed to, or withdrawn by, Borrower, and Lender shall have the right to apply all or any portion of the funds held in any of such accounts to the Loan in Lender's sole discretion. In the event that sufficient funds to fund all of the Sub-Accounts pursuant to this Section for the Payment Date in any Current Month are not on deposit in the Central Account on the Business Day immediately preceding the Payment Date (the "Notice Date") for the then Current Month, Lender shall deliver to Borrower, via telecopy, on or before 4:00 P.M. New York time on the Notice Date a notice stating that sufficient funds have not theretofore been deposited into the Central Account for allocation to the various Sub-Accounts pursuant to this Section. If any such notice is delivered, Borrower shall be obligated to deposit immediately available United States funds (in addition to Operating Income) into the relevant Central Account, prior to such Payment Date, in the amount of such deficiency, and failure to make such deposit shall be an Event of Default hereunder. If, on any Payment Date, the aggregate balance in the Central Account (excluding funds allocated to any Sub-Account other than funds allocated to the Debt Service Payment Sub-Account or the Basic Carrying Costs Sub-Account) is insufficient to make the payment of the Basic Carrying Costs Monthly Installment and the Required Debt Service Payment required to be made pursuant to clauses (A) and (B) of this Section, then an Event of Default shall exist hereunder. In the event that Lender elects to apply the proceeds of any Sub-Account to pay any Required Debt Service Payment or to fund any Basic Carrying Costs, Borrower shall, upon 48 demand, repay to Lender the amount of the funds so applied to replenish such Sub-Account up to the amount contained therein immediately prior to such application (i.e., including interest earned on the balance prior to withdrawal), and if Borrower shall fail to repay such amounts within 5 days after such application, an Event of Default shall exist hereunder, which Event of Default shall not be cured unless and until Borrower repays such amount or all Sub-Accounts have been fully funded from Operating Income for the then applicable Current Month and all prior months. Lender may, at its sole option, replenish such Sub-Account(s) out of available Operating Income in subsequent months that Borrower would have otherwise been entitled to receive. 9.5 Payment of Basic Carrying Costs. Borrower shall pay all Basic Carrying Costs with respect to Borrower, the Property and any Operating Income derived therefrom or with respect thereto. At least 5 Business Days prior to the due date of any Basic Carrying Costs, and not more frequently than once each month, Borrower may notify Lender in writing and request that Lender pay such Basic Carrying Costs on behalf of Borrower on or prior to the due date thereof, and, provided that no Event of Default has occurred and that there are sufficient funds available in the Basic Carrying Costs Sub-Account, Lender shall make such payments out of the Basic Carrying Costs Sub-Account before same shall be delinquent. Together with each such request, Borrower shall furnish Lender with bills and all other documents necessary, as reasonably determined by Lender, for the payment of the Basic Carrying Costs that are the subject of such request. Borrower's obligation to pay (or cause Lender to pay) Basic Carrying Costs pursuant to this Agreement shall include, to the extent permitted by applicable law, Impositions resulting from future changes in law that impose upon Lender an obligation to pay any property taxes or other Impositions or that otherwise adversely affect Lender's interests. Provided that no Event of Default shall have occurred, all funds deposited into the Basic Carrying Costs Sub-Account shall be held by Lender pursuant to the provisions of this Agreement and shall be applied in payment of Basic Carrying Costs in accordance with the terms hereof. Should an Event of Default occur, the proceeds on deposit in the Basic Carrying Costs Sub-Account may be applied by Lender in payment of any Basic Carrying Costs for all or any portion of the Property or may be applied to the payment of the Loan or any other charges affecting all or any portion of the Property as Lender in its sole discretion may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided. 9.6 Debt Service Payment Sub-Account. On each Payment Date during the term of the Loan, Lender shall transfer to the Collection Account to reduce the Loan in accordance with the terms of the Note, from the Debt Service Payment Sub-Account, an 49 amount equal to the sum of (a) the Required Debt Service Payment for such Payment Date and (b) any amounts deposited into the Central Account that are either (i) Loss Proceeds that Lender has the right to and has elected to apply to reduce the Loan in accordance with the terms of this Article or (ii) excess Loss Proceeds remaining after the completion of any restoration required hereunder. Borrower shall have no right whatsoever to direct the investment of the proceeds of the Collection Account. 9.7 Recurring FF&E Sub-Account. A. Borrower shall pay all Recurring FF&E Expenditures with respect to Borrower and the Property (without regard to the amount of money then available in the Recurring FF&E Sub-Account); provided that (i) Lender has received written notice from Borrower at least 5 Business Days prior to the due date of any payment relating to Recurring FF&E Expenditures and not more frequently than once each month, (ii) no Event of Default has occurred, (iii) there are sufficient funds available in the Recurring FF&E Sub-Account, (iv) with respect to any Recurring FF&E Expenditure in excess of $50,000, Lender has given its prior written consent (not to be unreasonably withheld) to the improvement subject to payment, and (v) Borrower shall have theretofore furnished Lender with lien waivers (if appropriate), copies of bills, invoices and other reasonable documentation as may be required by Lender to establish that the Recurring FF&E Expenditures that are the subject of such request represent amounts due for new and first class furniture, fixtures or equipment for installation or use at the Property such Recurring FF&E Expenditures shall be reimbursed out of the Recurring FF&E Sub-Account. B. Should an Event of Default occur, the proceeds on deposit in the Recurring FF&E Sub-Account may be applied by Lender in payment of any Recurring FF&E Expenditures for all or any portion of the Property or may be applied to the payment of the Loan or any other charges affecting all or any portion of the Property, as Lender in its sole discretion may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided. 9.8 Operations and Maintenance Expense Sub-Account. All funds allocated to the Operation and Maintenance Expense Sub-Account shall be held by Lender pursuant to the provisions of this Agreement. Any sums held in the Operation and Maintenance Expense Sub-Account shall be disbursed to Borrower within 5 Business Days of receipt by Lender from Borrower of (a) a written request for such disbursement that shall indicate the Operating Expenses (exclusive of Impositions) for which the required disbursement is to pay and (b) an Officer's Certificate stating that no Operating Expenses with respect to the 50 Property are more than 60 days past due; provided, however, in the event that Borrower legitimately disputes any invoice for an Operating Expense, and (i) no Event of Default has occurred and is continuing hereunder, (ii) Borrower shall have set aside adequate reserves for the payment of such disputed sums together with all interest and late fees thereon, (iii) Borrower has complied with all the requirements of this Agreement relating thereto, and (iv) the contesting of such sums shall not constitute a default under any other instrument, agreement, or document to which Borrower is a party, then Borrower may, after certifying to Lender as to items (i) through (iv) hereof, contest such invoice. Together with each such request, Borrower shall furnish Lender with bills and all other documents necessary for the payment of the Operating Expenses that are the subject of such request. Borrower may request a disbursement from the Operation and Maintenance Expense Sub-Account no more than one (1) time per calendar month. Should an Event of Default occur and be continuing, the proceeds on deposit in the Operation and Maintenance Expense Sub-Account may be applied by Lender in payment of any Operating Expenses for the Property or may be applied to the payment of the Loan or other charges affecting all or any portion of the Property as Lender, in its sole discretion, may determine; provided, however, that no such application shall be deemed to have been made by operation of law or otherwise until actually made by Lender as herein provided. All sums, if any, remaining in the Operation and Maintenance Expense Sub-Account after the payment of all Operating Expenses for the then Current Month shall be deposited into the Curtailment Reserve Sub-Account, as set forth in Section 9.4 hereof, if applicable. 9.9 Curtailment Reserve Sub-Account. In the event that: (x) if and only if the Loan is a Fixed Rate Loan, as defined in the ESA Loan Agreement, Borrower shall fail to provide Lender with a Refinancing Commitment on or before the Refinance Notification Date or if the Void Commitment Date occurs, then commencing on the next Payment Date following the Refinance Notification Date or Void Commitment Date, and on each and every Payment Date thereafter until the date on which all Debt has been paid in full, or (y) an Event of Default occurs, Lender shall allocate all Excess Rent to the Curtailment Reserve Sub-Account in accordance with Section 9.4.E until such time as the Loan has been paid in full or the Event of Default no longer exists. On each Payment Date during any period for which funds have been allocated to the Curtailment Reserve Sub- Account pursuant to Section 9.4.E hereof, Lender shall transfer to the Collection Account an amount equal to the lesser of (a) the amount available in the Curtailment Reserve Sub-Account, and (b) the total Debt then outstanding under the Note and the other Loan Documents. 51 9.10 Loss Proceeds. In the event of a casualty to the Property, unless Lender elects to or is required to, pursuant to the terms hereof, make all of the proceeds received under the insurance policy required to be maintained by Borrower ("Insurance Proceeds") available to Borrower for restoration, Lender and Borrower shall cause all such Insurance Proceeds to be paid by the insurer directly to the Central Account, whereupon Lender shall, after deducting Lender's and, to the extent available, Borrower's costs of recovering and paying out such Insurance Proceeds, including without limitation, reasonable attorneys' fees, apply same to reduce the Loan in accordance with the terms of the Note; provided, however, that if Lender elects to make the Insurance Proceeds available for restoration, all Insurance Proceeds in respect of business interruption coverage shall be maintained in the Central Account, to be applied by Lender in the same manner as Operating Income received from Manager with respect to the operation of the Property; provided, further, however, that in the event that the Insurance Proceeds of such business interruption insurance policy are paid in a lump sum in advance, Lender shall hold such Insurance Proceeds in a segregated interest-bearing escrow account, which shall be an Eligible Account, shall estimate, in Lender's reasonable discretion based upon a certification of an Engineer or Architect, the number of months required for Borrower to restore the damage caused by the casualty, shall divide the aggregate business interruption Insurance Proceeds by such number of months, and shall disburse from such escrow account into the Central Account each month during the performance of such restoration such monthly installment of said Insurance Proceeds. In the event that Insurance Proceeds are to be applied toward restoration, Lender shall hold such funds in a segregated bank account at the Bank, which shall be an Eligible Account, and shall disburse same in accordance with the provisions of Section 6.5. Unless Lender elects to, or is required to make all of the proceeds in respect of any Taking (any such proceeds, "Condemnation Proceeds") available to Borrower for restoration, Lender and Borrower shall cause all such Condemnation Proceeds to be paid to the Central Account, whereupon Lender shall, after deducting Lender's costs of recovering and paying out such Condemnation Proceeds, including without limitation, reasonable attorneys' fees, apply same, by transferring such amounts to the Collection Account, to reduce the Loan in accordance with the terms of the Note; provided, however, that any Condemnation Proceeds received in connection with a temporary Taking shall be maintained in the Central Account, to be applied by Lender in the same manner as Operating Income received from Manager with respect to the operation of the Property; provided, further, however, that in the event that the Condemnation Proceeds of any such temporary Taking are paid in a lump sum in advance, Lender shall hold such Condemnation Proceeds in a segregated interest-bearing escrow account, which shall be an Eligible Account, shall estimate, in Lender's reasonable discretion, the number of months that the Property shall be affected by such temporary Taking, shall divide the aggregate Condemnation Proceeds in connection with such temporary Taking by such number of months, and shall disburse from such escrow account into the Central Ac- 52 count each month during the pendency of such temporary Taking such monthly installment of said Condemnation Proceeds. In the event that Condemnation Proceeds are to be applied toward restoration, Lender shall hold such funds in a segregated bank account at the Bank, which shall be an Eligible Account, and shall disburse same in accordance with the provisions of Section 6.5. If any Insurance Proceeds or Condemnation Proceeds (collectively, "Loss Proceeds") are received by Borrower, such Loss Proceeds shall be received in trust for Lender, shall be segregated from other funds of Borrower, and shall be forthwith paid into the Central Account, or paid to Lender to hold in a segregated account, in each case to be applied or disbursed in accordance with the foregoing. Any Loss Proceeds made available to Borrower for restoration in accordance herewith, to the extent not used by Borrower in connection with, or to the extent they exceed the cost of, such restoration, shall be deposited into the Central Account, whereupon Lender shall apply the same to reduce the Loan in accordance with the terms of the Note. 10 PROPERTY MANAGEMENT 10.1 The Property will be managed at all times by Manager pursuant to the Management Agreement, it being understood that the Management Agreement submitted to Lender prior to the date hereof is acceptable to Lender. 10.2 After Borrower has knowledge of a fifty percent (50%) or more change in control of the ownership of Manager, Borrower will promptly give Lender notice thereof (a "Manager Control Notice"). 10.3 Lender may terminate the Management Agreement at any time: (a) for cause (including, but not limited to, Manager's gross negligence, willful misconduct or fraud) in which case Borrower shall appoint a substitute Manager meeting the Approved Manager Standard, subject to Lender's approval, in Lender's sole discretion, (b) following either (w) the occurrence of an Event of Default, (x) the receipt of a Manager Control Notice, or (y) the failure of Borrower to make any Required Debt Service Payment on the due date therefor; and in event of any of the foregoing events described in subclauses (x) through (y), Lender may, in its sole discretion, appoint a reputable Independent property manager selected by Lender, in its sole discretion, to manage the Property. 10.4 Borrower may from time to time appoint a successor Manager to manage the Property with Lender's prior written consent, which consent shall not be unreasonably withheld or delayed, provided that, any such successor manager shall have a senior executive who shall satisfy the Approved Manager Standard and shall be reasonably acceptable to 53 Lender. Borrower shall require Manager (or any successor managers) to maintain at all times during the term of the Loan worker's compensation insurance as required by Governmental Authorities. 11 EVENTS OF DEFAULT 11.1 Events of Default. The Loan shall become immediately due at the option of Lender upon any Event of Default under the Mortgage. 11.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, Lender may, in addition to any other rights or remedies available to it hereunder, under the Collateral Documents, at law or in equity, take such action, without notice or demand, as it reasonably deems advisable to protect and enforce its rights against ESA and in and to the Hotel Property or any one or more of them, including, but not limited to, the following actions, each of which may be pursued singly, concurrently or otherwise, at such time and in such order as Lender may determine, in its sole discretion, without impairing or otherwise affecting any other rights and remedies of Lender hereunder, at law or in equity: A. declare all or any portion of the unpaid Obligations to be immediately due and payable and the obligation of Lender to make Loan to be terminated; provided, however, that upon the occurrence of an Event of Default, the entire Debt will be immediately due and payable without notice or demand or any other declaration of the amounts due and payable; B. pursue the remedies available under the Mortgage; or C. pursue any or all such other rights or remedies as Lender may have under applicable law or in equity; provided, however, that the provisions of this Section shall not be construed to extend or modify any of the notice requirements or grace periods provided for hereunder or under any of the other Loan Documents. 11.3 General Provisions Regarding Remedies. A. Right to Terminate Proceedings. Lender may terminate or rescind any proceeding or other action brought in connection with its exercise of the remedies provided in Section 11.2 at any time before the conclusion thereof, as determined in Lender's sole discretion and without prejudice to Lender. 54 B. No Waiver or Release. The failure of Lender to exercise any right, remedy or option provided in the Loan Documents shall not be deemed a waiver of such right, remedy or option or of any covenant or obligation secured by the Loan Documents. No acceptance by Lender of any payment after the occurrence of an Event of Default and no payment by Lender of any payment or obligation for which ESA or any Borrower is liable hereunder shall be deemed to waive or cure any Event of Default. No sale of all or any portion of the Hotel Property, no forbearance on the part of Lender, and no extension of time for the payment of the whole or any portion of the Loan or any other indulgence given by Lender to ESA or any other Person, shall operate to release or in any manner affect the interest of Lender in the Hotel Property or the liability of ESA to pay the Loan. No waiver by Lender shall be effective unless it is in writing and then only to the extent specifically stated. C. No Impairment; No Releases. Except to the extent thereof, the interests and rights of Lender under the Loan Documents shall not be impaired by any indulgence, including (i) any renewal, extension or modification that Lender may grant with respect to any of the Loan; (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Lender may grant with respect to the Hotel Property or any portion thereof; or (iii) any release or indulgence granted to any maker, endorser, guarantor or surety of any of the Loan. 12 [RESERVED] 13 [RESERVED] 14 ESTOPPEL CERTIFICATES 14.1 After request by Lender, Borrower, within 15 days and at its expense, will furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the amount of the original principal amount of the Note, and the unpaid principal amount of the Note, (ii) the rate of interest of the Note, (iii) the date payments of interest and/or principal were last paid, (iv) any offsets or defenses to the payment of the Loan, and if any are alleged, the nature thereof, (v) that the Note and this Agreement have not been modified or if modified, giving particulars of such modification and (vi) that there has not occurred and is then continuing no Default or Event of Default pursuant to the Note or this Agreement or any event or circumstance that, with the giving of notice or the passage of time, or both, 55 would constitute a Default or Event of Default hereunder, or if such Default, Event of Default, event or circumstance exists, the nature thereof, the period of time it has existed, and the action being taken to remedy such Default, Event of Default, event or circumstance. 14.2 Within 15 days after written request by Borrower, Lender shall furnish to Borrower a written statement confirming the amount of the Loan, the maturity date of the Note, the date to which interest has been paid and the dates on which any notices of Events of Default were sent to Borrower. 15 LENDER ASSIGNMENTS 15.1 Lender may sell, transfer, negotiate or assign to one or more other Persons the Loan Documents and any interest in the Note held by it and a commensurate portion of its rights and obligations hereunder and under the other Loan Documents from and after the date the Lender no longer has any obligation to advance any Loans. The Lender also reserves the right at any time during the term of the Loans, in its sole and absolute discretion, to effect a so-called securitization of the Loans in such a manner and on such terms and conditions as the Lender shall deem to be appropriate in its sole and absolute discretion and with such domestic or foreign banks, insurance companies, pension funds, trusts or other institutional lenders or governmental agencies or other persons, parties or investors (including, but not limited to, guarantor trusts, owner trusts, special purpose corporations, REMICs, real estate investment trusts or other similar or comparable investment vehicles) as may be selected by the Lender in its sole and absolute discretion. 15.2 Lender may sell participations (including blind or undisclosed participations and subparticipations) to one or more banks or other Persons in or to all or a portion of its rights and obligations under the Loan Documents (including, without limitation, all or a portion of its commitment to make the Loan, the Loan owing to it and the Note held by it). In the event of the sale of any participation by Lender, (i) Lender's obligations under the Loan Documents shall remain unchanged, (ii) Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) Lender shall remain the holder of such Note and Obligations for all purposes of this Agreement, and (iv) Borrower shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations under this Agreement. 15.3 Each participant shall be entitled to the benefits of Section 2.7 of the ESA Loan Agreement as if it were a Lender; provided, however, that anything herein to the contrary notwithstanding, Borrower shall not, at any time, be obligated to pay to any 56 participant of any interest of Lender, under Section 2.7 of the ESA Loan Agreement, any sum in excess of the sum which Borrower would have been obligated to pay Lender in respect of such interest had such assignment not been effected or had such participation not been sold. 15.4 Borrower shall cooperate with Lender and any other party to whom Lender may assign or sell participations (or negotiate for such assignment or sale) in all or a portion of this Agreement owing to it and an interest in the Note, with costs to be borne in accordance with the terms of the ESA Loan Agreement. Such cooperation of the part of Borrower shall include but shall not be limited to the execution and delivery of (i) amendments, modifications and/or supplements to one or more Loan Documents, in form and substance as may be required by Lender, and (ii) the execution and delivery of one or more additional promissory notes; provided however, that such promissory notes, amendments, modifications and/or supplements do not materially increase the obligations of Borrower or materially diminish the rights of Borrower under the Loan Documents. 16 MISCELLANEOUS 16.1 Representations and Warranties of Borrower and Lender. Borrower and Lender each represents and warrants to the other that neither Borrower nor Lender has dealt with any financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Each party shall indemnify and hold harmless the other from and against any and all claims, liabilities, costs and expenses of any kind in any way relating to or arising from (i) a claim by any Person that such Person acted on behalf of the indemnifying party in connection with the transactions contemplated herein or (ii) any breach of the foregoing representation or any breach of Lender's payment obligation as aforesaid. The provisions of this subsection shall survive the repayment of the Loan. 16.2 Costs; Expenses; Indemnities. A. Borrower shall pay on demand (i) all reasonable costs and expenses of Lender in connection with the preparation, execution, delivery, modification and amendment of this Agreement, each of the other Loan Documents and each of the other documents to be delivered hereunder and thereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel, accountants, appraisers, consultants or industry experts retained by Lender with respect thereto and (ii) all costs and expenses of Lender (including, without limitation, the fees and out-of-pocket expenses of counsel, retained by Lender) in 57 connection with the enforcement (whether through negotiation, legal proceedings or otherwise) of this Agreement and the other Loan Documents. B. Borrower agrees to indemnify and hold harmless Lender and its Affiliates, and the directors, officers, employees, agents, attorneys, consultants and advisors of or to any of the foregoing (each of the foregoing, an "Indemnitee") from and against any and all claims, damages, liabilities, obligations, losses, penalties, actions, judgments, suits, costs, disbursements and expenses of any kind or nature (including, without limitation, fees and disbursements of counsel to any such Indemnitee and experts, engineers and consultants and the costs of investigation and feasibility studies) which may be imposed on, incurred by or asserted against any such Indemnitee in connection with or arising out of any investigation, litigation or proceeding, whether or not any such Indemnitee is a party thereto, whether direct, indirect, or consequential and whether based on any federal, state or local law or other statutory regulation, securities or commercial law or regulation, or under common law or in equity, or on contract, tort or otherwise, in any manner relating to or arising out of or based upon or attributable to this Agreement, any other Loan Document, any document delivered hereunder or thereunder, any Obligation, or any act, event or transaction related or attendant thereto arising out of or based upon anything relating to real property owned, leased or operated by Borrower and the facilities or operations; provided, however, that Borrower shall not have any obligation under this Section to an Indemnitee with respect to any of the foregoing matters caused by or resulting from the gross negligence or willful misconduct of that Indemnitee, as determined by a court of competent jurisdiction in a final non-appealable judgment or order. C. Borrower agrees that any indemnification or other protection provided to any Indemnitee pursuant to this Agreement (including, without limitation, pursuant to this Section) or any other Loan Document shall (i) survive payment of the Obligations and (ii) inure to the benefit of any Person who was at any time an Indemnitee under this Agreement or any other Loan Document. D. The provisions of this Section shall survive any termination of this Agreement. In addition, and without limitation to any other provision of this Agreement, Borrower shall protect, indemnify and save harmless Lender and its successors and assigns, and each of their agents, employees, officers and directors, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expense (including, without limitation, reasonable attorneys' fees and expenses, whether incurred within or outside the judicial process), imposed upon or incurred by or asserted against Lender and its assigns, or 58 any of their agents, employees, officers or directors, by reason of (a) ownership of this Agreement, the Property or any part thereof or any interest therein or receipt of any Operating Income; (b) any accident, injury to or death of any person or loss of or damage to property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, parking areas, streets or ways; (c) any use, nonuse or condition in, on or about, or possession, alteration, repair, operation, maintenance or management of, the Property or any part thereof or on the adjoining sidewalks, curbs, parking areas, streets or ways; (d) any failure on the part of Borrower to perform or comply with any of the terms of this Agreement; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; (f) any claim by brokers, finders or similar Persons claiming to be entitled to a commission in connection with any Lease or other transaction involving the Property or any part thereof; (g) any Imposition including, without limitation, any Imposition attributable to the execution, delivery, filing, or recording of any Loan Document, Lease or memorandum thereof; (h) any lien or claim arising on or against the Property or any part thereof under any Legal Requirement or any liability asserted against Lender with respect thereto; or (i) the claims of any lessee or any Person acting through or under any lessee or otherwise arising under or as a consequence of any Lease. Notwithstanding the foregoing provisions of this Section to the contrary, Borrower shall have no obligation to indemnify Lender pursuant to this Section for liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses relative to the foregoing that result from Lender's, and its successors' or assigns', willful misconduct or gross negligence. Any amounts payable to Lender by reason of the application of this Section shall constitute a part of the Loan secured by this Agreement and other Loan Documents and shall become immediately due and payable and shall bear interest at the Default Rate from the date loss or damage is sustained by Lender, as applicable, until paid. 16.3 [RESERVED]. 16.4 [RESERVED] 16.5 Securitization Opinions. In the event the Loan becomes the subject of a securitization underwritten by Lender or any of its Affiliates, Borrower shall, within 15 Business Days after Lender's written request therefor, deliver a 10(b)(5) opinion and a nonconsolidation opinion with respect to Borrower, each opinion to be in form and substance and delivered by counsel reasonably acceptable to Lender and the Rating Agency, as may be reasonably required by Lender and/or the Rating Agency in connection with such securitization. Borrower shall undertake all actions (including structural reorganization, if appropriate) necessary to enable its counsel to issue the opinion. Borrower's failure to 59 deliver the opinions required hereby within such fifteen (15) Business Day period shall constitute an Event of Default hereunder. 16.6 Cooperation with Rating Agencies. Borrower covenants and agrees that in the event Lender decides to include the Loan as an asset of a securitization, Borrower shall (a) gather any environmental information reasonably required by the Rating Agency in connection with such a securitization, (b) at Lender's request, meet with representatives of the Rating Agency to discuss the business and operations of the Property, and (c) cooperate with the reasonable requests of the Rating Agency in connection with all of the foregoing. 16.7 Securitization Financials. Borrower covenants and agrees that, upon Lender's written request therefor in connection with a securitization in which the Loan is to be included as an asset, Borrower shall promptly deliver audited financial statements and related documentation prepared by an Independent certified public accountant that satisfy securities laws and requirements for use in a public registration statement (which may include up to three (3) years (but no period prior to the date hereof) of historical audited financial statements). 16.8 Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by Lender, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 16.9 Notices, Etc. Any notices, demand, statement, request or consent and other communications provided for hereunder shall be in writing and delivered personally or sent to the party to whom the notice, demand or request is being made by Federal Express or other nationally recognized overnight delivery service, as follows and shall be deemed given when personally delivered or one Business Day after being timely deposited with Federal Express or such other nationally recognized delivery service. If any notice date falls on a non- Business Day, then the notice shall be due on the next succeeding Business Day. 60 If to Borrower, at the address first written above, with a copy to: Johnson, Smith, Hibbard & Wildman Law Firm, L.L.P. 220 N. Church St. Spartanburg, SC 29306 Attn: Donald B. Wildman, Esq. and to: Pedersen & Houpt, P.C. 161 North Clark St., Ste. 3100 Chicago, IL 60601-3224 Attn: Thomas J. Kelly, Esq. If to Lender, at its address first written above, Attn: Marc J. Warren with a copy to: and to: Weil Gotshal & Manges 767 Fifth Ave. New York, NY 10153 Attn: Managing Partner Real Estate Department (FW) Any such address may be changed, or additional addresses (not to exceed three) added by notice given in the manner provided herein. Any notice or other communication may be given by counsel for the party giving the same. 16.10 No Waiver; Remedies. No failure on the part of Lender to exercise, and no delay in exercising, any right hereunder or under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other 61 or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 16.11 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of Borrower against any and all of the Obligations now or hereafter existing whether or not Lender shall have made any demand under this Agreement or any Note or any other Loan Document and although such Obligations may be unmatured. Lender agrees promptly to notify Borrower after any such set-off and application made by Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which Lender may have. 16.12 Binding Effect. This Agreement shall become effective when it shall have been executed by Borrower and Lender and thereafter shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, except that Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Lender. 16.13 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 16.14 Submission to Jurisdiction; Service of Process. A. Any legal action or proceeding with respect to this Agreement or the Note or any document related thereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. 62 B. Borrower irrevocably consents to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to Borrower at its address provided herein. C. Nothing contained in this Section shall affect the right of Lender or any holder of the Note to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against Borrower in any other jurisdiction. 16.15 Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 16.16 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 16.17 Entire Agreement. This Agreement, together with all of the other Loan Documents and all certificates and documents delivered hereunder or thereunder embody the entire agreement of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. 16.18 Confidentiality. Lender agrees to keep information obtained by it pursuant hereto and the other Loan Documents confidential in accordance with Lender's customary practices and agrees that it will only use such information in connection with the transactions contemplated by this Agreement and not disclose any of such information other than (i) to Lender's employees, representatives and agents who are or are expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement and who are advised of the confidential nature of such information, (ii) to the extent such information presently is or hereafter becomes available to Lender, as the case may be, on a non-confidential basis from a source other than Borrower, (iii) to the extent disclosure is required by law, regulation or judicial order or requested or required by bank regulators or auditors, or (iv) to assignees or participants or potential assignees or participants who agree to be bound by the provisions of this sentence. 16.19 Waiver of Jury Trial. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, or arising out of, under or in connection with this Agreement or any other Loan Document, or any course of conduct, course of dealing, verbal or written statement or action of any party hereto. 63 16.20 Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Borrower is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. 16.21 Actions and Proceedings. After an Event of Default, Lender may appear in and defend any action or proceeding brought with respect to the Property in its own name or, if required by Legal Requirements or, if in Lender's reasonable judgment, it is necessary, in the name and on behalf of Borrower, which Lender believes will adversely affect the Property or this Agreement and may bring any action or proceedings, in its name or in the name and on behalf of Borrower, which Lender, in its discretion, decides should be brought to protect its interest in the Property. 16.22 Usury Laws. This Agreement and the Note are subject to the express condition, and it is the expressed intent of the parties, that at no time shall Borrower be obligated or required to pay interest on the principal balance due under the Note at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate that Borrower is permitted by law to contract or agree to pay. If by the terms of this Agreement or the Note, Borrower is at any time required or obligated to pay interest on the principal balance due under the Note at a rate in excess of such maximum rate, such rate of interest shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Note. No application to the principal balance of the Note pursuant to this Section shall give rise to any requirement to pay any prepayment premium due hereunder, if any, including, without limitation, Yield Maintenance Premium. 16.23 Remedies of Borrower. Under no circumstances shall Lender be liable for any punitive, consequential or incidental damages suffered by, awarded to or claimed by Borrower, any Affiliate or third party. In the event that a claim or adjudication is made that Lender has acted unreasonably or unreasonably delayed acting in any case where by law or under this Agreement, it has an obligation to act reasonably or promptly, Lender shall only be liable for Borrower's actual damages, if it is determined that Lender intentionally and in bad faith acted unreasonably or unreasonably delayed acting. In all other cases, Lender shall not be liable for any monetary damages, and Borrower's remedies shall be limited to injunctive relief or declaratory judgment. 64 16.24 Offsets, Counterclaims and Defenses. Any assignee of this Agreement and the Note shall take the same free and clear of all offsets, counterclaims or defenses that are unrelated to the Note or this Agreement that Borrower may otherwise have against any assignor of this Agreement and the Note and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon this Agreement or the Note and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower. 16.25 Waiver of Statute of Limitations. The pleadings of any statute of limitations as a defense to any and all obligations secured by this Agreement are hereby waived to the full extent permitted by Legal Requirements. 16.26 Advances. This Agreement shall cover any and all advances made pursuant to the Loan Documents, rearrangements and renewals of the Loan and all extensions in the time of payment thereof, even though such advances, extensions or renewals be evidenced by new promissory notes or other instruments hereafter executed and irrespective of whether filed or recorded. Likewise, the execution of this Agreement shall not impair or affect any other security that may be given to secure the payment of the Loan, and all such additional security shall be considered as cumulative. The taking of additional security, execution of partial releases of the security, or any extension of time of payment of the Loan shall not diminish the force, effect or lien of the Mortgage and shall not affect or impair the liability of Borrower and shall not affect or impair the liability of any maker, surety, or endorser for the payment of the Loan. 16.27 Application of Default Rate Not a Waiver. Application of the Default Rate shall not be deemed to constitute a waiver of any Default or Event of Default or any rights or remedies of Lender under this Agreement, any other Loan Document or applicable Legal Requirements, or a consent to any extension of time for the payment or performance of any obligation with respect to which the Default Rate may be invoked. 16.28 No Joint Venture or Partnership. Borrower and Lender intend that the relationship created hereunder be solely that of mortgagor and mortgagee or borrower and lender, as the case may be. Nothing herein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender nor to grant Lender any interest in the Property other than that of mortgagee or lender. 16.29 Time of the Essence. Time shall be of the essence in the performance of all obligations of Borrower hereunder. 65 16.30 Borrower's Obligations Absolute. Except as set forth to the contrary in the Loan Documents, all sums payable by Borrower hereunder shall be paid without notice or demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Borrower hereunder shall in no way be released, discharged, or otherwise affected (except as expressly provided herein) by reason of: (a) any damage to or destruction of or any Taking of the Property or any portion thereof; (b) any restriction or prevention of or interference with any use of the Property or any portion thereof; (c) any title defect or encumbrance or any eviction from the Real Estate or any portion thereof by title paramount or otherwise; (d) any bankruptcy proceeding relating to Borrower or any guarantor or indemnitor, or any action taken with respect to this Agreement, the Mortgage or any other Loan Document by any trustee or receiver of Borrower or any such guarantor or indemnitor, or by any court, in any such proceeding; (e) any claim that Borrower has or might have against Lender; (f) any default or failure on the part of Lender to perform or comply with any of the terms hereof or of any other agreement with Borrower; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Borrower shall have notice or knowledge of any of the foregoing. 16.31 Recourse. The Loan shall be fully recourse to Borrower. 16.32 Limitation on Costs. Notwithstanding the foregoing Borrower's obligation to pay certain expenses and costs under this Agreement are subject to limitations set forth in Sections 15.5A and 15.32 of the ESA Loan Agreement. 17 ADDITIONAL PROVISIONS Exhibit B annexed hereto and made a part hereof contains additional provisions that are necessary or appropriate under the laws of the State in which the Property is located. 66 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [ESA Borrower] By:________________________________________________ Name:_________________________________________ Title:________________________________________ CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION By:________________________________________________ Name:_________________________________________ Title:________________________________________ 67 Exhibit 7.6H - ------------ STANDSTILL AND SUBORDINATION AGREEMENT This STANDSTILL AND SUBORDINATION AGREEMENT, made as of _____________, 199__, by and between CS First Boston Mortgage Capital Corporation, a Delaware corporation (the "Senior Lender") and Extended Stay America, Inc. (the "Subordinate Lender"), a Delaware corporation. W I T N E S S E S T H: --------------------- WHEREAS, Senior Lender and Subordinate Lender entered into that certain Credit Facility Agreement dated as of May __, 1996, pursuant to which Senior Lender agreed to lend up to $300,000,000 to various subsidiaries of Subordinate Lender; WHEREAS, Senior Lender has made [or is about to make] a loan to [ESA Sub] ("Borrower") in the principal amount of up to $_____________ evidenced by a Note in like amount (the "Senior Note"), which is to be governed by a Property Loan Agreement; WHEREAS, the Senior Note and other indebtedness of the Borrower or Affiliates of the Borrower, in accordance with the Credit Facility Agreement and the Property Loan Agreement, are to be secured by a Mortgage on the Property as that term is defined in the Mortgage (the "Mortgaged Property") and other security Documents, (the Mortgage and other security documents, the "Senior Security Documents") (the Credit Facility Agreement, the Senior Note, the Property Loan Agreement, the Senior Security Documents, collectively the "Senior Loan Documents"); WHEREAS, Subordinate Lender desires to make loans to Borrower in amounts not to exceed $100,000, each loan to be evidenced by an unsecured note in like amounts (the "Subordinate Notes"); WHEREAS, Subordinate Lender has agreed not to make such loans without the permission of Senior Lender and without executing this Agreement; NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the Subordinate Lender and the Senior Lender hereby agree as follows: 1. The indebtedness, obligations, or liabilities of the Borrower to the Subordinate Lender, under and pursuant to the Subordinate Notes and any extensions, refundings or renewals of such indebtedness, obligations or liabilities, whether contingent or absolute, including, without limitation, any future advances whether obligatory or not (all such indebtedness, obligations or liabilities being referred to herein as "Subordinated Indebtedness") shall at all times be: (i) in an amount less than $100,000, (ii) wholly unsecured and (iii) wholly subordinate and junior in right of payment and otherwise to any and all indebtedness, obligations or liabilities of the Borrower now or hereafter owed to the Senior Lender under the Senior Loan Documents or otherwise, including without limitation any protective advances, future advances whether obligatory or not and to any extensions, substitutions, modifications, amendments and consolidations thereof, as permitted herein (all such indebtedness, obligations or liabilities being referred to herein as "Senior Indebtedness"). The Subordinate Lender does hereby subordinate to the Senior Indebtedness all of its right, title and interest, if any, in and to all insurance proceeds or condemnation awards arising from or related to the Mortgaged Property subject to the liens of the Senior Lender and the Subordinate Lender agrees that the amount of such proceeds and awards shall be applied pursuant to the terms and provisions of the Senior Security Documents. 2. The Subordinate Lender agrees that so long as any sum shall remain outstanding on the Senior Indebtedness or any other amounts secured by the Senior Security Documents are unpaid (as such may be amended, modified or extended, as permitted herein): (a) The Subordinate Indebtedness shall remain an unsecured obligation of the Borrower; (b) The Subordinate Lender shall not accept any payment of principal or prepayment of interest under the Subordinate Documents or any rents, issues or profits from the Property if the Borrower is in Default, declared or otherwise, under any or all of the Senior Loan Documents; (c) Except as permitted by clause (b), the Subordinate Lender will not ask, demand, sue for, take or receive, directly or indirectly, by set-off, redemption or in any manner whatsoever, any payment of any kind on account of the Subordinate Loan, until the Senior Indebtedness is indefeasibly paid in full. Furthermore, the Subordinate Lender shall not (i) send notices of default and/or acceleration, (ii) commence any action on the Subordinate Indebtedness, (iii) petition for the appointment of a receiver, (iv) take title to the Premises or a security interest therein; 2 (d) The Subordinate Lender shall take not any action which will affect the lien and priority of the Senior Security Documents; (e) The Subordinate Lender shall not take an assignment of rents and leases from the Borrower; (f) The Subordinate Lender shall not acquire, by subrogation or otherwise, any lien, estate, right or other interest in the Mortgaged Property which is or may be prior in right to the Senior Security Documents; (g) The Subordinate Lender hereby waives any and all rights it may acquire by subrogation or otherwise to the lien and security interest of the Senior Security Documents; (h) The Subordinate Lender will not challenge the validity or priority of the lien of the Senior Security Documents or take any other action which adversely affects the interests of the Senior Lender; (i) The Subordinate Lender shall not commence any Bankruptcy Proceeding against the Borrower; (j) The Subordinate Lender shall not attempt to consolidate a bankruptcy of the Borrower with that of any other entity; (k) The Subordinate Lender agrees that 10 days before the Senior Indebtedness is to be included as an asset in a securitization, the indebtedness evidenced by the Subordinate Notes will terminate without further action by the Subordinate Lender or Borrower regardless of whether or not the indebtedness has been paid in part or in full. In connection with the securitization of the Senior Note and loan, Senior Lender will endeavor to give notice of such securitization to Subordinate Lender 20 days prior to such securitization, but in no event will the failure of Senior Lender to give such notice in any way affect Subordinate Lender's obligations hereunder; and (l) The Subordinate Lender will not modify in any way the Subordinate Notes without the consent of the Senior Lender, which consent shall not be unreasonably withheld or delayed. 3. If the Subordinate Lender, in violation of the provisions set forth herein, shall commence, prosecute or participate in any suit, action or proceeding, against Borrower, 3 the Senior Lender or any other party, then the Senior Lender, or any trustee for their benefit, may intervene and interpose such defense or plea in its own name or in the name of the party against which the action is being taken, and may, in any event, have standing to restrain the actions of the Subordinate Lender in its own name or in the name of the Senior Lender in the same suit, action or proceeding or in an independent suit, action or proceeding. 4. In the event of any proceedings to liquidate, dissolve or wind up the Borrower, or of any execution, sale, receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization, or other similar proceedings relative to the Borrower or its property (collectively, a "Bankruptcy Proceeding"), the Senior Indebtedness shall first be paid in full before any payment is made upon the Subordinate Indebtedness; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities, which shall be made upon or in respect of the Subordinate Indebtedness or any collateral for the Senior Indebtedness in or as a result of any such proceeding shall be paid over to the Senior Lender, until the Senior Indebtedness has been paid in full. 5. The Senior Lender or its nominee in its reasonable discretion shall have the right to accept or reject any plan proposed in any Bankruptcy Proceeding and to take any other action which a party filing a claim is entitled to take in order to effectuate the subordination contained herein. In such cases, whether in administration, bankruptcy or otherwise, any party authorized to pay such claim shall pay to the holder of the Senior Indebtedness the amount payable on such claim and, to the full extent necessary for the purposes of this Section, the Subordinate Lender shall assign to the holders of the Senior Indebtedness all of the Subordinate Lender's rights to any such payments or distributions to which the Subordinate Lender would otherwise be entitled; provided, however, that the obligations of the Borrower and the Subordinate Lender shall not be satisfied except to the extent that the holders of the Senior Indebtedness receive cash by reason of any such payment or distribution. If the holders of the Senior Indebtedness receive anything in a Bankruptcy Proceeding other than cash, the same shall be held as collateral for amounts due under the Senior Security Documents. 6. If notwithstanding the provisions of this agreement, the Subordinate Lender shall receive any payment of principal or interest on Subordinated Indebtedness which the Subordinate Lender is not entitled to receive pursuant to the terms hereof, whether or not the Subordinate Lender has knowledge that it is not entitled to receive such payment, the Subordinate Lender shall promptly account for such payment and upon the Senior Lender's demand pay over such payment for application to the Senior Indebtedness. No payment or any distribution received by the Subordinate Lender in respect of Subordinated Indebtedness shall 4 entitle the Subordinate Lender to any right, whether by virtue of subrogation or otherwise, in and to any Senior Indebtedness. 7. The Subordinate Lender further covenants, agrees and undertakes that: (a) if the Senior Lender or its agents exercises any right or takes any remedial action pursuant to the terms and provisions of the Mortgage, or any of the other Senior Documents, the Subordinate Lender expressly waives any claims it may have against Senior Lender in connection with such act by the Senior Lender, or its agents; (b) the Subordinate Lender shall not exercise any right or take any action which could terminate or in any way adversely affect the lien or security interests or the availability of the Mortgaged Property (including without limitation all rents, revenues, issues, profits and proceeds of the Mortgaged Property) to pay and satisfy the Senior Indebtedness under the Senior Documents. 8. The Subordinate Lender hereby consents and agrees that, without the necessity of any reservation of rights against any of such persons, and without notice to or further assent by any of such persons: (i) any demand for payment of the Senior Indebtedness made by the holder(s) thereof may be rescinded in whole or in part by such holder(s), and the Senior Indebtedness, or the liability of Borrower or of any other party upon or for any part thereof, or any collateral security or guaranty therefor or right of offset with respect thereto, or any obligation or liability of Borrower or of any other party under the Senior Documents, may, from time to time, in whole or in part, by accelerated, compromised, waived, surrendered or released by any or all the holder(s) of the Senior Indebtedness, and (ii) any of the Senior Documents, and any other document or instrument evidencing or governing the terms of any of the Senior Indebtedness and any collateral security documents or guaranties or other documents in connection with any thereof may be waived or terminated, in whole or in part, and remedies thereunder may be exercised in whole or in part or not at all, all as the Senior Lender may deem advisable from time to time, and any collateral security at any time held by the holder or holders of any Senior Indebtedness for the payment of any of the Senior Indebtedness may be sold, exchanged, waived, surrendered or released, in each case all without notice to or further assent by Subordinated Lender, and all without impairing, abiding, releasing or affecting the subordination provided for herein, notwithstanding any such acceleration, compromise, termination, sale, exchange, waiver, surrender or release. The Subordinate Lender waives any and all notice of the creation or accrual of any of the Senior Indebtedness and notice of or proof of reliance by the holder(s) of the Senior Indebtedness upon the provisions hereof. The Subordinate Lender agrees with the Senior Lender to enter 5 into a subordination agreement on the same terms and conditions as this Agreement with any purchaser or refinancer of the Senior Indebtedness. The Senior Lender shall conclusively be deemed to have acted in reliance upon the provisions hereof. The Subordinate Lender acknowledges and agrees that the holder(s) of the Senior Indebtedness have relied upon the subordination provided for herein in consenting to the Subordinate Documents. The Subordinate Lender waives notice of or proof of reliance on the provisions hereof and protest and demand for payment. 9. The Subordinate Lender and Senior Lender each hereby agree that no failure to exercise, and no delay in exercising, on the part of any holder of the Senior Indebtedness or Subordinate Indebtedness of any right, power or privilege in any agreement relating to any of the Senior Indebtedness or Subordinate Indebtedness, or any right, power or privilege under the terms hereof shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege in any agreement relating to any of the Senior Indebtedness or Subordinate Indebtedness or under the terms hereof preclude any other further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided herein and in any agreement relating to any of the Senior Indebtedness or Subordinate Indebtedness and all other agreements, instruments and documents referred to in any of the foregoing are cumulative and shall not be exclusive of any rights or remedies provided by law. 10. The Subordinate Lender hereby agrees to execute and deliver such further documents as Senior Lender may reasonably request in order fully to effect the purposes hereof. 11. THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 12. This Subordination Agreement is made for the sole benefit of Senior Lender and Subordinate Lender and neither the Borrower nor any other person or persons shall have any benefits, rights or remedies under or by reason of this Agreement. 13. This Agreement may not be changed or amended except by a writing signed by each of the parties hereto. 14. This Agreement constitutes the entire understanding of the parties hereto with respect to the transactions contemplated hereby and all prior undertakings with respect thereto, whether written or oral, shall be of no force and effect. 6 IN WITNESS WHEREOF the Senior Lender and the Subordinate Lender have duly executed this Agreement as of the day and year above written. SUBORDINATE LENDER: EXTENDED STAY AMERICA, INC. By:_______________________________________ Its:___________________________________ SENIOR LENDER: CS FIRST BOSTON MORTGAGE CAPITAL CORPORATION By:_______________________________________ Its:___________________________________ 7 -----END PRIVACY-ENHANCED MESSAGE-----