-----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, Gy3S33jckhpQLRyo5szKwsLxQ02zbU8jVKvXPKSea3y8+tbtTBLIix94YMVuIfaE Tv5HiLoQgVVjwoFcHO2guQ== 0000928385-99-000591.txt : 19990303 0000928385-99-000591.hdr.sgml : 19990303 ACCESSION NUMBER: 0000928385-99-000591 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERISTAR HOSPITALITY CORP CENTRAL INDEX KEY: 0001012967 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752648842 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11903 FILM NUMBER: 99555549 BUSINESS ADDRESS: STREET 1: 1010 WISCONSIN AVENUE N W CITY: WASHINGTON STATE: DC ZIP: 20007 BUSINESS PHONE: 9725506800 MAIL ADDRESS: STREET 1: 1010 WISCONSIN AVENUE N W CITY: WASHINGTON STATE: DC ZIP: 20007 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GENERAL HOSPITALITY CORP DATE OF NAME CHANGE: 19960428 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission File Number 1-11903 MERISTAR HOSPITALITY CORPORATION (Exact name of issuer as specified in its charter) MARYLAND 75-2648842 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1010 WISCONSIN AVENUE, N.W., WASHINGTON, D.C. 20007 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (202) 295-1000 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered: -------------------------------- ------------------------------------------ Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X - Based on the average sale price at March 1, 1999, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $824,935,000. The number of shares of the Registrant's common stock outstanding as of March 1, 1999 was 46,828,959. DOCUMENTS INCORPORATED BY REFERENCE: Part III - Those portions of the Registrant's definitive proxy statement relating to Registrant's 1999 Annual Meeting of Stockholders which are incorporated into Items 10, 11, 12, and 13. PART I ITEM 1. BUSINESS THE COMPANY MeriStar Hospitality Corporation (the "Company") is a comprehensive real estate investment trust ("REIT"), which owns a portfolio of primarily upscale, full-service hotels, diversified by franchise and brand affiliations, in the United States and Canada. As of December 31, 1998, the Company owned 117 hotels that contain 29,351 rooms (the "Hotels"). The Hotels are located in major metropolitan areas or rapidly growing secondary markets and are well located within these markets. A majority of the Hotels are operated under nationally recognized brand names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Doubletree(R) and Embassy Suites(R). All of the Hotels and the Company's other assets are held by, and all of the Company's operations are conducted by, MeriStar Hospitality Operating Partnership, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and controls its operations. The Company was created on August 3, 1998, when American General Hospitality Corporation ("AGH"), a Maryland corporation operating as a REIT, and its affiliated entities merged with CapStar Hotel Company, a Delaware corporation ("CapStar"), and its affiliated entities pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998 (the "Merger"). At the Merger, through a series of transactions, CapStar transferred or caused to be transferred certain assets and liabilities to MeriStar Hotels & Resorts, Inc. ("OPCO"), a Delaware corporation and a wholly owned subsidiary of CapStar, so that OPCO would own the hotel management and leasing business previously operated by CapStar and its subsidiaries, and CapStar then distributed to its stockholders on a share-for-share basis (the "Spin-Off") all of the outstanding capital stock of OPCO. Immediately following the Merger, OPCO acquired 100% of the partnership interests in AGH Leasing, L.P., the third-party lessee that leased most of the hotels owned by AGH, and substantially all of the assets and certain liabilities of American General Hospitality, Inc., the third-party manager that managed most of the hotels owned by AGH. OPCO is the lessee and manager of 109 of the Hotels as well as properties of other hotel owners. The eight Hotels not leased by OPCO are leased by affiliates of Prime Hospitality, Corp. ("Prime"). The Company and OPCO share certain key officers and four board members. An intercompany agreement aligns the Company's interests with the interests of OPCO (the "Intercompany Agreement"), with the objective of benefiting both companies' shareholders. See "Intercompany Agreement." Each of the Company's leases is a participating lease ("Participating Lease") designed to allow the Company to achieve substantial participation in any future growth of revenues generated at the Hotels. Each Participating Lease has a term of twelve years from the inception of the lease, subject to earlier termination upon the occurrence of certain events. Under each Participating Lease, the lessee is obligated to pay the Company the greater of fixed base rent or participating rent based on a percentage of revenues at each of the Hotels. See "The Participating Leases." The Company's business strategy is to opportunistically acquire hotel properties and related businesses with the potential for cash flow growth, and to renovate and reposition each hotel according to the characteristics of the hotel and its market. During the year ended December 31, 1998, the Company spent (including expenditures by both CapStar and AGH prior to the Merger) a total of $200 million on renovations at the Hotels and intends to spend an additional $175 million during 1999 completing its renovation programs. See "Special Note Regarding Forward-Looking Statements." The Company believes that the upscale, full-service segment of the lodging industry is the most attractive segment in which to own hotels. The upscale, full-service segment is attractive for several reasons. First, the real estate market has experienced a significant slow down in the past year in the development of upscale, full-service hotels. Second, upscale, full-service hotels appeal to a wide variety of customers, thus reducing the risk of decreasing demand from any particular customer group. Additionally, such hotels have particular 2 appeal to both business executives and upscale leisure travelers, customers who are generally less price sensitive than travelers who use limited-service hotels. BUSINESS The Company seeks to increase shareholder value by maintaining its close relationship with OPCO, a successful hotel operator, and by continuing to find upscale, full-service hotels that can be acquired at prices below replacement cost in selected markets throughout North America. The Intercompany Agreement Rights of First Refusal The Intercompany Agreement provides that OPCO has a right of first refusal to become the lessee of any real property acquired by the Company if the Company determines that, consistent with its status as a REIT, the Company is required to enter into a lease; provided that OPCO or an entity controlled by OPCO is qualified to be the lessee based on experience in the industry and financial and legal qualifications. The Intercompany Agreement provides that the Company must provide OPCO with written notice of a lessee opportunity. During the 30 days following such notice, OPCO has a right of first refusal with regard to the offer to become a lessee and the right to negotiate with the Company on an exclusive basis regarding the terms and conditions of the lease. If after 30 days, the Company and OPCO are unable to agree on the terms of a lease or if OPCO indicates that it is not interested in pursuing the opportunity, the Company may offer the opportunity to other hotel operators for a period of one year thereafter, at a price and on terms and conditions that are not more favorable than the price and terms and conditions proposed to OPCO. After this one-year period, if the Company has not leased the property, the Company must again offer the opportunity to OPCO in accordance with the procedures specified above. Each company has established a leasing committee which reviews all hotel leases to be entered into between the companies. Both leasing committees consist of directors that are not directors of the other company. OPCO has agreed not to acquire or make (i) investments in real estate or (ii) any other investments that may be made by a REIT under the federal income tax rules governing REITs unless they have provided written notice to the Company of the material terms and conditions of the acquisition or investment opportunity, and the Company has determined not to pursue such acquisitions or investments either by providing written notice to OPCO rejecting the opportunity within 20 days or by allowing such 20-day period to lapse. OPCO has also agreed to assist the Company in structuring and consummating any acquisition or investment which the Company elects to pursue. The Intercompany Agreement provides the Company and OPCO with a symbiotic relationship so that investors in both companies may enjoy the economic benefit of the entire enterprise. Investors should be aware, however, that because of the independent trading of the shares of the Company and the shares of OPCO, stockholders of each company may develop divergent interests which could lead to conflicts of interest. This divergence of interests could also reduce the anticipated benefits of the relationship between the two companies. Provision of Services OPCO provides the Company with certain services as the Company may reasonably request from time to time, including administrative, corporate, accounting, financial, insurance, legal, tax, data processing, human resources, acquisition identification and due diligence, and operational services. The Company compensates OPCO for services provided in an amount determined in good faith by OPCO as the amount an unaffiliated third party would charge the Company for comparable services. 3 Equity Offerings If either the Company or OPCO desires to engage in a securities issuance, such issuing party will give notice to such other party as promptly as practicable of its desire to engage in a securities issuance. Any such notice will include the proposed material terms of such issuance, to the extent determined by the issuing party, including whether such issuance is proposed to be pursuant to public or private offering, the amount of securities proposed to be issued and the manner of determining the offering price and other terms thereof. The non- issuing party will cooperate with the issuing party in every way to effect any securities issuance of the issuing party by assisting in the preparation of any registration statement or other document required in connection with such issuance and, in connection therewith, providing the issuing party with such information as may be required to be included in such registration statement or other document. Term The Intercompany Agreement will terminate upon the earlier of (a) August 3, 2008, or (b) a change in ownership or control of OPCO. The Company may lend OPCO up to $75 million for general corporate purposes pursuant to a revolving credit agreement. Amounts outstanding under the facility bear interest at the rate of the 30-day London Interbank Offered Rate ("LIBOR") plus 350 basis points. As of December 31, 1998, OPCO had drawn $67 million on the facility at an interest rate of 8.56%. Acquisition Strategy In order to maintain its qualification as a REIT, the Company must make annual distributions to its stockholders of at least 95% of its taxable income (excluding net capital gains). As a result, in order to complete acquisitions, the Company relies heavily on its ability to raise new capital through debt and equity offerings; that ability is dependent on the then current status of the capital markets. During the last six to nine months, the capital markets have changed and equity capital is not available at prices that make it beneficial to acquire new assets. Although the Company is not currently pursuing direct acquisition opportunities due to the lack of available capital, it continues to be aware of acquisition opportunities in the upscale, full-service hotel market. The Company currently anticipates that it may make investments in hotels through joint ventures with strategic partners or through equity contributions, sales and leasebacks, or secured loans. The Company focuses its attention on investments in hotels located in markets with economic, demographic and supply dynamics favorable to hotel owners. Through its extensive due diligence process, the Company selects those acquisition targets where it believes selective capital improvements and well selected third-party management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management of the Company together with OPCO create detailed plans covering all areas of renovation and operation. These plans serve as the basis for the Company's acquisition decisions and guide subsequent renovation and operating plans which will be carried out by a third-party hotel operator. Competition The Company competes primarily in the upscale and mid-priced sectors of the full-service segment of the lodging industry. In each geographic market in which the Hotels are located, there are other full- and limited-service hotels that compete with the Hotels. Competition in the U.S. lodging industry is based generally on convenience of location, brand affiliation, price, range of services and guest amenities offered and quality of customer service and overall product. 4 Employees As of December 31, 1998, the Company employed four persons, all of whom are compensated on a salary basis. All of the Company's employees work at the corporate headquarters. The Company also reimburses OPCO for work performed by its employees on behalf of the Company. During 1998, the Company reimbursed OPCO approximately $781,000 for worked performed by OPCO employees on behalf of the Company. Franchises The Company employs a flexible branding strategy based on a particular hotel's market environment and the hotel's unique characteristics. Accordingly, the Company uses various national trade names pursuant to licensing arrangements with national franchisors. Governmental Regulation Americans with Disability Act - Under the Americans with Disabilities Act (the "ADA"), all public accommodations are required to meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to the Hotels, a determination that the Company is not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. The Company is likely to incur additional costs of complying with the ADA; however, such costs are not expected to have a material adverse effect on the Company's results of operations or financial condition. Environmental Laws - 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 hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to use the property, sell the property or borrow by using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. The operation and removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the ownership of the Hotels, the Company could be liable for the costs of remedial action with respect to such regulated substances and storage tanks and claims related thereto. Certain environmental laws and common law principles could also 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. Phase I environmental site assessments ("ESA") have been conducted at all of the Hotels, and Phase II ESAs have been conducted at some of the Hotels by qualified independent environmental engineers. The purpose of the ESA is to identify potential sources of contamination for which the Hotels may be responsible and to assess the status of environmental regulatory compliance. The ESAs have not revealed any environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company's business, assets, results of operations or liquidity, nor is the Company aware of any material environmental liability or concerns. Nevertheless, it is possible that these ESAs did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which the Company is currently unaware. In reliance upon the Phase I and Phase II ESAs, the Company believes the Hotels are in material compliance with all federal, state and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any governmental 5 authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in any of the Hotels. THE OPERATING PARTNERSHIPS The following summary information is qualified in its entirety by the provisions of the MeriStar Hospitality Operating Partnership, L.P. limited partnership agreement, a copy of which has been filed as an exhibit to this Form 10-K. Substantially all of the Company's assets are held indirectly by MeriStar Hospitality Operating Partnership, L.P. (the "Operating Partnership"), the Company's subsidiary operating partnership. The Company is the sole general partner of the Operating Partnership, and the Company and approximately 114 independent third parties are limited partners of the Operating Partnership. The partnership agreement of the Operating Partnership give the general partner full control over the business and affairs of the Operating Partnership. The general partner is also given the right, in connection with the contribution of property to the Operating Partnership or otherwise, to issue additional partnership interests in the Operating Partnership in one or more classes or series, with such designations, preferences and participating or other special rights and powers (including rights and powers senior to those of the existing partners) as the general partner may determine. The Operating Partnership's partnership agreement provides for four classes of partnership interests ("OP Units"): Common OP Units, Class B OP Units, Class C OP Units and Class D OP Units. As of March 1, 1999, the partners of the Operating Partnership own the following aggregate numbers of OP Units: (i) the Company and its wholly-owned subsidiaries own a number of Common OP Units equal to the number of issued and outstanding shares of the Company's common stock, par value $0.01, (the "Common Stock") and (ii) independent third parties own 5,782,490 OP Units (consisting of 3,306,872 Common OP Units, 974,588 Class B OP Units, 1,108,873 Class C OP Units and 392,157 Class D OP Units). Common OP Units and Class B OP Units receive quarterly distributions per OP Unit equal to the dividend paid on each of the Company's Common Shares. Class C OP Units receive a non-cumulative, quarterly distribution equal to $0.5575 per Class C OP Unit until such time as the dividend rate on the Company's Common Shares exceeds $0.5575 whereupon the Class C OP Units automatically convert into Common OP Units. Class D OP Units pay a 6.5% cumulative annual preferred return based on an assumed price per Common Share of $22.16, compounded quarterly to the extent not paid on a current basis, and are entitled to a liquidation preference of $22.16 per Class D OP Unit. All net income and capital proceeds earned by the Operating Partnership, after payment of the annual preferred return and, if applicable, the liquidation preference, will be shared by the holders of the Common OP Units in proportion to the number of Common OP Units in the relevant Operating Partnership owned by each such holder. Each OP Unit held by the independent third-parties is redeemable by the holder for one share of Common Stock (or, at the Company's option, for cash in an amount equal to the market value of a share of Common Stock). In addition, the Class D OP Units may be redeemed by the Operating Partnership at a price of $22.16 per Class D OP Unit (or, at the Company's option, for a number of shares of Common Stock having a value equal to such redemption price) at any time after April 1, 2000 or by the holders of the Class D OP Units at a price of $22.16 per Class D OP Unit (in cash or, at the holder's option, for a number of shares of Common Stock having a value equal to the redemption price) at any time after April 1, 2004. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain information both included and incorporated by reference in this Prospectus may contain forward- looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our 6 future plans, strategies and expectations are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on the operations and future prospects of our Company include, but are not limited to, changes in: economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts), availability of capital, interest rates, competition, supply and demand for hotel rooms in our current and proposed market areas and general accounting principles, policies and guidelines applicable to real estate investment trusts. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Washington, D.C. and owns hotel properties throughout the United States and Canada. As of December 31, 1998, the Company owned 117 Hotels. The Company leases land for seven of its Hotels (Hilton Washington Embassy Row, Washington, DC; Hilton Port of Los Angeles/San Pedro, San Pedro, California; Doubletree Resort, Palm Springs, California; Jekyll Inn, Jekyll Island, Georgia; Hilton Clearwater, Clearwater, Florida; Courtyard by Marriott, Lake Buena Vista, Florida; and Radisson Hotel, Rochester, New York). The Company also leases part of the land for six of the Hotels (Westin Morristown, Morristown, New Jersey; Courtyard by Marriott Meadowlands, Secaucus, New Jersey; Wyndham Hotel Albuquerque, Albuquerque, New Mexico; Hilton Hotel Toledo, Toledo, Ohio; Wyndham Airport Hotel, San Jose, California; and Westin Resort Key Largo, Key Largo, Florida). No one hotel property is material to the operation of the Company. A typical Hotel has meeting and banquet facilities, food and beverage facilities and guest rooms and suites. The Hotels feature, or after the Company's renovation programs have been completed will feature, comfortable, modern guest rooms, extensive meeting and convention facilities and full-service restaurant and catering facilities that attract meeting and convention functions from groups and associations, upscale business and vacation travelers as well as banquets and receptions from the local community. The following table sets forth certain information with respect to the Hotels for the year ended December 31, 1998:
Guest Average Average Hotel Location Rooms Daily Rate Occupancy -------- -------- ----------- -------------- ------------- Sheraton Hotel.................... Mesa, AZ 273 $ 85.15 53.0% Crowne Plaza Hotel............. Phoenix, AZ 250 84.32 52.8 Embassy Suites.................... Tucson, AZ 204 83.72 74.8 Courtyard by Marriott............. Century City, CA 134 115.24 85.6 Hilton Hotel...................... Irvine, CA 289 100.04 73.0 Marriott Hotel.................... Los Angeles, CA 469 118.78 68.5 Courtyard by Marriott............. Marina Del Rey, CA 276 90.08 92.2 Hilton Hotel...................... Monterey, CA 204 114.62 62.5 Doubletree Resort................. Palm Springs, CA 285 81.62 52.8 Hilton Hotel...................... Sacramento, CA 331 100.09 71.9 Holiday Inn Select............... San Diego, CA 317 75.54 84.0 Sheraton Hotel................... San Francisco, CA 525 151.62 86.9 Crowne Plaza Hotel............. San Jose, CA 239 129.05 72.7 Wyndham Hotel..................... San Jose, CA 355 133.51 65.3 Hilton Hotel...................... San Pedro, CA 226 71.83 81.0 Santa Barbara Inn................. Santa Barbara, CA 71 149.60 82.3
7 Holiday Inn....................... Colorado Springs, CO 200 66.38 70.7 Sheraton Hotel.................... Colorado Springs, CO 500 76.89 69.2 Embassy Suites Denver............. Englewood, CO 236 109.99 76.3 Hilton Hotel...................... Hartford, CT 388 102.60 74.3 Ramada............................ Meriden, CT 150 78.20 72.2 The Lodge at the Seaport.......... Mystic, CT 77 81.73 54.7 Ramada............................ Shelton, CT 155 122.03 75.9 Doubletree Bradley Airport........ Windsor Locks, CT 200 81.97 69.4 Embassy Row Hilton................ Washington, DC 193 125.84 74.9 Georgetown Inn.................... Washington, DC 96 133.96 83.2 The Latham Hotel.................. Washington, DC 143 124.03 83.0 South Seas Plantation............. Captiva, FL 579 221.00 59.4 Hilton Hotel...................... Clearwater, FL 426 100.57 70.6 Ramada Hotel...................... Clearwater, FL 289 72.95 66.9 Hilton Hotel...................... Cocoa Beach, FL 296 84.93 76.8 Holiday Inn....................... Ft. Lauderdale, FL 240 73.69 73.1 Howard Johnson Resort............. Key Largo, FL 100 78.57 84.6 Westin Hotel...................... Key Largo, FL 200 133.37 70.2 Courtyard by Marriott............. Lake Buena Vista, FL 314 102.48 84.9 Sheraton Safari Hotel............. Lake Buena Vista, FL 489 77.11 77.8 Radisson Hotel.................... Marco Island, FL 268 126.19 69.7 Holiday Inn....................... Madeira Beach, FL 149 76.09 65.5 Radisson Hotel.................... Orlando, FL 742 88.05 71.2 Best Western Hotel................ Sanibel Island, FL 46 133.76 75.6 Sanibel Inn....................... Sanibel Island, FL 96 148.93 74.3 Seaside Inn....................... Sanibel Island, FL 32 148.12 71.2 Song of the Sea................... Sanibel Island, FL 30 170.91 86.3 Sundial Beach Resort.............. Sanibel Island, FL 243 184.43 72.7 Doubletree Hotel.................. Tampa, FL 496 58.97 71.4 Doubletree Guest Suites........... Atlanta, GA 155 107.45 65.9 Westin Atlanta Airport............ Atlanta, GA 495 85.14 78.7 Jekyll Inn........................ Jekyll Island, GA 262 65.59 52.8 Wyndham Hotel..................... Marietta, GA 218 63.60 72.0 Radisson Hotel.................... Arlington Heights, IL 201 87.15 70.3 Radisson Hotel & Suites........... Chicago, IL 350 150.26 78.0 Holiday Inn....................... Rosemont, IL 507 110.26 80.4 Radisson Hotel.................... Schaumburg, IL 200 89.11 70.2 Doubletree Guest Suites........... Indianapolis, IN 137 90.00 69.0 Radisson Plaza.................... Lexington, KY 367 84.00 62.7 Seelbach Hilton Hotel............. Louisville, KY 321 107.54 65.6 Holiday Inn Select................ Kenner, LA 303 85.60 76.6 Lafayette Hilton & Towers......... Lafayette, LA 327 76.89 72.6 Maison de Ville.................. New Orleans, LA 23 267.25 67.6 Holiday Inn....................... Annapolis, MD 219 91.11 70.4 Radisson Hotel................... Baltimore, MD 148 106.25 75.5 Sheraton Hotel................... Columbia, MD 287 102.77 73.4 Holiday Inn Express............ Hanover, MD 159 75.43 82.5 Hampton Inn..................... Ocean City, MD 168 82.67 53.7 Hilton Hotel...................... Detroit, MI 151 93.12 85.1 Hilton Hotel...................... Grand Rapids, MI 224 85.91 66.7 Holiday Inn Sports Complex........ Kansas City, MO 163 69.87 73.0 Holiday Inn....................... St. Louis, MO 120 71.91 81.7 Sheraton Airport Plaza............ Charlotte, NC 222 90.87 73.4 Hilton Hotel...................... Durham, NC 194 88.98 62.0 Courtyard by Marriott............. Durham, NC 146 81.01 72.0 Four Points Hotel................. Cherry Hill, NJ 213 78.64 62.8
8 Ramada Hotel...................... Mahwah, NJ 128 91.11 73.2 Sheraton Hotel.................... Mahwah, NJ 225 117.79 78.0 Westin Morristown................. Morristown, NJ 199 121.67 59.1 Four Points Hotel................. Mt. Arlington, NJ 124 100.86 75.7 Doral Forrestal................... Princeton, NJ 290 154.39 65.3 Courtyard by Marriott............. Secaucus, NJ 165 115.84 87.8 Marriott Hotel.................... Somerset, NJ 440 123.13 74.9 Doubletree Hotel.................. Albuquerque, NM 295 75.26 71.4 Wyndham Hotel..................... Albuquerque, NM 276 65.89 80.8 Crowne Plaza Hotel................ Las Vegas, NV 202 86.40 82.2 St. Tropez Suites................. Las Vegas, NV 149 97.35 72.6 Radisson Hotel.................... Rochester, NY 171 69.93 71.4 Radisson Hotel.................... Middleburg Heights, OH 237 75.41 66.8 Hilton Hotel...................... Toledo, OH 213 70.81 60.7 Westin Hotel...................... Oklahoma City, OK 395 74.64 52.9 Crowne Plaza Hotel................ Lake Oswego, OR 161 109.06 64.4 Sheraton Great Valley ............ Frazer, PA 198 110.18 75.4 Embassy Suites Center City........ Philadelphia, PA 288 136.31 74.7 Holiday Inn Select................ Trevose, PA 215 92.77 72.2 Hilton Hotel...................... Arlington, TX 309 86.18 76.8 Doubletree Hotel.................. Austin, TX 350 95.80 66.8 Austin Hilton & Towers............ Austin, TX 320 80.52 67.3 Holiday Inn Select................ Bedford, TX 243 66.62 80.1 Radisson Hotel.................... Dallas, TX 304 65.08 71.8 Renaissance Hotel................. Dallas, TX 289 94.91 58.0 Sheraton Hotel.................... Dallas, TX 348 68.29 60.9 Hilton Hotel...................... Houston, TX 291 67.56 69.2 Marriott Hotel.................... Houston, TX 302 117.52 69.4 Hilton Hotel...................... Houston, TX 295 105.85 78.7 Sheraton Hotel.................... Houston, TX 382 80.55 56.3 Holiday Inn Select................ Irving, TX 409 77.76 79.7 Hilton Hotel...................... Midland, TX 249 74.88 51.9 Hilton Hotel...................... Salt Lake City, UT 287 78.35 80.8 Holiday Inn....................... Alexandria, VA 178 107.75 75.4 Ramada Inn........................ Alexandria, VA 253 99.52 68.0 Hilton Hotel...................... Arlington, VA 209 117.10 82.4 Hilton Hotel...................... Arlington, VA 386 99.25 71.2 Hampton Inn....................... Richmond, VA 124 70.01 75.6 Holiday Inn....................... Richmond, VA 280 55.56 60.9 Hilton Hotel...................... Bellevue, WA 179 118.91 79.0 Crowne Plaza Hotel................ Madison, WI 226 94.11 71.5 Holiday Inn Calgary Airport....... Calgary, Alberta 170 48.36 78.7 Sheraton Hotel.................... Guildford, B.C. 278 66.61 70.1 Holiday Inn Metrotown............. Vancouver, B.C. 100 72.74 83.1 Ramada Vancouver Centre........... Vancouver, B.C. 118 68.74 79.9 ------- ------- ---- Total/Weighted Average 29,351 $ 95.00 71.5% ======== ======= ======
9 THE PARTICIPATING LEASES Subsidiaries of OPCO (the "Lessees") lease all but eight of the Hotels. Each Participating Lease provides for an initial term of 12 years. Each Participating Lease provides OPCO with three renewal options of five years each (except in the case of properties with ground leases having a remaining term of less than 40 years), provided that (a) the Lessee will not have the right to a renewal if a change in the tax law has occurred that would permit the Company to operate the hotel directly; (b) if the Lessee elects not to renew a Participating Lease for any applicable Hotel, then the Company has the right to reject the exercise of a renewal right on a Participating Lease of a comparable hotel; and (c) the rent for each renewal term is adjusted to reflect the then fair market rental value of the hotel. If the Company and the Lessee are unable to agree upon the then fair market rental value of a hotel, the Participating Lease terminates upon the expiration of the then current term and the Lessee then has a right of first refusal to lease the hotel from the Company on such terms as the Company may have agreed upon with a third-party lessee. Base Rent; Participating Rent; Additional Charges Each Participating Lease requires the Lessee to pay (i) fixed monthly base rent (the "Base Rent"), (ii) participating rent ("Participating Rent") which is payable monthly and based on certain percentages of room revenue, food and beverage revenue and telephone and other revenue at each hotel in excess of Base Rent, and (iii) certain other amounts, including interest accrued on any late payments or charges ("Additional Charges"). Base Rent and Participating Rent departmental thresholds (departmental revenue on which the rent percentage is based) are increased annually by a percentage equal to the percentage increase in the Consumer Price Index (CPI percentage increase plus 0.75% in the case of the Participating Rent departmental revenue threshold) compared to the prior year. In addition, under certain circumstances, a reduced percentage rate will apply to the revenues attributable to certain "discounted rates" that the Lessee may offer. Base Rent is payable monthly in arrears. Participating Rent is payable in arrears based on a monthly schedule adjusted to reflect the seasonal variations in the hotel's revenue. Other than real estate and personal property taxes and assessments, rent payable under ground leases, casualty insurance, including loss of income insurance, capital impositions and capital replacements and refurbishments (determined in accordance with generally accepted accounting principles), that are obligations of the Company, the Participating Leases require the Lessee to pay rent, liability insurance, all costs and expenses and all utility and other charges incurred in the operation of the hotels. The Participating Leases also provide for rent reductions and abatements in the event of damage or destruction or a partial taking of any hotel. The Participating Leases also provide for a rental adjustment under certain circumstances in the event of (a) a major renovation of the hotel, or (b) a change in the franchisor of the hotel. Lessee Capitalization The Participating Leases require OPCO, as guarantor of the Participating Leases, to maintain a book net worth of not less than $40 million. Further, commencing January 1, 1999, for so long as the tangible net worth of OPCO is less than 17.5% of the aggregate rents payable under the Participating Leases for the prior calendar year, OPCO is prohibited from paying dividends or making distributions other than dividends or distributions made for the purpose of permitting the partners of the Operating Partnership to pay taxes on the taxable income of the Operating Partnership attributable to its partners plus any required preferred distributions existing to partners. Termination The Company has the right to terminate the applicable Participating Lease upon the sale of a hotel to a third party or, upon the Company's determination not to rebuild after a casualty, upon payment to the Lessee of the fair market value of the leasehold estate (except for properties initially identified by the Company and OPCO as properties slated to be sold). The fair market value of the leasehold estate is 10 determined by discounting to present value at a discount rate of 10% per annum the cash flow for each remaining year of the then current lease term, which cash flow will be deemed to be the cash flow realized by the Lessee under the applicable Participating Lease for the 12-month period preceding the termination date. The Company will receive as a credit against any such termination payments an amount equal to any outstanding "New Lease Credits," which means the projected cash flow (determined on the same basis as the termination payment) of any new Participating Leases entered into between the Company and OPCO after the Effective Date for the initial term of such new Participating Lease amortized on a straight-line basis over the initial term of the new Participating Lease. Performance Standards The Company has the right to terminate the applicable Participating Lease if, in any calendar year, the gross revenues from a hotel are less than 95% of the projected gross revenues for such year as set forth in the applicable budget unless (a) the Lessee can reasonably demonstrate that the gross revenue shortfall was caused by general market conditions beyond the Lessee's control or (b) the Lessee "cures" the shortfall by paying to the Company the difference between the rent that would have been paid to the Company had the property achieved gross revenues of 95% of the budgeted amounts and the rent paid based on actual gross revenues. The Lessee does not have such a cure right for more than two consecutive years. The Participating Leases also require that the Lessee spend in each calendar year at least 95% of the amounts budgeted for marketing expenses and for repair and maintenance expenses. Assignment and Subleasing The Lessees do not have the right to assign a Participating Lease or sublet a hotel without the prior written consent of the Company. For purposes of the Participating Lease, a change in control of OPCO or the Lessees will be deemed an assignment of the Participating Lease and will require the Company's consent, which may be granted or withheld in its sole discretion. ITEM 3. LEGAL PROCEEDINGS In the course of the Company's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters have been submitted to a vote of security holders during the fourth quarter of 1998. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "MHX." The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock on the NYSE.
Price ---------- High Low ---------- ------------- 1999: First Quarter (through March 1, 1999)............................................................ $ 19 3/8 $17 11/16 1998: Fourth Quarter (ended December 31, 1998)......................................................... 20 1/4 12 15/16 Third Quarter (from Merger on August 3, 1998 through September 30, 1998) 21 3/8 14 9/16 Third Quarter (from July 1, 1998 through August 2, 1998)(1) 29 7/8 25 1/16 Second Quarter (ended June 30, 1998) (1) 34 7/16 27 1/8 First Quarter (ended March 31, 1998) (1) 36 1/2 31 1/8
_____________ (1) Represents the share prices of CapStar Hotel Company which, pursuant to generally accepted accounting principles, is the predecessor of the Company. The last reported sale price of the Common Stock on the NYSE on March 1, 1999 was $17 15/16. As of March 1, 1999, there were approximately 297 holders of record of the Common Stock. On November 4, 1998, the Company declared a dividend of $0.505 per share relating to the fourth quarter of 1998 that was paid on January 29, 1999 to stockholders of record as of December 30, 1998. The Company intends to make regular quarterly distributions to its stockholders. Future distributions by the Company will be at the discretion of the Board of Directors and will depend on the Company's financial condition, its capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. There can be no assurance that any such distributions will be made by the Company. In order to maintain its qualification as a REIT, the Company must make annual distributions to its stockholders of at least 95% of its taxable income (excluding net capital gains). Under certain circumstances, the Company may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements. In that event, the Company would seek to borrow the amount to obtain the cash necessary to make distributions to retain its qualification as a REIT for federal income tax purposes. The distributions made in 1998 represent a 33% return of capital. Recent Sales of Unregistered Securities CapStar Hotel Company Each of CapStar's private issuances of shares of Common Stock and the Operating Partnership's private issuances of OP Units has been in reliance on an exemption from registration under Section 4(2) of the Act in the amounts and for the consideration set forth below. On May 29, 1996, CapStar issued 100 shares of Common Stock to Cherwell Investors, Inc., a wholly-owned subsidiary of Acadia Partners, L.P. for nominal consideration. 12 On June 20, 1996, CapStar entered into a formation agreement pursuant to which it became obligated to issue 3,504,221 shares of Common Stock to the beneficial owners of EquiStar Hotel Investors, L.P. ("EquiStar") and the CapStar operating partnership. In August 1996, in connection with CapStar's initial public offering, CapStar issued 3,504,221 shares of Common Stock to such beneficial owners. On April 1, 1997, CapStar issued 809,523 Common OP Units and 392,157 Class D OP Units to affiliates of Highgate Hotels, Inc. ("Highgate") in connection with CapStar's purchase of a portfolio of six hotels from certain affiliates of Highgate. On November 17, 1997, CapStar issued 674,236 Common OP Units to affiliates of Winston Hospitality, Inc. ("Winston") in connection with CapStar's acquisition of substantially all of the assets of Winston. American General Hospitality Corporation Each of AGH's private issuances of shares of Common Stock and the Operating Partnership's private issuances of OP Units has been in reliance on an exemption from registration under Section 4(2) of the Act in the amounts and for the consideration set forth below. On June 27, 1997, AGH privately issued 225,690 Class B OP Units as part of the purchase of the Hilton Hotel Cocoa Beach. On July 16, 1997 the Class B OP Units automatically converted into Common OP Units. On July 14, 1997, as part of the terms of the strategic alliance between Wyndham International and AGH, an affiliate of Wyndham purchased 95,741 shares of restricted Common Stock. The shares were purchased in connection with the conversion of the LeBaron Airport Hotel to the Wyndham San Jose Airport Hotel. On October 14, 1997, AGH issued under the Company's Non-Employee Directors' Incentive Plan, 1,109 shares of Common Stock to the Board of Directors for compensation in accordance with their agreement to serve as directors of the Company. On November 30, 1997, AGH privately issued 11,568 Class B OP Units as part of the purchase of the Courtyard by Marriott Durham. On December 31, 1997, these Class B OP Units automatically converted into Common OP Units. On December 31, 1997, AGH privately sold an additional 1,159,546 shares of its Common Stock to certain investment funds and separate accounts advised by ABKB/LaSalle Securities Limited Partnership and LaSalle Advisors Limited Partnership. On January 2, 1998, AGH privately sold an additional 420,106 shares of Common Stock to certain investment funds and separate accounts advised by ABKB/LaSalle Securities Limited Partnership and LaSalle Advisors Limited Partnership. On January 8, 1998, AGH privately issued 439,375 Class B OP Units as part of the purchase price of a portfolio hotels owned by Prime. On April 16, 1998 the Class B OP Units converted into Common OP Units. On January 15, 1998, AGH privately sold the balance of 100,829 shares of its Common Stock to certain investment funds and separate accounts advised by ABKB/LaSalle Securities Limited Partnership and LaSalle Advisors Limited Partnership. 13 On February 3, 1998, AGH privately issued 1,108,874 Class C OP Units as part of the purchase price of the Holiday Inn O'Hare International Hotel. The Class C OP Units bear a preferred annual distribution rate of $2.23 per Class C OP Unit until such time as the dividend distribution rate for the Class C OP Units will equal the distribution rate on the Common Stock. In addition, the holders of the Class C OP Units received 974,588 additional OP Units due to the fact that the fair market value of the Common Stock (as reported on the New York Stock Exchange, Inc.) was trading below $35 per share on the anniversary date of the closing of the acquisition. The Company On August 21, 1998, the Company privately issued 46,628 Class B OP Units as part of the purchase of the land under the Four Points Hotel in Mt. Arlington, New Jersey. On October 14, 1998 the Class B OP Units automatically converted into Common OP Units. On October 1, 1998, the Company privately issued 916,230 Common OP Units as part of the purchase of a portfolio of assets from South Seas Properties Company Limited Partnership and its affiliates. 14 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information for the Company. The selected Operating Results and Balance Sheet Data have been extracted from the consolidated financial statements for each of the periods presented. The following information should be read in conjunction with the consolidated financial statements and notes thereto for the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ----------- ------------ ----------- ------------ (dollars in thousands, except per share amounts and Operating Data) Revenue: Hotel operations: Participating lease revenue............................. $ 135,994 $ - $ - $ - $ - Rooms....................................................... 275,610 207,736 68,498 14,456 0 Food, beverage, office rental and other..................... 110,519 103,521 36,949 7,471 0 Management services and other revenues...................... 3,174 5,136 4,345 4,436 4,418 ------------- ----------- --------- ---------- ------- Total revenues............................................ 525,297 316,393 109,792 26,363 4,418 ------------- ----------- ---------- ---------- ------- Operating expenses: Departmental expenses: Rooms....................................................... 65,048 51,075 17,509 4,190 0 Food, beverage and other.................................... 80,327 77,373 27,102 5,437 0 Undistributed operating expenses: Administrative and general.................................. 62,350 50,332 20,448 8,078 4,508 Property and other operating costs.......................... 122,963 55,111 17,151 3,934 0 Depreciation and amortization............................... 60,703 20,990 8,248 2,097 23 ------------- ----------- ---------- ---------- ------- Total operating expenses.................................. 391,391 254,881 90,458 23,736 4,531 ------------- ----------- ---------- ---------- ------- Net operating income (loss).................................. 133,906 61,512 19,334 2,627 (113) Interest expense, net........................................ 64,378 21,024 12,346 2,414 0 Minority interest............................................ 5,121 1,425 (39) (18) 0 Provision for income taxes (A)............................... 15,699 14,911 2,674 0 0 ------------- ----------- ---------- ---------- ------- Income (loss) before extraordinary loss...................... 48,708 24,152 4,353 231 (113) Extraordinary loss, net of tax (B).......................... (4,080) (4,092) (1,956) (888) 0 Cumulative effect of accounting change, net of tax (C) (921) - - - - ------------- ----------- ---------- ---------- ------- Net income (loss)......................................... $ 43,707 $ 20,060 $ 2,397 $ (657) $ (113) ============ =========== ========= ========= ======= Basic earnings per share before extraordinary loss (D)....... $1.45 $1.29 $0.31 - - Diluted earnings per share before extraordinary loss (D)..... $1.40 $1.27 $0.31 - - Number of shares of common stock issued and outstanding (E).. 46,718 24,867 12,754 - - Other Financial Data: EBITDA (F)................................................... $ 194,609 $ 82,502 $ 27,582 $ 4,724 $ (90) Net cash provided by operating activities.................... 162,796 59,882 13,373 4,357 66 Net cash used in investing activities........................ (785,505) (586,259) (225,251) (116,573) (41) Net cash provided by financing activities.................... 543,256 588,428 226,830 119,048 0 Balance Sheet Data: Investments in hotel properties, gross....................... $2,909,439 $ 950,052 $ 343,092 $ 110,883 $ 176 Total assets................................................. 2,998,460 1,124,642 379,161 132,650 1,232 Long term debt............................................... 1,602,352 492,771 200,361 73,574 0
15
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Operating Data: Owned Hotels: Number of hotels (E)........................................... 117 47 19 6 - Number of guest rooms (E)...................................... 29,351 12,019 5,166 2,101 - Total revenues................................................. $522,123 $311,257 $105,447 $21,927 - Average occupancy (G).......................................... 71.5% 72.0% 71.6% 72.3% - ADR (H)........................................................ $ 95.00 $ 86.87 $ 82.84 $ 71.58 - RevPAR (I)..................................................... $ 67.90 $ 62.55 $ 59.31 $ 51.75 -
___________ (A) No provision for federal income taxes was included prior to the August 1996 initial public offering as the Company's predecessor entities were partnerships and all federal income tax liabilities were passed through to the individual partners. (B) During 1995, 1996, 1997 and 1998 certain loan facilities were refinanced and the write-offs of deferred costs associated with the prior facilities were recorded as extraordinary losses. (C) Pursuant to AICPA Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities" which the Company adopted on July 1, 1998, the effect of this accounting change was a pre-tax charge against income for the year ended December 31, 1998 of $1,485 ($921 net of tax effect). (D) Basic and diluted earnings per share before extraordinary item for the year ended December 31, 1996 is based on earnings for the period from August 20, 1996 through December 31, 1996. (E) As of December 31 for the periods presented. (F) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Management believes that EBITDA is a useful measure of operating performance because (i) it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization and minority interests of common and preferred OP Unit holders, which is generally equivalent to EBITDA, and (ii) EBITDA is unaffected by the debt and equity structure of the entity. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs, and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations and may not be comparable to other similarly titled measures used by other companies. (G) Represents total number of rooms occupied by hotel guests on a paid basis divided by total available rooms. (H) Represents total room revenues divided by total number of rooms occupied by hotel guests on a paid basis. (I) Represents total room revenues divided by total available rooms. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General MeriStar Hospitality Corporation (the "Company") owns a portfolio of primarily upscale, full-service hotels, diversified by franchise and brand affiliations, in the United States and Canada. Substantially all of the Company's hotels are leased to and operated by MeriStar Hotels & Resorts, Inc. ("OPCO"). As of December 31, 1998, the Company owned 117 hotels (with 29,351 rooms), 109 of which are leased and operated by OPCO. On March 15, 1998, CapStar Hotel Company ("CapStar") and American General Hospitality Corporation ("AGH") entered into a definitive agreement (the "Merger Agreement") pursuant to which the parties agreed, subject to stockholder approval and other conditions and covenants, to the merger of CapStar with and into AGH (the "Merger"), with the surviving entity being named "MeriStar Hospitality Corporation". The Merger was approved at a special meeting of stockholders of CapStar and the annual meeting of stockholders of AGH on July 28, 1998. The Merger and related transactions became effective August 3, 1998. Pursuant to the Merger Agreement, CapStar also distributed on a pro rata basis to its stockholders all of the capital stock of OPCO (the "Spin-Off"), whose assets consisted of CapStar's hotel operations (including leased hotels) and management business. On August 3, 1998, the Company's common stock, par value $.01 per share ("Common Stock"), and the common stock of OPCO began trading on the New York Stock Exchange. The Merger was accounted for as a purchase for financial reporting purposes. In accordance with the provisions of Accounting Principles Board Opinion No. 16, "Business Combinations," CapStar was considered the acquiring enterprise for financial reporting purposes. The Company established a new accounting basis for AGH's assets and liabilities based on their fair values. For financial reporting purposes, the results of operations of AGH were included in the Company's statement of operations from August 3, 1998. The Company has included expenditures related directly to the acquisition of AGH as part of the cost of acquiring AGH and those expenditures relating to the Spin-Off as expenses incurred (see - Results of Operations). The Company purchased AGH for approximately $1.3 billion through the issuance of 23.9 million shares of common stock and units of limited partnership interest ("OP Units") in the Company's subsidiary operating partnership, valued at $795 million and assumption of debt and other liabilities of $550 million. The acquisition has been recorded at the fair value of the net assets acquired. Prior to August 3, 1998, the Company's consolidated financial statements included the operating results for the owned and leased hotels as well as management fees from hotels managed for third-party owners. Subsequent to August 3, 1998, the Company owns certain hotels that are leased to hotel operators and no longer manages hotels. Therefore, the financial statements for the periods ended December 31, 1998 reflect differing numbers of owned, leased, and managed hotels throughout the periods. The following table outlines the Company's portfolio of owned, leased and managed hotels:
Owned Leased Managed Total Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms ---------- ---------- --------- --------- --------- ---------- --------- --------- December 31, 1998 117 29,351 - - - - 117 29,351 December 31, 1997 47 12,019 40 5,687 27 4,631 114 22,337 December 31, 1996 19 5,166 - - 28 4,619 47 9,785
17 Financial Condition December 31, 1998 compared with December 31, 1997 Total assets increased by $1,873.9 million to $2,998.5 million at December 31, 1998 from $1,124.6 million at December 31, 1997. This growth was due to the acquisition of 70 hotels during 1998, including 53 hotels pursuant to the Merger. Total liabilities increased by $1,152.5 million to $1,708.9 million at December 31, 1998 from $556.4 million at December 31, 1997 due mainly to an increase in long-term debt. Long-term debt increased by $1,109.6 million to $1,602.4 million at December 31, 1998 from $492.8 million at December 31, 1997 as a result of the debt assumed in connection with the Merger and borrowings under new credit facilities to finance the acquisitions of certain hotels. Minority interests increased $89.7 million to $138.5 million at December 31, 1998 from $48.8 million at December 31, 1997, reflecting the value of OP Units of the Company's operating partnership subsidiaries issued in conjunction with the Merger and with the acquisitions of certain hotels and South Seas Properties Company, Limited Partnership. The increase in additional paid-in capital resulted primarily from the Merger and the redemption of OP Units. Results of Operations Year Ended December 31, 1998 compared with the Year Ended December 31, 1997 Subsequent to August 3, 1998, the Company earned participating lease revenue of $136.0 million. Substantially all of the Company's hotels are leased to and operated by OPCO. Participating lease revenue represents lease payments to the Company from the lessees pursuant to the Company's participating lease agreements. Total revenue increased by $208.9 million or 66% to $525.3 million in 1998 compared to $316.4 million in 1997. This increase was primarily attributable to the Merger, the acquisition of new hotels and revenue growth from hotels in the Company's portfolio that benefited from renovation and repositioning programs. On a pro forma basis for the year ended December 31, 1998, revenue per available room ("REVPAR") increased 7.0% to $67.90 compared to 1997. On a pro-forma basis same-store average daily rate ("ADR") for the hotels rose 5.7% to $95.00, coupled with a 1% increase in occupancy to 71.5%. Hotel department and other operating expenses increased slightly for the year ended December 31, 1998 compared to the prior year. Hotel operations for the year are only reflected through August 3, 1998. Subsequent to that date, in conjunction with the Merger and Spin-Off, hotel operations were leased to OPCO. The increase in hotel department and other operating expenses is primarily due to an increase in the number of owned and leased hotels in 1998 prior to the Merger and Spin-Off. Undistributed operating expenses increased significantly in 1998 as a result of the acquisition of new properties in 1998 and the Merger. Subsequent to August 3, 1998, the Company is responsible for real estate taxes, property insurance and various other undistributed expenses that are not included in hotel operations which are leased to OPCO. Net interest expense increased $43.4 million to $64.4 million for the year ended December 31, 1998, from $21.0 million in 1997. This increase was attributable to the borrowings made to finance the acquisition of hotels during 1998 and the debt assumed in connection with the Merger. Minority interests increased $3.7 million to $5.1 million from $1.4 million in 1997 due to the issuance of OP Units in conjunction with the Merger and the acquisition of certain hotels. Income taxes increased $0.8 million in 1998 to $15.7 million from $14.9 million in 1997. Subsequent to August 3, 1998, the Company's overall effective tax rate decreased to 3% as a result of the elimination of federal income taxes as a result of the Company becoming a real estate investment trust ("REIT"). The slight increase in income taxes compared to prior year is a result of the substantial increase in pre-tax income in 1998 coupled with an overall effective tax rate of 38.2% through August 2, 1998. 18 On August 3, 1998, the Company recognized extraordinary losses of $4,080 (net of a tax benefit of $2,083), due to the write-off of unamortized deferred financing fees in conjunction with refinancing certain credit facilities. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires that all non-governmental entities expense costs of start-up activities, including organizational costs, as those costs are incurred and requires the write-off of any unamortized balances upon implementation. SOP 98-5 is effective for financial statements issued for periods beginning after December 15, 1998. The Company chose to adopt SOP 98-5 effective July 1, 1998. The effect of this accounting change was a charge against income for the year ended December 31, 1998 of $921 (net of tax benefit of $564). Earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") grew $112.1 million to $194.6 million in 1998 from $82.5 million in 1997. This growth reflects both the increases in the number of hotels owned and improved operating margins on the Company's overall hotel portfolio. The White Paper on Funds From Operations ("FFO") approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after comparable adjustments for the Company's portion of these items related to unconsolidated entities and joint ventures. The Company believes that FFO is helpful to investors as a measure of the performance of an equity real estate investment trust ("REIT") because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. FFO does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. FFO may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. Pro forma information for the company is presented as if the Merger, the Spin- Off, and the acquisition of all hotels of CapStar and AGH had occurred as of the beginning of the period presented. The following is a reconciliation between pro forma net income and pro forma FFO for the year ended December 31, 1998 (in thousands); 1998 ---- Pro forma net income $ 96,232 Minority interest 9,883 Interest on convertible debt 8,194 Hotel depreciation and amortization 85,117 -------- Pro forma FFO $199,426 ======== 19 Year Ended December 31, 1997 compared with the Year Ended December 31, 1996 Total revenue increased by $206.6 million or 188% to $316.4 million in 1997 compared to $109.8 million in 1996. This increase resulted from acquiring 28 hotels and leasing 40 hotels during the year, and revenue growth from hotels in the Company's portfolio that benefited from renovation and repositioning programs. Operating expenses increased $164.4 million to $254.9 million in 1997 from $90.5 million in 1996 due to the increase in the number of hotels owned and leased during 1997. Net operating income as a percentage of total revenue increased to 19.4% in 1997 from 17.6% in 1996, reflecting increased operational efficiencies in the Company's hotel portfolio. Net interest expense increased $8.7 million to $21.0 million in 1997 from $12.3 million in 1996. This increase was attributable to the borrowings made to finance the acquisition of hotels during 1997, partially offset by the use of proceeds from Common Stock offerings to repay outstanding indebtedness in 1997 and lower average interest rates charged on the Company's borrowings in 1997 as compared to 1996. Minority interests of $1.4 million in 1997 were significantly higher than in 1996 due to the minority interest related to the OP Units issued in 1997. Income taxes increased $12.2 million to $14.9 million in 1997 compared to $2.7 million in 1996, due to substantially higher levels of pre-tax income in 1997. The Company's overall effective tax rate decreased to 38.2% in 1997 from 40.0% in 1996 as a result of lower state and local taxes. EBITDA grew $54.9 million to $82.5 million in 1997 from $27.6 million in 1996. This growth reflects both the increase in the number of hotels owned and operated, and improved operating margins on the Company's overall hotel portfolio. During 1997 and 1996, the Company recognized extraordinary losses of $4.1 million and $2.0 million (net of tax benefits of $2.5 million and $1.3 million), respectively, related to the write-off of unamortized loan costs in connection with expanding the Company's credit facilities. Liquidity and Capital Resources Prior to the Merger and related transactions, CapStar's primary sources of liquidity were cash on hand, cash generated from operations, and funds from external borrowings and debt and equity offerings. CapStar's continuing operations were funded through cash generated from hotel operations. Hotel acquisitions and joint venture improvements were financed through a combination of internally generated cash, external borrowings and the issuance of OP Units and/or Common Stock. CapStar did not pay dividends to stockholders. Following the Merger and Spin-Off, the Company's principal sources of liquidity are cash on hand, cash generated from operations, and funds from external borrowings and debt and equity offerings. The Company expects to fund its continuing operations through cash generated by its participating leases. The Company also expects to finance future hotel acquisitions and joint venture investments through a combination of internally generated cash, external borrowings and the issuance of OP Units and/or common stock. Additionally, the Company will be required, in order to maintain favorable tax treatment accorded to a REIT under the Internal Revenue Code of 1986, as amended, to distribute to stockholders at least 95% of its REIT taxable income. The Company expects to fund such distributions through cash generated from operations or borrowings on the Company's credit facility. Operating activities provided $162.8 million of net cash for the year ended December 31, 1998 mainly due to higher levels of net income and depreciation and amortization. The Company used $785.5 million of cash in investing activities for the year ended December 31, 1998, primarily for the acquisition of hotels and capital expenditures at the Company's hotels and a note receivable from OPCO. Net cash provided by financing activities of $543.3 million resulted primarily from net borrowings under the Company's credit facilities. 20 In conjunction with the Merger, CapStar terminated its existing credit facility effective August 3, 1998, and the Company entered into a $1.0 billion senior secured credit facility (the "New Credit Facility"). The New Credit Facility is structured as a $300 million, five-year term loan facility; a $200 million, five-and-a-half year term loan facility; and a $500 million, three-year revolving credit facility with two one-year optional extensions. The interest rate on the term loans and revolving facility ranges from 100 to 200 basis points over 30-day LIBOR, depending on certain financial performance covenants and long-term senior unsecured debt ratings. The weighted average interest rate on borrowings outstanding under the New Credit Facility as of December 31, 1998 was 7.4%. The initial proceeds from the New Credit Facility were used to refinance CapStar's and AGH's existing credit facilities. As of December 31, 1998, the company had available $90 million under the New Credit Facility's revolving facility. Effective August 3, 1998, the Company also entered into a $250 million secured facility ("Secured Facility"), which is expected to be converted into a commercial mortgage-backed security secured by 16 hotels. The interest rate on the Secured Facility is 110 basis points over 30-day LIBOR. The weighted average interest rate on the Secured Facility as of December 31, 1998 was 6.8%. Capital for renovation work has historically been and is expected to continue to be provided by a combination of internally generated cash and external borrowings. Once initial renovation programs for a hotel are completed, the Company expects to spend approximately 4% annually of hotel revenues for ongoing capital expenditure programs, including room and facilities refurbishment's, renovations, and furniture and equipment replacements. For the year ended December 31, 1998, the Company spent (including expenditures by both CapStar and AGH prior to the Merger) $200 million on initial renovation and ongoing capital expenditure programs. The Company expects to spend $175 million in 1999, with $125 million used for renovations and $50 million in recurring refurbishment projects. The Company believes cash generated by operations, together with anticipated borrowing capacity under the New Credit Facility, will be sufficient to fund its existing working capital, ongoing capital expenditures, and debt service requirements. The Company believes, however, that its future capital decisions will also be made in response to specific acquisition and/or investment opportunities, depending on conditions in the capital and or other financial markets. Accordingly, the Company may consider increasing its borrowing capacity or issuing additional debt or equity securities, the proceeds of which could be used to finance acquisitions or investments, or to refinance existing debt. Seasonality Demand in the lodging industry is affected by recurring seasonal patterns. Demand is lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. Accordingly, the Company's operations are seasonal in nature, with lower participating lease payments to the Company in the first and fourth quarters and higher participating lease payments to the Company in the second and third quarters. Year 2000 Conversion The Company is in the process of conducting a review of its computer systems to identify the systems that could be affected by the "Year 2000" problem and has initiated an implementation plan to address the problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, this could result in a major systems failure or miscalculations. The Company's hotel properties contain various information technology and embedded technology systems. Both types of systems contain microprocessors and microcontrollers that must be assessed for Year 2000 compliance. The Company has developed a comprehensive implementation plan to address the potential Year 2000 problems caused by such systems. This plan involves six stages: increase awareness of issue; assign responsibility for coordinating response to issue; information collection; analysis; modification, repair or replacement; and testing. The Company is currently in its analysis stage, and 21 expects to complete this stage by March 1999. The subsequent stages are expected to be completed as follows: modification, repair or replacement -- June 1999; and testing -- August 1999. As an additional part of its implementation plan to address the Year 2000 problem, the Company has also initiated communications with third parties with which it has material relationships to determine the extent of potential Year 2000 problems with these parties' services provided to the Company. The most critical of these services involve such items as reservations systems for the Company's hotels. Without such systems, the Company could suffer a material decline in business at many of its properties. The Company expects to complete its communications and assessment of these outside parties' services by March 1999. Also, the Company expects to develop contingency plans in 1999 to allow for manual or other alternative operation of certain computerized systems, in the event that modification, repair, and replacement efforts are not completed timely. The Company anticipates completing its Year 2000 implementation plan no later than August 31, 1999, which is prior to any anticipated impact on its operating systems. Historical costs incurred to address the Year 2000 problem include approximately $0.8 million. The Company has not yet developed a final cost estimate related to fixing Year 2000 issues, but an initial estimate of these remediation costs for its properties is $10-20 million. This cost estimate is based on the Company's preliminary assessment, and will be refined and adjusted as the Company continues to complete the stages of its implementation plan to address the potential Year 2000 problems. Based on its preliminary assessment, the Company believes that its risks of Year 2000 non-compliance (that is, its "most reasonably likely worst case scenario"), with modifications to existing software and converting to new software, will not pose significant operational problems for the Company's computer systems as so modified and converted. If, however, such modifications and conversions are not completed timely, the Year 2000 problem could have a material impact on the Company's financial position and operations. The Company's operations are highly dependent upon participating lease revenue earned from the lessees of its properties. These participating lease revenue amounts are based upon revenues generated at the leased properties. To the extent that the Year 2000 problems materially affect the conduct of operations at those properties, it is likely that those lessees' revenues would be affected, and that the Company's participating lease revenues would ultimately be affected. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on long- term debt obligations that impact the fair value of these obligations. The Company's policy is to manage interest rates through the use of a combination of fixed and variable rate debt. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at a combination of fixed and variable rates, and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company has no cash flow exposure due to general interest rate changes for its fixed long-term debt obligations. All items described are non-trading (in thousands of dollars). 22 The table below presents the principal amounts, weighted average interest rates, and fair values by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.
Long-term Debt ------------------------------------------------------------------------------------ Average Interest Variable Rate Average Expected Maturity Fixed Rate Rate Interest Rate - -------------------------- ------------------ ------------------- ---------------- --------------- 1999 $ 5,109 7.1% $ 54,750 7.4% 2000 3,420 7.1% 252,000 6.4% 2001 6,513 7.1% 427,000 7.3% 2002 10,731 7.1% 32,000 6.9% 2003 2,994 7.1% 257,000 6.9% Thereafter 360,835 6.7% 190,000 6.9% ------------------ ------------------- ---------------- --------------- Total $389,602 6.7% $1,212,750 7.0% ================== =================== ================ =============== Fair Value at 12/31/98 $389,602 $1,212,750 ================== ================
During 1998, the Company entered into six separate $100,000 swap agreements with financial institutions in order to hedge against the impact future interest rate fluctuations may have on the Company's existing floating rate debt instruments. The swap agreements effectively fix 30-day LIBOR at between 4.9% and 5.4%. During the period ended December 31, 1998, the Company made payments totaling $211 relating to these hedges. This amount is included in interest expense. The hedge agreements terminate at various times between November 1999 and September 2000. On February 18, 1997, the Company entered into a $40,000 swap agreement and a $40,000 collar agreement with Lehman Brothers Special Financing, Inc. and Canadian Imperial Bank of Commerce, respectively. The swap agreement effectively fixes 30-day LIBOR at 5.9% while the collar agreement creates a 30- day LIBOR floor of 5.1% and ceiling of 7.5%. During the years ended December 31, 1998 and 1997 the Company made payments totaling $56 and $88, respectively relating to these hedges. This amount is included in interest expense. Both hedge agreements terminate in September 1999. Additionally, in anticipation of the August 1997 offering of $150,000 aggregate principal amount of its 8.75% senior subordinated notes due 2007 ( the "Subordinated Notes"), the Company entered into separate hedge transactions during June and July 1997. Upon completion of the Subordinated Notes offering, the Company terminated the underlying swap agreements, resulting in a net payment to the Company of $836. This amount was deferred and is being recognized as a reduction to interest expense over the life of the underlying debt. As a result, the effective interest rate on the Subordinated Notes has been reduced to 8.69%. Although the Company conducts business in Canada, the Canadian operations were not material to the Company's consolidated financial position, results of operations or cash flows as of December 31, 1998. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the year ended December 31, 1998. Accordingly, the Company was not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on the Company's future costs or on future cash flows it would receive from its foreign subsidiaries. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements, Supplementary Data and Financial Statement Schedules are filed as part of this Annual Report on Form 10-K:
MeriStar Hospitality Corporation Independent Auditors' Report............................................................................................ 25 Consolidated Balance Sheets as of December 31, 1998 and 1997............................................................ 26 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 27 Consolidated Statements of Stockholders' Equity and Partners' Capital for the years ended December 31, 1998, 1997 and 1996................................................................................................................... 28 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 29 Notes to the Consolidated Financial Statements.......................................................................... 30 Schedule III. Real Estate and Accumulated Depreciation.................................................................. 47
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto. 24 INDEPENDENT AUDITORS' REPORT The Board of Directors MeriStar Hospitality Corporation: We have audited the accompanying consolidated balance sheets of MeriStar Hospitality Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998, and the supplementary schedule. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule 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 and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MeriStar Hospitality Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles, and the supplementary schedule, in our opinion, presents fairly, in all material respects, the information set forth therein. KPMG LLP Washington, D.C. February 1, 1999 25 MERISTAR HOSPITALITY CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (in thousands, except per share amounts)
1998 1997 ---------- --------- ASSETS Investments in hotel properties $2,909,439 $ 950,052 Accumulated depreciation (83,797) (27,275) ---------- ---------- 2,825,642 922,777 Cash and cash equivalents 4,180 83,429 Accounts receivable, net 3,044 24,731 Income taxes receivable 339 - Deposits 1,618 16,173 Prepaid expenses, inventory and other 2,259 8,496 Note receivable from Lessee 67,000 - Due from Lessee 7,437 - Investments in and advances to affiliates 8,787 11,970 Restricted cash 11,879 3,111 Properties held for sale 48,104 - Intangible assets, net of accumulated amortization of $2,666 and $2,032 18,171 53,955 ---------- ---------- $2,998,460 $1,124,642 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,111 $ 16,726 Accrued expenses and other liabilities 45,549 31,996 Accrued interest 24,472 8,250 Income taxes payable - 565 Dividends and distributions payable 25,988 - Deferred income taxes 8,453 6,098 Long-term debt 1,602,352 492,771 ---------- ------------ Total liabilities 1,708,925 556,406 ---------- ------------ Minority interests 138,543 48,824 Stockholders' Equity: Common stock, par value $0.01 per share Authorized- 250,000 shares Issued and outstanding- 46,718 and 24,867 shares 467 249 Additional paid-in capital 1,133,357 499,576 Retained earnings 23,655 22,114 Accumulated other comprehensive income (6,487) (2,527) ---------- ------- Total stockholders' equity 1,150,992 519,412 ---------- ------- $2,998,460 $1,124,642 ========== =========
See accompanying notes to consolidated financial statements. 26 MERISTAR HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
1998 1997 1996 ------------ ------------- ------------- Revenue: Participating lease revenue $135,994 $ - $ - Hotel operations: Rooms 275,610 207,736 68,498 Food and beverage 85,374 86,298 30,968 Other operating departments 19,496 15,049 5,981 Office rental, parking and other revenue 5,649 2,174 - Hotel management and other fees 3,174 5,136 4,345 ------------ ------------- ------------- Total revenue 525,297 316,393 109,792 ------------ ------------- ------------- Hotel operating expenses by department: Rooms 65,048 51,075 17,509 Food and beverage 67,493 68,036 24,589 Other operating departments 10,121 8,492 2,513 Office rental, parking and other operating expenses 2,713 845 - Undistributed operating expenses: Administrative and general 62,350 50,332 20,448 Property operating costs 50,027 38,437 12,586 Property taxes, insurance and other 29,814 12,558 4,565 Lease expense 34,641 4,116 - Depreciation and amortization 60,703 20,990 8,248 Spin-off costs 8,481 - - ------------ ------------- ------------- Total operating expenses 391,391 254,881 90,458 ------------ ------------- ------------- Net operating income 133,906 61,512 19,334 Interest expense, net 64,378 21,024 12,346 ------------ ------------- ------------- Income before minority interests, income taxes, extraordinary loss and cumulative effect of accounting change 69,528 40,488 6,988 Minority interests 5,121 1,425 (39) ------------ ------------- ------------- Income before income taxes, extraordinary loss and cumulative effect of accounting change 64,407 39,063 7,027 Income taxes 15,699 14,911 2,674 ------------ ------------- ------------- Income before extraordinary loss and cumulative effect of accounting change 48,708 24,152 4,353 Extraordinary loss on early extinguishment of debt, net of tax benefit of $2,083 in 1998, $2,508 in 1997, and $1,304 in 1996 4,080 4,092 1,956 Cumulative effect of change in accounting principle, net of tax benefit of $564 921 - - ------------ ------------- ------------- Net income $ 43,707 $ 20,060 $ 2,397 ============ ============= ============= Earnings per share: Basic: Income before extraordinary loss and cumulative effect of accounting change $ 1.45 $ 1.29 $ 0.31 Extraordinary loss (0.12) (0.22) (0.15) Cumulative effect of accounting change (0.03) - - ------------ ------------- ------------- Net income $ 1.30 $ 1.07 $ 0.16 ============ ============= ============= Diluted: Income before extraordinary loss and cumulative effect of accounting change $ 1.40 $ 1.27 $ 0.31 Extraordinary loss (0.11) (0.21) (0.15) Cumulative effect of accounting change (0.03) - - ------------ ------------- ------------- Net income $ 1.26 $ 1.06 $ 0.16 ============ ============= =============
See accompanying notes to consolidated financial statements. 27 MERISTAR HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Accumulated Partner's Capital Common Stock Additional Other ------------------- ----------------- Paid-in Retained Comprehensive General Limited Shares Amount Capital Earnings Income Parnters Partners Total ------- ------- ---------- -------- ------------- -------- -------- ---------- Balance, January 1, 1996 - $ - $ - $ - $ - $ 2,432 $ 46,206 $ 48,638 Capital distributions - - - - - (2) (170) (172) Repayment of notes receivable from management - - - - - - 987 987 Net income for period January 1, 1996 through August 19, 1996 - - - - - 45 298 343 ------ ------- ---------- -------- ------------- -------- -------- ---------- Balance, August 19, 1996 - - - - - 2,475 47,321 49,796 Issuance of common stock 6,750 68 110,044 - - - - 110,112 Shares issued for partners' capital on August 20, 1996 6,004 60 49,736 (2,475) (47,321) - Deferred tax liability assumed from partners on August 20, 1996 - - (1,247) - - - - (1,247) Net income for period August 20, 1996 through December 31, 1996 - - - 2,054 - - - 2,054 ------ ------- ---------- -------- ------------- -------- -------- ---------- Balance, December 31, 1996 12,754 128 158,533 2,054 - - - 160,715 Net income for the year - - - 20,060 - - - 20,060 Foreign currency translation adjustment - - - - (2,527) - (2,527) ------ ------- ---------- -------- ------------- -------- -------- ---------- Comprehensive income 17,533 ------ ------- ---------- -------- ------------- -------- -------- ---------- Issuances of common stock 11,713 117 330,047 - - - - 330,164 Redemption of OP Units 400 4 10,996 - - - - 11,000 ------ ------- ---------- -------- ------------- -------- -------- ---------- Balance, December 31, 1997 24,867 249 499,576 22,114 (2,527) 519,412 Net income for the year - - - 43,707 - 43,707 Foreign currency translation adjustment - - - - (3,960) (3,960) ------ ------- ---------- -------- ------------- -------- -------- ---------- Comprehensive income 39,747 ------ ------- ---------- -------- ------------- -------- -------- ---------- Issuances of common stock 20,839 208 654,671 - - - - 654,879 Distribution to spun-off affiliate - - (52,310) - - (52,310) Redemption of OP Units 1,012 10 31,420 - - - - 31,430 Dividends paid and declared - - - (42,166) - - - (42,166) ------ ------- ---------- -------- ------------- -------- -------- ---------- Balance, December 31, 1998 46,718 $ 467 $1,133,357 $ 23,655 $(6,487) $ - $ - $1,150,992 ====== ======= ========== ======== ============= ======== ======== ==========
See accompanying notes to the consolidated financial statements. 28 MERISTAR HOSPITALITY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in thousands)
1998 1997 1996 ---------------------------------------- Operating activities: Net income $ 43,707 $ 20,060 $ 2,397 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 60,703 20,990 8,248 Extraordinary loss on early extinguishment of debt 6,163 6,600 3,260 Cumulative effect of accounting change 1,485 - - Minority interests 5,121 1,425 (39) Non-cash spin-off costs 3,205 - - Deferred income taxes (4,445) 4,917 (66) Changes in operating assets and liabilities: Accounts receivable, net 29,673 (17,900) (5,360) Deposits, prepaid expenses, inventory and other 24,760 (17,449) (4,011) Accounts payable (7,100) 12,601 1,797 Accrued expenses and other liabilities 7,865 29,509 5,711 Due from lessee (7,437) - - Income taxes payable (904) (871) 1,436 --------- --------- --------- Net cash provided by operating activities 162,796 59,882 13,373 --------- --------- --------- Investing activities: Purchases of property and equipment (701,710) (558,265) (231,885) Purchases of intangible assets (5,584) (13,476) - Investments in and advances to affiliates (2,320) (11,320) (650) Purchases of minority interests (44) (87) (67) Funding of notes receivable (67,000) - - Change in restricted cash (8,847) (3,111) 7,351 --------- --------- --------- Net cash used in investing activities (785,505) (586,259) (225,251) --------- --------- --------- Financing activities: Proceeds from long-term debt 1,407,261 844,192 372,778 Principal payment on long-term debt (821,051) (568,828) (248,387) Release of restricted deposits for hedge agreement - - 2,559 Deferred financing fees (4,251) (16,612) (10,943) Repayments of loans to management - - 987 Proceeds from issuances of common stock, net 1,870 330,164 110,112 Spin-off to stockholders (23,745) - - Dividends paid to stockholders (16,178) - - Distributions to limited partners - - (172) Distributions to minority investors (650) (488) (104) --------- --------- --------- Net cash provided by financing activities 543,256 588,428 226,830 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents 204 (406) - Net increase (decrease) in cash and cash equivalents (79,249) 61,645 14,952 Cash and cash equivalents, beginning of year 83,429 21,784 6,832 --------- --------- --------- Cash and cash equivalents, end of year $ 4,180 $ 83,429 $ 21,784 ========= ========= =========
See accompanying notes to consolidated financial statements. 29 MERISTAR HOSPITALITY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (dollars in thousands, except per share amounts) 1. Organization MeriStar Hospitality Corporation (the "Company") was formed on August 3, 1998, as a result of the merger (the "Merger") of the CapStar Hotel Company ("CapStar") with and into American General Hospitality Corporation ("AGH"), a Maryland corporation operating as a real estate investment trust ("REIT"). The Company owns a portfolio of primarily upscale, full-service hotels, diversified by franchise and brand affiliations, in the United States and Canada. Substantially all of the Company's hotels are leased to and operated by MeriStar Hotels & Resorts, Inc. ("OPCO"). As of December 31, 1998, the Company owned 117 hotels with 29,351 rooms located in 27 states, the District of Columbia and Canada. The following table outlines the Company's portfolio of owned, leased and managed hotels:
Owned Leased Managed Total ------------------------ ------------------------ ------------------------ ---------------------- Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms ---------- ---------- ---------- ---------- ---------- ---------- --------- --------- December 31, 1998 117 29,351 - - - - 117 29,351 December 31, 1997 47 12,019 40 5,687 27 4,631 114 22,337 December 31, 1996 19 5,166 - - 28 4,619 47 9,785
On March 15, 1998, CapStar and AGH entered into a definitive agreement (the "Merger Agreement") pursuant to which the parties agreed, subject to stockholder approval and other conditions and covenants, to the Merger, with the surviving entity being named "MeriStar Hospitality Corporation." The Merger was approved at a special meeting of stockholders of CapStar and the annual meeting of stockholders of AGH on July 28, 1998. The Merger and related transactions became effective August 3, 1998. Pursuant to the Merger Agreement, CapStar also distributed on a pro rata basis to its stockholders all of the capital stock of OPCO (the "Spin-Off"), whose assets consisted of CapStar's hotel operations (including leased hotels) and management business. The Spin-Off occurred on August 3, 1998. On August 3, 1998, the Company's common stock, par value $.01 per share ("Common Stock"), and the common stock of OPCO began trading on the New York Stock Exchange. The Merger was accounted for as a purchase for financial reporting purposes and, accordingly, the operating results of AGH have been included in the Company's consolidated financial statements since August 3, 1998, the date of acquisition. In accordance with the provisions of Accounting Principles Board Opinion No. 16, "Business Combinations," CapStar was considered the acquiring enterprise for financial reporting purposes. The Company established a new accounting basis for AGH's assets and liabilities based on their fair values. Prior to August 3, 1998, the financial statements of the Company include hotel operations and operations of OPCO; subsequent to August 3, 1998, the hotel operations are leased to OPCO following the Spin-Off and are no longer reflected in the Company's operating results. The Company has included expenditures related directly to the acquisition of AGH as part of the cost of acquiring AGH and those expenditures relating to the Spin-Off as expenses as incurred. Pursuant to an intercompany agreement, the Company and OPCO provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by each party. In particular, OPCO has a right of first refusal to become the lessee of any real property acquired by the Company. OPCO also provides the Company with certain services including administrative, corporate, accounting, finance, insurance, legal, tax, data processing, human resources, acquisition identification and due diligence, and operational services, for which OPCO is compensated in an amount that the Company would be charged by an unaffiliated third party for comparable services. 30 2. Summary of Significant Accounting Policies Principles of Consolidation- The consolidated financial statements include the accounts of the Company and all of its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated joint ventures and affiliated companies in which the Company holds a voting interest of 50% or less and exercises significant influence are accounted for using the equity method. The Company uses the cost method to account for its investment in entities in which it does not have the ability to exercise significant influence. Cash Equivalents and Restricted Cash- The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash represents amounts required to be maintained in escrow under certain of the Company's credit facilities. Deposits- Deposits primarily represent amounts escrowed during the negotiation of potential and pending hotel acquisitions. Investments in Hotel Properties- Investments in hotel properties are recorded at cost, which includes the allocated purchase price for hotel acquisitions, or at fair value at the time of contribution for contributed property. Property and equipment balances are depreciated using the straight-line method over lives ranging from five to 40 years. For the years ended December 31, 1998, 1997 and 1996, the Company capitalized interest of $5,182, $442, and $461, respectively. Properties Held for Sale- Properties held for sale are carried at the lower of their carrying values or estimated fair values less costs to sell. Although depreciation of these properties is discontinued when an operating property is classified as held for sale, operations continue to be recognized until the property is sold. Depreciation that would have been recorded had the properties not been recorded as held for sale was $700 in 1998. Intangible Assets- Intangible assets consist of the value of goodwill and lease contracts purchased, deferred financing fees, and franchise costs. Goodwill represents the excess of cost over the fair value of the net assets of acquired businesses. Intangibles are amortized on a straight-line basis over the estimated useful lives of the underlying assets ranging from five to 40 years. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of- The carrying values of long-lived assets, which include property and equipment and all intangibles, are evaluated periodically in relation to the operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected undiscounted future net cash flows is less than book value. No impairment losses were recorded during 1998, 1997 or 1996. Income Taxes- Prior to CapStar's initial public offering (the "IPO"), on August 20, 1996, no provision for income taxes was made since the Company's predecessor entities were partnerships, and, therefore, all income, losses, and credits for tax purposes were passed through to the individual partners. Concurrent with the IPO the Company implemented Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. In conjunction with the Merger on August 3, 1998, the Company became a REIT and is therefore no longer subject to federal income taxes provided that it complies with various requirements necessary to maintain REIT status. The Company will be subject to state and local taxes in certain jurisdictions. 31 2. Summary of Significant Accounting Policies (Continued) Foreign Currency Translation- Results of operations for the Company's Canadian hotels are maintained in Canadian dollars and translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Resulting translation adjustments are reflected in stockholders' equity as a cumulative foreign currency translation adjustment. Transaction gains and losses are included in the results of operations as incurred. Revenue Recognition- Prior to August 3, 1998, revenue was earned through the operations and management of the hotel properties and was recognized when earned. Subsequent to August 3, 1998, the Company earned participating lease revenue. Participating lease revenue represents lease payments from lessees to the Company pursuant to the Company's participating lease agreements. Office, retail and parking rental is generally recognized on a straight-line basis over the terms of the respective leases. Participating Lease Agreements- The Company's Participating Leases have non- cancelable remaining terms ranging from 10 to 12 years, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each percentage lease is the greater of base rent or percentage rent, as defined. Percentage rent applicable to room and food and beverage revenue varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index. Percentage rent applicable to other revenues is calculated by multiplying fixed percentages by the total amounts of such revenues. In May 1998, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 98-9, "Accounting for Contingent Rent in Interim Financial Periods." This issue addresses lessor revenue and lessee expense recognition in interim periods related to rental agreements which provide for minimum rental payments, plus contingent rents based on the lessee's operations, such as a percentage of sales in excess of an annual specified sales target. The EITF reached a final consensus that lessors, such as the Company, should defer recognition of contingent rental income until specified targets are met. The Company adopted EITF No. 98-9 effective July 1, 1998. Financial Instruments- From time to time the Company enters into swap and collar agreements that are designated as, and are effective as, hedges against the impact of interest rate fluctuation on certain of the Company's existing and probable future long-term debt instruments. Because these agreements qualify for hedge accounting treatment, any gains or losses are recognized as adjustments to interest expense over the lives of the underlying debt instruments. For hedge agreements that are terminated early or that are associated with anticipated future debt instruments, gains or losses are deferred until those debt instruments are entered into. If the Company determines it is no longer probable that the Company will enter into an anticipated debt instrument, any related deferred gains or losses are recognized in the current period. Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Segment Information- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires a public entity to report selected information about operating segments in financial reports issued to shareholders. It also establishes standards for related disclosures about product and services, geographic areas and major customers. Based on the guidance provided in the standard, the Company has determined that its business is conducted in one operating segment. 32 2. Summary of Significant Accounting Policies (Continued) The following table summarizes geographic information required to be disclosed under SFAS No. 131:
1998 1997 1996 ----------- --------- --------- Revenue: U.S. $ 510,344 $300,028 $109,792 Foreign 14,953 16,365 - ----------- --------- --------- $ 525,297 $316,393 $109,792 =========== ========= ========= Investments in hotel properties, net: U.S. $2,769,870 $866,541 Foreign 55,772 56,236 ----------- --------- $2,825,642 $922,777 =========== =========
Comprehensive Income-SFAS No. 130, "Reporting Comprehensive Income," requires an enterprise to display comprehensive income and its components in a financial statement to be included in an enterprise's full set of annual financial statements or in the notes to financial statements. Comprehensive income represents a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events for the period other than transactions with owners in their capacity as owners. Comprehensive income of the Company includes net income and other comprehensive income from foreign currency items. For the year ended December 31, 1998, net income was $43,707, other comprehensive income (loss), net of tax, was $ (3,960) and comprehensive income (loss) was $39,747. For the year ended December 31, 1997, net income was $20,060, other comprehensive income (loss), net of tax, was $ (2,527 ) and comprehensive income (loss) was $17,533. Cumulative Effect of Accounting Change-In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires that all non- governmental entities expense costs of start-up activities, including organizational costs, as those costs are incurred and requires the write-off of any unamortized balances upon implementation. SOP 98-5 is effective for financial statements issued for periods beginning after December 15, 1998. The Company chose to adopt SOP 98-5 effective July 1, 1998. The effect of this accounting change was a charge against income for the year ended December 31, 1998 of $921 (net of tax benefit of $564). New Accounting Pronouncements- In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities in statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is currently in the process of evaluating the effect this new standard will have on its financial statements. Reclassifications- Certain 1997 and 1996 amounts have been reclassified to conform to 1998 presentation. 33 3. Investments in Hotel Properties Investments in hotel properties consists of the following:
1998 1997 -------------- ------------ Land $ 309,810 $125,140 Buildings 2,254,953 737,095 Furniture, fixtures and equipment 230,710 75,226 Construction-in-progress 113,966 12,591 -------------- ------------ Total $2,909,439 $950,052 ============== ============
4. Investments in and Advances to Affiliates The Company has ownership interests in certain unconsolidated corporate joint ventures and affiliated companies. As of December 31, 1998, the Company had an investment in one joint venture in which it had a 50% ownership interest. As of December 31, 1997, the Company had investments in four joint ventures, three of which were contributed to OPCO pursuant to the Spin-Off. Prior to 1997, the Company did not have any investments in joint ventures. Combined summarized financial information of the Company's unconsolidated corporate joint ventures and affiliated companies is as follows:
Balance sheet data: 1998 1997 ------------ ---------- Current assets $ 748 $ 2,964 Non-current assets 29,458 41,333 Current liabilities 558 1,788 Non-current liabilities 445 168 Operating data: 1998 1997 ------------ ---------- Revenue $ 8,884 $10,140 Net income $ 186 $ 1,425
The Company's equity in the earnings of these affiliates was $369 and $0 in 1998 and 1997, respectively. 5. Intangible Assets Intangible assets consist of the following:
December 31, ------------------------ 1998 1997 --------- ---------- Deferred financing fees $17,575 $16,704 Goodwill - 27,847 Lease contracts - 6,576 Other 3,262 4,860 --------- ----------- 20,837 55,987 Less accumulated amortization (2,666) (2,032) --------- ----------- $18,171 $53,955 ========= ===========
On August 3, 1998, July 1, 1997, and September 30, 1996, the Company recognized extraordinary losses of $4,080, $4,092, and $1,956 (net of tax benefits of $2,083, $2,508, and $1,304), respectively, due to the write-off of unamortized deferred financing fees in conjunction with refinancing certain credit facilities. 34 6. Long-Term Debt Long-term debt consists of the following:
December 31, ---------------------------------- 1998 1997 -------------- ------------- New Credit Facility............... $ 910,000 $ - Prior Credit Facility............. - 100,000 Secured Facility.................. 250,000 - Convertible Notes................. 172,500 172,500 Subordinated Notes................ 149,826 149,805 Non-Recourse Facility............. 52,750 52,750 Mortgage Debt and Other........... 67,276 17,716 -------------- ------------- $1,602,352 $492,771 ============== =============
New Credit Facility-In conjunction with the Merger, CapStar terminated its existing credit facility ("Prior Credit Facility") effective August 3, 1998, and the Company entered into a $1,000,000 senior secured credit facility (the "New Credit Facility") with a syndicate of lenders led by Societe Generale. The New Credit Facility is structured as a $300,000, five-year term loan facility; a $200,000, five-and-a-half year term loan facility; and a $500,000, three-year revolving credit facility with two one-year optional extensions. The New Credit Facility is secured by the Company's common stock and its general partnership, limited partnership and limited liability company ownership interests in its subsidiaries. The interest rate on the term loans and revolving facility ranges from 100 to 200 basis points over 30-day London Interbank Offered Rate ("LIBOR"), depending on certain financial performance covenants and long-term senior unsecured debt ratings. The weighted average interest rate on borrowings outstanding under the New Credit Facility as of December 31, 1998 was 7.4%. The initial proceeds from the New Credit Facility were used to refinance CapStar's and American General's existing credit facilities. Effective August 3, 1998, the Company also entered into an 18-month, $250,000 secured loan facility ("Secured Facility"), which is expected to be converted into a commercial mortgage-backed security secured by sixteen hotels. The interest rate on the Secured Facility is 110 basis points over 30-day LIBOR. The weighted average interest rate on the Secured Facility as of December 31, 1998 was 6.8%. Convertible Notes-On October 9, 1997, the Company completed the offering of $172,500 aggregate principal amount of its 4.75% convertible subordinated notes due 2004 (the "Convertible Notes"), generating net proceeds to the Company of $167,581. The proceeds were used to repay outstanding indebtedness under the Prior Credit Facility and to finance certain hotel acquisitions. The Convertible Notes are unsecured obligations of the Company and provide for semi-annual payments of interest in April and October, commencing in April 1998. Subordinated Notes-On August 19, 1997, the Company completed the offering of $150,000 aggregate principal amount (issue price of $149,799, net of discount) of its 8.75% senior subordinated notes due 2007 (the "Subordinated Notes"), generating net proceeds to the Company of $144,620. The proceeds were used to repay outstanding indebtedness under the Prior Credit Facility. The indenture pursuant to which the Subordinated Notes were issued contains certain covenants, including maintenance of certain financial ratios, reporting requirements, and other customary restrictions. The Subordinated Notes are unsecured obligations of the Company and provide for semi-annual payments of interest on February 15 and August 15, commencing on February 15, 1998. Non-Recourse Facility-On August 12, 1997, the Company and Lehman Brothers entered into a $100,000 non-recourse facility (the "Non-Recourse Facility"). The Non-Recourse Facility has an 18-month initial term that can be extended an additional 12 months, at the Company's option, subject to payment of additional fees and compliance with certain financial ratios. In January 1999, the Company extended the initial term of the facility to August 1999; the Company paid $132 of fees in connection with this extension. The facility contains certain covenants, including maintenance of certain financial ratios, 35 reporting requirements, and other customary restrictions. The Non-Recourse Facility is secured by three hotels owned by the Company and bears interest at a rate of between 1.75% and 2.70% over 30-day LIBOR, based upon compliance with certain ratios. At December 31, 1998, the interest rate on the Non-Recourse Facility was 7.0%. Mortgage Debt- In connection with the Merger, the Company assumed mortgage debt secured by seven hotels. The mortgage debt matures between 2001 and 2012 and the interest rates on the mortgages range from 7.5% to 10.5%. Prior Credit Facility- On July 1, 1997, the Company entered into the Prior Credit Facility, a $450,000 senior secured credit facility with a syndicate of lenders led by Lehman Brothers Holdings Inc. The Prior Credit Facility was structured as a $350,000, 5-year revolving credit facility and a $100,000, 7- year term loan facility and was secured by substantially all of the Company's assets, except those assets securing the Non-Recourse Facility and the mortgage debt. The Prior Credit Facility provided for acquisition loans, working and renovation capital and letters of credit. The initial proceeds from the Prior Credit Facility were used to repay outstanding indebtedness under certain existing credit facilities. Borrowings under the Prior Credit Facility bore interest, at the Company's option, at a rate equal to the lender's prime rate plus a spread of between 0.5% and 1.125% or one, two, three or nine month LIBOR plus a spread of between 1.5% and 2.125%. The interest rate spread was determined based upon the Company's compliance with certain financial ratios. At December 31, 1997, the interest rate on the Prior Credit Facility was 7.6%. As discussed above, in conjunction with the Merger and entering into the New Credit Facility, the Company terminated the Prior Credit Facility on August 3, 1998. Hedge Agreements- During 1998, the Company entered into six separate $100,000 swap agreements with financial institutions in order to hedge against the impact future interest rate fluctuations may have on the Company's existing floating rate debt instruments. The swap agreements effectively fix 30-day LIBOR at between 4.9% and 5.4%. During the period ended December 31, 1998, the Company made payments totaling $211 relating to these hedges. The hedge agreements terminate at various times between November 1999 and September 2000. On February 18, 1997, the Company entered into a $40,000 swap agreement and a $40,000 collar agreement with Lehman Brothers Special Financing, Inc. and CIBC, respectively. The swap agreement effectively fixes 30-day LIBOR at 5.9% while the collar agreement creates a 30-day LIBOR floor of 5.1% and ceiling of 7.5%. During the years ended December 31, 1998 and 1997 the Company made payments totaling $56 and $88, respectively relating to these hedges. This amount is included in interest expense. Both hedge agreements terminate in September 1999. Additionally, in anticipation of the August 1997 Subordinated Notes offering, the Company entered into separate hedge transactions during June and July 1997. Upon completion of the Subordinated Notes offering, the Company terminated the underlying swap agreements, resulting in a net payment to the Company of $836. This amount was deferred and is being recognized as a reduction to interest expense over the life of the underlying debt. As a result, the effective interest rate on the Subordinated Notes has been reduced to 8.69%. Future Maturities- Aggregate future maturities of the above obligations are as follows: 1999..................................... $ 59,859 2000..................................... 255,420 2001..................................... 433,513 2002..................................... 42,731 2003..................................... 259,994 Thereafter............................... 550,835 ------------ $1,602,352 ============
36 Management has determined that the outstanding balance of the Company's long- term debt approximates its fair value by discounting the future cash flows under the debt arrangements using rates currently available for debt with similar terms and maturities. 7. Income Taxes The Company's income taxes were allocated as follows:
1998 1997 1996 ------------ ------------ ------------- Taxes on income before extraordinary loss............. $15,699 $14,911 $ 2,674 Tax benefit on extraordinary loss..................... (2,083) (2,508) (1,304) Tax benefit on cumulative effect of accounting change. (564) - - ------------ ------------ ------------- $13,052 $12,403 $ 1,370 ============ ============ =============
The Company's 1996 income taxes are based on pretax income since the IPO and the associated change in the Company's tax status to a C Corporation on August 20, 1996. Income before income taxes and extraordinary loss for the period August 20, 1996 through December 31, 1996 was $6,684. The Company's effective income tax rate differs from the federal statutory income tax rate as follows:
1998 1997 1996 ------------ ------------ ------------ Statutory tax rate 35.0% 35.0% 34.0% Effect of REIT dividends paid deduction (35.0) - - Effect of federal taxes in pre-REIT period 17.9 - - State and local taxes 2.1 2.6 6.0 Difference in effective rate on foreign subsidiaries 2.8 0.6 - Other 0.2 - - ------------ ------------ ------------ 23.0% 38.2% 40.0% ============== ============== ==============
The components of income tax expense related to income before extraordinary loss are as follows:
1998 1997 1996 ------------ ------------- -------------- Current: Federal $14,873 $ 7,542 $2,118 State 3,771 899 622 Foreign 1,500 1,553 - ------------ ------------- -------------- 20,144 9,994 2,740 Deferred: Federal (3,546) 4,243 (51) State (899) 505 (15) Foreign - 169 - ------------ ------------- -------------- (4,445) 4,917 (66) ------------ ------------- -------------- $15,699 $14,911 $2,674 ============ ============= ==============
37 The tax effects of the principal temporary differences that give rise to the Company's net deferred tax liability are as follows:
December 31, ---------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- Accelerated depreciation $1,111 $5,788 $1,515 Fair market value of hotel assets acquired 6,800 - - Allowance for doubtful accounts (29) (219) (75) Accrued vacation (14) (385) (252) Accrued expenses 311 570 - Other 274 344 (7) ------------ ------------- ------------- Net deferred tax liability $8,453 $6,098 $1,181 ============ ============= =============
There is no valuation allowance for deferred tax assets as of December 31, 1998 or 1997 as management believes it is more likely than not that these deferred tax assets will be fully realized. In conjunction with the Merger and related transactions, the Company had several significant events that affect income tax-related balances for the year ended December 31, 1998. These events are summarized below: . The Spin-Off was treated as a taxable event to the Company and CapStar's shareholders. As a result, the Company experienced a taxable gain equal to the excess of the fair market value of the OPCO stock over the Company's tax basis in that stock. The taxable gain associated with this transaction is estimated as approximately $47,378. . As a result of the Merger, the combined entity will continue to file as REIT. REITs are generally not subject to federal income taxes, provided that they comply with various requirements necessary to maintain REIT status. Since the Company expects to maintain its REIT status, the tax effect of cumulative temporary differences as of August 3, 1998 has been reversed as a charge to deferred income tax expense and reduction in deferred income taxes payable. This reversal reduced deferred income taxes payable by approximately $19,290 as of August 3, 1998. . REITs are subject to federal income taxes in certain instances for asset dispositions occurring within 10 years of electing REIT status. The Company does not expect to incur federal tax liability resulting from the disposition of assets with built-in gain. . REITs are subject to state and local income taxes in certain jurisdictions. The Company has estimated the state and local income taxes associated with the reversal of temporary differences as $1,653; this amount is included in the deferred income tax liability as of December 31, 1998. . As described above, for purposes of preparing the Company's financial statements, the Company established a new accounting basis for AGH's assets and liabilities based on their fair values. In accordance with generally accepted accounting principles, the Company has provided a deferred income tax liability for the estimated future tax effect of differences between the accounting and tax bases of assets acquired from AGH. This deferred income tax liability, related to future state and local income taxes, is estimated as $6,800, based on information available at the date of the Merger, and may be adjusted upon the final determination of the estimated tax liability. 8. Stockholders' Equity and Minority Interests Common Stock Transactions- In connection with its formation, CapStar issued 6,004,321 shares of common stock to the partners of its predecessor entities. On August 20, 1996, the Company completed its IPO of 9,250,000 shares of common stock at a price of $18 per share. The Company sold 6,750,000 of the initial shares, which, after underwriting discounts, commissions and other IPO expenses, produced net proceeds to the Company of $110,112. The remaining 2,500,000 shares were sold by Acadia Partners, L.P. ("Acadia Partners") and certain related entities which 38 received all of the net proceeds from the sale of their shares. The Company used the proceeds of the IPO to repay a portion of the Company's outstanding indebtedness. On March 12, 1997, the Company completed a follow-on offering of 5,750,000 shares of common stock at a price of $24.75 per share. After underwriting discounts, commissions and other offering expenses, net proceeds to the Company were $134,051, and were used to fund certain hotel acquisitions and repay a portion of the Company's outstanding indebtedness. On October 9, 1997, the Company completed an additional follow-on offering of 5,953,722 shares of common stock at $34.625 per share. Concurrent with the common stock offering, the Company also completed the Convertible Notes offering. The notes were initially convertible into shares of the Company's common stock, any time after 90 days following issuance, at the option of the holders at $43 per share. After underwriting discounts, commissions and other offering expenses, net proceeds to the Company from the Convertible Notes offering and the common stock offering were $167,581 and $195,766, respectively. The proceeds were used to fund certain acquisitions and repay certain indebtedness. In conjunction with the Merger, the conversion price was adjusted to $34 per share. On March 15, 1998, CapStar and AGH entered into the Merger Agreement. Pursuant to the Merger, CapStar shareholders received one share each in the Company and OPCO, for each CapStar share owned. AGH shareholders received 0.8475 shares of the Company for each AGH share owned. To effect the Merger, the Company issued 20,607,611 shares valued at $755,907 to former AGH shareholders. CapStar also distributed on a pro rata basis to its stockholders all of the capital stock of OPCO, which consisted of CapStar's hotel operations (including leased hotels) and management business (the "Spin-Off"). In conjunction with the Spin-Off, the Company distributed $23,745 of cash and $28,565 of net assets to the new shareholders of OPCO. In May 1997, CapStar implemented a stock purchase plan that allowed eligible employees to purchase the Company's common stock at a discount to market value. The Company had reserved 500,000 shares of common stock for issuance under this plan. In June 1998, the plan was terminated in accordance with the Merger Agreement. OP Units- Substantially all of the Company's assets are held indirectly by and operated through MeriStar Hospitality Operating Partnership, L.P. (the "Operating Partnership"), the Company's subsidiary operating partnership. The Operating Partnership's partnership agreement provides four classes of partnership interests ("OP Units"): Common OP Units, Class B OP Units, Class C OP Units and Class D OP Units. Common OP Units and Class B OP Units receive quarterly distributions per OP Unit equal to the dividend paid on each of the Company's Common Shares. Class C OP Units receive a non-cumulative, quarterly distribution equal to $0.5575 per Class C OP Unit until such time as the dividend rate on the Company's Common Shares exceeds $0.5575 whereupon the Class C OP Units automatically convert into Common OP Units. Class D OP Units pay a 6.5% cumulative annual preferred and are entitled to a liquidation preference of $22.16 per Class D OP Unit. All net income and capital proceeds earned by the Operating Partnership, after payment of the annual preferred return and, if applicable, the liquidation preference, are shared by the holders of the Common OP Units. During 1998, 962,858 Common and Class B OP Units were issued to partially finance the purchases of certain hotels and 3,305,175 Common OP Units were issued to former holders of AGH OP Units. During 1997, the Company issued 1,483,759 Common and Class B OP Units and 392,157 Class D OP Units to partially finance the purchases of both certain hotels and lease contracts on hotels. Each OP Unit is redeemable by the holder for one share of Common Stock (or, at the Company's option, for cash in an amount equal to the market value of a share of Common Stock). In addition, the Class D OP Units may be redeemed by the Operating Partnership at a price of $22.16 per Class D OP Unit (or, at the Company's option, for a number of shares of Common Stock having a value equal to such redemption price) 39 at any time after April 1, 2000 or by the holders of the Class D OP Units at a price of $22.16 per Class D OP Unit (in cash or, at the holder's option, for a number of shares of Common Stock having a value equal to the redemption price) at any time after April 1, 2004. On September 2, 1998 and November 4, 1998, respectively, the Company declared its third and fourth quarter dividends, equivalent to an annual rate of $2.02 per share of common stock, par value of $0.01 per share ("Common Stock") and unit of limited partnership interest ("OP Unit") in the Company's subsidiary operating partnership. The third quarter dividend was paid on a prorated basis from August 4, 1998 (the first day of operations following the Merger), through September 30, 1998. The amount of the dividend was $0.31837 per share of Common Stock and OP Unit and was paid on October 30, 1998. The fourth quarter dividend of $.505 per share of Common Stock and OP Unit and was paid on January 29, 1999. 9. Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for income before extraordinary loss and cumulative effect of accounting change:
Year Ended December 31, ----------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- BASIC EPS COMPUTATION: Net income before extraordinary loss and cumulative effect of accounting change $ 48,708 $ 24,152 $ 4,010 Weighted average number of shares of Common Stock outstanding 33,653,154 18,784,763 12,754,321 ----------- ----------- ----------- Basic EPS $ 1.45 $ 1.29 $ 0.31 =========== =========== =========== DILUTED EPS COMPUTATION: Net income before extraordinary loss and cumulative effect of accounting change $ 48,708 $ 24,152 $ 4,010 Minority interest, net of tax 2,633 368 - ----------- ----------- ----------- Adjusted net income $ 51,341 $ 24,520 $ 4,010 ----------- ----------- ----------- Weighted average number of shares of Common Stock outstanding 33,653,154 18,784,763 12,754,321 Common Stock equivalents: Stock options 382,448 188,900 - OP Units 2,624,151 380,433 - ----------- ----------- ----------- Total weighted average number of diluted shares of Common Stock outstanding 36,659,753 19,354,096 12,754,321 ----------- ----------- ----------- Diluted EPS $ 1.40 $ 1.27 $ 0.31 =========== =========== ===========
The effects of certain OP Units and convertible debt were not included in the computation of diluted EPS as their effect was anti-dilutive. EPS for 1996 has been calculated using actual income before extraordinary loss, extraordinary loss, and net income amounts for the period from the IPO on August 20, 1996 through December 31, 1996. Earnings per share is not presented for periods prior to the IPO because the Company's predecessor entities were partnerships. 40 10. Related-Party Transactions Pursuant to an intercompany agreement, the Company and OPCO provide each other with, among other things, reciprocal rights to participate in certain transactions entered into by each party. In particular, OPCO has a right of first refusal to become the lessee of any real property acquired by the Company. OPCO also provides the Company with certain services including administrative, corporate, accounting, finance, insurance, legal, tax, data processing, human resources, acquisition identification and due diligence, and operational services, for which OPCO is compensated in an amount that the Company would be charged by an unaffiliated third party for comparable services. During the year ended December 31, 1998, OPCO provided $781 of such services to the Company. Summarized financial information of the Company's significant lessee, OPCO, is as follows:
Balance sheet data: 1998 --------- Total assets $247,529 Total liabilities $174,002 Operating data: Revenue $562,437 Net income $ 3,950
OPCO has a $75,000 revolving credit facility with the Company. Borrowings by OPCO bear interest at 30-day LIBOR plus 350 basis points. During 1998, the Company earned interest of $1,967 from this facility. As of December 31, 1998, $67,000 was outstanding on the facility. The Company has determined that the fair value of this note receivable approximates its carrying value. In order for AGH to qualify as a REIT prior to the Merger, AGH's operating partnership sold certain personal property relating to certain of the hotels acquired by AGH in connection with its initial public offering to AGH Leasing, L.P. (which has since come under the control of OPCO) for $315, which amount was paid by issuance of a promissory note to AGH's operating partnership. The note was transferred to the Company in connection with the Merger. The promissory note bears interest at the rate of 10.0% per annum and requires the payment of quarterly installments of principal and interest over a five-year period ending on July 31, 2001. At December 31, 1998, the balance outstanding on the note was $175. Certain members of management and their respective affiliates owned equity interests relating to the Courtyard by Marriott in Durham, North Carolina acquired by AGH in November 1997. Such persons and affiliates received an aggregate of 13,650 operating partnership units in AGH's operating partnership ("AGH OP Units") in exchange for such interests in the Durham hotel; which converted to 11,568 OP Units at the Merger. The AGH OP Units were converted into 11,568 shares of Common Stock in December 1998. Of the $150,000 aggregate principal amount of Subordinated Notes sold by the Company in August 1997, $50,000 principal amount was sold at a price of 97.866% per note to Oak Hill Securities Fund, L.P. ("OHSF"). The investment advisor to OHSF is Oak Hill Advisors, Inc., one of the principal stockholders of which is a director of the Company. The director is also a principal stockholder of Oak Hill Partners which is the investment advisor to Acadia Partners, which was a principal stockholder of CapStar. The Subordinated Notes purchased by OHSF are identical to those purchased by third parties, including voting rights. In April 1997, the Company acquired two properties for an aggregate purchase price of $10,128 from two partnerships in which certain members of management owned beneficial interests. The purchase price for these hotels was determined through arm's-length negotiations between the Company and representatives of 41 the holders of the majority of the beneficial interest in the partnerships. Those representatives were not affiliated with the Company. On March 8, 1996, the Company acquired a hotel for a purchase price of $12,000 from a partnership whose general partner was wholly-owned by certain members of the Company's management. Directly or indirectly, these members of management owned a 9.7% beneficial interest in the partnership and received $806 of the net sale proceeds paid to the partnership. The purchase price for this hotel was determined through arm's-length negotiations between the Company and representatives of the holders of the majority of the beneficial interests in the partnership. Those representatives were not affiliated with the Company. 11. Stock-Based Compensation On August 20, 1996, CapStar adopted an equity incentive plan that authorized CapStar to issue and award up to 1,740,000 shares of common stock as options to purchase shares, stock appreciation rights, or restricted shares. Awards could be granted to directors, officers or other key employees of CapStar or an affiliate. On August 20, 1996, in connection with its IPO, CapStar granted certain executive officers and other members of management 745,254 options to purchase shares of the CapStar's common stock at the initial public offering price of $18 per share. Of such options, 54,254 were exercisable immediately upon their grant. The remaining options were exercisable in three annual installments. All options granted lapse ten years from the date of grant. At the date of the Merger, CapStar had outstanding approximately 1,758,000 options (the "CapStar Options"). As a result of the Merger, all holders of CapStar Options received one option in the Company and one option of OPCO, and the original exercise price of the CapStar Options was allocated between the two companies. In addition, approximately 1,060,000 of the CapStar Options became fully vested as of the Merger date. In connection with the Merger, a new equity incentive plan (the "Equity Incentive Plan") was adopted. This plan authorizes 4,549,561 shares of common stock to be awarded. Awards may be granted to officers or other key employees of the Company or an affiliate. These shares are exercisable in three annual installments and expire ten years from the grant date. In addition, the Company adopted a new equity incentive plan for non-employee directors (the "Directors' Plan"). The Directors' Plan authorizes up to 125,000 options to be awarded. These shares are exercisable in three annual installments and expire ten years from the grant date. As of December 31, 1998, 45,000 options had been awarded. In conjunction with the Merger, holders of CapStar options were granted a total of 150,000 shares of stock with a value of $3,205. This restricted stock vests ratably over a three-year period. 42 Stock option activity for 1998, 1997 and 1996 is as follows:
Equity Incentive Plan Directors' Plan --------------------------------------- -------------------------------------- Number of Average Option Number of Average Option Shares Price Shares Price --------------- ------------------ --------------- ------------------ Balance, August 20, 1996 - - - - Granted 764,841 $18.00 - - Exercised - - - - Forfeited - - - - --------------- ------------------ --------------- ------------------ Balance, December 31, 1996 764,841 18.00 - - Granted 855,050 33.11 - - Exercised (235) 18.00 - - Forfeited (18,250) 18.00 - - --------------- ------------------ --------------- ------------------ Balance, December 31, 1997 1,601,406 26.28 - - Granted 2,171,796 24.78 45,000 $21.38 Exercised (37,823) 17.45 - - Forfeited (32,000) 29.44 - - --------------- ------------------ --------------- ------------------ Balance, December 31, 1998 3,703,379 $24.80 45,000 $21.38 =============== ================== =============== ================== Shares exercisable at December 31, 1996 54,254 $18.00 - - =============== ================== =============== ================== Shares exercisable at December 31, 1997 291,116 $18.00 - - =============== ================== =============== ================== Shares exercisable at December 31, 1998 2,231,072 $24.63 - - =============== ================== =============== ==================
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ----------------------------------------------------------------- ----------------------------------- Weighted Average Average Range of exercise Number Remaining Weighted Average Number Exercise prices outstanding Contractual Life Exercise Price exercisable Price - ------------------ --------------- --------------------- ------------------- --------------- --------------- $15.64 to $20.94 1,068,760 7.14 $17.31 862,301 $17.18 $20.97 to $24.99 721,901 9.05 21.77 109,500 23.93 $25.10 to $29.93 952,088 8.71 28.47 672,279 28.48 $30.15 to $33.30 1,005,630 8.90 31.48 586,992 31.29 --------------- --------------------- ------------------- --------------- --------------- $15.64 to $33.30 3,748,379 8.38 $24.80 2,231,072 $24.63 =============== ===================== =================== =============== ===============
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company applies Accounting Principles Board Opinion No. 25 in accounting for the Equity Incentive Plan and therefore no compensation cost has been recognized for the Equity Incentive Plan. Pro forma information regarding net income and EPS is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996:
1998 1997 1996 ---------- ----------- --------- Risk-free interest rate 5.51% 5.81% 5.96% Dividend rate $2.02 - - Volatility factor 0.35 0.26 0.25 Weighted average expected life 6.09 years 3.72 years 3.11 years
43 The Company's pro forma net income and EPS as if the fair value method had been applied were $35,035 and $0.96 for 1998, $18,273 and $0.96 for 1997, and $2,111 and $0.14 for 1996. The effects of applying SFAS No. 123 for disclosing compensation costs may not be representative of the effects on reported net income and EPS for future years. 12. Commitments and Contingencies The Company leases land at certain hotels from third parties. Certain leases contain contingent rent features based on gross revenues at the respective property. Future minimum lease payments required under these operating leases as of December 31, 1998 were as follows:
1999 $ 1,715 2000 1,537 2001 1,537 2002 1,537 2003 1,537 Thereafter 66,577 ------- $74,440 =======
The Company also leases office equipment under non-cancelable operating leases. These amounts are insignificant to the financial statements. The Company leases its hotels to MeriStar Hotels and Resorts and Prime Hospitality Corp. under noncancellable participating leases that expire from 2010 to 2012. The Company also leases certain office, retail and parking space to outside parties under non-cancelable operating leases with initial or remaining terms in excess of one year. Future minimum rental receipts under these leases as of December 31, 1998 were as follows: 1999 $ 236,479 2000 242,809 2001 249,119 2002 256,084 2003 263,364 Thereafter 2,013,776 ---------- $3,261,631 ==========
In the course of the Company's normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company. Based on currently available facts, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 13. Acquisitions During 1998, the Company acquired 70 hotels (containing 17,332 rooms), of which 53 were acquired pursuant to the Merger. The Company purchased AGH for approximately $1,306,000 through the issuance of approximately 23,913,000 shares of Common Stock and OP Units in the Company's subsidiary operating partnership. The total purchase price for the remaining 17 acquired hotels during 1998 was $549,068 of cash and $16,932 of OP Units. The cash portions of these acquisitions were funded through borrowings on the New Credit Facility and Prior Credit Facility. 44 The following unaudited pro forma summary presents information as if the Merger, the Spin-Off and all 117 hotels owned at December 31, 1998 had been acquired at the beginning of the periods presented. The pro forma information is provided for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the Company. PRO FORMA INFORMATION (UNAUDITED)
1998 1997 --------------- --------------- Total revenue.................................................................. $332,632 $280,482 Net income..................................................................... $ 96,232 $ 67,487 Diluted EPS.................................................................... $ 2.05 $ 1.48
14. Quarterly Financial Information (Unaudited) The following is a summary of the Company's quarterly results of operations:
1998 1997 -------------------------------------- ---------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- --------- ------- ------- ------- ------- -------- Total revenue................... $143,602 $184,145 $104,301 $93,249 $48,108 $73,711 $90,040 $104,534 Total operating expenses........ 125,890 147,209 81,827 36,465 40,574 55,809 69,822 88,676 Net operating income............ 17,712 36,936 22,474 56,784 7,534 17,902 20,218 15,858 Income before extraordinary loss 4,451 14,905 3,868 25,484 1,940 8,148 8,077 5,987 Net income (loss)............... 4,451 14,905 (1,133) 25,484 1,940 8,148 3,985 5,987 Diluted earnings (loss) per share.......................... $0.18 $ 0.55 $ (0.03) $ 0.54 $0.14 $ 0.43 $ 0.21 $ 0.25
15. Supplemental Cash Flow Information
1998 1997 1996 ------------ ------------- ------------- Cash paid for interest and income taxes: Interest, net of capitalized interest of $5,182, $442, and $461, respectively $48,156 $15,734 $11,644 Income taxes 18,591 7,606 807 Non-cash investing and financing activities: Additions to equipment through capital leases - $ 40 $ 324 Long-term debt assumed in purchase of property and equipment 543 16,478 - OP Units issued in purchase of property and equipment 16,932 32,264 - OP Units issued in purchase of intangible assets - 24,000 - Redemption of OP Units 31,430 11,000 - Deferred financing fees not yet paid - 528 - Issuance of common stock for partners' capital - - 49,796
45 Book value of assets distributed to spun-off affiliate $ 41,449 - - Book value of liabilities distributed to spun-off affiliate (11,768) - - Book value of debt distributed to spun-off affiliate (1,116) - - ------------ ------------- ------------- Book value of net assets distributed to spun-off affiliate $ 28,565 - - ============ ============= ============= Fair value of assets acquired in Merger $1,306,018 - - Fair value of liabilities assumed in Merger (26,167) - - Fair value of debt assumed in Merger (523,944) - - ------------ ------------- ------------ Fair value of net assets acquired in Merger $ 755,907 - - ============ ============= =============
16. Subsequent Events On January 11, 1999, the Company completed the acquisition of the Holiday Inn Madison, a 194-room hotel located in Madison, Wisconsin, for a purchase price of $11,961. The acquisition was funded using existing cash and borrowings on the New Credit Facility. On January 21, 1999, the Company sold The Lodge at the Seaport, a 77-room hotel in Mystic, Connecticut, for $3,000. 46 MERISTAR HOSPITALITY CORPORATION SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 (dollars in thousands)
Costs Initial cost to subsequent Gross amount Company to acquisition at end of year ---------------- --------------- -------------------------- Building Building Building Accum- and and and ulated Year of Encum- Improve- Improve- Improve- Deprecia- Construc- Date Description brances Land ments Land ments Land ments tion tion Acquired Life ------- ----- -------- ----- -------- ----- -------- --------- --------- -------- ----- Hotel Assets: Salt Lake Airport Hilton, UT (1) $ 770 $12,828 $ - $ 2,774 $ 770 $ 15,602 $ 1,373 1980 3/3/95 40 Radisson Hotel, Schaumburg, IL - 1,080 5,131 - 1,625 1,080 6,756 553 1979 6/30/95 40 Sheraton Hotel, Colorado Springs, CO (1) 1,071 14,592 1 3,231 1,072 17,823 1,457 1974 6/30/95 40 Hilton Hotel, Bellevue, WA - 5,211 6,766 - 1,542 5,211 8,308 653 1979 8/4/95 40 Marriott Hotel, Somerset, NJ - 1,978 23,001 - 3,677 1,978 26,678 1,996 1978 10/3/95 40 Westin Atlanta Airport, Atlanta, GA - 2,650 15,926 (300) 8,834 2,350 24,760 1,813 1982 11/15/95 40 Sheraton Hotel, Charlotte, NC - 4,700 11,057 - 3,354 4,700 14,411 998 1985 2/2/96 40 Radisson Hotel Southwest, Cleveland, OH - 1,330 6,353 - 4,158 1,330 10,511 641 1978 2/16/96 40 Orange County Airport Hilton, Irvine, CA (1) 9,990 7,993 - 3,029 9,990 11,022 691 1976 2/22/96 40 The Latham Hotel, Washington, DC - 6,500 5,320 - 2,981 6,500 8,301 475 1981 3/8/96 40 Hilton Hotel, Arlington, TX (1) 1,836 14,689 79 2,801 1,915 17,490 1,117 1983 4/17/96 40 Hilton Hotel, Arlington, VA - 4,000 15,069 - 165 4,000 15,234 934 1990 8/23/96 40 Southwest Hilton, Houston, TX - 2,300 15,665 - 910 2,300 16,575 879 1979 10/31/96 40 Embassy Suites, Englewood, CO (1) 2,500 20,700 - 1,685 2,500 22,385 1,182 1986 12/12/96 40 Holiday Inn, Colorado Springs, CO - 1,600 4,232 - 467 1,600 4,699 228 1974 12/17/96 40 Embassy Row Hilton, Washington, DC - 2,200 13,247 - 1,731 2,200 14,978 708 1969 12/17/96 40 Hilton Hotel & Towers, Lafayette, LA (1) 1,700 16,062 - 963 1,700 17,025 829 1981 12/17/96 40 Hilton Hotel, Sacramento, CA (1) 4,000 16,013 - 1,648 4,000 17,661 854 1983 12/17/96 40 Santa Barbara Inn, Santa Barbara, CA - 2,600 5,141 - 1,108 2,600 6,249 289 1959 12/17/96 40 San Pedro Hilton, San Pedro, CA - 640 6,047 - 1,803 640 7,850 347 1989 1/28/97 40 Doubletree Hotel, Albuquerque, NM (1) 2,700 15,075 - 784 2,700 15,859 739 1975 1/31/97 40 Westchase Hilton & Towers, Houston, TX - 3,000 23,991 - 1,308 3,000 25,299 1,194 1980 1/31/97 40 Four Points Hotel, Cherry Hill, NJ - 1,700 4,178 - 1,857 1,700 6,035 242 1991 3/20/97 40 Sheraton Great Valley Inn, Frazer, PA - 2,150 11,653 11 484 2,161 12,137 518 1971 3/27/97 40 Holiday Inn Calgary Airport, Calgary, Alberta, Canada - 751 5,011 (50) 456 701 5,467 342 1981 4/1/97 40 Sheraton Hotel Dallas, Dallas, TX - 1,300 17,268 - 2,038 1,300 19,306 788 1974 4/1/97 40 Radisson Hotel Dallas, Dallas, TX - 1,800 17,580 - 1,054 1,800 18,634 793 1972 4/1/97 40 Sheraton Hotel Guildford, Surrey, BC, Canada - 2,366 24,008 (157) (975) 2,209 23,033 1,520 1992 4/1/97 40 Doubletree Guest Suites, Indianapolis, IN (1) 1,000 8,242 - 616 1,000 8,858 373 1987 4/1/97 40 Ramada Vancouver Centre, Vancouver, BC, Canada - 4,400 7,840 (291) 1,810 4,109 9,650 550 1968 4/1/97 40 Holiday Inn Sports Complex, Kansas City, MO - 420 4,742 - 1,195 420 5,937 230 1975 4/30/97 40 Hilton Crystal City, Arlington, VA - 5,800 29,879 - 503 5,800 30,382 1,129 1974 7/1/97 40 Doubletree Resort Hotel, Cathedral City, CA - 1,604 16,141 - 1,256 1,604 17,397 632 1985 7/1/97 40 Radisson Hotel & Suites, Chicago, IL (1) 4,870 39,175 - 554 4,870 39,729 1,482 1971 7/15/97 40 Georgetown Inn, Washington, DC - 6,100 7,103 - 170 6,100 7,273 270 1962 7/15/97 40 Embassy Suites Center City, Philadelphia, PA (2) 5,500 26,763 - 113 5,500 26,876 950 1963 8/12/97 40 Doubletree Hotel Austin, Austin, TX (2) 2,975 25,678 - 218 2,975 25,896 912 1984 8/14/97 40 Radisson Plaza Hotel, Lexington, KY (2) 1,100 30,375 - 3,713 1,100 34,088 1,156 1982 8/14/97 40 Jekyll Inn, Jekyll Island, GA - - 7,803 - 2,777 - 10,580 308 1971 8/20/97 40 Holiday Inn Metrotown, Burnaby, BC, Canada - 1,115 5,303 (74) 349 1,041 5,652 274 1989 8/22/97 40 Embassy Suites International Airport, Tucson, AZ - 1,640 10,444 - 325 1,640 10,769 311 1982 10/23/97 40 Westin Morristown, NJ - 2,500 19,128 100 808 2,600 19,936 535 1962 11/20/97 40 Doubletree Hotel Bradley International Airport, Windsor Locks, CT - 1,013 10,228 87 284 1,100 10,512 279 1985 11/24/97 40 Sheraton Hotel, Mesa, AZ - 1,850 16,938 - 363 1,850 17,301 460 1985 12/5/97 40 Metro Airport Hilton & Suites, Detroit, MI - 1,750 12,639 - 285 1,750 12,924 321 1989 12/16/97 40 Marriott Hotel, Los Angeles, CA - 5,900 48,250 - 3,451 5,900 51,701 1,280 1983 12/18/97 40
47
Costs Initial cost to subsequent Gross amount Company to acquisition at end of year ---------------- --------------- -------------------------- Building Building Building Accum- and and and ulated Year of Encum- Improve- Improve- Improve- Deprecia- Construc- Date Description brances Land ments Land ments Land ments tion tion Acquired Life ------- ----- -------- ----- -------- ------ -------- --------- --------- -------- ----- Austin Hilton & Towers, TX - 2,700 15,852 - 653 2,700 16,505 404 1974 1/6/98 40 Dallas Renaissance North, TX - 3,400 20,813 - 1,384 3,400 22,197 543 1979 1/6/98 40 Houston Sheraton Brookhollow Hotel, TX - 2,500 17,609 - 1,761 2,500 19,370 467 1980 1/6/98 40 Seelbach Hilton, Louisville, KY - 1,400 38,462 - 295 1,400 38,757 964 1905 1/6/98 40 Midland Hilton & Towers, TX - 150 8,487 - 735 150 9,222 225 1976 1/6/98 40 Westin Oklahoma , OK - 3,500 27,588 - 656 3,500 28,244 698 1977 1/6/98 40 Sheraton Hotel, Columbia, MD - 3,600 21,393 - (40) 3,600 21,353 400 1972 3/27/98 40 Radisson Cross Keys, Baltimore, MD - 1,500 5,615 - (24) 1,500 5,591 105 1973 3/27/98 40 Sheraton Fisherman's Wharf, San Francisco, CA (1) 19,708 61,751 - 371 19,708 62,122 1,159 1975 4/2/98 40 Hartford Hilton, CT - 4,073 24,458 - (15) 4,073 24,443 376 1975 5/21/98 40 Holiday Inn Dallas DFW Airport South, TX 13,376 3,223 27,542 - 84 3,223 27,626 288 1974 8/3/98 40 Courtyard by Marriott Meadowlands, NJ 4,570 - 8,758 - 46 - 8,804 92 1993 8/3/98 40 Hampton Inn Richmond Airport, VA - 895 6,425 - 516 895 6,941 68 1972 8/3/98 40 Hotel Maison de Ville, New Orleans, LA - 272 2,860 - 14 272 2,874 30 1778 8/3/98 40 Hilton Hotel Toledo, OH - - 11,241 - 85 - 11,326 118 1987 8/3/98 40 Holiday Inn Select Dallas DFW Airport West, TX - 1,387 11,764 - 97 1,387 11,861 123 1974 8/3/98 40 Holiday Inn Select New Orleans International Airport, LA (1) 2,895 24,502 - 176 2,895 24,678 257 1973 8/3/98 40 Hampton Inn Ocean City, MD - 911 8,995 - 59 911 9,054 94 1989 8/3/98 40 Crowne Plaza Madison, WI (1) 2,518 20,783 - 154 2,518 20,937 218 1987 8/3/98 40 Holiday Inn Park Center Plaza, St. Louis, MO - 684 6,159 5 121 689 6,280 - 1975 8/3/98 - Wyndham Albuquerque Airport Hotel, NM - - 18,078 - 221 - 18,299 189 1972 8/3/98 40 Wyndham San Jose Airport Hotel, CA - - 33,797 - 228 - 34,025 353 1974 8/3/98 40 Holiday Inn Select Mission Valley, CA (1) 2,301 20,164 - 228 2,301 20,392 211 1970 8/3/98 40 Sheraton Safari Hotel, Lake Buena Vista, FL - 3,900 33,703 - 413 3,900 34,116 354 1985 8/3/98 40 Hilton Monterey, CA - 2,040 16,884 - 204 2,040 17,088 177 1971 8/3/98 40 Hilton Hotel Durham, NC - 1,508 14,981 - 198 1,508 15,179 157 1987 8/3/98 40 Wyndham Garden Hotel Marietta, GA - 1,835 16,577 - 83 1,835 16,660 161 1985 8/3/98 40 Westin Resort Key Largo, FL - 3,034 28,170 - 630 3,034 28,800 295 1985 8/3/98 40 Doubletree Guest Suites Atlanta, GA 9,150 2,166 17,975 - 3,406 2,166 21,381 190 1985 8/3/98 40 Radisson Hotel Arlington Heights, IL - 1,462 12,040 - 94 1,462 12,134 126 1981 8/3/98 40 Holiday Inn Select Bucks County, PA - 2,507 20,951 - 138 2,507 21,089 220 1987 8/3/98 40 Hilton Hotel Cocoa Beach, FL - 2,661 22,137 - 1,771 2,661 23,908 233 1986 8/3/98 40 Radisson Twin Towers Orlando, FL - 9,191 70,711 7 543 9,198 71,254 743 1972 8/3/98 40 Crowne Plaza Phoenix, AZ - 1,782 15,427 - 3,460 1,782 18,887 163 1981 8/3/98 40 Hilton Airport Hotel Grand Rapids, MI (1) 1,968 16,041 - 121 1,968 16,162 168 1979 8/3/98 40 Marriott West Loop Houston, TX - 2,793 22,779 - 171 2,793 22,950 239 1976 8/3/98 40 Courtyard by Marriott Durham, NC - 1,351 10,574 - 72 1,351 10,646 111 1996 8/3/98 40 Courtyard by Marriott, Marina Del Rey, CA - 3,323 23,557 - 161 3,323 23,718 247 1976 8/3/98 40 Courtyard by Marriott, Century City, CA - 2,079 15,806 - 137 2,079 15,943 166 1986 8/3/98 40 Courtyard by Marriott, Lake Buena Vista, FL - - 39,764 - 260 - 40,024 418 1972 8/3/98 40 Crowne Plaza, San Jose, CA (1) 1,977 22,229 - 614 1,977 23,843 234 1975 8/3/98 40 Doubletree Hotel Westshore, Tampa, FL - 2,788 22,587 - 153 2,788 22,740 237 1972 8/3/98 40 Howard Johnson Resort Key Largo, FL - 1,728 11,991 - 194 1,728 12,185 126 1971 8/3/98 40 Holiday Inn Annapolis, MD - 1,629 13,041 - 90 1,629 13,131 137 1975 8/3/98 40 Holiday Inn Fort Lauderdale, FL - 2,291 18,731 - 128 2,291 18,859 197 1969 8/3/98 40 Holiday Inn Express Hanover, MD - 1,159 9,286 - 59 1,159 9,345 97 1988 8/3/98 40 Holiday Inn Madeira Beach, FL - 1,725 12,918 - 86 1,725 13,004 136 1972 8/3/98 40 Holiday Inn Chicago O'Hare, IL 20,943 3,989 70,320 - 613 3,989 70,933 738 1975 8/3/98 40 Holiday Inn & Suites Alexandria, VA - 1,675 13,344 - 113 1,675 13,457 140 1985 8/3/98 40 Hilton Clearwater, FL - - 66,828 - 484 - 67,312 702 1980 8/3/98 40 Radisson Rochester, NY - - 6,131 - 48 - 6,179 64 1971 8/3/98 40 Ramada Plaza Old Towne Alexandria, VA 5,186 2,154 17,124 - 112 2,154 17,236 180 1975 8/3/98 40 Ramada Inn Clearwater, FL - 2,297 21,143 - 420 2,297 21,563 - 1969 8/3/98 - Lodge at the Seaport, Mystic, CT - 614 4,490 - 90 614 4,580 - 1967 8/3/98 - Holiday Inn Richmond, VA - 1,056 9,498 - 182 1,056 9,680 - 1975 8/3/98 -
48
Costs Initial cost to subsequent Gross amount Company to acquisition at end of year ------------------- --------------- ---------------------------- Building Building Building Accum- and and and ulated Year of Encum- Improve- Improve- Improve- Deprecia- Construc- Date Description brances Land ments Land ments Land ments tion tion Acquired Life ------- ------- -------- ----- -------- -------- --------- --------- --------- -------- ---- Crowne Plaza Las Vegas, NV - 2,934 23,460 - 166 2,934 23,626 246 1989 8/3/98 40 Crowne Plaza Portland, OR - 2,872 22,655 - 285 2,872 22,940 238 1988 8/3/98 40 Four Points Hotel, Mt. Arlington, NJ 5,032 6,603 5,762 - 46 6,603 5,808 60 1984 8/3/98 40 Ramada Inn Mahwah, NJ - 1,060 8,557 - 137 1,060 8,694 90 1972 8/3/98 40 Ramada Plaza Meriden, CT - 1,190 9,623 - 65 1,190 9,688 101 1985 8/3/98 40 Ramada Plaza Shelton, CT 4,817 1,934 15,423 - 92 1,934 15,515 162 1989 8/3/98 40 Sheraton Crossroads Mahwah, NJ - 3,093 24,916 - 292 3,093 25,208 262 1986 8/3/98 40 St. Tropez Suites, Las Vegas, NV - 2,942 23,774 - 266 2,942 24,040 250 1986 8/3/98 40 Doral Forrestal, Princeton, NJ - 9,578 57,555 - - 9,578 57,555 598 1981 /11/98 40 South Seas Plantation, Captiva, FL - 3,084 83,573 - 489 3,084 84,062 517 1975 0/1/98 40 Radisson Suites Beach Resort, Marco Island, FL - 7,120 35,300 - 234 7,120 35,534 219 1983 0/1/98 40 Best Western Sanibel Island, FL - 3,868 3,984 - 45 3,868 4,029 25 1967 0/1/98 40 The Dunes Golf & Tennis Club, Sanibel Island, FL - 7,705 3,043 - 53 7,705 3,096 19 1964 0/1/98 40 Sanibel Inn, Sanibel Island, FL - 8,482 12,045 - 85 8,482 12,130 75 1964 0/1/98 40 Seaside Inn, Sanibel Island, FL - 1,702 6,416 - 41 1,702 6,457 40 1964 0/1/98 40 Song of the Sea, Sanibel Island, FL - 339 3,223 - 19 339 3,242 20 1964 0/1/98 40 Sundial Beach Resort, Sanibel Island, FL - 320 12,009 - 61 320 12,070 76 1975 0/1/98 40 ------- ------- --------- ----- -------- ------- --------- --------- --------- -------- --- 315,085 2,193,419 (582) 100,711 314,503 2,294,130 53,141 ======= ========= ===== ======== ======= ========= =========
(1) These properties secure the Secured Facility which, as of December 31, 1998, had an outstanding balance of $250,000. (2) These properties secure the Non-Recourse Facility which, as of December 31, 1998 had an outstanding balance of $52,750.
Property Accumulated and Equipment Depreciation -------------- ------------ Land $ 314,503 $ - Building and Improvements 2,294,130 53,141 Furniture and equipment 234,403 30,656 Construction in progress 114,507 - -------------- ------------ Total property and equipment $2,957,543 $ 83,797 ============== ============
1998 1997 1996 ------------ ------------ ------------- Hotel property and equipment Balance, beginning of period $ 947,597 $ 342,366 $ 110,455 Acquisitions during period 1,865,142 550,913 204,740 Improvements and construction -in-progress 144,804 54,318 27,171 ------------ ------------ ------------- Balance, end of period 2,957,543 947,597 342,366 ------------ ------------ ------------- Accumulated depreciation Balance, beginning of period 26,858 8,432 1,743 Additions-depreciation expense 56,939 18,426 6,689 ------------ ------------ ------------- Balance, end of period 83,797 26,858 8,432 ------------ ------------ ------------- Net hotel property and equipment, end of period $2,873,746 $920,739 $333,934 ============ ============ ============
49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 405 of Regulation S-K with respect to Directors and Executive Officers of the Company is incorporated herein by reference to the sections entitled "Management" and "Principal Stockholders" in the Company's definitive proxy for its 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections entitled "Executive Compensation," "Compensation of Directors" and "Stock Option Grants" in the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section entitled "Principal Stockholders" in the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the 1999 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. Index to Financial Statements and Financial Statement Schedules 1. Financial Statements The Financial Statements included in the Annual Report on Form 10-K are listed in Item 8. 2. Financial Statement Schedules The Financial Statement Schedules included in the Annual Report on Form 10-K are listed in Item 8. 50 3. Exhibits All Exhibits listed below are filed with this Annual Report on Form 10-K unless specifically stated to be incorporated by reference to other documents previously filed with the Commission.
Exhibit No. Description of Document - ----------- ---------------------------------------------------------------------------------------------------------------------- 3.1* Amended and Restated Articles of Incorporation of the Registrant (Articles of Merger between American General Hospitality Corporation and CapStar Hotel Company). 3.2* Amended and Restated By-laws of the Registrant. 4.1 ** Form of Share Certificate. 10.1* Agreement and Plan of Merger, dated as of March 15, 1998, by and among the Registrant and American General Hospitality Operating Partnership, L.P. on the one hand, and CapStar Hotel Company, CapStar Management Company, L.P., and CapStar Management Company II, L.P., on the other hand. 10.2* Amendment No.1 to the Agreement and Plan of Merger, dated as of June 5, 1998, by and among the Registrant and American General Hospitality Operating Partnership, L.P. on the one hand, and CapStar Hotel Company, CapStar Management Company, L.P., and CapStar Management Company II, L.P., on the other hand. 10.3 Second Amended and Restated Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P. dated as of August 3, 1998 10.4 Second Amended and Restated Senior Secured Credit Agreement dated as of August 3, 1998 10.5 Loan Agreement made as of August 3, 1998 between MeriStar Hospitality Corporation and its affiliates and Secore Financial Corporation. 10.6* Form of MeriStar Incentive Plan. 10.7* Form of MeriStar Non-Employee Directors' Incentive Plan. 10.8* Form of Employment Agreement between MeriStar Hospitality Corporation and Paul W. Whetsell. 10.9* Form of Employment Agreement between MeriStar Hospitality Corporation and Steven D. Jorns. 10.10 Form of Employment Agreement between MeriStar Hospitality Corporation and Bruce G. Wiles 10.11 Form of Employment Agreement between MeriStar Hospitality Corporation and John Emery 10.12* Form of Exchange Rights Agreement, by and among MeriStar Hospitality Corporation, MeriStar Hospitality Operating Partnership, L.P., and the Persons set forth therein. 10.13* Form of Contribution, Assumption and Indemnity Agreement between CapStar Hotel Company and CMC Operating Company. 10.14* Form of Intercompany Agreement, among MeriStar Hospitality Corporation, MeriStar Hospitality Operating Partnership, L.P., CMC Operating Company and CMC Operating Partnership, L.P. 10.15* Form of Operating Lease 12 Schedule Regarding the Computation of Ratios 21 Subsidiaries of the Company 23 Consent of KPMG LLP 27 Financial Data Schedule 29 Power of Attorney (see signature page)
___________ * Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-49611), filed with the Securities and Exchange Commission on April 7, as amended. ** Incorporated by reference to the Company's Registration Statement on Form S-3 (File No. 333-66229), filed with the Securities and Exchange Commission on October 28, 1998, as amended. ___________ B. Reports on Form 8-K: None 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, MeriStar Hospitality Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERISTAR HOSPITALITY CORPORATION By: /s/ PAUL W. WHETSELL ------------------------------- Paul W. Whetsell Chief Executive Officer and Chairman of the Board Dated: March 1, 1999 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Paul W. Whetsell, Bruce G. Wiles and John Emery, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this report filed pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report and the foregoing Power of Attorney have been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - ------------------------------- -------------------------------------------- --------------------- /s/ PAUL W. WHETSELL Chief Executive Officer and Chairman of the March 1, 1999 - ------------------------------- Board of Directors (Principal Executive Paul W. Whetsell Officer) /s/ STEVEN D. JORNS - ------------------------------- Vice Chairman of the Board of Directors March 1, 1999 Steven D. Jorns /s/ BRUCE G. WILES - ------------------------------- President and Director March 1, 1999 Bruce G. Wiles /s/ JOHN EMERY Chief Financial Officer (Principal March 1, 1999 - ------------------------------- Financial and Accounting Officer) John Emery 52
/s/ JAMES F. DANNHAUSER - ------------------------------- Director March 1, 1999 James F. Dannhauser - ------------------------------- Director March 1, 1999 Daniel L. Doctoroff - ------------------------------- Director March 1, 1999 William S. Janes /s/ MAHMOOD KHIMJI - ------------------------------- Director March 1, 1999 Mahmood Khimji - ------------------------------- Director March 1, 1999 H. Cabot Lodge III /s/ JAMES R. WORMS - ------------------------------- Director March 1, 1999 James R. Worms
53 EX-10.3 2 AGREEMENT OF LIMITED PARTNERSHIP EXHIBIT 10.3 SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. August 3, 1998 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINED TERMS................................................................... 2 ARTICLE 2 ORGANIZATIONAL MATTERS.......................................................... 14 Section 2.1 Continuation...................................................... 14 Section 2.2 Name.............................................................. 14 Section 2.3 Registered Office and Agent; Principal Office..................... 14 Section 2.4 Power of Attorney................................................. 15 Section 2.5 Term.............................................................. 16 ARTICLE 3 PURPOSE......................................................................... 16 Section 3.1 Purpose and Business.............................................. 16 Section 3.2 Powers............................................................ 17 ARTICLE 4 CAPITAL CONTRIBUTIONS........................................................... 17 Section 4.1 Capital Contributions of the Partners............................. 17 Section 4.2 Additional Funds; Restrictions on the Company..................... 18 Section 4.3 Issuance of Additional Partnership Interests; Admission of Additional Limited Partners..................... 19 Section 4.4 Contribution of Proceeds of Issuance of REIT Stock................ 19 Section 4.5 Repurchase of REIT Stock.......................................... 20 Section 4.6 No Third Party Beneficiary........................................ 20 Section 4.7 No Interest; No Return............................................ 21 Section 4.8 No Preemptive Rights.............................................. 21 Section 4.9 Class B Certificate of Designation................................ 21 Section 4.10 Class C Certificate of Designation................................ 21 Section 4.11 Class D Certificate of Designation................................ 21 ARTICLE 5 DISTRIBUTIONS................................................................... 22 ARTICLE 6 ALLOCATIONS..................................................................... 25 ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS........................................... 25 Section 7.1 Management........................................................ 25 Section 7.2 Certificate of Limited Partnership................................ 29 Section 7.3 Reimbursement of the General Partner and the Company.................................................. 30 Section 7.4 Outside Activities of the General Partner......................... 30 Section 7.5 Contracts with Affiliates......................................... 31 Section 7.6 Indemnification................................................... 31
Section 7.7 Liability of the General Partner................................. 33 Section 7.8 Other Matters Concerning the General Partner..................... 34 Section 7.9 Title to Partnership Assets...................................... 34 Section 7.10 Reliance by Third Parties........................................ 35 ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS..................................... 35 Section 8.1 Limitation of Liability.......................................... 35 Section 8.2 Management of Business........................................... 36 Section 8.3 Outside Activities of Limited Partners........................... 36 Section 8.4 Return of Capital................................................ 36 Section 8.5 Rights of Limited Partners Relating to the Partnership...................................................... 37 Section 8.6 Exchange Rights Agreement........................................ 38 ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS......................................... 38 Section 9.1 Records and Accounting........................................... 38 Section 9.2 Fiscal Year...................................................... 38 Section 9.3 Reports.......................................................... 38 ARTICLE 10 TAX MATTERS.................................................................... 39 Section 10.1 Preparation of Tax Returns....................................... 39 Section 10.2 Tax Elections.................................................... 39 Section 10.3 Tax Matters Partner.............................................. 39 Section 10.4 Organizational Expenses.......................................... 41 Section 10.5 Withholding...................................................... 41 ARTICLE 11 TRANSFERS AND WITHDRAWALS...................................................... 42 Section 11.1 Transfer......................................................... 42 Section 11.2 Transfer of the General Partner's General Partner Interest......................................................... 42 Section 11.3 Limited Partners' Rights to Transfer............................. 44 Section 11.4 Substituted Limited Partners..................................... 45 Section 11.5 Assignees........................................................ 46 Section 11.6 General Provisions............................................... 46 ARTICLE 12 ADMISSION OF PARTNERS.......................................................... 47 Section 12.1 Admission of Successor General Partner........................... 47 Section 12.2 Admission of Additional Limited Partners......................... 48 Section 12.3 Amendment of Agreement and Certificate of Limited Partnership.............................................. 49 ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION....................................... 49 Section 13.1 Dissolution...................................................... 49 Section 13.2 Winding Up....................................................... 50 Section 13.3 No Obligation to Contribute Deficit.............................. 52 Section 13.4 Rights of Limited Partners....................................... 52
Section 13.5 Notice of Dissolution........................................ 52 Section 13.6 Termination of Partnership and Cancellation of Certificate of Limited Partnership........................... 52 Section 13.7 Reasonable Time for Winding-Up............................... 53 Section 13.8 Waiver of Partition.......................................... 53 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS................................... 53 Section 14.1 Amendments................................................... 53 Section 14.2 Meetings of the Partners..................................... 54 ARTICLE 15 GENERAL PROVISIONS............................................................. 55 Section 15.1 Addresses and Notice......................................... 55 Section 15.2 Titles and Captions.......................................... 56 Section 15.3 Pronouns and Plurals......................................... 56 Section 15.4 Further Action............................................... 56 Section 15.5 Binding Effect............................................... 56 Section 15.6 Creditors.................................................... 56 Section 15.7 Waiver....................................................... 56 Section 15.8 Counterparts................................................. 56 Section 15.9 Applicable Law............................................... 57 Section 15.10 Invalidity of Provisions..................................... 57 Section 15.11 Entire Agreement............................................. 57 Section 15.12 Guaranty by the Company...................................... 57 Section 15.13 Merger....................................................... 57 Section 15.14 Limitation of Partnership Interest........................... 57
Page ---- EXHIBITS - -------- Exhibit A - Partners' Contributions and Partnership Interests Exhibit B - Allocations Exhibit C - Class B Certificate of Designation Exhibit D - Class C Certificate of Designation Exhibit E - Class D Certificate of Designation v SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. (F/K/A AMERICAN GENERAL HOSPITALITY OPERATING PARTNERSHIP, L.P.) THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. (this "AGREEMENT"), dated as of August 3, 1998, is entered into by and among MERISTAR HOSPITALITY CORPORATION, a Maryland corporation, as general partner ("MERISTAR" or the "GENERAL PARTNER") and the Limited Partners set forth on the limited partner signature pages attached hereto; WHEREAS, MeriStar Hospitality Operating Partnership, L.P. (the "PARTNERSHIP"), was initially formed pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware by filing a certificate of limited partnership on April 9, 1996 with the Secretary of State of the State of Delaware and entering into a limited partnership agreement dated as of April 9, 1996 (the "ORIGINAL PARTNERSHIP AGREEMENT"); WHEREAS, the Original Partnership Agreement was amended and restated on July 31, 1996 (the "AMENDED AND RESTATED PARTNERSHIP AGREEMENT") to, inter ----- alia, admit Additional Limited Partners (as defined below); - ---- WHEREAS, AGH GP, Inc., a Nevada corporation ("AGH GP"), on August 3, 1998, merged with and into the General Partner (the "GP MERGER"), and prior to that time had been the general partner of the Partnership (as defined below); WHEREAS, after the consummation of the GP Merger, the General Partner, as general partner of the Partnership, continued the business of the Partnership without dissolution in accordance with the terms of the Amended and Restated Partnership Agreement; WHEREAS, subsequent to the GP Merger, but still on August 3, 1998, the General Partner merged with CapStar Hotel Company, with the General Partner being the surviving entity operating under the name MeriStar Hospitality Corporation, and the business of the Partnership was continued without dissolution in accordance with the terms of the Amended and Restated Partnership Agreement; WHEREAS, CapStar Hotel Company LLC, a Delaware limited liability company ("CAPSTAR HOTEL LLC") and CapStar Hotel Company II, LLC, a Delaware limited liability company ("CAPSTAR HOTEL II LLC"), on August 3, 1998 merged with and into the Partnership; WHEREAS, the General Partner desires, pursuant to Section 14.1A and Section 14.1B of this Agreement, to amend and restate the Amended and Restated Partnership Agreement to reflect (i) the admission of MeriStar as the general partner of the Partnership, (ii) the merger of CapStar Hotel LLC and CapStar Hotel II LLC with and into the Partnership and the admission of CapStar Management Company, LLC as an Additional Limited Partner, (iii) the change of the Partnership's name to "MeriStar Hospitality Operating Partnership, L.P." and address to 1010 Wisconsin Avenue, N.W., Washington, DC 20007 and (iv) other clarifications to this Agreement, not inconsistent with this Agreement, in accordance with Section 14.1B hereto. NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows: ARTICLE 1 DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "ACT" means the Delaware Revised Uniform Limited Partnership Act, as --- it may be amended from time to time, and any successor to such statute. "ADDITIONAL LIMITED PARTNER" means a Person that has executed and -------------------------- delivered an additional limited partner signature page, has been admitted to the Partnership as a Limited Partner pursuant to Section 4.3 hereof and who is shown as such on the books and records of the Partnership. "ADJUSTED CAPITAL ACCOUNT DEFICIT" means with respect to any Partner, -------------------------------- the negative balance, if any, in such Partner's Capital Account as of the end of any relevant fiscal year, determined after giving effect to the following adjustments: (a) credit to such Capital Account any portion of such negative balance which such Partner (i) is treated as obligated to restore to the Partnership pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or (ii) is deemed to be obligated to restore to the Partnership pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. "ADJUSTED CONTRIBUTION" means the Capital Contributions of any Partner --------------------- reduced by the total distributions to such Partner from Capital Events. With respect to the General Partner or the Initial Limited Partner (as the case may be), the Adjusted Contribution shall include the difference, if any, between gross proceeds from the future issuance of REIT Stock, if any, and the proceeds actually received by the Company. "AFFILIATE" means, (a) with respect to any individual Person, any --------- member of the Immediate Family of such Person or a trust established for the benefit of such member, or (b) with respect to any Entity, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, any such Entity. "AGREEMENT" means this Second Amended and Restated Agreement of --------- Limited Partnership, as originally executed and as amended, modified, supplemented or restated from time to time, as the context requires. "ARTICLES OF INCORPORATION" means the Company's Amended and Restated ------------------------- Articles of Incorporation, filed with the Maryland State Department of Assessments and Taxation, as amended, modified, supplemented or restated from time to time, as the context requires. "ASSIGNEE" means a Person to whom one or more OP Units have been -------- transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. "AVAILABLE CASH" means, with respect to the applicable period of -------------- measurement (i.e., any period beginning on the first day of the fiscal year, quarter or other period commencing immediately after the last day of the fiscal year, quarter or other applicable period for purposes of the prior calculation of Available Cash for or with respect to which a distribution has been made, and ending on the last day of the fiscal year, quarter or other applicable period immediately preceding the date of the calculation), the excess, if any, as of such date, of (a) the gross cash receipts of the Partnership for such period from all sources whatsoever, including, without limitation, the following: (i) all Participating Lease and other rents, revenues, income and proceeds derived by the Partnership from its operations, including, without limitation, distributions received by the Partnership from any Entity in which the Partnership has an interest; (ii) all proceeds and revenues received by the Partnership on account of any sales of hotels or other property of the Partnership or as a refinancing of or payments of principal, interest, costs, fees, penalties or otherwise on account of any borrowings or loans made by the Partnership or financings or refinancings of any hotel or other property of the Partnership; (iii) the amount of any insurance proceeds and condemnation awards received by the Partnership; (iv) all capital contributions or loans received by the Partnership from its Partners; (v) all cash amounts previously reserved by the Partnership, to the extent such amounts are no longer needed for the specific 3 purposes for which such amounts were reserved; (vi) all principal and interest received under the FF&E Note; and (vii) the proceeds of liquidation of the Partnership's property in accordance with this Agreement, over (b) the sum of: (i) all operating costs and expenses, including, to the extent of the Partnership's obligations under the Participating Leases, costs relating to the replacement or refurbishment of FF&E, taxes and other expenses of the Hotels, of the Partnership and capital expenditures made during such period (without deduction, however, for any capital expenditures, charges for Depreciation or other expenses not paid in cash or expenditures from reserves described in (viii) below); (ii) all costs and expenses expended or paid during such period in connection with the sale or other disposition, or financing or refinancing, of the hotels or other property of the Partnership or the recovery of insurance or condemnation proceeds; (iii) all fees provided for under this Agreement; (iv) all debt service, including principal and interest, paid during such period on all indebtedness (including under any line of credit) of the Partnership; (v) all capital contributions, advances, reimbursements or similar payments made to any Person in which the Partnership has an interest; (vi) all loans made by the Partnership in accordance with the terms of this Agreement; (vii) all reimbursements to the General Partner or its Affiliates during such period; and (viii) any new reserves or increases in reserves required to be established under the Participating Leases or reasonably determined by the General Partner to be necessary for working capital, capital improvements, payments of periodic expenditures, debt service or other purposes for the Partnership or any Person in which the Partnership has an interest. Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, or take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership. "CAPITAL ACCOUNT" means with respect to any Partner, the Capital --------------- Account maintained for such Partner in accordance with the following provisions: a. to each Partner's Capital Account there shall be credited (i) such Partner's Capital Contributions, (ii) such Partner's distributive share of Net Income and any items in the nature of income or gain which are specially allocated to such Partner pursuant to Paragraphs 1 and 2 of Exhibit B and (iii) the amount of any Partnership liabilities assumed by such Partner or which are secured by any asset distributed to such Partner; 4 b. to each Partner's Capital Account there shall be debited (i) the amount of cash and the Gross Asset Value of any Hotel distributed to such Partner pursuant to any provision of this Agreement, (ii) such Partner's distributive share of Net Losses and any items in the nature of expenses or losses which are specially allocated to such Partner pursuant to Paragraphs 1 and 2 of Exhibit B and (iii) the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any asset contributed by such Partner to the Partnership; and c. in the event all or a portion of a Partnership Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall reasonably determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed assets or which are assumed by the Partnership, the General Partner or any Limited Partner) are computed in order to comply with such Regulations, the General Partner may make such modification; provided that -------- it does not have an adverse effect on the amounts distributable to any Partner pursuant to Article 13 hereof upon the dissolution of the Partnership. "CAPITAL CONTRIBUTION" means, with respect to any Partner, any cash, -------------------- cash equivalents or the Gross Asset Value of property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Article 4 hereof. "CAPITAL EVENT" means any Partnership transaction not in the ordinary ------------- course of its business including, without limitation, principal payments, prepayments, prepayment penalties, Participating Lease termination penalties, sales, exchanges, foreclosures or other dispositions of Hotels owned by the Partnership, recoveries of damage awards and insurance proceeds not used to rebuild (other than the receipt of contributions to the capital of the Partnership and business or rental interruption insurance proceeds not used to rebuild). "CERTIFICATE" means the Certificate of Limited Partnership relating to ----------- the Partnership filed on April 9, 1996 in the office of the Delaware Secretary of State, as amended and/or restated from time to time in accordance with the terms hereof and the Act. "CLASS B OP UNIT" means a fractional, undivided share of the --------------- Partnership Interests of all Partners, designated as Class B OP Units, issued pursuant to Sections 4.1, 4.2 and 4.3. The number of Class B OP Units outstanding and the Percentage Interests in the 5 Partnership represented by such Class B OP Units are set forth in Exhibit A, as such Exhibit may be amended from time to time. The ownership of Class B OP Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the OP Units shall be uncertificated securities. The rights and preferences of the Class B OP Units are as set forth in the Class B Certificate of Designation (as defined in Section 4.9) of the Class B OP Units and shall entitle the holder thereof to the same rights and preferences of a holder of an OP Unit under this Agreement except with respect to the initial dividend such holder is entitled to receive following issuance of such Class B OP Unit. "CLASS C OP UNIT" means a fractional, undivided share of the --------------- Partnership Interests of all Partners, designated as Class C OP Units, issued pursuant to Sections 4.1, 4.2 and 4.3. The number of Class C OP Units outstanding and the Percentage Interests in the Partnership represented by such Class C OP Units are set forth in Exhibit A, as such Exhibit may be amended from time to time. The ownership of the Class C OP Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the OP Units shall be uncertificated securities. The rights and preferences of the Class C OP Units are as set forth in the Class C Certificate of Designation (as defined in Section 4.10) of the Class C OP Units and shall entitle the holder thereof to the same rights and preferences of a holder of an OP Unit under this Agreement except as set forth in the Class C Certificate of Designation of the Class C OP Units. "CLASS D OP UNIT" means a fractional, undivided share of the --------------- Partnership Interests of all Partners, designated as Class D OP Units, issued pursuant to Section 4.3. The number of Class D OP Units outstanding and the Percentage Interests in the Partnership represented by such Class D OP Units are set forth in Exhibit A, as such Exhibit may be amended from time to time. The ownership of the Class D OP Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the OP Units shall be uncertificated securities. The rights and preferences of the Class D OP Units are as set forth in the Class D Certificate of Designation (as defined in Section 4.11) of the Class D OP Units and shall entitle the holder thereof to the same rights and preferences of a holder of an OP Unit under this Agreement except as set forth in the Class D Certificate of Designation of the Class D OP Units. "CODE" means the Internal Revenue Code of 1986, as amended and in ---- effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "COMPANY" means MeriStar Hospitality Corporation, a Maryland ------- corporation, the General Partner and the parent of the Initial Limited Partner. 6 "CONSENT" means the consent or approval of a proposed action by a ------- Partner given in accordance with Section 14.2 hereof. "CONTRIBUTED PROPERTY" means each property, partnership interest, -------------------- contract right or other asset, in such form as may be permitted by the Act, contributed or deemed contributed to the Partnership by any Partner (including any interest in a successor partnership as a result of a termination pursuant to Section 708 of the Code). "DEPRECIATION" means, with respect to any asset of the Partnership for ------------ any fiscal year or other period, the depreciation, depletion, amortization or other cost recovery deduction, as the case may be, allowed or allowable for federal income tax purposes in respect of such asset for such fiscal year or other period; provided, however, that except as otherwise provided in Section -------- ------- 1.704-2 of the Regulations, if there is a difference between the Gross Asset Value (including the Gross Asset Value, as determined pursuant to paragraph 1 of the definition of Gross Asset Value) and the adjusted tax basis of such asset at the beginning of such fiscal year or other period, Depreciation for such asset shall be an amount that bears the same ratio to the beginning Gross Asset Value of such asset as the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such fiscal year or other period bears to the beginning adjusted tax basis of such asset; provided, further, that if the -------- ------- federal income tax depreciation, depletion, amortization or other cost recovery deduction for such asset for such fiscal year or other period is zero, Depreciation of such asset shall be determined with reference to the beginning Gross Asset Value of such asset using any reasonable method selected by the General Partner. "DISTRIBUTION PERIOD" has the meaning set forth in Section 5.1(b). ------------------- "ENTITY" means any general partnership, limited partnership, ------ corporation, joint venture, trust, business trust, real estate investment trust, limited liability company, cooperative or association. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time (or any corresponding provisions of succeeding laws). "EXCHANGE FACTOR" has the meaning set forth in the Exchange Rights --------------- Agreement. "EXCHANGE RIGHT" has the meaning set forth in the Exchange Rights -------------- Agreement. "EXCHANGE RIGHTS AGREEMENT" has the meaning set forth in Section 8.6. ------------------------- "FF&E" means furniture, fixtures and equipment. ---- 7 "FF&E NOTE" means those certain promissory notes in the original --------- principal amount of $400,000 between AGH Leasing, L.P., a Delaware limited partnership, as maker, and the Partnership's subsidiaries, as payee, issued in connection with such subsidiaries' sale of certain FF&E to AGH Leasing L.P. "GAAP" means United States generally accepted accounting principles, ---- as in effect from time to time. "GENERAL PARTNER" means MeriStar Hospitality Corporation, a Maryland --------------- corporation, in its capacity as the general partner of the Partnership, or its successors as general partner of the Partnership. "GENERAL PARTNER INTEREST" means a Partnership Interest held by the ------------------------ General Partner, in its capacity as general partner. A General Partner Interest may be expressed as a number of OP Units. "GROSS ASSET VALUE" means, with respect to any asset of the ----------------- Partnership, such asset's adjusted basis for federal income tax purposes, except as follows: 1. the initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, without reduction for liabilities, as determined by the contributing Partner and the Partnership on the date of contribution thereof; 2. if the General Partner reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Partners, the Gross Asset Values of all Partnership assets shall be adjusted in accordance with Sections 1.704-1(b)(2)(iv)(f) and (g) of the Regulations to equal their respective gross fair market values, without reduction for liabilities, as reasonably determined by the General Partner, as of the following times: a. a Capital Contribution (other than a de minimis Capital ---------- Contribution) to the Partnership by a new or existing Partner as consideration for a Partnership Interest; or b. the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership assets as consideration for the ---------- repurchase of a Partnership Interest; or c. the liquidation of the Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations; 8 3. the Gross Asset Values of Partnership assets distributed to any Partner shall be the gross fair market values of such assets (taking Section 7701(g) of the Code into account) without reduction for liabilities, as reasonably determined by the General Partner as of the date of distribution; and 4. the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations (as set forth in Exhibit B); provided, however, that Gross Asset Values shall -------- ------- not be adjusted pursuant to this paragraph (4) to the extent that the General Partner reasonably determines that an adjustment pursuant to paragraph (2) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (4). At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Partnership's assets for purposes of computing Net Income and Net Loss. "HOTEL" means any hotel in which the Partnership, directly or ----- indirectly, acquires ownership of a fee or leasehold interest. "IMMEDIATE FAMILY" means, with respect to any individual, such ---------------- individual's spouse, parents, parents-in-law, children, nephews, nieces, brothers, sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law and daughters-in-law or any trust solely for the benefit of any of the foregoing family members whose sole beneficiaries include the foregoing family members. "INCAPACITY" or "INCAPACITATED" means, (i) as to any individual ---------- ------------- Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership or limited liability company which is a Partner, the dissolution and commencement of winding up of the partnership or limited liability company; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against 9 the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof; (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay. "INDEMNITEE" means (i) any Person made a party to a proceeding by ---------- reason of (A) such Person's status as (1) the General Partner, (2) a director, trustee or officer of the Partnership or the General Partner, or (3) a director, trustee or officer of any other Entity, each Person serving in such capacity at the request of the Partnership or the General Partner, or (B) his or its liabilities, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to); and (ii) such other Persons (including Affiliates of the General Partner, the Company or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion. "INITIAL LIMITED PARTNER" means MeriStar LP, Inc. (f/k/a/ AGH LP, ----------------------- Inc.), a Nevada corporation. "IRS" shall mean the Internal Revenue Service of the United States. --- "LIEN" means any lien, security interest, mortgage, deed of trust, ---- charge, claim, encumbrance, pledge, option, right of first offer or first refusal and any other right or interest of others of any kind or nature, actual or contingent, or other similar encumbrance of any nature whatsoever. "LIMITED PARTNER" means the Initial Limited Partner and any other --------------- Person named as a Limited Partner in Exhibit A, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner of the Partnership. "LIMITED PARTNER INTEREST" means a Partnership Interest of a Limited ------------------------ Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of OP Units. "LIQUIDATING EVENT" has the meaning set forth in Section 13.1 hereof. ----------------- 10 "LIQUIDATOR" has the meaning set forth in Section 13.2 hereof. ---------- "NET INCOME" or "NET LOSS" means, for each fiscal year or other ------------------------ applicable period, an amount equal to the Partnership's taxable income or loss for such year or period as determined for federal income tax purposes by the General Partner, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), adjusted as follows: (a) by including as an item of gross income any tax-exempt income received by the Partnership and not otherwise taken into account in computing Net Income or Net Loss; (b) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code (or which is treated as a Section 705(a)(2)(B) expenditure pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations) and not otherwise taken into account in computing Net Income or Net Loss, including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership and by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property disallowed pursuant to Section 267(a)(1) or 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code; (c) by taking into account Depreciation in lieu of depreciation, depletion, amortization and other cost recovery deductions taken into account in computing taxable income or loss; (d) by computing gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (e) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (g) of the Regulations, by taking into account the amount of such adjustment as if such adjustment represented additional Net Income or Net Loss pursuant to Exhibit B; and (f) by not taking into account in computing Net Income or Net Loss items separately allocated to the Partners pursuant to Paragraphs 1 and 2 of Exhibit B. "NONRECOURSE DEDUCTIONS" has the meaning set forth in Sections 1.704- ---------------------- 2(b)(1) and 1.704-2(c) of the Regulations. "NONRECOURSE LIABILITIES" has the meaning set forth in Section 1.704- ----------------------- 2(b)(3) of the Regulations. "OP UNIT" means a fractional, undivided share of the Partnership ------- Interests of all Partners issued pursuant to Sections 4.1, 4.2 and 4.3. The number of OP Units outstanding and the Percentage Interests in the Partnership represented by such OP Units are set forth in Exhibit A, as such Exhibit may be amended from time to time. The ownership of OP Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the OP Units shall be uncertificated securities. 11 "PARTICIPATING LEASES" shall mean those certain lease agreements -------------------- relating to the lease of the Partnership's Hotels, as such leases may be amended from time to time. "PARTNER" means a General Partner or a Limited Partner, and "Partners" ------- means the General Partner and the Limited Partners collectively. "PARTNER MINIMUM GAIN" means an amount, with respect to each Partner -------------------- Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "PARTNER NONRECOURSE DEBT" has the meaning set forth in Regulations ------------------------ Section 1.704-2(b)(4). "PARTNER NONRECOURSE DEDUCTIONS" has the meaning set forth in ------------------------------ Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). "PARTNERSHIP" means the limited partnership formed under the Act and ----------- pursuant to this Agreement, and any successor thereto. "PARTNERSHIP INTEREST" means an ownership interest in the Partnership -------------------- representing a Capital Contribution by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of OP Units. "PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations ------------------------ Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "PARTNERSHIP RECORD DATE" means the record date established by the ----------------------- General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall be the same as the record date established by the Company for a distribution to its stockholders of some or all of its portion of such distribution. "PARTNERSHIP YEAR" means the fiscal year of the Partnership, as set ---------------- forth in Section 9.2 hereof. "PERCENTAGE INTEREST" means, as to a Partner, the fractional part of ------------------- the Partnership Interests owned by such Partner and expressed as a percentage as specified in Exhibit A, as such Exhibit may be amended from time to time. 12 "PERMITTED PARTNERS" has the meaning set forth in subparagraph 1(b) of ------------------ Exhibit B. "PERMITTED TRANSFEREE" means any person to whom OP Units are -------------------- Transferred in accordance with Section 11.3 of this Agreement. "PERSON" means an individual or Entity. ------ "PRECONTRIBUTION GAIN" has the meaning set forth in subparagraph 3(c) -------------------- of Exhibit B. "QUARTER" means each of the three month periods ending on March 31, ------- June 30, September 30 and December 31. "REGULATIONS" means the final, temporary or proposed Income Tax ----------- Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "REIT" means a real estate investment trust as defined in Section 856 ---- of the Code. "REIT REQUIREMENTS" has the meaning set forth in Section 5.2. ----------------- "REIT STOCK" means a share of stock of the Company. ---------- "REIT STOCK AMOUNT" has the meaning set forth in the Exchange Rights ----------------- Agreement. "RESTRICTED PARTNER" has the meaning set forth in Section 1(b) of ------------------ Exhibit B. "STOCK OPTION PLANS" means collectively, the MeriStar Hospitality ------------------ Corporation 1996 Incentive Plan, the MeriStar Hospitality Corporation Non- Employee Directors' Incentive Plan, each as amended and/or restated from time to time, and any other plan adopted from time to time by the Company pursuant to which REIT Stock is issued, or options to acquire REIT Stock are granted, to employees or directors of the Company, employees of the Partnership or employees of their respective Affiliates in consideration for services or future services. "SUBSIDIARY" means, with respect to any Person, any corporation, ---------- partnership or other entity of which a majority of (i) the voting power of the voting equity securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person. "SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a --------------------------- Limited Partner to the Partnership pursuant to Section 11.4 hereof. 13 "TAX ITEMS" has the meaning set forth in Exhibit B. --------- "TERMINATING CAPITAL TRANSACTION" means any sale or other disposition ------------------------------- of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. "TRANSFER" as a noun, means any sale, assignment, conveyance, pledge, -------- hypothecation, gift, encumbrance or other transfer, and as a verb, means to sell, assign, convey, pledge, hypothecate, give, encumber or otherwise transfer. Certain additional terms and phrases have the meanings set forth in Exhibit B. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Continuation ------------ The Partners hereby agree to continue the Partnership under and pursuant to the Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Without the need for any further consent of any Person and notwithstanding any other provision of this Agreement to the contrary, each Person listed on Exhibit A as a Limited Partner (i) who was not a limited partner of the Partnership prior to the effective date and time of this Agreement is hereby admitted to Partnership as a limited partner of the Partnership, and (ii) who was a limited partner of the Partnership prior to the effective date and time of the Agreement shall continue to be a limited partner of the Partnership. Section 2.2 Name ---- The name of the Partnership shall continue to be MeriStar Hospitality Operating Partnership, L.P. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the Company or any Affiliate thereof. The words "Limited Partnership,""L.P.,""Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may, upon 5 days prior written notice to the Limited Partners, change the name of the Partnership. Section 2.3 Registered Office and Agent; Principal Office --------------------------------------------- The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in 14 the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington (New Castle County), Delaware 19801. The principal office of the Partnership shall be 1010 Wisconsin Avenue, N.W., Washington, D.C. 20007, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. Section 2.4 Power of Attorney ----------------- A0 Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property, including, without limitation, any documents necessary or advisable to convey any Contributed Property to the Partnership; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13 hereof or the Capital Contribution of any Partner; (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interest; and (f) amendments to this Agreement as provided in Article 14 hereof; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of 15 the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B0 The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the Transfer of all or any portion of such Limited Partner's or Assignee's OP Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term ---- The term of the Partnership shall continue until December 31, 2046, unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. ARTICLE 3 PURPOSE Section 3.1 Purpose and Business -------------------- The purpose and nature of the business to be conducted by the Partnership is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act including, without limitation, to engage in the following activities: to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, 16 encumber, convey, exchange, and otherwise dispose of or deal with the Hotels; to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with real and personal property of all kinds; to undertake such other activities as may be necessary, advisable, desirable or convenient to the business of the Partnership; and to engage in such other ancillary activities as shall be necessary or desirable to effectuate the foregoing purposes. The Partnership shall have all powers necessary or desirable to accomplish the purposes enumerated. In connection with the foregoing, but subject to all of the terms, covenants, conditions and limitations contained in this Agreement and any other agreement entered into by the Partnership, the Partnership shall have full power and authority to enter into, perform, and carry out contracts of any kind, to borrow money and to issue evidences of indebtedness, whether or not secured by mortgage, trust deed, pledge or other Lien, and, directly or indirectly, to acquire and construct additional Hotels necessary or useful in connection with its business. Section 3.2 Powers ------ The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership; provided, that the Partnership shall not take, or refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Company to continue to qualify as a REIT, unless the Company otherwise ceases to qualify as a REIT; (ii) could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Company or its securities, unless such action (or inaction) shall have been specifically consented to by the General Partner in writing. The Partnership also is empowered to do any and all acts and things necessary, appropriate or advisable to ensure that the Partnership will not be classified as a "publicly traded partnership" for the purposes of Section 7704 of the Code. ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions of the Partners ------------------------------------- The Partners have made the Capital Contributions set forth in the agreements pursuant to which the OP Units were originally issued as reflected in the books and records of the Partnership. To the extent the Partnership acquires any property by the merger of any other Person into the Partnership, Persons who receive Partnership Interests in exchange for their interests in the Person merging into the Partnership shall become Partners and shall be deemed to have made Capital Contributions as provided in the applicable merger agreement. Each Partner shall own OP Units in the amounts set forth for such Partner in Exhibit A and shall have a Percentage Interest in the Partnership as set forth in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time to time by the General Partner to the extent 17 necessary to reflect accurately exchanges, additional Capital Contributions, the issuance of additional OP Units or similar events having an effect on any Partner's Percentage Interest. The number of OP Units held by the General Partner, in its capacity as general partner, shall be deemed to be the General Partner Interest. Except as provided in Sections 4.2 and 10.5, the Partners shall have no obligation to make any additional Capital Contributions or loans to the Partnership. Section 4.2 Additional Funds; Restrictions on the Company --------------------------------------------- A0 The sums of money required to finance the business and affairs of the Partnership shall be derived from the initial Capital Contributions made to the Partnership by the Partners as set forth in Section 4.1 and from funds generated from the operation and business of the Partnership including, without limitation, rents received under the Participating Leases and distributions directly or indirectly received by the Partnership from any Subsidiary. In the event additional financing is needed from sources other than as set forth in the preceding sentence for any reason, the General Partner may, in its sole and absolute discretion, in such amounts and at such times as it solely shall determine to be necessary or appropriate, (i) cause the Partnership to issue additional Partnership Interests and admit additional Limited Partners to the Partnership in accordance with Section 4.3; (ii) make additional Capital Contributions to the Partnership (subject to the provisions of Section 4.2B); (iii) cause the Partnership to borrow money, enter into loan arrangements, issue debt securities, obtain letters of credit or otherwise borrow money on a secured or unsecured basis; (iv) make a loan or loans to the Partnership (subject to Section 4.2B); or (v) sell any Hotels or other assets or properties of the Partnership. In no event shall the Limited Partners be required to make any additional Capital Contributions or any loan to, or otherwise provide any financial accommodation for the benefit of, the Partnership. B0 The Company shall not issue any debt securities, any preferred stock or any common stock (including additional REIT Stock (other than (i) as payment of the REIT Stock Amount or (ii) in connection with the conversion or exchange of securities of the Company solely in conversion or exchange for other securities of the Company)) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase any of the foregoing (collectively, "SECURITIES"), other than to all holders of REIT Stock, unless the Company (through the General Partner and the Initial Limited Partner) shall (i) in the case of debt securities, lend to the Partnership the proceeds of or consideration received for such Securities on the same terms and conditions, including interest rate and repayment schedule, as shall be applicable with respect to or incurred in connection with the issuance of such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable); (ii) in the case of equity Securities senior or junior to the REIT Stock as to dividends and distributions on liquidation, contribute to the Partnership the proceeds of or consideration (including any property or other non-cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and receive from the Partnership, interests in the Partnership in consideration therefor with the same terms and conditions, including dividend, dividend priority and liquidation preference, as are 18 applicable to such Securities; and (iii) in the case of REIT Stock or other equity Securities on a parity with the REIT Stock as to dividends and distributions on liquidation (including, without limitation, REIT Stock or other Securities issued as a stock award or upon exercise of options issued under the Stock Option Plans), contribute to the Partnership the proceeds of or consideration (including any property or other non-cash assets, including services) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and receive from the Partnership a number of additional OP Units in consideration therefor equal to the product of (x) the number of shares of REIT Stock or other equity Securities issued by the Company, multiplied by (y) a fraction the numerator of which is one and the denominator of which is the Exchange Factor in effect on the date of such contribution. Section 4.3 Issuance of Additional Partnership Interests; Admission ------------------------------------------------------- of Additional Limited Partners - ------------------------------ In addition to any Partnership Interests issuable by the Partnership pursuant to Section 4.2, the General Partner is authorized to cause the Partnership to issue additional Partnership Interests (or options therefor) in the form of OP Units or other Partnership Interests senior or junior to the OP Units to any Persons at any time or from time to time, for consideration not less than the fair market value thereof (or the fair market value as of the date an option is granted) (as such fair market value is determined in the discretion of the General Partner's Board of Directors), and on such terms and conditions, as the General Partner shall establish in each case in its sole and absolute discretion, without any approval being required from any Limited Partner or any other Person; provided, however, that (i) such issuance does not effect a -------- ------- material adverse impact (as such material adverse impact is determined in the discretion of the General Partner's Board of Directors) on (A) the existing Limited Partners' right to exercise the Exchange Rights pursuant to the Exchange Rights Agreement or (B) the economic interest of the Limited Partners in the allocations set forth in Exhibit B (other than due to the issuance of OP Units or other interests in the Partnership as set forth in this Section 4.3 or Section 4.2B); (ii) such issuance does not cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA or Section 4975 of the Code, a "party in interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e) of the Code); and (iii) such issuance would not cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Section 2510.3-101 of the regulations of the United States Department of Labor. Subject to the limitations set forth in the preceding sentence, the General Partner may take such steps as it, in its reasonable discretion, deems necessary or appropriate to admit any Person as a Limited Partner of the Partnership, including, without limitation, amending the Certificate, Exhibit A or any other provision of this Agreement. Section 4.4 Contribution of Proceeds of Issuance of REIT Stock -------------------------------------------------- In connection with any offering, grant, award, or issuance of REIT Stock or securities, rights, options, warrants or convertible or exchangeable securities pursuant to Section 4.2, the Company shall cause the General Partner and the Initial Limited Partner to 19 make aggregate Capital Contributions to the Partnership of the proceeds raised in connection with such offering, grant, award, or issuance, provided that if the proceeds actually received by the Company are less than the gross proceeds of such offering, grant, award, or issuance as a result of any underwriter's discount, commission, or fee or other expenses paid or incurred in connection with such offering, grant, award, or issuance, then the General Partner and the Initial Limited Partner shall be deemed to have made a Capital Contribution to the Partnership in the amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have paid pursuant to Section 7.3C for the amount of such underwriter's discount or other expenses. Section 4.5 Repurchase of REIT Stock; Excess Shares --------------------------------------- A. In the event that the Company shall elect to purchase from its stockholders REIT Stock for the purpose of delivering such REIT Stock to satisfy an obligation under any dividend reinvestment program adopted by the Company, any employee stock purchase plan adopted by the Company, or any other obligation or arrangement undertaken by the Company in the future, the purchase price paid by the Company for such REIT Stock and any other expenses incurred by the Company in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the General Partner on behalf of the Company, subject to the condition that: (i) if such REIT Stock subsequently is to be sold by the Company, the Company shall pay to the Partnership, through the General Partner and the Initial Limited Partner, any proceeds received by the Company from the sale of such REIT Stock (provided that an exchange of REIT Stock for OP Units pursuant to the Exchange Rights Agreement would not be considered a sale for such purposes); and (ii) if such REIT Stock is not re- transferred by the Company within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel a number of OP Units held by the Initial Limited Partner and/or the General Partner (as applicable) equal to the product of (x) the number of shares of such REIT Stock and (y) a fraction, the numerator of which is one and the denominator of which is the Exchange Factor in effect on the date of such cancellation. B. In the event the Company purchases Shares-in-Trust (as defined in the Articles of Incorporation), the Partnership will purchase from the General Partner and/or the Initial Limited Partner (as applicable) a number of OP Units equal to the product of (x) the number of Shares-in-Trust purchased by the Company multiplied by (y) a fraction, the numerator of which is one and the denominator of which is the Exchange Factor in effect on the date of such purchase. Section 4.6 No Third Party Beneficiary -------------------------- No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being 20 understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. Section 4.7 No Interest; No Return ---------------------- No Partner shall be entitled to interest on its Capital Contribution or on such Partner's Capital Account. Except as provided herein or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution from the Partnership. Section 4.8 No Preemptive Rights -------------------- Subject to any preemptive rights that may be granted pursuant to Section 4.3 hereof, no Person shall have any preemptive or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership; or (ii) issuance or sale of any OP Units or other Partnership Interests. Section 4.9 Class B Certificate of Designation ---------------------------------- The Partnership may issue from time to time Class B OP Units, which Limited Partner Interest shall have the rights and preferences set forth in the Certificate of Designation attached hereto as Exhibit C (the "Class B Certificate of Designation"). Section 4.10 Class C Certificate of Designation ---------------------------------- The Partnership may issue from time to time Class C OP Units, which Limited Partner Interest shall have the rights and preferences set forth in the Certificate of Designation attached hereto as Exhibit D (the "Class C Certificate of Designation"). Section 4.11 Class D Certificate of Designation ---------------------------------- The Partnership may issue from time to time Class D OP Units, which Limited Partner Interest shall have the rights and preferences set forth in the Certificate of Designation attached hereto as Exhibit E (the "Class D Certificate of Designation"). 21 ARTICLE 5 DISTRIBUTIONS 5.1 Regular Distributions --------------------- (a) Except for distributions pursuant to Section 13.2 in connection with the dissolution and liquidation of the Partnership, and subject to the provisions of Sections 5.3, 5.4, 5.5 and 12.2C, the General Partner shall cause the Partnership to distribute, on a quarterly basis (or, at the election of the General Partner, more frequently), an amount of Available Cash, determined by the General Partner in its sole discretion to the Partners, as of the applicable Partnership Record Date, in accordance with each Partner's respective Percentage Interest, provided, however, that in no event may a Partner receive a distribution of Available Cash with respect to an OP Unit if such Partner is entitled to receive a distribution out of such Available Cash with respect to REIT Stock for which such OP Unit has been exchanged. (b) If for any quarter or shorter period with respect to which a distribution is to be made (a "Distribution Period") Class B OP Units are outstanding on the Partnership Record Date for such Distribution Period, the General Partner shall allocate the Available Cash with respect to such Distribution Period available for distribution with respect to the OP Units and Class B OP Units collectively between the Partners who are holders of OP Units and the Partners who are holders of Class B OP Units ("Class B") as follows: (1) Holders of OP Units shall receive that portion of the Available Cash (the "OP Unit REIT Portion") determined by multiplying the amount of Available Cash by the following fraction: A x Y --------------- (A x Y)+(B x X) (2) Class B shall receive that portion of the Available Cash (the "Class B REIT Portion") determined by multiplying the amount of Available Cash by the following fraction: B x X --------------- (A x Y)+(B x X) (3) For purposes of the foregoing formulas, (i) "A" equals the number of OP Units outstanding on the Partnership Record Date for such Distribution Period; (ii) "B" equals the number of Class B OP Units outstanding on the Partnership Record Date for such Distribution Period; (iii) "Y" equals the number of days in the Distribution Period; and (iv) "X" equals the number of 22 days in the Distribution Period for which the Class B OP Units were issued and outstanding. The OP Unit REIT Portion shall be distributed among Partners holding OP Units on the Partnership Record Date for the Distribution Period in accordance with the number of OP Units held by each Partner on such Partnership Record Date; provided that, in no event may a Partner receive a distribution of Available Cash with respect to an OP Unit if a Partner is entitled to receive a distribution out of such Available Cash with respect to REIT Stock for which such OP Unit has been redeemed or exchanged. The Class B REIT Portion shall be distributed among the Partners holding Class B OP Units on the Partnership Record Date for the Distribution Period in accordance with the number of Class B OP Units held by each Partner on such Partnership Record Date. In no event shall any Class B OP Units be entitled to receive any distribution of Available Cash for any Distribution Period ending prior to the date on which such Class B OP Units are issued. (c) Distributions When Class B OP Units Have Been Issued on Different ----------------------------------------------------------------- Dates. If Class B OP Units which have been issued on different dates are - ----- outstanding on the Partnership Record Date for any Distribution Period, then the Class B OP Units issued on each particular date shall be treated as a separate series of Partnership Interests for purposes of making the allocation of Available Cash for such Distribution Period among the holders of Partnership Interests (and the formula for making such allocation, and the definitions of variables used therein, shall be modified accordingly). Thus, for example, if two series of Class B OP Units are outstanding on the Partnership Record Date for any Distribution Period, the allocation formula for each series, "Series B1" and "Series B2" would be as follows: (4) Series B1 shall receive that portion of the Available Cash determined by multiplying the amount of Available Cash by the following fraction: B1 x X1 --------------------------- (A x Y)+(B1 x X1)+(B2 x X2) (5) Series B2 shall receive that portion of the Available Cash determined by multiplying the amount of Available Cash by the following fraction: B2 x X2 --------------------------- (A x Y)+(B1 x X1)+(B2 x X2) (6) For purposes of the foregoing formulas the definitions set forth in Section 5.1(b)(3) remain the same except that (i) "B1" equals the number of Partnership Interests in Series B1 outstanding on the Partnership Record Date 23 for such Distribution Period; (ii) "B2" equals the number of Partnership Interests in Series B2 outstanding on the Partnership Record Date for such Distribution Period; (iii) "X1" equals the number of days in the Distribution Period for which the Partnership Interests in Series B1 were issued and outstanding; and (iv) "X2" equals the number of days in the Distribution Period for which the Partnership Interests in Series B2 were issued and outstanding. 5.2 Qualification as a REIT ----------------------- The General Partner shall use its best efforts to cause the Partnership to distribute sufficient amounts under this Article 5 to enable the Company to pay stockholder dividends that will enable the Company to (i) satisfy the requirements for qualification as a REIT under the Code and Regulations ("REIT Requirements"), and (ii) avoid any federal income or excise tax liability; provided, however, the General Partner shall not be bound to comply with this covenant to the extent such distributions would (i) violate applicable Delaware law or (ii) contravene the terms of any notes, mortgages or other types of debt obligations which the Partnership may be subject to in conjunction with borrowed funds. 5.3 Withholding ----------- With respect to any withholding tax or other similar tax liability or obligation to which the Partnership may be subject as a result of any act or status of any Partner or to which the Partnership becomes subject with respect to any OP Unit, the Partnership shall have the right to withhold amounts of Available Cash distributable to such Partner or with respect to such OP Units, to the extent of the amount of such withholding tax or other similar tax liability or obligation pursuant to the provisions contained in Section 10.5. 5.4 Additional Partnership Interests -------------------------------- If the Partnership issues Partnership Interests in accordance with Section 4.2 or 4.3, the distribution priorities set forth in Section 5.1 shall be amended, as necessary, to reflect the distribution priority of such Partnership Interests and corresponding amendments shall be made to the provisions of Exhibit B. 5.5 Distributions Upon Liquidation ------------------------------ Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2. 24 ARTICLE 6 ALLOCATIONS The Net Income, Net Loss and other Partnership items shall be allocated pursuant to the provisions of Exhibit B. ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management ---------- A0 Except as otherwise expressly provided in this Agreement, full, complete and exclusive discretion to manage and control the business and affairs of the Partnership are and shall be vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: (1) (a) the making of any expenditures, the lending or borrowing of money, including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the Company (so long as the Company qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its stockholders in amounts sufficient to permit the Company to maintain REIT status, (b) the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, (c) the issuance of evidence of indebtedness (including the securing of the same by deed, mortgage, deed of trust or other lien or encumbrance on the Partnership's assets) and (d) the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership, including the payment of all expenses associated with the Company; 25 (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership or the Company; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity; (4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the Company, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Subsidiaries of the Partnership and/or the Company) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to its Subsidiaries; (5) the expansion, development, construction, leasing, repair, alteration, demolition or improvement of any Hotel owned by the Partnership or any Subsidiary of the Partnership; (6) the negotiation, execution, and performance of any contracts (including, without limitation, the Participating Leases), conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership's assets; (7) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; 26 (8) holding, managing, investing and reinvesting cash and other assets of the Partnership; (9) the collection and receipt of revenues and income of the Partnership; (10) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer" of the Partnership), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or engagement; (11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate; (12) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person from time to time); (13) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of, any claim, cause of action, liability, debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitration or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expenses, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law; (14) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons); 27 (15) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt; (16) the exercise, directly or indirectly, through any attorney- in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person; (19) the making, execution and delivery of any and all deeds, leases, notes, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate, in the judgment of the General Partner, for the accomplishment of any of the foregoing; (20) the issuance of additional OP Units in connection with Capital Contributions by Additional Limited Partners and additional Capital Contributions by Partners pursuant to Article 4 hereof; and (21) The opening of bank accounts on behalf of, and in the name of, the Partnership and its Subsidiaries. B0 Each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this 28 Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C0 At all times from and after the date hereof, the General Partner at the expense of the Partnership, may or may not, cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the properties of the Partnership and (ii) liability insurance for the Indemnitees hereunder. D0 At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amount as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. E0 In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner of any action taken by it; provided, that if the General Partner decides to refinance (directly or indirectly) any outstanding indebtedness of the Partnership, the General Partner shall use reasonable efforts to structure such refinancing in a manner that minimizes any adverse tax consequences resulting therefrom to the Limited Partners. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner taken pursuant to its authority under and in accordance with this Agreement. Section 7.2 Certificate of Limited Partnership ---------------------------------- The Certificate has been filed with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. Section 7.3 Reimbursement of the General Partner and the Company ---------------------------------------------------- 29 A0 Except as provided in this Section 7.3 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B0 The General Partner shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all expenses that it incurs on behalf of the Partnership relating to the ownership and operation of the Partnership's assets, or for the benefit of the Partnership, including all expenses associated with compliance by the Company, the General Partner and the Initial Limited Partner with laws, rules and regulations promulgated by any regulatory body and any and all salaries, compensation and expenses of officers and employees of the Company; provided, that the amount of any such reimbursement shall be reduced by any interest earned by the Company (including the General Partner and the Initial Limited Partner) with respect to bank accounts or other instruments or accounts held by it in its name. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.6 hereof. Notwithstanding any provisions to the contrary set forth herein, the General Partner shall not be entitled to reimbursement for any administrative costs and expenses incurred by the Company or that are attributable to Hotels or partnership interests in a Subsidiary of the Partnership that are owned by the Company directly. C. Expenses incurred by the Company relating to the organization and/or reorganization of the Partnership and the Company, the initial public offering of REIT Stock by the Company, and any other issuance of additional Partnership Interests, REIT Stock or rights, options, warrants, or convertible or exchangeable securities pursuant to Section 4.2 hereof and all costs and expenses associated with the preparation and filing of any periodic reports by the Company under federal, state or local laws or regulations (including, without limitation, all costs, expenses, damages, and other payments resulting from or arising in connection with litigation related to any of the foregoing) are primarily obligations of the Partnership. To the extent the General Partner, on behalf of the Company, pays or incurs such expenses, the General Partner, on behalf of the Company, shall be reimbursed for such expenses. Section 7.4 Outside Activities of the General Partner ----------------------------------------- The Company shall not, and it shall cause the General Partner and the Initial Limited Partner not to, directly or indirectly enter into or conduct any business other than in connection with the ownership, acquisition, development and disposition of Partnership Interests and the management of the business of the Partnership, and such activities as are incidental thereto. The General Partner and any Affiliates of the General Partner may acquire 30 Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests. Section 7.5 Contracts with Affiliates ------------------------- A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. B. Except as provided in Section 7.4, the Partnership may Transfer assets to joint ventures, limited liability companies, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion may determine. C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, Transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, employee benefit plans, stock option plans, and similar plans funded by the Partnership for the benefit of employees of the Company, the Partnership, the General Partner, any Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the Company, any Subsidiaries of the Partnership or any Affiliate of any of them. E. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a "right of first opportunity" or "right of first offer" arrangement, non-competition agreements and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable. Section 7.6 Indemnification --------------- A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, reasonable attorneys' fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any 31 and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership, the General Partner or the Company as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, except to the extent it is finally determined by a court of competent jurisdiction, from which no further appeal may be taken, that such Indemnitee's action constituted intentional acts or omissions constituting willful misconduct or fraud. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.6 in favor of any Indemnitee having or potentially having liability for any such indebtedness. Any indemnification pursuant to this Section 7.6 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.6. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding. C. The indemnification provided by this Section 7.6 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitees are indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.6, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by such Indemnitee of its duties to the Partnership also imposes duties on, or otherwise involves services by, such Indemnitee to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 7.6; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the 32 performance of its duties for a purpose reasonably believed by it to be in the interest of the participant and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.6 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.6 or any provision hereof shall be prospective only and shall not in any way affect the Partnership's liability to any Indemnitee under this Section 7.6, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.7 Liability of the General Partner -------------------------------- A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the shareholders of the Company collectively, that the General Partner, subject to the provisions of Section 7.1E hereof, is under no obligation to consider the separate interest of the Limited Partners in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. With respect to any indebtedness of the Partnership which any Limited Partner may have guaranteed, the General Partner shall have no duty to keep such indebtedness outstanding. C. Subject to its obligations and duties as General Partner set forth in Section 7.1A hereof, the General Partner may exercise any of the powers granted to it by this 33 Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith. D. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's and its officers' and directors' liability to the Partnership and the Limited Partners under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.8 Other Matters Concerning the General Partner -------------------------------------------- A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT; or (ii) to avoid the Company incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. Section 7.9 Title to Partnership Assets --------------------------- 34 Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership asset for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. Section 7.10 Reliance by Third Parties ------------------------- Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS 35 Section 8.1 Limitation of Liability ----------------------- The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.5 hereof, or under the Act. Notwithstanding the preceding sentence, each Limited Partner shall have the right, but not the obligation, to guarantee a portion of indebtedness of the Partnership. Section 8.2 Management of Business ---------------------- No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. Section 8.3 Outside Activities of Limited Partners -------------------------------------- Subject to any agreements entered into pursuant to Section 7.5 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its Subsidiaries, any Limited Partner (other than the Initial Limited Partner) and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner (other than the Initial Limited Partner) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners (other than the Initial Limited Partner) nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person. Section 8.4 Return of Capital ----------------- 36 Except pursuant to the Exchange Rights Agreement, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Exhibit B, or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership ------------------------------------------------------ A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner' s own expense (including such reasonable copying and administrative charges as the General Partner may establish from time to time): (10 to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the Company pursuant to the Securities Exchange Act of 1934; (20 to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (30 to obtain a current list of the name and last known business, residence or mailing address of each Partner; (40 to obtain a copy of this Agreement and the Certificate and all amendments and/or restatements thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments and/or restatements thereto have been executed; and (50 to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner. B. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information 37 that (i) the General Partner reasonably believes to be in the nature of trade secrets or other information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential. Section 8.6 Exchange Rights Agreement ------------------------- The Limited Partners have been granted the right, but not the obligation, to exchange all or a portion of their OP Units for cash or at the option of the Company, for shares of REIT Stock on the terms and subject to the conditions and restrictions contained in those certain Exchange Rights Agreements among the Company and the particular Limited Partners (as amended from time to time, the "Exchange Rights Agreements"). ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting ---------------------- The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business, including, without limitation, all books and records necessary to comply with applicable REIT Requirements and to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Sections 8.5A and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or such other basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year ----------- The fiscal year of the Partnership shall be the calendar year. Section 9.3 Reports ------- A. As soon as practicable, but in no event later than one hundred five (105) days after the close of each Partnership Year, the General Partner shall cause to be mailed to 38 each Limited Partner as of the close of the Partnership Year, an annual report containing financial statements of the Partnership, or of the Company, if such statements are prepared on a consolidated basis with the Company, for such Partnership Year, presented in accordance with GAAP, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner in its sole discretion. B. As soon as practicable, but in no event later than one hundred five (105) days after the close of each calendar quarter (except the last calendar quarter of each calendar year), the General Partner shall cause to be mailed to each Limited Partner a report containing unaudited financial statements as of the last day of the calendar quarter of the Partnership, or of the Company, if such statements are prepared on a consolidated basis with the Company, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns -------------------------- The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections ------------- Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that the General Partner shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder effective for the Partnership's first calendar year. The General Partner shall elect a permissible method of eliminating the disparity between the book value and the tax basis of property contributed to the Partnership or to a Subsidiary of the Partnership pursuant to the regulations promulgated under the provisions of Section 704(c) of the Code. The General Partner shall have the right to seek to revoke any tax election it makes including, without limitation, the election under Section 754 of the Code, upon the General Partner's determination, in its sole and absolute discretion, that such revocation is in the best interests of the Partners. Section 10.3 Tax Matters Partner ------------------- 39 A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the Internal Revenue Service of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the Internal Revenue Service with the name, address, taxpayer identification number, and profit interest of each of the Limited Partners and the Assignees; provided, that such information is provided to the Partnership by the Limited Partners and the Assignees. B. The tax matters partner is authorized, but not required: (10 to enter into any settlement with the Internal Revenue Service with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the Internal Revenue Service providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of the Code); (20 in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (30 to intervene in any action brought by any other Partner for judicial review of a final adjustment; (40 to file a request for an administrative adjustment with the Internal Revenue Service and, if any part of such request is not allowed by the Internal Revenue Service, to file an appropriate pleading 40 (petition or complaint) for judicial review with respect to such request; (50 to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and (60 to take any other action on behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.6 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. Section 10.4 Organizational Expenses ----------------------- The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code. Section 10.5 Withholding ----------- Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days 41 after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay when due any amounts owed to the Partnership pursuant to this Section 10.5, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event, the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amount payable by a Limited Partner hereunder shall bear interest at the highest base or prime rate of interest published from time to time by any of Citibank, N.A., Chemical Bank, Morgan Guaranty Trust Company of New York and Chase Manhattan Bank, N.A., plus four (4) percentage points, but in no event higher than the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer -------- A. The term "Transfer," when used in this Article 11 with respect to an OP Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person. The term "Transfer" when used in this Article 11 does not include any exchange of OP Units for cash or REIT Stock pursuant to the Exchange Rights Agreement. 42 B. No Partnership Interest shall be Transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any Transfer or purported Transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void. Section 11.2 Transfer of the General Partner's General Partner ------------------------------------------------- Interest -------- A. The General Partner may not Transfer any of its General Partner Interest or withdraw as General Partner, or Transfer any of its Limited Partner Interest, except (i) if Limited Partners holding at least a majority of the Percentage Interests of the Limited Partners (other than Limited Partner Interests held by the Company or any Affiliate thereof) consent to such Transfer or withdrawal, (ii) if such Transfer is to the Company or an entity which is wholly-owned by the Company and is a Qualified REIT Subsidiary as defined in Section 856(i) of the Code or (iii) in connection with a transaction described in Section 11.2D or 11.2E (as applicable). B. The Initial Limited Partner may not Transfer any of its Limited Partner Interest or withdraw as a Limited Partner, except (i) if Limited Partners holding a majority of the Percentage Interest of the Limited Partners (other than Limited Partner Interests held by the Company or any Affiliate thereof) consent to such Transfer or withdrawal, (ii) if such Transfer is to the Company or an entity which is wholly owned by the Company and is a Qualified REIT Subsidiary as defined in Section 856(i) of the Code or (iii) in connection with a transaction described as Section 11.2D. C. In the event the General Partner withdraws as general partner of the Partnership in accordance with clause (A) above, the General Partner's General Partner Interest shall immediately be converted into a Limited Partner Interest. D. Except as otherwise provided in Section 11.2E, the Company shall not engage in any merger, consolidation or other combination with or into another Person or sale of all or substantially all of its assets, or any reclassification, or any recapitalization or change of outstanding REIT Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination of REIT Stock) (a "Transaction"), unless (i) the Transaction also includes a merger of the Partnership or sale of substantially all of the assets of the Partnership as a result of which all Limited Partners will receive for each OP Unit an amount of cash, securities, or other property equal to the product of the Exchange Factor and the greatest amount of cash, securities or other property or value paid in the Transaction to or received by a holder of one share of REIT Stock in consideration of one share of REIT Stock, provided that if, in connection with the Transaction, a purchase, -------- ---- tender or exchange offer ("Offer") shall have been made to and accepted by the holders of more than 50% of the outstanding REIT Stock, each holder of OP Units shall be given the option to exchange its OP Units for the greatest amount of cash, securities, or other property which a Limited Partner 43 would have received had it (A) exercised its Exchange Right and (B) sold, tendered or exchanged pursuant to the Offer the REIT Stock received upon exercise of the Exchange Right immediately prior to the expiration of the Offer; and (ii) no more than 75% of the equity securities of the acquiring Person in such Transaction shall be owned, after consummation of such Transaction, by the General Partner or Persons who were Affiliates of the Partnership or the General Partner immediately prior to the date on which the Transaction is consummated. E. Notwithstanding Section 11.2D, the General Partner may merge into or consolidate with another entity if immediately after such merger or consolidation (i) substantially all of the assets of the successor or surviving entity (the "Surviving General Partner"), other than OP Units held by the General Partner, are contributed to the Partnership as a Capital Contribution in exchange for OP Units with a fair market value equal to the value of the assets so contributed as determined by the Surviving General Partner in good faith and (ii) the Surviving General Partner expressly agrees to assume all obligations of the General Partner hereunder. Upon such contribution and assumption, the Surviving General Partner shall have the right and duty to amend this Exchange Rights Agreement as set forth in this Section 11.2.E. The Surviving General Partner shall in good faith arrive at a new method for the calculation of the Exchange Factor for an OP Unit after any such merger or consolidation so as to approximate the existing method for such calculation as closely as reasonably possible. Such calculation shall take into account, among other things, the kind and amount of securities, cash and other property that was receivable upon such merger or consolidation by a holder of REIT Stock or options, warrants or other rights relating thereto, and which a holder of OP Units could have acquired had such OP Units been redeemed for REIT Stock immediately prior to such merger or consolidation. Such amendment to this Agreement shall provide for adjustment to such method of calculation, which shall be as nearly equivalent as may be practicable to the adjustments provided for with respect to the Exchange Factor. The above provisions of this Section 11.2E shall similarly apply to successive mergers or consolidations permitted hereunder. Section 11.3 Limited Partners' Rights to Transfer ------------------------------------ A. Subject to the provisions of Sections 11.3C, 11.3D, 11.3E and 11.4, a Limited Partner (other than the Initial Limited Partner) may, without the consent of the General Partner, Transfer all or any portion of its Limited Partnership Interest. B. If a Limited Partner is Incapacitated, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to Transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. 44 C. The General Partner may prohibit any Transfer by a Limited Partner of its OP Units if, in the opinion of legal counsel to the Partnership, such Transfer would require filing of a registration statement under the Securities Act of 1933, as amended, or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the OP Units. D. No Transfer by a Limited Partner of its OP Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes; (ii) such Transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (iii) such Transfer would, in the opinion of legal counsel for the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (iv) such Transfer would subject the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; (v) without the consent of the General Partner, which consent may be withheld in its sole and absolute discretion, if such Transfer is a sale or exchange, and such sale or exchange would, when aggregated with all other sales and exchanges during the 12-month period ending on the date of the proposed Transfer, result in 50% or more of the interests in Partnership capital and profits being sold or exchanged during such 12-month period; or (vi) such Transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. E. No transfer of any OP Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Regulations Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a nonrecourse liability (within the meaning of Regulations Section 1.752.1(a)(2)), without the consent of the General Partner, which may be withheld in its sole and absolute discretion, provided that as a condition to such consent the lender -------- ---- will be required to enter into an arrangement with the Partnership and the General Partner to exchange for the Cash Amount (as such term is defined in the Exchange Rights Agreement) any OP Units in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. F. Any Transfer in contravention of any of the provisions of this Section 11.3 shall be void and ineffectual and shall not be binding upon, or recognized by, the Partnership. Section 11.4 Substituted Limited Partners ---------------------------- 45 A. No Limited Partner shall have the right to substitute a Permitted Transferee for a Limited Partner in his place. The General Partner shall, however, have the right to consent to the admission of a Permitted Transferee of the Partnership Interest of a Limited Partner pursuant to this Section 11.4 as a Substitute Limited Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit such transferee to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. C. No Permitted Transferee will be admitted as a Substituted Limited Partner unless such transferee has furnished to the General Partner (a) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement and the Exchange Rights Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (b) such other documents or instruments as may be required in the reasonable discretion of the General Partner in order to effect such Person's admission as a Substituted Limited Partner. Upon the admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address, number of OP Units, and Percentage Interest of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Limited Partner. Section 11.5 Assignees --------- If the General Partner, in its sole and absolute discretion, does not consent to the admission of any transferee as a Substituted Limited Partner, as described in Section 11.4A, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses and any other items, gain, loss deduction and credit of the Partnership attributable to the OP Units assigned to such transferee, but shall not be deemed to be a holder of OP Units for any other purpose under this Agreement, and shall not be entitled to vote such OP Units in any matter presented to the Limited Partners for a vote (such OP Units being deemed to have been voted on such matter in the same proportion as all other OP Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such OP Units, such transferee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of OP Units. Section 11.6 General Provisions ------------------ 46 A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of such Limited Partner's OP Units in accordance with this Article 11 or pursuant to exchange of all of its OP Units pursuant to the Exchange Rights Agreement. B. Any Limited Partner which shall Transfer all of its OP Units in a Transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such OP Units as Substituted Limited Partners. Similarly, any Limited Partner which shall Transfer all of its OP Units pursuant to an exchange of all of its OP Units pursuant to the Exchange Rights Agreement shall cease to be a Limited Partner. C. Other than pursuant to the Exchange Rights Agreement or without the consent of the General Partner, transfers pursuant to this Article 11 may only be made as of the first day of a fiscal quarter of the Partnership. D. If any Partnership Interest is transferred or assigned during the Partnership's fiscal year in compliance with the provisions of this Article 11 or exchanged pursuant to the Exchange Rights Agreement on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the Transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which an exchange occurs shall be allocated to the exchanging Partner, provided, however, that the General Partner may adopt such other conventions relating to allocations in connection with transfers, assignments, or exchanges as it determines are necessary or appropriate. All distributions of Available Cash attributable to such OP Units with respect to which the Partnership Record Date is before the date of such transfer, assignment, or exchange shall be made to the transferor Partner or the exchanging Partner, as the case may be, and in the case of a Transfer or assignment other than an exchange, all distributions of Available Cash thereafter attributable to such OP Units shall be made to the transferee Partner. ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner -------------------------------------- 47 A. A successor to all of the General Partner Interest pursuant to Section 11 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. B. A Person shall be admitted as a substitute or successor General Partner of the Partnership only if the following terms and conditions are satisfied: (a) the Person to be admitted as a substitute or additional General Partner shall have accepted and agreed to be bound by all the terms and provisions of this Agreement by executing a counterpart thereof and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner; (b) if the Person to be admitted as a substitute or additional General Partner is a corporation or a partnership it shall have provided the Partnership with evidence satisfactory to counsel for the Partnership of such Person's authority to become a General Partner and to be bound by the terms and provisions of this Agreement; and (c) counsel for the Partnership shall have rendered an opinion (relying on such opinions from other counsel as may be necessary) that the admission of the person to be admitted as a substitute or additional General Partner is in conformity with the Act, that none of the actions taken in connection with the admission of such Person as a substitute or additional General Partner will cause (i) the Partnership to be classified other than as a partnership for federal income tax purposes, or (ii) the loss of any Limited Partner's limited liability. C. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6D hereof. Section 12.2 Admission of Additional Limited Partners ---------------------------------------- A. After the admission to the Partnership of the additional Limited Partners on the date hereof, a Person who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement and the Exchange Rights Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the 48 discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such item for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner. Section 12.3 Amendment of Agreement and Certificate of Limited ------------------------------------------------- Partnership ----------- For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution ----------- The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in 49 accordance with the terms of this Agreement. The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. an event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within ninety (90) days after such event of withdrawal, majority in interest of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; C. from and after the date of this Agreement through December 31, 2046, an election to dissolve the Partnership made by the General Partner, with the Consent of Limited Partners holding at least a majority of the Percentage Interest of the Limited Partners (other than Limited Partnership Interests held by the Initial Limited Partner); D. on or after January 1, 2047, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; E. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; F. the sale of all or substantially all of the assets and properties of the Partnership; G. a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner. Section 13.2 Winding Up ---------- A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by Limited Partners holding at least a majority of the 50 Limited Partnership Interests (the General Partner or such other Person being referred to herein as the "Liquidator"), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of common stock or other securities of the Company) shall be applied and distributed in the following order: (1) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than the Partners; (2) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the General Partner; (3) Third, to the payment and discharge of all of the Partnership's debts and liabilities to the other Partners; and (4) The balance, if any, to the General Partner and Limited Partners to the extent of and in accordance with the positive balances in their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. Any distributions pursuant to this Section 13.2A shall be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). B. Notwithstanding the provisions of Section 13.2A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any asset except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interests of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. 51 C. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be: (1) distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or (2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2A as soon as practicable. Section 13.3 No Obligation to Contribute Deficit ----------------------------------- If any Partner has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. Section 13.4 Rights of Limited Partners -------------------------- Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its Capital Contributions, distributions, or allocations. 52 Section 13.5 Notice of Dissolution --------------------- In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners. Section 13.6 Termination of Partnership and Cancellation of ---------------------------------------------- Certificate of Limited Partnership ---------------------------------- Upon the completion of the liquidation of the Partnership's assets, as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the state of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.7 Reasonable Time for Winding-Up ------------------------------ A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation. Section 13.8 Waiver of Partition ------------------- Each Partner hereby waives any right to partition of the Partnership property. ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS Section 14.1 Amendments ---------- A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the Initial Limited Partner) holding in the aggregate 25 percent or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with 53 respect to the proposal. Except as provided in Section 14.1B, 14.1C or 14.1D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Limited Partners holding at least a majority of the Percentage Interests of the Limited Partners (including Limited Partnership Interests held by the Initial Limited Partner). B. Notwithstanding Section 14.1A, the General Partner shall have the power, without the consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.3 hereof; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and (5) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law. The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1B is taken. C. Notwithstanding Section 14.1A and 14.1B hereof, this Agreement shall not be amended without the Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Article IV 54 and Section 14.1B(3) hereof); (iv) cause the termination of the Partnership prior to the time set forth in Section 2.5 or 13.1; or (v) amend this Section 14.1C. D. Notwithstanding Section 14.1A or Section 14.1B hereof, the General Partner shall not amend Section 4.3, 7.4, 7.5, 11.2, 13.1 or 14.2 without the Consent of Limited Partners holding a majority of the Percentage Interests of the Limited Partners, excluding Limited Partner Interests held by the Initial Limited Partner. Section 14.2 Meetings of the Partners ------------------------ A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the Initial Limited Partner) holding 25 percent or more of the Partnership Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Limited Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of the Partners or may be given in accordance with the procedure prescribed in Section 14.1A hereof. Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests held by Partners (including Limited Partnership Interests held by the Initial Limited Partner) shall control. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date of the consent as certified by the General Partner. C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact and a copy thereof delivered to the Partnership. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the General Partner's receipt of written notice of such revocation from the Limited Partner executing such proxy. 55 D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Meetings of Partners may be conducted in the same manner as meetings of the stockholders of the Company and may be held at the same time, and as part of, meetings of the shareholders of the Company. ARTICLE 15 GENERAL PROVISIONS Section 15.1 Addresses and Notice -------------------- Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by overnight delivery or via facsimile to the Partner or Assignee at the address set forth in Exhibit A or such other address of which the Partner shall notify the General Partner in writing. Section 15.2 Titles and Captions ------------------- All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals -------------------- Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Section 15.4 Further Action -------------- The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect -------------- 56 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Creditors --------- Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 15.7 Waiver ------ No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. Section 15.8 Counterparts ------------ This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.9 Applicable Law -------------- This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof. Section 15.10 Invalidity of Provisions ------------------------ If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. Section 15.11 Entire Agreement ---------------- This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto. Section 15.12 Guaranty by the Company ----------------------- 57 For so long as the General Partner is a wholly-owned subsidiary of the Company and the General Partner is the general partner of the Partnership, the Company unconditionally and irrevocably guarantees to the Limited Partners the performance by the General Partner of the General Partner's obligations under this Agreement. This guarantee is exclusively for the benefit of the Limited Partners and shall not extend to the benefit any creditor of the Partnership. Section 15.13 Merger ------ Subject to Section 4.2 herein, the Partnership may merge with, or consolidate into, any Person or Entity in accordance with Section 17-211 of the Act. Section 15.14 Limitation of Partnership Interest ---------------------------------- No Limited Partner (other than the Initial Limited Partner) shall own, directly or indirectly, as determined under the rules provided for in Section 7704(d)(3)(B) of the Code, more than 4.9 percent of the Partnership Interests. If a direct or indirect acquisition of Partnership Interests or REIT Stock would result in a Limited Partner (other than the Initial Limited Partner) owning, directly or indirectly, Partnership Interests in excess of 4.9 percent as determined under the rules provided for in Section 7704(d)(3)(B) of the Code (such excess interest referred to as an "Excess Interest"), then the Excess Interest shall be automatically exchanged in accordance with the terms of the Exchange Rights Agreement to which such Partner is a party and the terms of such Exchange Rights Agreement shall govern the disposition of such Excess Interest. This Agreement shall be effective at 9:01 a.m., New York time, on August 3, 1998. 58 Signature Page to the Second Amended and Restated Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P., by and among the undersigned and the other parties thereto. GENERAL PARTNER: MERISTAR HOSPITALITY CORPORATION By: __________________________________________________ Name: Bruce G. Wiles Title: President and Chief Investment Officer 59 Signature Page to the Second Amended and Restated Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P., by and among the undersigned and the other parties thereto. CAPSTAR MANAGEMENT COMPANY, L.L.C. By: MeriStar Hotels & Resorts, Inc., its Manager By: ____________________________________________ Name: James A. Calder Title: Chief Financial Officer 60 Signature Page to the Second Amended and Restated Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P., by and among the undersigned and the other parties thereto. MeriStar LP, Inc. 3005 Hotel Associates, Ltd. Jackson-Shaw Partners No. 51, Ltd. 3100 Hotel Associates, L.P. Virtual Hospitality, Inc. James E. Sowell Lewis W. Shaw, II Kenneth W. Shaw Monica Jorns Steven D. Jorns Bruce G. Wiles Kenneth E. Barr 3860 Investors Joint Venture Jim Sowell Construction Co., Inc. John D. Gourley Louis E. Capt Richard O. Jacobson Thomas J. Corcoran, Jr. Hervey A. Feldman Jerry Jacob Pin Nien Hwang Thomas L. Wiese Steven L. Cobb Barbara Hess DFW South Acquisition Corporation Corporate Property Associates 4 Corporate Property Associates 8, L.P. Devlo, Inc. The Cocoa Beach Company, Inc. Charles R. Faust C. Wayne Thompson S. Ronald Thompson John D. Monson Clyde E. Williams, Jr. CW Associates Co. 1815 Hotel Associates Limited Partnership Prime Hospitality Corp. O/K Associates Limited Partnership By: MeriStar Hospitality Corporation, Attorney- In-Fact Pursuant to Section 2.4 of the Second Amended and Restated Agreement of Limited Partnership of the Partnership By:_______________________________________ Name: Bruce G. Wiles Title: President and Chief Investment 61 Post Merger: Total Shares of MeriStar Hospitality Corporation Outstanding: 45,753,550 Total OP Units Outstanding: 50,455,367 EXHIBIT A --------- Partnership Interests
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- General Partner - ------------------------------------ MeriStar Hospitality Corporation 504,554 1.00% 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Limited Partners - ------------------------------------ MeriStar LP, Inc. 45,248,996 89.68% EquiStar Acquisition Corporation CapStar Westchase Acquisition Corp. CapStar Lexington, Inc. CapStar Austin, Inc. CapStar PA, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 3005 Hotel Associates, Ltd. 26,636 .05% 5605 MacArthur Blvd. Suite 1200 Irving, Texas 75038 Jackson-Shaw Partners No. 51, Ltd. 4,455 .009%
A-1
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- 3131 McKinney, Suite 200 Dallas, Texas 75204 3100 Hotel Associates, L.P. 20,612 .04% 5605 MacArthur Blvd. Suite 1200 Irving, Texas 75038 Virtual Hospitality, Inc. 5,279 .01% 5605 MacArthur Blvd. Suite 1200 Irving, Texas 75038 James E. Sowell 95,223 .18% 7000 Vassar Dallas, Texas 75205 Lewis W. Shaw, II 60,850 .12% 9915 Meadowbrook Dallas, Texas 75220 Kenneth W. Shaw 59,907 .12% 1313 Plantation Drive Colleyville, TX 76034 Monica Jorns 16,190 .03% 900 Kingsburg Way Southlake, TX 76029 Steven D. Jorns 44,659 .09% 900 Kingsburg Way Southlake, TX 76092
A-2
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- Bruce G. Wiles 18,039 .04% 5204 Lincolnshire Ct. Dallas, TX 75287 Kenneth E. Barr 8,475 .02% 3206 Brook Glen Drive Garland, TX 75044 3860 Investors Joint Venture 18,268 .04% 5605 MacArthur Blvd. Suite 1200 Dallas, TX 75038 Jim Sowell Construction Co., Inc. 12,731 .03% 7000 Vassar Dallas, TX 75205 John D. Gourley 5,704 .01% Madison Realty Investors 6116 North Central Expressway, Suite 901 Dallas, TX 75206 Louis E. Capt 24,357 .05% L.E.C. Investments 333 E. Main (Box 189) Uvalde, TX 78801 Richard O. Jacobson 36,537 .07% c/o Jacobson Warehouses 3811 Dixon Avenue Des Moines, IA 50313
A-3
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- Thomas J. Corcoran, Jr. 36,537 .07% 4100 Oxford Court Colleyville, TX 76034 Hervey A. Feldman 18,268 .04% 8181 Douglas, #310 Dallas, TX 75225 Jerry Jacob 8,525 .02% 90 Perkins Road Greenwich, CT 06830 Pin Nien Hwang 7,185 .01% 360 E. Randolph St. #3006 Chicago, IL 60601 Thomas L. Wiese 3,045 .006% 3611 Ingleside Drive Dallas, TX 75229 Steven L. Cobb 3,045 .006% 10929 South Richmond Avenue Tulsa, OK 74137 Barbara Hess 6,955 .01% 12920 NW 17th Street Topeka, KS 66615 DFW South Acquisition Corporation 98,041 .19% 545 East John Carpenter Freeway Suite 1300
A-4
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- Irving, TX 75062 Corporate Property Associates 4, 361,889 .72% a California Limited Partnership c/o W.P. Carey & Company, Inc. Attn: Anthony Mohl 50 Rockefeller Plaza, 2nd Fl. New York, NY 10020 Corporate Property Associates 8, L.P. 418,380 .83% c/o W.P. Carey & Company, Inc. Attn: Anthony Mohl 50 Rockefeller Plaza, 2nd Fl. New York, NY 10020 Devlo, Inc. 20,608 .04% c/o James Pruett 4381 Green Oaks Blvd. West, #100 Arlington, TX 76016 The Cocoa Beach Company, Inc. 2,278 .005% c/o Spieth, Bell, McCurdy & Newell Co., L.P.A. 925 Euclid Avenue, Suite 2000 Cleveland, OH 44115 Charles R. Faust 22,340 .04% Beck-Summit Management Group 4116 N. Ocean Drive, Suite 700 Lauderdale by the Sea, FL 33308
A-5
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- C. Wayne Thompson 44,682 .09% 325 Fifth Avenue Indialantic, FL 32903 S. Ronald Thompson 44,682 .09% 325 Fifth Avenue Indialantic, FL 32903 John D. Monson 55,852 .11% c/o Ostendorf-Morris Company 1100 Superior Avenue, Suite 1000 Cleveland, OH 44114 Clyde E. Williams, Jr. 18,601 .04% c/o Spieth, Bell, McCurdy & Newell Co., L.P.A. 925 Euclid Avenue, Suite 2000 Cleveland, OH 44115 CW Associates Co. 37,250 .07% c/o Spieth, Bell, McCurdy & Newell Co., L.P.A. 925 Euclid Avenue, Suite 2000 Cleveland, OH 44115 1815 Hotel Associates Limited Partnership, 11,568 .02% c/o MeriStar Hospitality Corporation, 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007
A-6
Class B Class C Class D Percentage Name and Address of Partner OP Units OP Units OP Units OP Units Interest --------------------------- -------- -------- -------- -------- -------- Prime Hospitality Corp. 439,375 .87% 700 Route 46 East Fairfield, NJ 07707-2700 O/K Associates Limited Partnership 9400 West Foster, Suite 204 1,108,873 2.20% Chicago, Illinois 60656 CapStar Management Company, LLC 1010 Wisconsin Avenue, N.W. 1,083,759 392,157 2.86% Washington, D.C. 20007
A-7 Exhibit B --------- Allocations 1. Allocation of Net Income and Net Loss. ------------------------------------- (a) Net Income. Subject to subparagraph 1(c) hereof and except as ---------- otherwise provided in this Exhibit B, Net Income (or items thereof) (other than Net Income, or items thereof, arising in connection with a Terminating Capital Transaction) for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests. (b) Net Loss. Except as otherwise provided in this Exhibit B, Net Loss -------- (or items thereof) of the Partnership for each fiscal year or other applicable period shall be allocated to the Partners in accordance with the Partners' respective Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) allocated to a Partner under this subparagraph (b) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit, or increase the amount of an existing Adjusted Capital Account Deficit, as of the end of the fiscal year or other applicable period to which such Net Loss relates, such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance --- ---- with each Permitted Partner's Percentage Interest. (c) Net Income (or items thereof) for each year shall first be allocated (i) to the holders of Class C OP Units up to an amount equal to the excess of the Preferential Distribution distributed for such year and all prior years to the holders of such Units in accordance with the Certificate of Designation of the Class C OP Units over the aggregate amount of Net Income previously allocated to such holders under this subparagraph 1(c)(i), and (ii) to the holders of Class D OP Units up to an amount equal to the excess of the Preferred Return accrued with respect to such Units in accordance with the Certificate of Designation of the Class D OP Units for the current year and all prior years over the aggregate amount of Net Income previously allocated to such Holders under this subparagraph 1(c)(ii), to the extent of and in proportion to the respective amounts of such excesses. (d) Terminating Capital Transaction; Liquidation. Allocations of Net -------------------------------------------- Income or Net Loss (or items thereof) in connection with a Terminating Capital Transaction or liquidation of the Partnership shall first be made so that, to the extent possible, each Partner's Capital Account balance is equal to such Partner's Adjusted Contribution, and the remainder of such Net Income or Net Loss (or items thereof) shall be allocated to the Partners in accordance with their Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) would be allocated to a Restricted Partner under this subparagraph (c), such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the Permitted Partners pro rata in accordance with each Permitted Partner's Percentage Interest. - --- ---- (e) Rules of Construction. --------------------- (1) Capital Account Increases. For purposes of making allocations ------------------------- pursuant to subparagraph 1(d) of this Exhibit B, a Partner's Capital Account balance shall be deemed to be increased by such Partner's share of any Partnership Minimum Gain and Partner Minimum Gain remaining at the close of the fiscal period in respect of which such allocations are being made. (2) Change in Percentage Interests. In the event any Partner's ------------------------------ Percentage Interest changes during a fiscal year for any reason, including without limitation, the Transfer of any interest in the Partnership, the tax allocations contained in this Exhibit B shall be applied as necessary to reflect the varying interests of the Partners during such year. 2. Special Allocations. Notwithstanding any provisions of paragraph 1 of this ------------------- Exhibit B, the following special allocations shall be made. (a) Minimum Gain Chargeback (Nonrecourse Liabilities). Except as ------------------------------------------------- otherwise provided in Section 1.704-2(f) of the Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Sections 1.704-2(f) and (i) of the Regulations. This subparagraph 2(a) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(a) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. (b) Partner Minimum Gain Chargeback. Except as otherwise provided in ------------------------------- Section 1.704-2(i)(4) of the Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This subparagraph 2(b) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(b) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. (c) Qualified Income Offset. In the event a Partner unexpectedly receives ----------------------- any adjustments, allocations or distributions described in Sections 1.704- 1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has an Adjusted Capital Account Deficit, items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible as required by the Regulations. This subparagraph 2(c) is intended to constitute a "qualified income offset" under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) Other Chargeback of Impermissible Negative Capital Account. To the ---------------------------------------------------------- extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership fiscal year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this -------- paragraph 2(d) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Exhibit B have been tentatively made as if this paragraph 2(d) were not in the Agreement. (e) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or ---------------------- other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests. (f) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for ------------------------------ any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704- 2(b)(4) and 1.704-2(i)(1) of the Regulations). (g) Intent of Allocations. The parties intend that the allocation --------------------- provisions of this Exhibit B shall result in final Capital Account balances of the Partners that initially are equal to each Partner's Adjusted Contribution and are then in proportion to the Partners' respective Percentage Interests, so that when liquidating distributions are made in accordance with such final Capital Account balances under Section 13.2A(4) hereof, such distributions will be able to return to each Partner its Adjusted Contribution and then will be made in proportion to the Partners' respective Percentage Interests. To the extent that such final Capital Account balances do not so reflect the provisions of this Exhibit B, income and loss of the Partnership for the current year and future years, as computed for book purposes, shall be allocated among the Partners so as to result in final Capital Account balances reflecting the provisions of this Exhibit B and to the extent such allocations of items of income (including gross income) and deduction do not result in such final Capital Account balances, then, income and loss of the Partnership for prior open years, as computed for book purposes (or items of gross income and deduction of the Partnership for such years, as computed for book purposes) shall be reallocated among the Partners consistent with the foregoing. This subparagraph shall control B-3 notwithstanding any reallocation of income, loss, or items thereof, as computed for book purposes, by the Internal Revenue Service or any other taxing authority. (h) Section 754 Adjustment. To the extent an adjustment to the adjusted ---------------------- tax basis of any asset of the Partnership pursuant to Section 734(b) of the Code or Section 743(b) of the Code is required, pursuant to Section 1.704- 1(b)(2)(iv)(m) of the Regulations, to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated among the Partners in a manner consistent with the manner in which each of their respective Capital Accounts are required to be adjusted pursuant to such section of the Regulations. (i) Gross Income Allocation. There shall be specially allocated to the ----------------------- General Partner an amount of Partnership income and gain during each Partnership Year or portion thereof, before any other allocations are made hereunder, which is equal to the excess, if any, of the cumulative distributions of cash made to the General Partner under Section 7.3B hereof over the cumulative allocations of Partnership income and gain to the General Partner pursuant to this Section 2(i) of this Exhibit B. 3. Tax Allocations. --------------- (a) Items of Income or Loss. Except as is otherwise provided in this ----------------------- Exhibit B, an allocation of Partnership Net Income or Net Loss to a Partner shall be treated as an allocation to such Partner of the same share of each item of income, gain, loss, deduction and item of tax-exempt income or Section 705(a)(2)(B) expenditure (or item treated as such expenditure pursuant to Regulations Section 1.704-1(b)(2)(iv)(i)) ("Tax Items") that is taken into account in computing Net Income or Net Loss. (b) Section 1245/1250 Recapture. If any portion of gain from the sale of --------------------------- Partnership assets is treated as gain which is ordinary income by virtue of the application of Code Sections 1245 or 1250 ("Affected Gain"), then such Affected Gain shall be allocated among the Partners in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated. This subparagraph 3(b) shall not alter the amount of Net Income (or items thereof) allocated among the Partners, but merely the character of such Net Income (or items thereof). For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income and Net Loss for such respective period. (c) Precontribution Gain, Revaluations. With respect to any Contributed ---------------------------------- Property, the Partnership shall use any permissible method contained in the Regulations promulgated under Section 704(c) of the Code selected by the General Partner, in its sole discretion, to take into account any variation between the adjusted basis of such asset and the fair market value of B-4 such asset as of the time of the contribution ("Precontribution Gain"). Each Partner hereby agrees to report income, gain, loss and deduction on such Partner's federal income tax return in a manner consistent with the method used by the Partnership. If any asset has a Gross Asset Value which is different from the Partnership's adjusted basis for such asset for federal income tax purposes because the Partnership has revalued such asset pursuant to Regulations Section 1.704-1(b)(2)(iv)(f), the allocations of Tax Items shall be made in accordance with the principles of Section 704(c) of the Code and the Regulations and the methods of allocation promulgated thereunder. The intent of this subparagraph 3(c) is that each Partner who contributed to the capital of the Partnership a Contributed Property will bear, through reduced allocations of depreciation, increased allocations of gain or other items, the tax detriments associated with any Precontribution Gain. This subparagraph 3(c) is to be interpreted consistently with such intent. (d) Excess Nonrecourse Liability Safe Harbor. Pursuant to Regulations ---------------------------------------- Section 1.752-3(a)(3), solely for purposes of determining each Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership (as defined in Regulations Section 1.752-3(a)(3)), the Partners' respective interests in Partnership profits shall be determined in accordance with each Partner's Percentage Interest; provided, however, that each Partner who has -------- ------- contributed an asset to the Partnership shall be allocated, to the extent possible, a share of "excess nonrecourse liabilities" of the Partnership which results in such Partner being allocated nonrecourse liabilities in an amount which is at least equal to the amount of income pursuant to Section 704(c) of the Code and the Regulations promulgated thereunder (the "Liability Shortfall"). In the event there is an insufficient amount of nonrecourse liabilities to allocate to each Partner an amount of nonrecourse liabilities equal to the Liability Shortfall, then an amount of nonrecourse liabilities in proportion to, and to the extent of, the Liability Shortfall shall be allocated to each Partner. (e) References to Regulations. Any reference in this Exhibit B or the ------------------------- Agreement to a provision of proposed and/or temporary Regulations shall, in the event such provision is modified or renumbered, be deemed to refer to the successor provision as so modified or renumbered, but only to the extent such successor provision applies to the Partnership under the effective date rules applicable to such successor provision. (f) Successor Partners. For purposes of this Exhibit B, a transferee of a ------------------ Partnership Interest shall be deemed to have been allocated the Net Income, Net Loss and other items of Partnership income, gain, loss, deduction and credit allocable to the transferred Partnership Interest that previously have been allocated to the transferor Partner pursuant to this Agreement. B-5 Exhibit C --------- CERTIFICATE OF DESIGNATION OF THE CLASS B OP UNITS OF MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "Partnership"), does hereby certify that, pursuant to the authority conferred on its general partner, MeriStar Hospitality Corporation, a Maryland corporation (the "General Partner") by the Second Amended and Restated Agreement of Limited Partnership of the Partnership, as amended from time to time (the "Agreement"), the General Partner hereby adopts the following for the Partnership: "RESOLVED, that pursuant to the authority vested in this General Partner in accordance with Article 4 of the Agreement: 1. A series of Class B limited partnership interests of the Partnership, to be known as Class B OP Units be, and it hereby is, created, classified, authorized and the issuance thereof provided for, and that the designation and number of units, and relative rights, preferences and limitations thereof, shall be as set forth herein; 2. DESIGNATION, AMOUNT AND RIGHTS. (a) CLASS B OP UNITS. The units of this series of limited partnership interests shall be designated as "Class B OP Units," and the number of units of limited partnership interests constituting such series shall be that number of Class B OP Units issued pursuant to Section 4.1, 4.2 and 4.3. The number of Class B OP Units outstanding and the Percentage Interests in the Partnership represented by such Class B OP Units are set forth in Exhibit A of the --------- Agreement, as such Exhibit may be amended from time to time. Except with ------- respect to the payment of dividends as provided in Section 2.1 below, all holders of Class B OP Units shall have the identical rights, preferences and obligations as a holder of OP Units. The ownership of Class B Units shall be evidenced by such form of certificate as the General Partner adopts from time to time unless the General Partner determines that the Class B OP Units shall be uncertificated securities. 3. DIVIDENDS. (a) DIVIDEND. A dividend period (a "Dividend Period") with respect to any Class B OP Unit shall commence on and include the first day of issuance of such series of Class B OP Units and shall end on and include the last day of the calendar quarter to which such Dividend Period corresponds. The holder of each Class B OP Unit shall be entitled to receive, when and as declared by the board of directors of the General Partner, and on the terms and subject to the conditions specified by the board of directors of the General Partner at the time any such dividend is declared, out of funds legally available therefor, such dividend relating only to the Dividend Period for which such dividend is declared. Accordingly, that holder of a Class B OP Unit shall be entitled to receive a dividend equal to the product of (i) the number of Class B OP Units owned by the Partner multiplied by the dividend declared per unit of limited partnership interest of the Partnership by the board of directors of the General Partner, multiplied by (ii) a fraction the numerator of which is the Dividend Period and the denominator of which is the number of days in the calendar quarter to which such Dividend Period relates. 4. CONVERSION. (a) AUTOMATIC CONVERSION. On the first day following the record date for the payment of dividends relating to the calendar quarter in which such Class B OP Unit was issued, each such issued and outstanding Class B OP Unit shall automatically be converted into an equal amount of OP Units, without any action required on the part of the Class B OP Unit holder. 5. MISCELLANEOUS. (a) Unless otherwise defined herein, all defined terms used herein shall be such meaning ascribed such term in the Agreement." Exhibit D --------- CERTIFICATE OF DESIGNATION OF THE CLASS C OP UNITS OF MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "Partnership"), does hereby certify that, pursuant to the authority conferred on its general partner, MeriStar Hospitality Corporation, a Maryland corporation (the "General Partner"), by the Second Amended and Restated Agreement of Limited Partnership of the Partnership, as amended from time to time (the "Agreement"), the General Partner hereby adopts the following for the Partnership: "RESOLVED, that pursuant to the authority vested in this General Partner in accordance with Article 4 of the Agreement: 1. A series of Class C limited partnership interests of the Partnership, to be known as "Class C OP Units" be, and it hereby is, created, classified, authorized and the issuance thereof provided for, and that the designation and number of units, and relative rights, preferences and limitations thereof, shall be as set forth herein; 2. DESIGNATION, AMOUNT AND RIGHTS. (a) CLASS C OP UNITS. The units of this series of limited partnership interests shall be designated as "Class C OP Units," and the number of units of limited partnership interest constituting such series shall be that number of Class C OP Units issued pursuant to Sections 4.1, 4.2 and 4.3 of the Agreement. The number of Class C OP Units outstanding and the Percentage Interests in the Partnership represented by such Class C OP Units shall be as set forth in Exhibit A to the Agreement, as such Exhibit may be amended from time to time. - --------- ------- Except as otherwise provided herein, all holders of Class C OP Units shall have the identical rights, preferences and obligations as a holder of OP Units. The ownership of Class C Units shall be evidenced by such form of certificate as the General Partner adopts from time to time unless the General Partner determines that the Class C OP Units shall be uncertificated securities. 3. DISTRIBUTIONS. (a) PREFERENTIAL DISTRIBUTIONS. Except for the First Distribution Payment as provided in Section 3.2 below, the holders of the Class C OP Units are entitled to receive, when as determined by the General Partner, quarterly distributions of $0.5575 per Class C OP Unit (the "Preferential Distribution"). The distribution on the Class C OP Units shall be non-cumulative. The Class C OP Unit distribution is subject to adjustment as determined by the General Partner as equitably required in the event that there is any change in the units of limited partnership of the Partnership or exchange of such units of limited partnership for a different number or kind of units or other partnership interests of the Partnership by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, subdivision or consolidation of such units, change in partnership structure or other event which results in a similar change in the equity position of a holder of Class C OP Units (such an event a "Reclassification"). The right of a holder of a Class C OP Unit to receive the Preferential Distribution shall terminate upon the earlier to occur of (i) the exchange of the Class C OP Unit into share(s) of common stock of the Company (an "Exchange Termination Event") and (ii) the payment of a quarterly distribution per OP Unit of at least $0.5575 per unit, as adjusted to reflect a Reclassification (a "Preferential Distribution Termination Event," and together with an Exchange Termination Event, a "Termination Event"). Upon a Preferential Distribution Termination Event, the affected Class C OP Units shall automatically convert to OP Units as described in Section 5.1, provided however, a Preferential Distribution Termination Event shall not by itself terminate such unit's associated Contingent Value Right (as defined in Section 4). While any Class C OP Units are issued and outstanding, the General Partner shall not pay any quarterly distribution in accordance with Section 5.1 of the Agreement with respect to any class of OP Unit that is junior in rank with regard to the payment of distributions pursuant to Section 5.1 of the Agreement prior to the declaration and payment of the Preferential Distribution with regard to any issued and outstanding Class C OP Unit. The Class C OP Units shall rank pari passu with respect to distributions with the Class D OP Units. (b) FIRST DISTRIBUTION. Subject to Section 3.1, the first distribution to be paid for each Class C OP Unit after its issuance (the "First Distribution Payment") shall equal the product of (i) the Preferential Distribution (subject to adjustment in the event of a Reclassification) multiplied by (ii) a fraction, the numerator of which is the First Distribution Period (as defined below) and the denominator of which is the number of days in the calendar quarter to which such First Distribution Period corresponds. After the declaration and payment of the First Distribution Payment, Class C OP Units shall pay a dividend equal to the Preferential Distribution, to the extent provided herein. "First Distribution Period" shall mean that period of time that commences on and includes the day of issuance of such Class C OP Unit and shall end on and include the last day of the calendar quarter in which such issuance occurred. 4. CONTINGENT VALUE RIGHT. Upon issuance of a Class C OP Unit, the holder thereof shall also receive one Contingent Value Right which right shall attach to and remain inseparable, other than in connection with a Preferential Distribution Termination Event, from the Class C OP Unit upon which it was issued. A "Contingent Value Right" shall automatically entitle the holder thereof to receive on the first year anniversary of the issuance of the Class C OP Unit that number of OP Units equal to 1 multiplied by a fraction (a) the numerator of which is the difference between (i) $35.40 (subject to adjustment as provided below under Current Market Price) and (ii) the Current Market Price (as defined below) of a share of common stock of the Company and (b) the denominator of which is the Current Market Price of a share of common stock of the Company. For example, if the Current Market Price per share of common stock of the Company were either $25, $35 or $40, then the number of OP Units to be issued upon exercise of the Contingent Value Right would be calculated as follows, respectively: (i) 35.40-$25 = .416 OP Unit --------- $25 (ii) 35.40-$35 = .011 OP Unit --------- $35 or (iii) 35.40-$40 = OP Unit --------- $40 "Current Market Price" shall mean the average final closing price per share of common stock of the Company as calculated during the twenty (20) trading days immediately preceding the first year anniversary date of the issuance of the Class C OP Unit. Notwithstanding anything herein to the contrary, the Contingent Value Right shall terminate and be null and void (i) if the Current Market Price of a share of common stock of the Company equals at least $35.40, provided, however, that in any event, if prior to exercise of the Contingent Value Right the outstanding shares of common stock of the Company shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the $35.40 amount shall be correspondingly adjusted, as determined by the General Partner, to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, or (ii) if an Exchange Termination Event has occurred prior to the first year anniversary date of the issuance of the Class C OP Unit or (iii) if the Contingent Value Right is not exercised on or before the first year anniversary date of the issuance of the Class C OP Unit or (iv) D-3 upon exercise of a Contingent Value Right. Upon a Preferential Distribution Termination Event, the corresponding Contingent Value Right shall detach from the Class C OP Unit and shall automatically attach to the OP Unit issued in exchange for the terminated Class C OP Unit. 5. CONVERSION. Immediately upon a Preferential Distribution Termination Event, each such issued and outstanding Class C OP Unit shall automatically be converted into an equal amount of OP Units, without any action required on the part of the Class C OP Unit holder. Upon a Preferential Distribution Termination Event, the corresponding Contingent Value Right shall detach from the Class C OP Unit and shall automatically attach to the OP Unit issued in exchange for the terminated Class C OP Unit. 6. VOTING RIGHTS. The holders of the Class C OP Units shall be entitled to one vote per Class C OP Unit and, except as required by law, shall vote together with the holders of the OP Units and not as a separate class or group. 7. MISCELLANEOUS. (a) Unless otherwise defined herein, all defined terms used herein shall have such meaning ascribed such term in the Agreement." D-4 Exhibit E --------- CERTIFICATE OF DESIGNATION OF THE CLASS D OP UNITS OF MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (the "Partnership"), does hereby certify that, pursuant to the authority conferred on its general partner, MeriStar Hospitality Corporation, a Maryland corporation (the "General Partner") by the Second Amended and Restated Agreement of Limited Partnership of the Partnership, as amended from time to time (the "Agreement"), the General Partner hereby adopts the following for the Partnership: "RESOLVED, that pursuant to the authority vested in this General Partner in accordance with Article 4 of the Agreement: 1. A series of Class D limited partnership interests of the Partnership, to be known as "Class D OP Units" be, and it hereby is, created, classified, authorized and the issuance thereof provided for, and that the designation and number of units, and relative rights, preferences and limitations thereof, shall be as set forth herein; 2. DESIGNATION, AMOUNT AND RIGHTS. (a) CLASS D OP UNITS. The units of this series of limited partnership interests shall be designated as "Class D OP Units," and the number of units of limited partnership interest constituting such series shall be that number of Class D OP Units issued pursuant to Section 4.3 of the Agreement. The number of Class D OP Units outstanding and the Percentage Interests in the Partnership represented by such Class D OP Units shall be as set forth in Exhibit A to the --------- Agreement, as such Exhibit may be amended from time to time. Except as ------- otherwise provided herein, all holders of Class D OP Units shall have the identical rights, preferences and obligations as a holder of OP Units. The ownership of Class D Units shall be evidenced by such form of certificate as the General Partner adopts from time to time unless the General Partner determines that the Class D OP Units shall be uncertificated securities. 3. DISTRIBUTIONS. The holders of the Class D OP Units are entitled to receive, except to the extent the General Partner, by resolution of its Board of Directors, determines that the Partnership does not have cash available for distribution, with respect to each Class D OP Unit, a preferential distribution (a "Preferential Distribution") equal to the excess, if any, of (x) a preferred distribution right at the rate of 6.5% per annum, compounded quarterly to the extent not distributed (the "Preferred Return"), with respect to an amount equal to $22.16 (the "Preferred Capital") per class D OP Unit over (y) the aggregate of all amounts previously distributed to such Class D OP Unit pursuant to Section 5.1 of the Agreement. While any Class D OP Units are issued and outstanding, the General Partner shall not pay any quarterly distribution in accordance with Section 5.1 of the Agreement with respect to any class of OP Unit that is junior in rank with regard to the payment of distributions pursuant to Section 5.1 of the Agreement prior to the declaration and payment of the Preferential Distribution with regard to any issued and outstanding Class D OP Unit. The Class D OP Units shall rank pari passu with respect to distributions with the Class OP Units. In addition, the holders of the Class D OP Units shall be entitled to receive any accrued but unpaid distributions attributable to the 392,157 Preferred Units issued pursuant to the Third Amendment to the Agreement of Limited Partnership of CapStar Management Company, L.P. 4. MANDATORY REDEMPTION. (a) Except as otherwise provided in the last sentence of this Section 4(a), the Partnership shall have the right ("Mandatory Redemption Right") at any time on or after April 1, 2000, to redeem all or any portion of the Class D OP Units at a redemption price equal to $22.16 per Class D OP Unit; provided, however, that any such redemption shall be effected on a pro rata basis among all of the holders of Class D OP Units. The Mandatory Redemption Right shall be exercised pursuant to a notice (the "Mandatory Redemption Notice") delivered by the Partnership to the holders of Class D OP Units whose Class D OP Units are being redeemed. If the Mandatory Redemption Notice is given to a holder of Class D OP Units, then the redemption of such holder's Class D OP Units shall take place on the tenth Business Day (as defined in the Exchange Rights Agreement, dated August 3, 1998, among MeriStar Hospitality Corporation ("MHC"), the Partnership and the Persons set forth therein (the "Exchange Agreement")) after the giving of such notice. On such tenth Business Day, the Partnership shall pay to such holder of Class D OP Units the redemption price herein above provided for, and such holder of Class D OP Units shall deliver to the Partnership such instruments of transfer as the Partnership shall reasonably require, assigning to the Partnership the Class D OP Units being redeemed, free and clear of all liens and encumbrances. Such holder of Class D OP Units shall pay any state or local property tax payable in connection with such transfer. Notwithstanding anything to the contrary contained in the foregoing, if, within 5 Business Days after the giving of the Mandatory Redemption Notice, any holder of Class D OP Units gives the Notice of Exchange (as defined in the Exchange Agreement) with respect to the Class D OP Units specified in such Mandatory Redemption Notice, then such Mandatory Redemption Notice shall be deemed null and void and the provisions of Article 2 of the Exchange Rights E-2 Agreement shall apply with respect to such Class D OP Unit Special Allocation. ------------------ To the extent that distributions are made to holders of a class of OP Units prior to distributions to holders of any other class of OP Units, whether pursuant to the provision of Article 5 or a Certificate of Designation with respect to a certain class or classes of OP Units, Net Income (or items thereof), shall first be allocated to such holders in an amount equal to such distributions. (b)(i) Notwithstanding anything to the contrary contained in Section 4(a), the General Partner shall have the right to cause MHC to purchase all or any portion of the Class D OP Units in lieu of the Partnership's exercise of its Mandatory Redemption Right. Any such purchase by MHC of the Class D OP Units shall be on the terms and conditions set forth in Section 4(a), with MHC performing the obligations of the Partnership under such section; provided, however, that the General Partner shall have the right (the "Share Exchange Right"), in lieu of causing MHC to pay to the holder of Class D OP Units in question the redemption price provided for in Section 4(a), to cause MHC to deliver to such holder of Class D OP Units a number of shares of common stock, par value $.01 per share of MHC (the "MHC Shares") equal to (i) the number of Class D OP Units being purchased, multiplied by (ii) $22.16, divided by (iii) the Value (as defined in the Exchange Rights Agreement) per MHC Share on the Valuation Date (as defined in the Exchange Rights Agreement) (which amount shall be rounded down to the nearest whole number if it is not a whole number). The Share Exchange Right shall be exercised by notice included in the Mandatory Redemption Notice. For purposes of this Section 4, the term "Valuation Date" shall mean the date on which the Mandatory Redemption Notice is delivered to the holder in question or, if such date is not a Business Day, the first Business Day thereafter. If MHC purchases Class D OP Units pursuant to this Section 4(b), MHC shall contribute such Class D OP Units to the General Partner, and the General Partner shall thereafter be treated for all purposes as the owner of such Class D OP Units. (ii) Notwithstanding anything to the contrary contained in clause (i) of this Section 4(b), if the General Partner shall exercise the Share Exchange Right with respect to a holder of Class D OP Units on or after April 1, 2000, such holder of Class D OP Units shall have the right, by notice given to the General Partner within five Business Days after the giving of the Mandatory Redemption Notice, to receive cash for its Class D OP Units in lieu of accepting delivery of MHC Shares therefor. If any holder of Class D OP Units shall exercise such right, then the Partnership or MHC shall pay to such holder of Class D OP Units the redemption price for the Class D OP Units being redeemed as provided in Section 4(a) or clause (i) of this Section 4(b), as applicable. In addition to the foregoing, if the General Partner shall exercise the Mandatory Redemption Right on or after April 1, 2000 and shall not exercise the Share Exchange Right as to a holder of Class D OP Units, such holder shall have the right, by notice given to the General Partner within five Business Days after the giving of the Mandatory Redemption Notice, to require the General Partner to cause MHC to deliver MHC Shares to such holder in exchange for such holder's Class D OP Units. If any holder of Class D OP Units shall exercise such right, then the General Partner shall cause MHC so to deliver such MHC Shares on the terms and conditions set forth in clause (i) of this Section 4(b). E-3 (c) If the Mandatory Redemption Right is exercised or MHC purchases Class D OP Units pursuant to Section 4(b), then the Partnership or MHC, as the case may be, shall be required to pay (or cause to be paid) to the holder of Class D OP Units in question, in addition to the payment or the delivery of MHC Shares herein above provided for, an amount equal to the Preferential Distribution (as of the date such payment is made) attributable to the Class D OP Units being so redeemed or purchased; provided, however, that if the General Partner has elected to cause MHC to purchase Class D OP Units by delivery of MHC Shares and a holder of Class D OP Units has not elected, pursuant to Section 4(b), to receive cash in lieu of such MHC Shares, or if a holder of Class D OP Units has elected pursuant to Section 4(b) to receive MHC Shares in exchange for its Class D OP Units, the General Partner shall have the right, in lieu of paying an amount equal to such Preferential Distribution, to cause MHC to deliver to such holder a whole number of MHC Shares equal to the amount of such Preferential Distribution (as of the date such payment is made) DIVIDED BY the Value on the Valuation Date of one MHC Share (rounded down to the nearest whole number of MHC Shares if such quotient is not a whole number). (d) Notwithstanding the foregoing, in no event shall the Mandatory Redemption Right be exercisable with respect to any Class D OP Unit as to which a Notice of Exchange has been given as provided in Article 2 of the Exchange Rights Agreement. 5. REDEMPTION. In addition to the right of redemption provided for in Article 2 of the Exchange Rights Agreement, the holders of Class D OP Units shall have the right, on one occasion only on or after April 1, 2004, to require the Partnership to redeem all of their Class D OP Units then outstanding at a redemption price equal to $22.16 per Class D OP Unit. If such right is exercised, then, for purposes of this Agreement but subject to the further provisions of this Section 5, (i) such exercise shall be deemed to constitute, as to each holder of Class D OP Units the exercise of the Exchange Right, (ii) each such holder of Class D OP Units shall be deemed an Exchanging Partner, and (iii) such redemption shall, except as provided above and except as hereinafter provided, be treated in the same manner as a redemption pursuant to Section 2.1 of the Exchange Rights Agreement; provided that (A) the Notice of Exchange shall be signed by all such holders of Class D OP Units, (B) each Notice of Exchange shall state specifically that it is being give under this Section 5 and (C) such holders of Class D OP Units shall be entitled to elect (which election shall be indicated in the Notice of Exchange) whether to be paid the Cash Amount (which term, for purposes of this Section 5, shall mean the redemption price provided for above) or to receive MHC Shares in exchange for their Class D OP Units (the number of MHC Shares so to be delivered to such holders of Class D OP Units to be computed in accordance with Section 5(b) hereof). In the event such holders of Class D OP Units elect to receive MHC Shares in exchange for their Class D OP Units, the provisions of Section 2.1.B of the Exchange Rights Agreement shall apply (except that references therein to the General Partner's election to deliver MHC Shares to the Exchanging Partners shall E-4 instead be deemed references to the election of the holders of Class D OP Units to receive MHC Shares). 6. VOTING RIGHTS. The holders of the Class D OP Units shall be entitled to one vote per Class D OP Unit and, except as required by law, shall vote together with the holders of the OP Units and not as a separate class or group. 7. MISCELLANEOUS. (a) Unless otherwise defined herein, all defined terms used herein shall have such meaning ascribed such term in the Agreement. E-5 IN WITNESS WHEREOF, the General Partner has caused this Certificate of Designation to be duly signed by the undersigned, this __th day of _________, 1998. MERISTAR HOSPITALITY CORPORATION By: ______________________________________ Name: Title: E-6 EX-10.4 3 SENIOR SECURED CREDIT AGREEMENT EXHIBIT 10.4 U.S. $1,000,000,000 SECOND AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT Dated as of August 3, 1998 Among MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. as the Borrower, --------------- SOCIETE GENERALE, SOUTHWEST AGENCY as Arranger and Administrative Agent, ------------------------------------ BANKERS TRUST COMPANY as Arranger and Syndication Agent, --------------------------------- LEHMAN COMMERCIAL PAPER INC. as Arranger and Documentation Agent, ----------------------------------- WELLS FARGO BANK, NATIONAL ASSOCIATION as Documentation Agent ---------------------- and THE LENDERS NAMED HEREIN as the Lenders -------------- TABLE OF CONTENTS -----------------
Page ARTICLE IDEFINITIONS AND ACCOUNTING TERMS Section 1.01 Certain Defined Terms............................ 2 Section 1.02 Computation of Time Periods...................... 47 Section 1.03 Accounting Terms; Changes in GAAP................ 47 Section 1.04 Classes and Types of Advances.................... 48 Section 1.05 Miscellaneous.................................... 48 Section 1.06 Recitals......................................... 48 Section 1.07 Amendment and Restatement........................ 48 Section 1.08 Senior Indebtedness.............................. 49 ARTICLE IITHE ADVANCES AND THE LETTERS OF CREDIT Section 2.01 The Advances..................................... 49 Section 2.02 Method of Borrowing.............................. 53 Section 2.03 Fees............................................. 58 Section 2.04 Reduction of the Commitments..................... 59 Section 2.05 Repayment of Advances............................ 59 Section 2.06 Interest, Late Payment Fee....................... 59 Section 2.07 Prepayment....................................... 61 Section 2.08 Breakage Costs................................... 64 Section 2.09 Increased Costs.................................. 64 Section 2.10 Payments and Computations........................ 66 Section 2.11 Taxes............................................ 68 Section 2.12 Illegality....................................... 71 Section 2.13 Letters of Credit................................ 71 Section 2.14 Determination of Leverage Ratio.................. 75 Section 2.15 Lender Replacement............................... 76 Section 2.16 Sharing of Payments, Etc......................... 77 ARTICLE III CONDITIONS OF LENDING
ii Section 3.01 Conditions Precedent to Amendment and Restatement and Additional Advances.................. 78 Section 3.02 Conditions Precedent for Each Borrowing or Letter of Credit................................... 81 ARTICLE IVREPRESENTATIONS AND WARRANTIES Section 4.01 Existence; Qualification; Partners; Subsidiaries...... 82 Section 4.02 Partnership and Corporate Power....................... 83 Section 4.03 Authorization and Approvals........................... 84 Section 4.04 Enforceable Obligations............................... 84 Section 4.05 Parent Common Stock................................... 84 Section 4.06 Financial Statements and Registration Statements...... 85 Section 4.07 True and Complete Disclosure.......................... 85 Section 4.08 Litigation............................................ 86 Section 4.09 Use of Proceeds....................................... 86 Section 4.10 Investment Company Act................................ 86 Section 4.11 Taxes................................................. 86 Section 4.12 Pension Plans......................................... 87 Section 4.13 Condition of Hotel Property; Casualties; Condemnation. 88 Section 4.14 Insurance............................................. 88 Section 4.15 No Burdensome Restrictions; No Defaults............... 88 Section 4.16 Environmental Condition............................... 89 Section 4.17 Legal Requirements, Zoning, Utilities, Access......... 90 Section 4.18 Existing Indebtedness................................. 90 Section 4.19 Title; Encumbrances................................... 91 Section 4.20 Leasing Arrangements.................................. 91 Section 4.21 Franchise Agreements.................................. 91 Section 4.22 Management Agreements................................. 92 Section 4.23 Senior Indebtedness................................... 92 Section 4.24 Specified Secured Indebtedness........................ 92 ARTICLE VAFFIRMATIVE COVENANTS Section 5.01 Compliance with Laws, Etc............................. 92
-iii- Section 5.02 Preservation of Existence; Separateness, Etc............... 93 Section 5.03 Payment of Taxes, Etc...................................... 94 Section 5.04 Visitation Rights; Lender Meeting.......................... 94 Section 5.05 Reporting Requirements..................................... 95 Section 5.06 Maintenance of Property and Required Work.................. 98 Section 5.07 Insurance.................................................. 99 Section 5.08 Interest Rate Agreements................................... 99 Section 5.09 Approved Participating Leases.............................. 99 Section 5.10 Use of Proceeds............................................ 100 Section 5.11. Collateral................................................. 100 Section 5.12. New Subsidiaries........................................... 100 Section 5.13 Year 2000 Compatibility.................................... 100 Section 5.14 Excluded Foreign Subsidiaries.............................. 101 ARTICLE VINEGATIVE COVENANTS Section 6.01 Liens, Etc................................................. 101 Section 6.02 Indebtedness............................................... 102 Section 6.03 Agreements Restricting Distributions From Subsidiaries..... 105 Section 6.04 Restricted Payments........................................ 105 Section 6.05 Fundamental Changes; Asset Dispositions.................... 106 Section 6.06 Personal Property Leases................................... 106 Section 6.07 Investments, Loans, Future Properties...................... 107 Section 6.08 Affiliate Transactions..................................... 109 Section 6.09 Sale and Leaseback......................................... 109 Section 6.10 Sale or Discount of Receivables............................ 110 Section 6.11 No Further Negative Pledges................................ 110 Section 6.12 Material Documents......................................... 110 Section 6.13 Limitations on Development, Construction, Renovation and Purchase of Hotel Properties............................... 111 ARTICLE VIIFINANCIAL COVENANTS Section 7.01 Interest Coverage Ratio.................................... 111 Section 7.02 Fixed Charge Coverage Ratio................................ 111
-iv- Section 7.03 Maintenance of Net Worth................................... 112 Section 7.04 Leverage Ratio............................................. 112 Section 7.05 Limitations on Secured Indebtedness........................ 112 Section 7.06 Limitations on Secured Recourse Indebtedness............... 112 Section 7.07 Unsecured Interest Coverage Ratio.......................... 112 Section 7.08 Permitted Non-Voting Stock Company Adjustment.............. 113 ARTICLE VIIIEVENTS OF DEFAULT; REMEDIES Section 8.01 Events of Default.......................................... 113 Section 8.02 Optional Acceleration of Maturity; Other Actions........... 117 Section 8.03 Automatic Acceleration of Maturity......................... 118 Section 8.04 Cash Collateral Account.................................... 118 Section 8.05 Swingline Advances and Commitment.......................... 119 Section 8.06 Non-exclusivity of Remedies................................ 119 Section 8.07 Right of Set-off........................................... 119 ARTICLE IXAGENCY AND ISSUING BANK PROVISIONS Section 9.01 Authorization and Action................................... 120 Section 9.02 Administrative Agent's Reliance, Etc....................... 120 Section 9.03 Each Agent and Its Affiliates.............................. 121 Section 9.04 Lender Credit Decision..................................... 121 Section 9.05 Indemnification............................................ 122 Section 9.06 Successor Agent and Issuing Banks.......................... 122 Section 9.07 Arrangers, Syndication Agent and Documentation Agents...... 123 ARTICLE XMISCELLANEOUS Section 10.01 Amendments, Etc............................................ 123 Section 10.02 Notices, Etc............................................... 127 Section 10.03 No Waiver; Remedies........................................ 127 Section 10.04 Costs and Expenses......................................... 127 Section 10.05 Binding Effect............................................. 128 Section 10.06 Lender Assignments and Participations...................... 128
-v- Section 10.07 Indemnification.......................................... 132 Section 10.08 Execution in Counterparts................................ 132 Section 10.09 Survival of Representations, Indemnifications, etc....... 132 Section 10.10 Severability............................................. 133 Section 10.11 Florida Liens............................................ 133 Section 10.12 Release of Guarantors.................................... 133 Section 10.13 Supplemental Guaranties.................................. 134 Section 10.14 Usury Not Intended....................................... 134 Section 10.15 GOVERNING LAW............................................ 135 Section 10.16 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL............................................... 135 Section 10.17 Lender Interest Rate Agreements.......................... 137 Section 10.18 Knowledge of Borrower.................................... 137 Section 10.19 Lenders Not in Control................................... 138 Section 10.20 Headings Descriptive..................................... 138 Section 10.21 Time is of the Essence................................... 138
-vi- EXHIBITS: Exhibit A-1 - Form of Revolving Note Exhibit A-2 - Form of Term A Note Exhibit A-3 - Form of Term B Note Exhibit A-4 - Form of Swingline Note Exhibit B - Form of Adjustment Report Exhibit C - Form of Assignment and Acceptance Exhibit D - Form of Compliance Certificate Exhibit E - Form of Environmental Indemnity Exhibit F - Form of Guaranty Exhibit G - Form of Notice of Borrowing Exhibit H - Form of Notice of Conversion or Continuation Exhibit I - Form of Pledge Agreement -vii- SCHEDULES: Schedule 1.01(a) - Commitments Schedule 1.01(b) - Initial Properties and Investment Amount Schedule 1.01(c) - Approved Franchisors Schedule 1.01(d) - Engineer Report Scope of Services Schedule 1.01(e) - Approved Engineers Schedule 1.01(f) - Environmental Report Scope of Services Schedule 1.01(g) - Approved Environmental Consultants Schedule 1.01(h) - Existing AGH Letters of Credit Schedule 1.01(i) - Guarantors Schedule 4.01 - Subsidiaries Schedule 4.08 - Litigation Schedule 4.17 - Legal Requirements; Zoning; Utilities; Access Schedule 4.18 - Existing Indebtedness Schedule 4.20 - Ground Leases Schedule 4.21 - Franchise Agreements Schedule 4.22 - Management Agreements Schedule 5.06 - Required Work Schedule 5.07 - Insurance Schedule 10.02 - Notice Information -viii- SECOND AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT SECOND AMENDED AND RESTATED SENIOR SECURED CREDIT AGREEMENT, dated as of August 3, 1998, is among MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (fka American General Hospitality Operating Partnership, L.P.), as the Borrower; SOCIETE GENERALE, SOUTHWEST AGENCY, as Arranger and Administrative Agent; BANKERS TRUST COMPANY, as Arranger and Syndication Agent; LEHMAN COMMERCIAL PAPER INC., as Arranger and Documentation Agent; WELLS FARGO BANK, NATIONAL ASSOCIATION, as Documentation Agent; and the Lenders. PRELIMINARY STATEMENTS: WHEREAS, in connection with the Merger, CapStar is merging with and into AGH REIT to form the Parent and the CapStar Hotel LLCs are merging with and into AGH OP to form the Borrower, all as more particularly described in the Registration Statements; WHEREAS, contemporaneously with the Merger CapStar will utilize Advances to repay the Existing CapStar Indebtedness to be Repaid; WHEREAS, certain of the parties hereto previously entered into the Existing AGH Credit Agreement pursuant to which the Existing AGH Lenders have made advances to AGH OP, and have issued or participated in the Existing AGH Letters of Credit, in each case on the terms and conditions set forth therein; WHEREAS, the Borrower has requested that the Existing AGH Lenders amend the Existing AGH Credit Agreement and the other Existing AGH Credit Documents in order to revise certain terms thereof and the Existing AGH Lenders have agreed to do so on the terms and conditions set forth herein; WHEREAS, the parties hereto have agreed to amend and restate the Existing AGH Credit Agreement as amended in its entirety for clarity only, and amend the other Existing AGH Credit Documents, in order to (i) add certain Lenders as parties to this Agreement, (ii) acknowledge that those Existing AGH Lenders who will be repaid in full in connection with this Agreement are no longer parties to this Agreement and have been repaid in full as if the Existing AGH Credit Agreement had been repaid in full, (iii) increase the Commitments under this Agreement to $1,000,000,000 and in part change the Class of Commitments, (iv) provide for the Obligations to be secured by certain Collateral and (v) amend certain other provisions of the Existing AGH Credit Agreement and the other Existing AGH Credit Documents as more fully set forth in this Agreement; WHEREAS, this Amended and Restated Senior Credit Agreement constitutes for all purposes an amendment to the Existing AGH Credit Agreement and not a new or substitute agreement and each reference to an "Advance" and "Letter of Credit" herein shall mean each such Advance made and each Letter of Credit issued heretofore under the Existing AGH Credit Agreement; WHEREAS, Bank One, Texas, N.A., Societe Generale, Southwest Agency and the other Existing AGH Lenders who are agents under the Existing AGH Credit Agreement desire to resign from their respective agency capacities under the Existing AGH Credit Agreement, and the Lenders desire to appoint Societe Generale, Southwest Agency as Administrative Agent and make certain other changes with respect to the other agents for the facilities described in this Agreement, all as more fully provided herein; NOW, THEREFORE, in consideration of the foregoing recitals and the provisions contained in this Agreement, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.0 Certain Defined Terms. As used in this Agreement, the --------------------- following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acceptable Security Interest" means a security interest which (a) exists in ---------------------------- favor of the Administrative Agent for its benefit and the ratable benefit of the Lenders, (b) is superior to all other security interests, (c) secures the Obligations and (d) is perfected and enforceable against all Persons in preference to any rights of any Person in the property encumbered thereby. "Accession Agreement" means an Accession Agreement in the form attached ------------------- respectively -2- the Guaranty, Environmental Indemnity and Pledge Agreement as Annex 1 thereto, which agreement causes the Person executing and delivering the same to the Administrative Agent to become a party to the Guaranty, Environmental Indemnity and Pledge Agreement. "Adjusted EBITDA" means, for any Person or Hotel Property, as applicable, for --------------- any period, the EBITDA of such Person or Hotel Property, as applicable, for such period less the aggregate FF&E Reserves for such period in respect of, as ---- applicable, each Hotel Property owned by such Person or its Subsidiaries (whether located on land owned by or land leased to such owner of the Hotel Property) or such Hotel Property. "Adjusted Net Worth" means, for the Parent as of any date, the sum of (a) the ------------------ Parent's Net Worth on such date plus (b) the minority interest of the Parent on ---- such date determined in accordance with GAAP (excluding that portion of the minority interest attributable to ownership interests in any Subsidiary of the Parent held by Persons [other than Persons who own partnership interests in the Borrower] for any such Subsidiary which (i) is not a Guarantor and (ii) has not granted a Lien on all or substantially all of such Subsidiary's assets to the Borrower to secure Indebtedness of such Subsidiary to the Borrower) plus (c) the ---- OP Adjustment on such date. "Adjusted Base Rate" means, for any day, the fluctuating rate per annum of ------------------ interest equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/2%. "Adjustment Event" has the meaning set forth in Section 2.14(b). ---------------- "Adjustment Report" means a certificate of the Borrower in substantially the ----------------- form of the attached Exhibit B. "Administrative Agent" means Societe Generale, Southwest Agency in its -------------------- capacity as Administrative Agent for the Lenders pursuant to Article IX and any successor Administrative Agent appointed pursuant to Section 9.06. "Administrative Agent Fee Letter" means the letter agreement dated as of May ------------------------------- 21, 1998 among CapStar, AGH Reit, and Societe Generale, Southwest Agency, as amended. "Advance" means a Revolving Advance, a Term A Advance, a Term B Advance, or a ------- -3- Swingline Advance. "Affiliate" means, as to any Person, any other Person that, directly or --------- indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of a Control Percentage, by contract or otherwise. A Person holding 35% or more of the voting capital stock of another Person shall be deemed to have control. "AGH GP" means AGH GP, Inc., a Nevada corporation. ------ "AGHI" means American General Hospitality, Inc., a Texas corporation. ---- "AGH Leasing" means AGH Leasing, L.P., a Delaware limited partnership. ----------- "AGH LP" means AGH LP, Inc., a Nevada corporation. ------ "AGH OP" means American General Hospitality Operating Partnership, L.P., a ------ Delaware limited partnership. "AGH REIT" means American General Hospitality Corporation, a Maryland -------- corporation. "Agreement" has the meaning given such term in the initial paragraph of this --------- agreement. "Applicable Lending Office" means, with respect to each Lender, such Lender's ------------------------- Domestic Lending Office in the case of a Base Rate Advance or a Swingline Advance and such Lender's LIBOR Lending Office in the case of a LIBOR Advance. [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK] -4- "Applicable Margin" means, (a) with respect to a Swingline Advance at any ----------------- date, the applicable percentage per annum set forth below based upon the Status then in effect under the column for Revolving Advances which are Base Rate Advances, (b) with respect to any other Class of Advance at any date, the applicable percentage per annum set forth below based upon the Status then in effect under the column for such Type and Class of Advance, (c) with respect to the letter of credit fee payable under Section 2.03(b) at any date, the applicable percentage per annum set forth below based upon the Status then in effect under the column for Revolving Advances which are LIBOR Advances and (d) with respect to the commitment fee payable under Section 2.03(a) at any date, the applicable percentage per annum set forth below based upon the Status then in effect under the column "Unused Commitment Fee."
Revolving Advances and Term A Advances Term Advances -------------------------------------- ------------- Unused Base Rate LIBOR Commitment Base Rate LIBOR Advances Advances Fee Advances Advances -------- --------- ----------- -------- -------- Level I 0% 1.00% .125% .25% 1.75% Status Level II 0% 1.125% .15% .25% 1.75% Status Level III 0% 1.17% .15% .25% 1.75% Status Level IV 0% 1.225% .20% .25% 1.75% Status Level V 0% 1.25% .20% .25% 1.75% Status Level VI 0% 1.325% .20% .25% 1.75% Status Level VII 0% 1.40% .20% .25% 1.75% Status Level VIII .125% 1.50% .25% .25% 1.75% Status Level IX .20% 1.65% .25% .50% 2.00% Status Level X .30% 1.875% .25% .50% 2.00% Status
-5- "Approved Franchisor" means those certain franchisors listed on Schedule ------------------- 1.01(c) attached hereto, or any other reputable, nationally known, third party franchisor or licensor of a Hotel Property approved by the Administrative Agent in writing. "Approved Fund" means any fund that invests in commercial loans which is ------------- advised or managed by an investment advisor which has total assets under management in excess of $100,000,000. "Approved Other Country" means each of the following countries: Canada, ---------------------- Mexico, United Kingdom, France, Germany, Spain, Belgium, The Netherlands, Luxembourg, Italy, Portugal, Austria, Switzerland, Norway, Sweden, Denmark, U. S. Virgin Islands, British Virgin Islands, Bahamas, Puerto Rico, and Japan. "Approved Participating Lease" means a participating lease with an Approved ---------------------------- Participating Lessee in substantially the form of those participating leases being executed in connection with the Merger or such other form as is approved by the Administrative Agent in writing (which approval shall not be unreasonably withheld). "Approved Participating Lessee" means OPCO, OPCO OP, AGH Leasing, Twin ----------------------------- Towers Leasing, L.P. (approved only with respect to the Initial Property for which it is a lessee), Prime Hospitality (approved only with respect to the Initial Properties for which it is a lessee and those Future Properties which the Borrower has already agreed to purchase from Prime Hospitality), any Approved Franchisor, any of the foregoing Person's respective Affiliates and any future participating lessee for a Hotel Property approved by two out of the three Arrangers in writing. "Arranger" means each of Societe Generale, Southwest Agency, Bankers Trust -------- Company, and Lehman Commercial Paper Inc., in its capacity as Arranger for the Lenders and any successor Arranger appointed for any of such Persons pursuant to Section 9.06. "Asset Disposition" means (a) any sale or lease of all or substantially all ----------------- of a Hotel Property (in which the Borrower or a Guarantor is lessor but exclusive of the Approved Participating Leases), or conveyance, exchange, transfer, or assignment of any other Investment or Property by the Borrower or a Guarantor to a Person other than the Borrower or a Guarantor; (b) any sale of timeshare intervals for any Hotel Property, but not a Permitted Timeshare -6- Conversion; and (c) any loss, casualty or condemnation of a Hotel Property owned by the Borrower or any Guarantor. "Assignment and Acceptance" means an assignment and acceptance entered into ------------------------- by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of the attached Exhibit C. "Base Rate Advance" means an Advance which bears interest as provided in ----------------- Section 2.06(a). "Borrower" means MeriStar Hospitality Operating Partnership, L.P., a -------- Delaware limited partnership. "Borrowing" means a Revolving Borrowing, a Term A Borrowing, a Term B --------- Borrowing or a Swingline Advance. "Business Day" means a day of the year on which banks are not required or ------------ authorized to close in New York City or Dallas, Texas and, if the applicable Business Day relates to any LIBOR Advances, any day other than a Saturday or Sunday or a day on which banking institutions are generally authorized or obligated by law or executive order to close in the City of London, England. "Capital Expenditure" means any payment made directly or indirectly for the ------------------- purpose of acquiring or constructing fixed assets, Real Property or equipment which in accordance with GAAP would be capitalized in the fixed asset accounts of such Person making such expenditure, including, without limitation, amounts paid or payable for such purpose under any conditional sale or other title retention agreement or under any Capital Lease, but excluding repairs of Property in the normal and ordinary course of business in keeping with the past practices of the Borrower. "Capital Lease" means, for any Person, any lease of any Property (whether ------------- real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" means, as to any Person, the capitalized ----------------------------- amount of all obligations of such Person or any of its Subsidiaries under Capitalized Leases, as determined on a consolidated basis in conformity with GAAP. -7- "CapStar" means CapStar Hotel Company, a Delaware corporation. ------- "CapStar Hotel LLCs" means CapStar Hotel Operating Company, LLC and CapStar ------------------ Hotel Operating Company II, LLC, each a Delaware limited liability company. "Cash Collateral Account" means a special cash collateral account ----------------------- containing cash deposited pursuant to the terms of this Agreement to be maintained at the Administrative Agent's office in accordance with Section 8.04. "CERCLA" means the Comprehensive Environmental Response, Compensation, and ------ Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect. "Change in Control" means for any Person a change in ownership or control ----------------- of such Person effected through either of the following transactions: (a) any Person or related group of Persons (other than such Person or an Affiliate of such Person) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities possessing more than thirty-five percent (35%) of the total combined voting power of such Person's outstanding securities; or (b) there is a change in the composition of such Person's Board of Directors over a period of thirty-six (36) consecutive months (or less) such that a majority of Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. "Class" has the meaning set forth in Section 1.04. ----- "Closing Date" means August 3, 1998. ------------ -8- "Code" means the Internal Revenue Code of 1986, as amended, and any ---- successor statute. "Collateral" means the Parent's and its Subsidiaries' (except Permitted ---------- Other Subsidiaries') interest in the capital stock, limited liability interests and partnership interests of all existing Subsidiaries of the Parent which are not Permitted Other Subsidiaries and any future Material Subsidiaries, and any other collateral described in the Pledge Agreement. "Commitments" means, (a) as to any Lender, its Revolving Commitment, its ----------- Term A Commitment and its Term B Commitment, and (b) as to the Swingline Lender, its Swingline Commitment. "Compliance Certificate" means a certificate of the Borrower in ---------------------- substantially the form of the attached Exhibit D. "Consolidated" refers to the consolidation of the accounts of the Borrower ------------ with the Borrower's Subsidiaries and the Parent with the Parent's Subsidiaries, as applicable, in accordance with GAAP, including principles of consolidation consistent with those applied in the preparation of the Registration Statements. "Control Percentage" means, with respect to any Person, the percentage of ------------------ the outstanding capital stock of such Person having ordinary voting power which gives the direct or indirect holder of such stock the power to elect a majority of the Board of Directors of such Person. "Controlled Group" means all members of the controlled group of ---------------- corporations and all trades (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Convert", "Conversion", and "Converted" each refers to a conversion of ------- ---------- --------- Advances of one Type into Advances of another Type pursuant to Section 2.02(b). "Convertible Indebtedness" means CapStar's 4.75% Convertible Subordinated ------------------------ Notes due October 15, 2004 in the aggregate principal amount of $172,500,000 and any notes issued in exchange thereof pursuant to the Convertible Indebtedness Indenture. "Convertible Indebtedness Indenture" means the Indenture dated as if ---------------------------------- October 16, 1997 -9- between CapStar and First Trust of New York, National Association, as trustee. "Credit Documents" means this Agreement, the Notes, the Guaranties, the ---------------- Environmental Indemnities, the Security Documents, the Fee Letter, the Administrative Agent Fee Letter, and each other agreement, instrument or document executed by the Borrower or any of its Subsidiaries at any time in connection with this Agreement. "Default" means (a) an Event of Default or (b) any event or condition which ------- with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Defaulting Lender" means any Lender which has wrongfully refused or failed ----------------- to make available its portion of any Borrowing or to fund its portion of any unreimbursed payment under Section 9.05, or notified in writing the Borrower or the Administrative Agent that such Lender does not intend to comply with its obligations under this Agreement. "Development Property" means either (a) a new Hotel Property under -------------------- construction including the conversion of a non-Hotel Property into a Hotel Property or (b) an existing Hotel Property which is undergoing an expansion pursuant to which the total guest rooms for such Hotel Property will be increased by 25% or more. "Dollar Equivalent" means the equivalent in another currency of an amount ----------------- in U.S. Dollars to be determined by reference to the rate of exchange quoted by the Administrative Agent, at 11:00 a.m. (Dallas, Texas time) on the date of determination, for the spot purchase in the foreign exchange market of such amount of Dollars with such other currency. "Dollars" and "$" means lawful money of the United States of America. ------- - "Domestic Lending Office" means, with respect to any Lender, the office of ----------------------- such Lender specified as its "Domestic Lending Office" opposite its name on Schedule 10.02 or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "EBITDA" means for any Person or Hotel Property, as applicable, for any ------ period for which such amount is being determined, an amount equal to (a) the Net Income for such Person or Hotel Property, as applicable, for such period plus ---- (b) to the extent deducted in determining Net -10- Income, Interest Expense, income taxes, depreciation, amortization, and other non-cash items for such period, as determined on a Consolidated basis in accordance with GAAP plus (c) to the extent deducted in determining Net Income, ---- deductions for minority interest attributable to the ownership interests in the Borrower not owned (directly or indirectly) by the Parent; provided that with -------- respect to EBITDA attributable to an Unconsolidated Entity, (i) for any such Unconsolidated Entity for which the Unconsolidated Entity Percentage is equal to or greater than 20%, such Person shall only be deemed to have received the Unconsolidated Entity Percentage of such Unconsolidated Entity's EBITDA to the extent not subject to (A) any limitation or restriction (except for the obligation to repay Indebtedness of such Person) on the right to distribute such EBITDA to such Person's owners or (B) any decision by another Person to not distribute the available cash of such Unconsolidated Entity to the owners of such Unconsolidated Entity, and (ii) for any such Unconsolidated Entity for which the Unconsolidated Entity Percentage is less than 20%, such Person shall only be deemed to have received the actual sums paid by such Unconsolidated Entity to such Person. "Effective Date" means the date all of the conditions precedent set forth -------------- in Section 3.01 have been satisfied. "Eligible Assignee" means (a) a commercial bank organized under the laws of ----------------- the United States, or any State thereof, and having primary capital of not less than $250,000,000 and approved by the Administrative Agent and the Issuing Bank, which approvals will not be unreasonably withheld, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development and having primary capital (or its equivalent) of not less than $250,000,000 (or its Dollar Equivalent) and approved by the Administrative Agent and the Issuing Bank, which approvals will not be unreasonably withheld, (c) an investment bank organized under the laws of the United States, or any State thereof, and having total assets in excess of $5,000,000,000, (d) an insurance company, finance company or financial institution (whether a corporation, partnership, trust or other Person) organized under the laws of the United States, or any state thereof, and having total assets in excess of $5,000,000,000, (e) any Approved Fund, (f) any "accredited investor" (as defined in Regulation D of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder) which has total assets in excess of $100,000,000, (g) a Lender, and (h) an Affiliate of the respective assigning Lender, without approval of any Person but otherwise meeting the eligibility requirements of (a), (b), (c), (d), (e) or (f) above. -11- "Engineering Report" means with respect to any Hotel Property, an ------------------ engineering report in accordance with the scope of services attached hereto as Schedule 1.01(d) reasonably satisfactory to the Administrative Agent prepared for the Lenders by a Person set forth on Schedule 1.01(e) or otherwise reasonably satisfactory to the Administrative Agent covering the physical condition of the Hotel Property, including without limitation the structural, electrical, plumbing, mechanical and other essential components of the Hotel Property. "Environment" or "Environmental" shall have the meanings set forth in 42 ----------- ------------- U.S.C. (S) 9601(8), as amended. "Environmental Claim" means any third party (including governmental ------------------- agencies and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law. "Environmental Indemnity" means one or more environmental indemnity ----------------------- agreements dated of even date herewith in substantially the form of the attached Exhibit E executed or to be executed by the Borrower, the Parent and all Subsidiaries of the Borrower (excluding the Permitted Other Subsidiaries), and any future environmental indemnities executed in connection with any Hotel Property, as any of such environmental indemnities may be amended hereafter in accordance with the terms of such agreements. "Environmental Law" means all Legal Requirements arising from, relating to, ----------------- or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, medical, infectious, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical, infectious, or toxic substances, materials or wastes. -12- "Environmental Permit" means any permit, license, order, approval or other -------------------- authorization under Environmental Law. "Environmental Report" means with respect to any Hotel Property, an -------------------- environmental report in accordance with the scope of services attached hereto as Schedule 1.01(f) prepared for the Lenders by a Person set forth on Schedule 1.01(g) or otherwise reasonably satisfactory to the Administrative Agent covering the Hotel Property and the soil and the groundwater thereunder. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in ------------------------ Regulation D of the Federal Reserve Board (or any successor), as in effect from time to time. "Event of Default" has the meaning set forth in Section 8.01. ---------------- "Exchange Act" has the meaning set forth in Section 2.04. ------------ "Excluded Foreign Subsidiaries" means those Subsidiaries of the Borrower ----------------------------- which (a) are incorporated or organized under the laws of any jurisdiction other than the United States or any state or territory thereof, (b) own only Hotel Properties and related assets which are Unencumbered except for FF&E which is collateral for Indebtedness permitted by this Agreement and (c) do not own Hotel Properties and other Investments which for all such Subsidiaries in the aggregate have an Investment Amount in excess of $75,000,000. "Existing AGH Credit Agreement" means that Amended and Restated Senior ----------------------------- Unsecured Credit Agreement, dated as of February 13, 1998, among AGH OP, Societe Generale, Southwest Agency, as Arranger, Syndication Agent, and Documentation Agent, Bank One, Texas, N.A., as Administrative Agent, The Bank of Nova Scotia and Wells Fargo Bank, National Association, as Managing-Agents and the Existing AGH Lenders, as amended by First Amendment to Credit Agreement dated as of February 27, 1998, among such same Persons. "Existing AGH Credit Documents" means the Credit Documents (as defined in ----------------------------- the Existing AGH Credit Agreement). "Existing AGH Lenders" means the banks and other financial institutions -------------------- party to the -13- Existing AGH Credit Agreement. "Existing AGH Letters of Credit" means the letters of credit outstanding on ------------------------------ the date of this Agreement issued for the account of the Borrower or its Subsidiaries which are described in the attached Schedule 1.01(h), as the same may be amended, supplemented, and otherwise modified from time to time. "Existing AGH Notes" means the promissory notes payable under the Existing ------------------ AGH Credit Agreement. "Existing CapStar Indebtedness to be Repaid" means all Indebtedness owing ------------------------------------------ pursuant to that certain Credit Agreement dated as of June 30, 1997, by and between CapStar; Lehman Brothers Holdings, Inc., Bankers Trust Company, BANKBOSTON, N.A., and Wells Fargo Bank, N.A., as various agents; and the other lenders party thereto, as amended. "Existing Subordinate Indebtedness" means CapStar's 8.75% Senior --------------------------------- Subordinated Notes due August 19, 2007 in the aggregate principal amount of $150,000,000 and any notes issued in exchange thereof pursuant to the Existing Subordinate Indebtedness Indenture. "Existing Subordinate Indebtedness Indenture" means the Indenture dated as ------------------------------------------- of August 19, 1997 between CapStar and IBJ Schroder Bank & Trust Company, as trustee. "Expiration Date" means, with respect to any Letter of Credit, the date on --------------- which such Letter of Credit will expire or terminate in accordance with its terms. "Facilitators" means Societe Generale, Southwest Agency, Bankers Trust ------------ Company, and Lehman Commercial Paper Inc. "Federal Funds Rate" means, for any period, a fluctuating interest rate per ------------------ annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing -14- selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve --------------------- System or any of its successors. "Fee Letter" means the letter agreement dated as of May 21, 1998 among ---------- CapStar, AGH REIT, and the Facilitators, as amended. "FF&E" means furniture, fixtures and equipment. ---- "FF&E Reserve" means, for any Person or any Hotel Property for any period, ------------ a reserve equal to four percent (4%) of gross revenues from any Hotel Property owned by such Person or from such Hotel Property, as applicable, for such period, excluding, however, from such calculation for the applicable Persons and Hotel Properties the gross revenues generated by the office, retail and garage portions of such Hotel Properties or Hotel Properties owned or leased by such Persons. "Financial Statements" means the respective financial statements of AGH -------------------- REIT and its Subsidiaries and CapStar and its Subsidiaries dated as of March 31, 1998. "Fiscal Quarter" means each of the three-month periods ending on March 31, -------------- June 30, September 30 and December 31. "Fiscal Year" means the twelve-month period ending on December 31. ----------- "Fixed Charges" means, for any Person for the period for which such amount ------------- is being determined, the amount (without duplication) of all scheduled principal payments and mandatory prepayments (excluding optional prepayments and scheduled principal payments in respect of any such Indebtedness which is payable in a single installment at final maturity), Interest Expense during such period, all payments scheduled to be made in respect of Capital Leases of such Person and such Person's Subsidiaries on a Consolidated basis during such period, and all preferred stock dividends and preferred partnership distributions paid during such period by such Person and such Person's Subsidiaries on a Consolidated basis. "Fixed Charge Coverage Ratio" means, as of the end of any Rolling Period, a --------------------------- ratio of (a) the Parent's Adjusted EBITDA for such Rolling Period to (b) the Parent's Fixed Charges for such Rolling Period. -15- "Florida Liens" means the Liens securing the Existing AGH Credit Documents ------------- on the Initial Properties located in the State of Florida except for those Liens pertaining to the cash management system used in the Existing AGH Credit Documents. "Free Cash Flow" means, for any Person for any period, (a) the Funds From -------------- Operations for such period plus (b) any amortization costs for such period not ---- previously added back in the computation of Funds From Operations less (c) the ---- sum of (i) the aggregate FF&E Reserves for such Person and its Subsidiaries for such period, and (ii) the aggregate amount of scheduled principal payments and mandatory prepayments on the Total Indebtedness of such Person (excluding optional prepayments, scheduled principal payments in respect of any such Indebtedness which is payable in a single installment at final maturity and mandatory prepayments in connection with Asset Dispositions) required to be made during such period. "Fund," "Trust Fund," or "Superfund" means the Hazardous Substance Response ---- ---------- --------- Trust Fund, established pursuant to 42 U.S.C. (S) 9631 (1988) and the Post- closure Liability Trust Fund, established pursuant to 42 U.S.C. (S) 9641 (1988), which statutory provisions have been amended or repealed by the Superfund Amendments and Reauthorization Act of 1986, and the "Fund," "Trust Fund," or "Superfund" that are now maintained pursuant to 42 U.S.C. (S) 9507. "Funds From Operations" means, for any Person for any period for which such --------------------- amount is being determined, an amount equal to such Person's (a) Net Income for such period excluding gains (losses) from debt restructuring and sales of property (including furniture and equipment) plus (b) depreciation and ---- amortization (excluding amortization of deferred financing costs) plus (or ---- minus) (c) adjustments for Unconsolidated Entities owned by such Person to - ----- reflect the actual cash received by such Person from such Unconsolidated Entities in lieu of those amounts included in the preceding clauses (a) and (b) for such Unconsolidated Entities. "Future Property" means any Hotel Property except for the Initial --------------- Properties which the Parent or any Subsidiary of the Parent acquires which Hotel Property may be subject to a timeshare program to the extent that the Permitted Timeshare Requirements would be satisfied upon the acquisition of such Hotel Property. "GAAP" means United States generally accepted accounting principles as in ---- effect from time to time, applied on a basis consistent with the requirements of Section 1.03. -16- "Governmental Authority" means any foreign governmental authority, the ---------------------- United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, securities exchange, self-regulatory organization, authority or instrumentality, bureau or court having jurisdiction over any Lender, the Parent, the Borrower, any Subsidiaries of the Borrower or the Parent, an approved participating lessee, a property manager or any of their respective Properties. "Governmental Proceedings" means any action or proceedings by or before any ------------------------ Governmental Authority, including, without limitation, the promulgation, enactment or entry of any Legal Requirement. "Guarantor" means each of the Parent and each Subsidiary of the Borrower --------- (except the Permitted Other Subsidiaries and the Subsidiaries which respectively own the Atlanta, Georgia Westin during such time as the Borrower holds a first- lien mortgage on such Hotel Property), and "Guarantors" means all of such ---------- Persons. The Guarantors on the Effective Date are identified on Schedule 1.01(i). "Guaranty" means one or more Guaranty and Contribution Agreements in -------- substantially the form of the attached Exhibit F executed by the Borrower and all of the Subsidiaries of the Borrower (excluding the Permitted Other Subsidiaries and the Subsidiary which owns the Atlanta, Georgia Westin during such time as the Borrower holds a first-lien mortgage on such Hotel Property), evidencing the joint and several guaranty by the signatories thereto of the obligations of Borrower in respect of the Credit Documents, and any future guaranty and contribution agreement executed to secure Advances except for Supplemental Guaranties, as any of such agreements may be amended hereafter in accordance with the terms of such agreements. "Hazardous Substance" means the substances identified as such pursuant to ------------------- CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radio nuclides, radioactive materials, and medical and infectious waste. "Hazardous Waste" means the substances regulated as such pursuant to any --------------- Environmental Law. -17- "Hospitality/Leisure-Related Business" shall mean a full service and ------------------------------------ limited service hotel or resort, executive conference center, an extended stay lodging, or a convention center, and other businesses incidental to, or in support of such business, including without limitation, (a) developing, improving or acquiring lodging facilities, restaurants and other food-service facilities, golf facilities or other entertainment facilities or club, timeshare programs, convention or meeting facilities and marketing services or reservation systems related thereto, and (b) acquiring, developing, or improving any real estate (including retail, office or garage use) ancillary or connected to any hotel, resort, executive conference center, extended stay lodging, convention center or reservation system constructed, leased, owned, managed or operated (or proposed to be constructed, leased, or owned) by the Borrowers, the Guarantors or any of their Subsidiaries at any time; provided that such business shall not -------- --- include any casino or other gaming (even if only a part of a Hotel Property) or senior living. "Hotel Property" for any hotel means the Real Property and the Personal -------------- Property for such hotel. "Improvements" for any hotel means all buildings, structures, fixtures, ------------ tenant improvements and other improvements of every kind and description now or hereafter located in or on or attached to the Land for such hotel; and all additions and betterments thereto and all renewals, substitutions and replacements thereof. "Indebtedness" means (without duplication), at any time and with respect to ------------ any Person, (a) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services purchased (other than amounts constituting trade payables, accruals or bank drafts arising in the ordinary course of business), including without limitation indebtedness of such Person which is convertible into an ownership interest in such Person; (b) indebtedness of others in the amount which such Person has directly or indirectly assumed or guaranteed or otherwise provided credit support therefor or for which such Person is liable as a partner of such Person; (c) indebtedness of others in the amount secured by a Lien on assets of such Person, whether or not such Person shall have assumed such indebtedness; (d) obligations of such Person in respect of letters of credit, acceptance facilities, or drafts or similar instruments issued or accepted by banks and other financial institutions for the account of such Person (other than trade payables or bank drafts arising in the ordinary course); (e) obligations of such Person under Capital Leases; (f) to the extent treated as a liability under GAAP obligations under interest rate swap agreements, interest rate cap agreements, interest rate -18- collar agreements or other similar agreements or arrangements designed to protect against fluctuations in interest rates; (g) to the extent treated as a liability under GAAP, unfunded liability under a Plan. "Initial Properties" means collectively the Hotel Properties listed on ------------------ Schedule 1.01(b), and "Initial Property" means any of such Hotel Properties. ---------------- "Intercompany Agreement" means the Intercompany Agreement dated as of ---------------------- August 3, 1998, by and among the Parent, the Borrower, OPCO, and OPCO OP. "Interest Coverage Ratio" means, as of the end of any Rolling Period, a ----------------------- ratio of (a) the Parent's EBITDA to (b) Parent's Interest Expense, for such Rolling Period. "Interest Expense" means, for any Person for any period for which such ---------------- amount is being determined, the total interest expense (including that properly attributable to Capital Leases in accordance with GAAP) and all charges incurred with respect to letters of credit determined on a Consolidated basis in conformity with GAAP, plus capitalized interest of such Person and its ---- Subsidiaries. "Interest Period" means, for each LIBOR Advance comprising part of the same --------------- Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Base Rate Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.02 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.02. The duration of each such Interest Period shall be one, two, three or six months, in each case as the Borrower may select, upon notice received by the Administrative Agent not later than 11:00 a.m. (Dallas, Texas time) on the third Business Day prior to the first day of such Interest Period, provided, however, -------- ------- that: (a) Interest Periods for Advances of the same Borrowing shall be of the same duration; (b) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such -------- extension would cause the last day of such Interest -19- Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (c) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and (d) each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; and (e) no Interest Period with respect to any portion of any Revolving Advance shall extend beyond the Revolving Maturity Date, no Interest Period with respect to any portion of any Swingline Advance shall extend beyond the Swingline Maturity Date, no Interest Period with respect to any portion of any Term A Advance shall extend beyond the Term A Maturity Date and no Interest Period with respect to any portion of any Term B Advance shall extend beyond the Term B Maturity Date. "Interest Rate Agreements" means any interest rate swap agreement, interest ------------------------ rate cap agreement, interest rate collar agreement or other similar agreement or arrangement designed to protect the Borrower, the Parent or any of their respective Subsidiaries against fluctuations in interest rates. "Investment" means, with respect to any Person, (a) any loan or advance to ---------- any other Person, (b) the ownership, purchase or other acquisition of, any Stock, Stock Equivalents, other equity interest, obligations or other securities of, (i) any other Person, (ii) all or substantially all of the assets of any other Person, or (iii) all or substantially all of the assets constituting the business of a division, branch or other unit operation of any other Person, or (c) any joint venture or partnership with, or any capital contribution to, or other investment in, any other Person or any real property. "Investment Amount" means (a) for any Hotel Property the sum of (i) for any ----------------- Initial Property, the amount set forth for such Initial Property on Schedule 1.01(b) attached hereto, and for any other Hotel Property, the aggregate purchase price paid by the Borrower or its Subsidiary for such other Hotel Property (giving effect to any securities used to purchase a Hotel Property at the fair market value of the securities at the time of purchase based upon the price at which such -20- securities could be exchanged into the Parent's common stock assuming such exchange occurred on the date of acquiring the Hotel Property), and (ii) the actual cost of any Capital Expenditures for such Hotel Property made by the Borrower or its Subsidiaries; provided that with respect to the Investment -------- Amount for a Hotel Property owned or leased by a Unconsolidated Entity, the Investment Amount for such Hotel Property shall be deemed to be the Unconsolidated Entity Percentage of the Investment Amount for such Hotel, and (b) for any other Investment the aggregate purchase price paid by the Borrower or its Subsidiary for such other Investment (giving effect to any securities used to purchase such Investment at the fair market value of the securities at the time of purchase based upon the price at which such securities could be exchanged into the Parent's common stock assuming such exchange occurred on the date of acquiring such Investment). "Investment Grade Rating Status" means that the Parent has a long-term ------------------------------ senior unsecured debt rating of BBB- or better by S&P and Baa3 or better by Moody's. "Issuing Bank" means, for the Existing AGH Letters of Credit, Bank One, ------------ Texas, N.A., and for any future Letter of Credit or renewal of Existing AGH Letters of Credit, Societe Generale, Southwest Agency or any Lender acting as a successor Issuing Bank pursuant to Section 9.06, and "Issuing Banks" means, ------------- collectively, all of such Lenders. "Land" for any hotel means the real property upon which the hotel is ---- located, together with all rights, title and interests appurtenant to such real property, including without limitation all rights, title and interests to (a) all strips and gores within or adjoining such property, (b) the streets, roads, sidewalks, alleys, and ways adjacent thereto, (c) all of the tenements, hereditaments, easements, reciprocal easement agreements, rights-of-way and other rights, privileges and appurtenances thereunto belonging or in any way pertaining thereto, (d) all reversions and remainders, (e) all air space rights, and all water, sewer and wastewater rights, (e) all mineral, oil, gas, hydrocarbon substances and other rights to produce or share in the production of anything related to such property, and (f) all other appurtenances appurtenant to such property, including without limitation, any now or hereafter belonging or in anywise appertaining thereto. "Legal Requirement" means any law, statute, ordinance, decree, requirement, ----------------- order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority. "Lenders" means the lenders listed on the signature pages of this Agreement ------- and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 10.06. -21- "Letter of Credit" means, individually, any letter of credit issued by the ---------------- Issuing Bank in accordance with the provisions of Section 2.13 of this Agreement including any Existing AGH Letter of Credit, and "Letters of Credit" means all ----------------- such letters of credit collectively. "Letter of Credit Documents" means, with respect to any Letter of Credit, -------------------------- such Letter of Credit and any reimbursement or other agreements, documents, and instruments entered into in connection with or relating to such Letter of Credit. "Letter of Credit Exposure" means, at any time, without duplication, the ------------------------- sum of (a) the aggregate undrawn maximum face amount of each Letter of Credit and (b) the aggregate unpaid amount of all Letter of Credit Obligations at such time. "Letter of Credit Obligations" means all obligations of the Borrower ---------------------------- arising in respect of the Letter of Credit Documents, including without limitation the aggregate drawn amounts of Letters of Credit which have not been reimbursed by the Borrower or converted into a Base Rate Advance pursuant to the provisions of Section 2.13(c). "Leverage Ratio" means the ratio on any date of (a) the Parent's Total -------------- Indebtedness on such date; provided that prior to November 1, 1998, the -------- Convertible Indebtedness will not be included in the calculation of the Parent's Total Indebtedness solely for the purpose of calculating the Leverage Ratio, to (b) the EBITDA of the Parent and the Parent's Subsidiaries on a Consolidated basis for the Rolling Period immediately preceding such date; provided that if -------- any Parent Property or any of the Parent's or its Subsidiary's other Investments with an Investment Amount in excess of $5,000,000 has been sold or conveyed by such Person on or prior to such date, the EBITDA arising from such Parent Property or Investment, as applicable, for the applicable Rolling Period shall be excluded from the calculation of EBITDA solely for calculation of the Leverage Ratio; and provided further that if the Parent or its Subsidiary has ---------------- acquired any Parent Property or any Investment with an Investment Amount in excess of $5,000,000 on or prior to such date, the EBITDA arising from such Parent Property or Investment, as applicable, for the applicable Rolling Period shall be included in the calculation of EBITDA solely for calculation of the Leverage Ratio (adjusted upward or downward to provide for a deemed management fee equal to a two and one-half percent (2.5%) of gross revenues from such Property incurred before the date of acquisition of such Property regardless of the actual management fees paid in connection with such Property incurred before the date of acquisition of such Property). For purposes of determining -22- the Leverage Ratio when the Parent's Total Indebtedness is measured as of the Rolling Period ended June 30, 1998 or when the EBITDA of the Parent and the Parent's Subsidiaries is measured for the Rolling Period ended June 30, 1998, the calculation of the Parent's Total Indebtedness or such EBITDA, as applicable, shall be the sum of the separate calculations of such figures for CapStar and AGH REIT based upon (a) the actual results for such Persons for the first 3 Fiscal Quarters in such Rolling Period and (b) until the actual results are known for such Persons for the Fiscal Quarter ending June 30, 1998, the pro forma projections for such Fiscal Quarter delivered by the Borrower to the Lenders, and thereafter the actual results for such Fiscal Quarter. "LIBOR" means, for the Interest Period for each LIBOR Advance comprising ----- part of the same Borrowing, an interest rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to (A) the rate per annum at which deposits in Dollars are offered to prime banks in the London interbank market at 11:00 a.m. (London time) three Business Days before the first day of such Interest Period as shown on the display designated "British Banker's Association Interest Settlement Rates" on the Telerate System ("Telerate") at Page 3750 or Page 3740, or such other page or pages as may replace such pages on Telerate for purposes of displaying such rate, in an amount substantially equal to the Administrative Agent's LIBOR Advance comprising part of such Borrowing and for a period equal to such Interest Period divided by (B) one minus the LIBOR Reserve Requirement; provided, however, that if such rate is not available on Telerate then such offered rate shall be otherwise independently determined by Administrative Agent from an alternate, substantially similar source available to Administrative Agent or shall be calculated by Administrative Agent by a substantially similar methodology as that theretofore used to determine such offered rate in Telerate. It is agreed that for purposes of this definition, LIBOR Advances made hereunder shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D and to be subject to the reserve requirements of Regulation D. "LIBOR Advance" means any Advance which bears interest as provided in ------------- Section 2.06(b). "LIBOR Lending Office" means, with respect to any Lender, the office of -------------------- such Lender specified as its "LIBOR Lending Office" opposite its name on Schedule 10.02 (or, if no such office is specified, its Domestic Lending Office) or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "LIBOR Reserve Requirement" shall mean, on any day, that percentage ------------------------- (expressed as a -23- decimal fraction) which is in effect on such date, as provided by the Federal Reserve System for determining the maximum reserve requirements generally applicable to financial institutions regulated by the Federal Reserve Board comparable in size and type to the Administrative Agent (including, without limitation, basic, supplemental, marginal and emergency reserves) under Regulation D with respect to "Eurocurrency liabilities" as currently defined in Regulation D, or under any similar or successor regulation with respect to Eurocurrency liabilities or Eurocurrency funding (or other category of liabilities which includes deposits by reference to which the interest rate on a LIBOR Advance is determined or any category or extensions of credit which includes loans by a non-United States office of the Administrative Agent to United States residents). Each determination by the Administrative Agent of the LIBOR Reserve Requirement, shall, in the absence of manifest error, be conclusive and binding upon the Borrower. "Lien" means any mortgage, lien, pledge, charge, deed of trust, security ---- interest, encumbrance or other type of preferential arrangement to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement). "Liquid Investments" means: ------------------ (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States; (b) (i) negotiable or nonnegotiable certificates of deposit, time deposits, or other similar banking arrangements maturing within 180 days from the date of acquisition thereof ("bank debt securities"), issued by (A) any Lender or (B) any other bank or trust company which has a combined capital surplus and undivided profit of not less than $250,000,000 or the Dollar Equivalent thereof, if at the time of deposit or purchase, such bank debt securities are rated not less than "A" (or the then equivalent) by the rating service of S&P or of Moody's, and (ii) commercial paper issued by (A) any Lender or (B) any other Person if at the time of purchase such commercial paper is rated not less than "A-2" (or the then equivalent) by the rating service of S&P or not less than "P-2" (or the then equivalent) by the rating service of Moody's, or upon the discontinuance of both of such services, such other nationally recognized rating service or services, as the case may be, as shall be selected by the Borrower with the consent of the Administrative Agent; -24- (c) repurchase agreements relating to investments described in clauses (a) and (b) above with a market value at least equal to the consideration paid in connection therewith, with any Person who regularly engages in the business of entering into repurchase agreements and has a combined capital surplus and undivided profit of not less than $250,000,000 or the Dollar Equivalent thereof, if at the time of entering into such agreement the debt securities of such Person are rated not less than "A" (or the then equivalent) by the rating service of S&P or of Moody's; and (d) such other instruments (within the meaning of New York's Uniform Commercial Code) as the Borrower may request and the Required Lenders may approve in writing, which approval will not be unreasonably withheld. "Mandatory Revolving Borrowing" means a Revolving Borrowing comprised of ----------------------------- Base Rate Advances made to repay a Swingline Advance which has not been repaid to the Swingline Lender on the date due. "Market Value" means for any Hotel Property, at any date, the value thereof ------------ to be calculated as follows: (a) For a Hotel Property that has been owned for four (4) or more Fiscal Quarters, by the Parent (or by AGH REIT or CapStar) or by a Person that has been a Subsidiary of the Parent (or of AGH REIT or CapStar) during such entire period, the product of (i) the Adjusted EBITDA for such Hotel Property for the preceding Rolling Period times (b) ten (10); and ----- (b) For any other Hotel Property, the Investment Amount in such Hotel Property. "Material Adverse Change" shall mean a material adverse change (a) in the ----------------------- business, property, condition (financial or otherwise), prospects or results of operations of the Borrower, the Parent and the other Guarantors taken as a whole, in each case since December 31, 1997 (assuming the Merger had occurred on or before such date) or (b) in the validity or enforceability of this Agreement or any of the other Credit Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "Material Credit Documents" means the material credit documents for any ------------------------- Indebtedness of the Parent or any of its Subsidiaries in excess of $50,000,000. -25- "Material Subsidiary" means any Subsidiary of the Parent (except for a ------------------- Permitted Other Subsidiary) having assets or annual revenues in excess of $5,000,000, and "Material Subsidiaries" means all such Subsidiaries --------------------- collectively. "Maturity Date" means, (a) with respect to any Revolving Advances, the ------------- Revolving Maturity Date, (b) with respect to any Term A Advances, the Term A Maturity Date, (c) with respect to any Term B Advances, the Term B Maturity Date and (d) with respect to the Swingline Advances, the earlier of (i) the Swingline Maturity Date and (ii) the date of the termination in whole of the Swingline Commitment pursuant to Section 8.05. "Maximum OPCO Loan Amount" means the sum of (a) the lesser of (i) the ------------------------ difference of (A) the product of OPCO's EBITDA for the immediately preceding Rolling Period (determined on a pro forma basis for those Fiscal Quarters in such Rolling Period for which OPCO does not have actual results) times 5.5 minus ----- (B) the Indebtedness of OPCO and OPCO's Subsidiaries on a Consolidated basis other than such loan to OPCO and (ii) $75,000,000 plus (b) the lesser of (i) the ---- amount of the Indebtedness incurred by OPCO to the Parent, the Borrower or any of their respective Subsidiaries in connection with the purchase by OPCO of FF&E from such Person in order for the Parent to comply with Section 856(d) of the Code and (ii) $5,000,000. "Maximum Rate" means the maximum nonusurious interest rate under applicable ------------ law. "Merger" means the merger of CapStar with and into AGH REIT and the merger ------ of the CapStar Hotel LLCs with and into AGH OP pursuant to the Merger Agreement, and the other related transactions contemplated by the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger among CapStar, ---------------- AGH REIT, AGH OP and the other parties specified therein, dated March 15, 1998, as amended by amendment dated June 5, 1998. "Minimum Tangible Net Worth" means, with respect to the Parent, at any -------------------------- time, the sum of $927,000,000 plus (a) 75% of the aggregate net proceeds ---- received by the Parent or any of its Subsidiaries after the date of this Agreement in connection with any offering of Stock or Stock Equivalents of the Parent or its Subsidiaries taken as a whole and (b) 75% of the value of any partnership interests in Borrower issued after the date of this Agreement for the acquisition of a Hotel Property or any interest in a Hotel Property permitted hereunder. -26- "Moody's" means Moody's Investor Service Inc. ------- "Multiemployer Plan" means a "multiemployer plan" as defined in Section ------------------ 4001(a)(3) of ERISA to which the Parent, the Borrower or any member of the Controlled Group is making or accruing an obligation to make contributions. "Net Cash Proceeds" means (a) the aggregate cash proceeds (including, ----------------- without limitation, insurance proceeds) received by the Parent, the Borrower or any of their respective Subsidiaries (as applicable) in connection with any Asset Disposition or incurrence of Indebtedness, minus (b) the reasonable ----- expenses of such Person in connection with such Asset Disposition or such incurrence of Indebtedness, minus (c) to the extent that assets disposed of in ----- connection with an Asset Disposition secure Indebtedness permitted pursuant to the provisions of Section 6.02(b), the amount of such Indebtedness which is required to be repaid pursuant to the terms of such Indebtedness in connection with such Asset Disposition, as reasonably evidenced by the Borrower to the Administrative Agent. "Net Income" means, for any Person or Hotel Property for any period for ---------- which such amount is being determined, the net income of such Person (on a consolidated basis) or Hotel Property, as applicable, after taxes, as determined on a Consolidated basis in accordance with GAAP, excluding, however, extraordinary items, including but not limited to (a) any net gain or loss during such period arising from the sale, exchange, or other disposition of capital assets (such term to include all fixed assets and all securities) other than in the ordinary course of business, (b) any write-up or write-down of assets, and (c) non-recurring expenses incurred in connection with the Merger. "Net Worth" means, for any Person, stockholders equity of such Person --------- determined in accordance with GAAP. "Non-Defaulting Lender" shall mean and include each Lender other than a --------------------- Defaulting Lender. "Note" means a Revolving Note, a Term A Note, a Term B Note or a Swingline ---- Note, and "Notes means all of such promissory notes. ----- "Notice of Borrowing" means a notice of borrowing in the form of the ------------------- attached Exhibit G -27- signed by a Responsible Officer of the Borrower. "Notice of Conversion or Continuation" means a notice of conversion or ------------------------------------ continuation in the form of the attached Exhibit H signed by a Responsible Officer of the Borrower. "Obligations" means all Advances, Letter of Credit Obligations, and other ----------- amounts payable by the Borrower to the Administrative Agent or the Lenders under the Credit Documents. "OP Adjustment" means on any measurement date an amount equal to the fair ------------- market value on the date of issuance of all partnership interests in the Borrower which on such measurement date (a) are not directly or indirectly owned by the Parent and (b) have been conveyed to Steven D. Jorns, Bruce G. Wiles, Kenneth E. Barr, James E. Sowell, Louis W. Shaw, II, Kenneth W. Shaw or Persons owned or controlled by such individuals in exchange for a Hotel Property or an ownership interest in a Person which owns a Hotel Property or an ownership interest in a Person which owns a Hotel Property and are still owned by such Persons. "OPCO" means MeriStar Hotels & Resorts, Inc., a Delaware corporation. ---- "OPCO OP" means MeriStar H & R Operating Company, L.P., a Delaware limited ------- partnership. "Parent" means MeriStar Hospitality Corporation, a Maryland corporation. ------ "Parent Common Stock" means the common stock of Parent, par value $.01 per ------------------- share. "Parent Deemed Investment Amount" means, in connection with measuring the ------------------------------- Investment Amount in an Unconsolidated Entity which owns or leases an Unconsolidated Entity Property in a particular category of hotel under the definition of "Parent Property Requirement", a reasonable allocation of the portion of the Investment Amount in such Unconsolidated Entity attributable to the Unconsolidated Entity Property or Unconsolidated Entity Properties owned or leased by such Unconsolidated Entity which is or are within the category tested. Such allocation shall be based upon the cost of such Unconsolidated Entity Property or Unconsolidated Entity Properties and the total cost of all assets owned by such Unconsolidated Entity, all as proposed by the Borrower and approved by the Administrative Agent in its reasonable discretion. -28- "Parent Property" means a Hotel Property owned or leased by the Parent or --------------- one of the Parent's Subsidiaries, and "Parent Properties" means all such Hotel ----------------- Properties. "Parent Property Requirements" means collectively that as of the last day ---------------------------- of any Rolling Period (a) all Parent Properties must be located within the United States or in an Approved Other Country, provided that the Investment Amount for the Parent Properties which are located in an Approved Other Country shall not exceed 15% of the Investment Amount for all Parent Properties; (b) the Investment Amount for the Parent Properties which are limited service or extended stay hotels or executive conference centers (excluding for purposes of this clause (b) the Forrestal at Princeton Hotel and Conference Center) shall not collectively in the aggregate exceed 20% of the Investment Amount for all Parent Properties; (c) the Investment Amount for the Parent Properties which are not operated (or are not subject to a binding agreement to convert to operation) under any franchise or license agreement with an Approved Franchisor shall not exceed 15% of the Investment Amount for all Parent Properties; (d) the Investment Amount or guest rooms, as applicable, for Parent Properties which are substantially subject to a ground lease shall not exceed 20% of the Investment Amount or 20% of the total guest rooms for all Parent Properties; (e) no Hotel Property or other Property shall cause the Parent to forfeit the Parent's tax status as a REIT; and (f) all Permitted Timeshare Requirements are satisfied. "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permitted Asset Disposition" means an Asset Disposition, including a --------------------------- Permitted Timeshare Disposition and a Permitted Sale/Leaseback Disposition, which occurs at a time in which no Default has occurred and is continuing and which would not cause a Default to occur upon the consummation of such Asset Disposition. "Permitted Encumbrances" means the Liens permitted to exist pursuant to ---------------------- Section 6.01. "Permitted Hazardous Substances" means (a) Hazardous Substances, petroleum ------------------------------ and petroleum products which are (i) used in the ordinary course of business and in typical quantities for a hotel and (ii) generated, used and disposed of in accordance with all Legal Requirements and good hotel industry practice and (b) non-friable asbestos to the extent (i) that no applicable Legal Requirements require removal of such asbestos from the Hotel Property and (ii) such asbestos is encapsulated in accordance with all applicable Legal Requirements and such reasonable operations -29- and maintenance program as may be reasonably required by the Administrative Agent. "Permitted Non-Voting Stock Company" means a corporation (a) which has one ---------------------------------- class of voting common stock which is 91% owned by Paul W. Whetsell or Steven D. Jorns and 9% owned by the Borrower or a Subsidiary of the Borrower and one class of non-voting common stock (the "Non-Voting Stock") owned entirely by the Borrower or a Subsidiary of the Borrower, (b) which has Paul W. Whetsell or Steven D. Jorns as its president or chief executive officer, (c) which has articles of incorporation, by-laws or other organizational documents which provide that the Non-Voting Stock stockholder is entitled to at least 95% of all dividends declared by the Board of Directors of the Permitted Non-Voting Stock Company, (d) which has no Liens on any of the Hotel Properties owned by such Person except Permitted Encumbrances and Liens which are held by the Borrower, and (e) the ownership of which by the Borrower or any Subsidiary of the Borrower would not cause a Material Adverse Change. "Permitted Non-Voting Stock Investment" means (a) the Non-Voting Stock of a ------------------------------------- Permitted Non-Voting Stock Company and (b) a loan to a Permitted Non-Voting Stock Company which may or may not be secured by a Permitted Non-Voting Stock Mortgage. "Permitted Non-Voting Stock Mortgage" means a Lien on a Hotel Property ----------------------------------- owned by a Permitted Non-Voting Stock Company which is held by the Borrower. "Permitted Other Subsidiaries" means either (a) a Subsidiary of the ---------------------------- Borrower which is a single-purpose Person (i) which owns a Hotel Property or Hotel Properties or an interest in a Person which owns a Property which Property or interest is pledged to secure Secured Non-Recourse Indebtedness or Secured Recourse Indebtedness permitted by this Agreement, and (ii) which does not own any Hotel Properties other than those that secure such Indebtedness or (b) a direct or indirect Subsidiary of the Parent which is a single-purpose Person and which is not a Subsidiary of the Borrower and does not have assets or annual revenues in excess of $5,000,000. "Permitted Sale/Leaseback Disposition" means the sale by the Borrower or ------------------------------------ its Subsidiary of all or a part of any Hotel Property and the simultaneous leasing of such Property, as lessee, by a Permitted Other Subsidiary for which the Net Cash Proceeds from the sale of all such Property sold does not in the aggregate exceed $100,000,000 and for which such lease under GAAP is treated as Indebtedness. "Permitted Sale/Leaseback Indebtedness" means Indebtedness incurred by a ------------------------------------- Permitted -30- Other Subsidiary pursuant to the lease executed in connection with a Permitted Sale/Leaseback Disposition which constitutes Secured Non-Recourse Indebtedness. "Permitted Timeshare Conversion" means for any hotel room owned by the ------------------------------ Borrower or its Subsidiary the inclusion of such hotel room in a timeshare program; provided that the Permitted Timeshare Requirements are satisfied in -------- connection therewith. "Permitted Timeshare Disposition" means the sale of any timeshare interval ------------------------------- for a hotel room which the Parent or any of its Subsidiaries, in accordance with the provisions of this Agreement, either purchased subject to a timeshare program or converted to a timeshare program. "Permitted Timeshare Indebtedness" means Indebtedness incurred by a -------------------------------- Subsidiary of the Borrower which (a) constitutes Secured Non-Recourse Indebtedness, (b) is secured solely by the Permitted Timeshare Receivables of such Person, and (c) is in an amount which does not exceed ninety percent (90%) of the outstanding amount of the Permitted Timeshare Receivables of such Person. "Permitted Timeshare Receivables" means the account receivables received by ------------------------------- the Borrower and its Subsidiaries from purchasers of timeshare intervals in connection with Permitted Timeshare Dispositions; provided that neither the -------- Parent, nor any Subsidiary of the Parent shall provide financing for any purchaser of a timeshare interval which exceeds 90% of the sales price for such timeshare interval. "Permitted Timeshare Requirements" means the following: -------------------------------- (a) Only the Borrower's Subsidiaries may own or lease any Hotel Property that is subject to a timeshare program. The Borrower's Subsidiaries shall not own or lease more than 11 Hotel Properties that are subject to a timeshare program. (b) The Borrower shall provide the Administrative Agent with 30 days prior written notice of a Hotel Property being subjected to a timeshare program which notice shall include the Borrower's timeshare plan for such Hotel Property, including without limitation the anticipated number of hotel rooms to be converted to timeshare, the time table for conversion of hotel rooms to timeshare, and any other information reasonably requested by the Administrative Agent. -31- (c) No Hotel Property shall be subjected to a timeshare program unless the Borrower intends to convert at least 25% of the hotel rooms in such Hotel Property into timeshare units within the three years following the initial subjecting of such Hotel Property to a timeshare program. (d) The aggregate hotel rooms owned by the Borrower's Subsidiaries that have been included in a timeshare program shall not (i) in any one year commencing with July 1, 1998 and thereafter commencing on each July 1 and ending with the following June 30 increase by an amount equal to the lesser of (A) three and one-third percent (3.33%) of the total hotel rooms of the Parent and its Subsidiaries at the time of any proposed addition to the number of rooms included in a timeshare program and (B) 1,000 hotel rooms and (ii) in the aggregate exceed the lesser of (A) ten percent (10%) of the total hotel rooms of the Parent and its Subsidiaries at the time of any proposed addition to the number of rooms included in a timeshare program and (B) 3,000 hotel rooms. "Person" means an individual, partnership, corporation (including a ------ business trust), joint stock company, trust, unincorporated association, limited liability company, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official. "Personal Property" for any Hotel Property means all FF&E, inventory and ----------------- other personal property of every kind, whether now existing or hereafter acquired, tangible and intangible, now or hereafter located on or about the Land, and used or to be used in the future in connection with the operation of such Hotel Property. "Plan" means an employee benefit plan (other than a Multiemployer Plan) ---- maintained for employees of the Parent, the Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. "Pledge Agreement" means the Pledge Agreement in favor of the ---------------- Administrative Agent from the Borrower, the Parent and the other Guarantors, pledging its current and future ownership interest in all of its direct operating Subsidiaries (excluding the Permitted Other Subsidiaries) in substantially the form of the attached Exhibit I. -32- "Prime Hospitality" means Prime Hospitality Corp. or an Affiliate of Prime ----------------- Hospitality Corp. "Prime Rate" means a fluctuating interest rate per annum as shall be in ---------- effect from time to time equal to the rate of interest publicly announced by the Administrative Agent as its prime commercial lending rate (which may not be the lowest rate offered to its customers), whether or not the Borrower has notice thereof. "Property" of any Person means any property or assets (whether real, -------- personal, or mixed, tangible or intangible) of such Person. "Property Information" for any Hotel Property means an Engineering Report -------------------- and Environmental Report for such Hotel Property. "Property Owner" for any Initial Property or Future Property, means the -------------- Person who owns fee or leasehold title interest (as applicable) in and to such Property. "Pro Rata Share" means, at any time with respect to any Lender, the ratio -------------- (expressed as a percentage) of (a) such Lender's Commitments, plus, to the extent any Class of Commitment has been terminated, such Lender's outstanding Advances for such Class (and participation interest in the Letter of Credit Exposure if the Revolving Commitments have been terminated) to (b) all Lenders' aggregate Commitments, plus, to the extent any Class of Commitment has been terminated, all Lenders' aggregate outstanding Advances for such Class (and participation interest in the Letter of Credit Exposure if the Revolving Commitments have been terminated); provided that the Swingline Commitment and -------- Swingline Advances will not be included in the calculation of Pro Rata Share. "Real Property" for any hotel means the Land and the Improvements for such ------------- hotel, including without limitation, parking and other ancillary functions necessary for the operation of such hotel, and office and retail property owned by the Borrower or a Guarantor other than the Parent in connection with such hotel. "Register" has the meaning set forth in paragraph (c) of Section 10.06. -------- "Registration Statements" means AGH REIT's S-4 filed with the Securities ----------------------- and Exchange Commission on April 7, 1998 under Registration No. 333-49611, as amended by Amendment No. 1 filed on May 22, 1998, Amendment No. 2 filed on June 8, 1998, Amendment No. 3 filed on -33- June 19, 1998, and Amendment No. 4 filed on June 22, 1998. "REIT" means a real estate investment trust under Sections 856-860 of the ---- Code. "Related Fund" means, with respect to any Approved Fund, any fund that ------------ invests in commercial loans which is advised or managed by the same investment advisor as such Approved Fund. "Release" shall have the meaning set forth in CERCLA or under any other ------- Environmental Law. "Repayment Event" means the occurrence of any of the following at a time --------------- when the Leverage Ratio is greater than 4.50 or such event would cause the Leverage Ratio to be greater than 4.50: (a) the incurrence by the Parent, the Borrower or any of their respective Subsidiaries of any Indebtedness after the date of this Agreement except: (i) the Obligations; (ii) Unsecured Indebtedness permitted pursuant to the provisions of Section 6.01 to the extent such Unsecured Indebtedness is an extension, renewal or refinancing of any of such Unsecured Indebtedness set forth on Schedule 4.18; (iii) Secured Recourse Indebtedness and Secured Non-Recourse Indebtedness permitted pursuant to the provisions of Section 6.01 to the extent such Indebtedness is either (A) an extension, renewal or refinancing of any of such Indebtedness set forth on Schedule 4.18 or (B) incurred in connection with the acquisition of Future Properties in accordance with the provisions of this Agreement; and (iv) Indebtedness permitted pursuant to the provisions of clauses (c), (d) or (e) of Section 6.01. (b) the occurrence of an Asset Disposition after the date of this Agreement except Asset Dispositions for which (i) the aggregate Net Cash Proceeds do not exceed $250,000,000, (ii) the Net Cash Proceeds from such Asset Disposition are used to make an Investment in the -34- Hospitality/Leisure-Related Business within one year of the date of such Asset Disposition and (iii) none of the Parent, the Borrower or any of their respective Subsidiaries are obligated by an agreement with another Person to apply such Net Cash Proceeds to the repayment of Indebtedness of such Person; provided that Net Cash Proceeds from a casualty or condemnation shall not be counted toward such $250,000,000 threshold to the extent such Net Cash Proceeds are utilized for the restoration of the Hotel Property affected by such casualty or condemnation within one year of the date of such casualty or condemnation. "Reportable Event" means any of the events set forth in Section 4043(b) of ---------------- ERISA. "Required Lenders" means Non-Defaulting Lenders the sum of whose ---------------- outstanding Term A Advances (and, prior to the termination thereof, Term A Commitments), Term B Advances (and, prior to the termination thereof, Term B Commitments) and Revolving Commitments (or after the termination thereof, outstanding Revolving Advances and participations in Letter of Credit Exposure) represent at least 51% of the sum of all outstanding Term A Advances (and, if prior to the termination thereof, Term A Commitments) and Term B Advances (and, if prior to the termination thereof, Term B Commitments) of Non-Defaulting Lenders and the sum of all Revolving Commitments of Non-Defaulting Lenders (or after the termination of the Revolving Commitments, the sum of the then total outstanding Revolving Advances of Non-Defaulting Lenders, and the aggregate participations of all Non-Defaulting Lenders of Letter of Credit Exposure at such time); provided that with respect to a vote which only involves a certain Class or Classes, only the Commitments and Advances for the applicable Class or Classes shall be used in the calculation of Required Lenders. "Required Work" means for any Initial Property, the work described on ------------- Schedule 5.06 attached hereto as may be modified by agreement between the Borrower and the Administrative Agent, and for any Future Property, the work agreed upon by the Borrower and the Administrative Agent, if any, as the Required Work for such Future Property, if any. "Response" shall have the meaning set forth in CERCLA or under any other -------- Environmental Law. "Responsible Officer" means the Chief Executive Officer, President, ------------------- Executive Vice President, Chief Operating Officer or Chief Financial Officer of any Person. -35- "Restricted Payment" means (a) any direct or indirect payment, prepayment, ------------------ redemption, purchase, or deposit of funds or Property for the payment (including any sinking fund or defeasance), prepayment, redemption or purchase of Indebtedness which Indebtedness is not permitted by this Agreement, and (b) the making by any Person of any dividends or other distributions (in cash, property, or otherwise) on, or payment for the purchase, redemption or other acquisition of, any shares of any capital stock, any limited liability company interests or any partnership interests of such Person, other than dividends or distributions payable in such Person's (or the Parent's) stock, limited liability company interests or any partnership interests. "Revolving Advance" means any advance by a Lender to the Borrower pursuant ----------------- to such Lender's Revolving Commitment or a continuation of an existing Revolving Advance, and refers to a Base Rate Advance or a LIBOR Advance. "Revolving Borrowing" means a borrowing consisting of simultaneous ------------------- Revolving Advances of the same Type made by each Lender pursuant to Section 2.01(a) or Converted by each Lender to Revolving Advances of a different Type pursuant to Section 2.02(b). "Revolving Commitment" means, for each Lender, the amount set opposite such -------------------- Lender's name on Schedule 1.01(a) as its Revolving Commitment or, if such Lender has entered into any Assignment and Acceptance after the Effective Date, set forth for such Lender as its Revolving Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(b). "Revolving Maturity Date" means July 31, 2001, as such date may be extended ----------------------- pursuant to the provisions of Section 2.01(e). "Revolving Note" means a promissory note of the Borrower payable to the -------------- order of any Lender, in substantially the form of the attached Exhibit A-1, evidencing indebtedness of the Borrower to such Lender resulting from Revolving Advances from such Lender, and "Revolving Notes" means all of such promissory --------------- notes. "Revolving Required Lenders" means Non-Defaulting Lenders the sum of whose -------------------------- Revolving Commitments (or after the termination thereof, outstanding Revolving Advances and participations in Letter of Credit Exposure) represent at least 51% of the sum of all Revolving Commitments of Non-Defaulting Lenders (or after the termination of the Revolving Commitments, the sum of the then total outstanding Revolving Advances of Non-Defaulting Lenders, and the aggregate -36- participations of all Non-Defaulting Lenders of Letter of Credit Exposure at such time). "Revolving Share" means, at any time with respect to any Lender with a --------------- Revolving Commitment, the ratio (expressed as a percentage) of such Lender's Revolving Commitment at such time to the aggregate Revolving Commitments at such time. "Rolling Period" means, as of any date, the four Fiscal Quarters ending on -------------- or immediately preceding such date. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, --- Inc., or any successor thereof. "Secured Indebtedness Ratio" means, as of any date, a ratio of (a) the sum -------------------------- of the Secured Non-Recourse Indebtedness and Secured Recourse Indebtedness of the Parent and its Subsidiaries on a Consolidated basis (excluding the Obligations) on such date to (b) the EBITDA of the Parent and its Subsidiaries on a Consolidated basis for the Rolling Period immediately preceding such date, as EBITDA is adjusted for acquisitions and dispositions in the definition of "Leverage Ratio.". "Secured Non-Recourse Indebtedness" of any Person means all Indebtedness of --------------------------------- such Person with respect to which recourse for payment is limited to specific assets encumbered by a Lien securing such Indebtedness; provided, however, that -------- ------- personal recourse of a holder of Indebtedness against any obligor with respect thereto for fraud, misrepresentation, misapplication of cash, non-payment of real estate taxes or ground lease rent, waste and other circumstances customarily excluded from non-recourse provisions in non-recourse financing of real estate shall not, by itself, prevent any Indebtedness from being characterized as Secured Non-Recourse Indebtedness, provided further that if a -------- ------- ---- personal recourse claim is made in connection therewith, such claim shall not constitute Secured Non-Recourse Indebtedness for the purposes of this Agreement to the extent of such claim. "Secured Recourse Indebtedness" of any Person means any Total Indebtedness ----------------------------- (excluding any Secured Non-Recourse Indebtedness) of such Person for which the obligations thereunder are secured by a Lien on any assets of such Person or its Subsidiaries. "Security Documents" means the Pledge Agreements, and each other document, ------------------ instrument or agreement executed in connection therewith or otherwise executed in order to secure all or a -37- portion of the Obligations. "South Seas Portfolio" means those Hotel Properties which CapStar has -------------------- agreed to acquire pursuant to Asset Purchase Agreement dated as of April 13, 1998 and Contribution Agreement dated as of April 9, 1998. "Specified Secured Indebtedness" means the Indebtedness evidenced by that ------------------------------ certain Loan Agreement dated as of August 3, 1998, by and between Lehman Brothers Holdings, Inc. and various Permitted Other Subsidiaries and the promissory notes and other documents executed in connection with such Loan Agreement. [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK] -38- "Status" means the existence of Level I Status, Level II Status, Level III ------ Status, Level IV Status, Level V Status, Level VI Status, Level VII Status, Level VIII Status, Level IX Status, Level X Status, as the case may be. As used in this definition: "Level I Status" exists at any date if, at such date, (a) the Leverage -------------- Ratio at the end of the preceding Rolling Period is less than 4.50 and (b) the Parent has a long-term senior unsecured debt rating of A- or better by S&P and A3 or better by Moody's; "Level II Status" exists at any date if, at such date, (a) the --------------- Leverage Ratio at the end of the preceding Rolling Period is less than 4.50 and (b) the Parent has a long-term senior unsecured debt rating of BBB+ by S&P and Baal by Moody's; "Level III Status" exists at any date if, at such date, (a) the ---------------- Leverage Ratio at the end of the preceding Rolling Period is less than 4.50 and (b) the Parent has a long-term senior unsecured debt rating of BBB by S&P and Baa2 by Moody's; "Level IV Status" exists at any date if, at such date, (a) the --------------- Leverage Ratio at the end of the preceding Rolling Period is less than 4.50 and (b) the Parent has a long-term senior unsecured debt rating of BBB- by S&P and Baa3 by Moody's; "Level V Status" exists at any date if, at such date, (a) none of -------------- Level I Status through Level IV Status exist and (b) the Leverage Ratio at the end of the preceding Rolling Period is less than 3.0; "Level VI Status" exists at any date if, at such date, (a) none of --------------- Level I Status through Level IV Status exist and (b) the Leverage Ratio at the end of the preceding Rolling Period is equal to or greater than 3.0 but less than 3.5; "Level VII Status" exists at any date if, at such date, (a) none of ---------------- Level I Status through Level IV Status exist and (b) the Leverage Ratio at the end of the preceding Rolling Period is equal to or greater than 3.5 but less than 4.0; "Level VIII Status" exists at any date if, at such date, (a) none of ----------------- Level I Status through Level IV Status exist and (b) the Leverage Ratio at the end of the preceding Rolling Period is equal to or greater than 4.0 but less than 4.5; "Level IX Status" exists at any date if, at such date, (a) none of --------------- Level I Status through Level IV Status exist and (b) the Leverage Ratio at the end of the preceding Rolling Period is equal to or greater than 4.5 but less than 5.0; and "Level X Status" exists at any date if, at such date, (a) none of -------------- Level I Status through Level IV Status exist and (b) the Leverage Ratio at the end of the preceding Rolling Period is equal to or greater than 5.0. provided that (i) if S&P and/or Moody's shall cease to issue ratings of debt - -------- securities of REITs -39- generally or (after issuing ratings with respect to the Parent) shall cease to issue ratings with respect to the Parent, then the Administrative Agent and the Borrower shall negotiate in good faith to agree upon a substitute rating agency or agencies (and to correlate the system of ratings of each substitute rating agency with that of the rating agency for which it is substituting) and (a) until such substitute rating agency or agencies are agreed upon, Status shall be determined on the basis of the rating assigned by the other rating agency (or, if both S&P and Moody's shall have so ceased to issue such ratings, on the basis of the Status in effect immediately prior thereto) and (b) after such substitute rating agency or agencies are agreed upon, Status shall be determined on the basis of the rating assigned by the other rating agency and such substitute rating agency or the two substitute rating agencies, as the case may be; (ii) if the long-term senior unsecured debt ratings of the Parent by S&P and Moody's are not equivalent, the higher rating will apply for the purposes of determining Status; and (iii) if the long-term senior unsecured debt ratings of the Parent by S&P and Moody's are two or more Levels apart, the rating one Level below the higher rating will apply for the purposes of determining Status. Status shall be determined and changed as of the Status Reset Date following any Fiscal Quarter; provided that if any of Status I through Status IV is in effect and either S&P, - ------------- Moody's or a substitute rating agency changes such Person's debt rating of the Parent, Status shall be determined and changed as of the 10th day following such rating change; provided further that if the Borrower fails to timely provide the --------------------- financial statements needed to recalculate the Leverage Ratio as required by the provisions of Section 5.05(a) prior to the 50th day following the end of any Fiscal Quarter, then Status shall automatically be reset at the Status one level higher than the Status existing immediately prior to such Status reset until such time as the Borrower provides such financial statements. Notwithstanding the foregoing, (a) the Status in effect under this Agreement shall be Level IX Status until November 30, 1998, at which time Status for all purposes under this Agreement other than with respect to Term B Advances shall be based upon the foregoing provisions of this definition of "Status" and (b) the Status in effect under this Agreement for Term B Advances shall be Level IX Status until the Status Reset Date following the Fiscal Quarter ending December 31, 1998, at which time Status for all purposes under this Agreement, including Term B Advances, shall be based upon the foregoing provisions of this definition of "Status." "Status Reset Date" means the date following the end of any Fiscal Quarter ----------------- which is the earlier of (a) the 50th day following the end of such Fiscal Quarter and (b) the date which is 5 days following the delivery of the reports and other documents required by the provisions of Section 5.05(a) for such Fiscal Quarter. "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. -40- "Stock Equivalents" means all securities (other than Stock) 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. "Subsidiary" of a Person means any corporation, association, partnership or ---------- other business entity of which more than 50% of the outstanding shares of capital stock (or other equivalent interests) having by the terms thereof ordinary voting power under ordinary circumstances to elect a majority of the board of directors or Persons performing similar functions (or, if there are no such directors or Persons, having general voting power) of such entity (irrespective of whether at the time capital stock (or other equivalent interests) of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person. A Permitted Non-Voting Stock Company shall not be deemed a Subsidiary of either the Borrower or the Parent for all purposes under this Agreement. "Super Required Lenders" means Non-Defaulting Lenders the sum of whose ---------------------- outstanding Term A Advances (and, prior to the termination thereof, Term A Commitments), Term B Advances (and, prior to the termination thereof, Term B Commitments) and Revolving Commitments (or after the termination thereof, outstanding Revolving Advances and participations in Letter of Credit Exposure) represent at least 66.67% of the sum of all outstanding Term A Advances (and, if prior to the termination thereof, Term A Commitments) and Term B Advances (and, if prior to the termination thereof, Term B Commitments) of Non-Defaulting Lenders and the sum of all Revolving Commitments of Non-Defaulting Lenders (or after the termination of the Revolving Commitments, the sum of the then total outstanding Revolving Advances of Non-Defaulting Lenders, and the aggregate participations of all Non-Defaulting Lenders of Letter of Credit Exposure at such time); provided that with respect to a vote which only involves a certain Class or Classes, only the Commitments and Advances for the applicable Class or Classes shall be used in the calculation of Super Required Lenders. "Supplemental Guarantor" means any partner of the Borrower or a Subsidiary ---------------------- of the Borrower except for the Parent or the Guarantors that executes a Supplemental Guaranty. "Supplemental Guaranty" means any future assumption of liability in a form --------------------- reasonably acceptable to the Administrative Agent executed by a Supplemental Guarantor to secure a portion -41- of Advances, as such future supplemental guaranties may be amended hereafter in accordance with their terms. "Swingline Advance" means any advance by the Swingline Lender to the ----------------- Borrower pursuant to the Swingline Lender's Swingline Commitment, and refers to a Base Rate Advance. "Swingline Commitment" means the obligation of the Swingline Lender to make -------------------- Swingline Advances up to a maximum principal amount of $10,000,000 at any time outstanding. "Swingline Lender" means Societe Generale, Southwest Agency or any other ---------------- Lender as a successor Swingline Lender. "Swingline Maturity Date" means the date 2 Business Days prior to the ----------------------- Revolving Maturity Date. "Swingline Note" means a promissory note of the Borrower payable to the -------------- order of the Swingline Lender in substantially the form of the attached Exhibit A-4, evidencing indebtedness of the Borrower to the Swingline Lender resulting from any Swingline Advance. "Term A Advance" means any advance by a Lender to the Borrower pursuant to -------------- such Lender's Term A Commitment or a continuation of an existing Term A Advance, and refers to a Base Rate Advance or a LIBOR Advance. "Term A Borrowing" means a borrowing consisting of simultaneous Term A ---------------- Advances of the same Type made by each Lender pursuant to Section 2.01(b) or Converted by each Lender to Term A Advances of a different Type pursuant to Section 2.02(b). "Term A Commitment" means, for each Lender, the amount set opposite such ----------------- Lender's name on Schedule 1.01(a) as its Term A Commitment or, if such Lender has entered into any Assignment and Acceptance after the Effective Date, set forth for such Lender as its Term A Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(b); provided, however, that after -------- the date the initial Term A Borrowing is made, the Term A Commitment for such Lender shall be zero. "Term A Required Lenders" means Non-Defaulting Lenders the sum of whose ----------------------- outstanding Term A Advances (and, prior to the termination thereof, Term A Commitments) represent at least -42- 51% of the sum of all outstanding Term A Advances (and, if prior to the termination thereof, Term A Commitments) of Non-Defaulting Lenders. "Term A Maturity Date" means July 31, 2003. -------------------- "Term A Note" means a promissory note of the Borrower payable to the order ----------- of any Lender in substantially the form of the attached Exhibit A-2, evidencing indebtedness of the Borrower to such Lender resulting from any Term Advance from such Lender, and "Term A Notes" means all such Term A Notes. ------------ "Term A Share" means, at any time with respect to any Lender with an ------------ outstanding Term A Advance, the ratio (expressed as a percentage) of such Lender's outstanding Term A Advances at such time to the aggregate outstanding Term A Advances at such time. "Term B Advance" means any advance by a Lender to the Borrower pursuant to -------------- such Lender's Term B Commitment or a continuation of an existing Term B Advance, and refers to a Base Rate Advance or a LIBOR Advance. "Term B Borrowing" means a borrowing consisting of simultaneous Term B ---------------- Advances of the same Type made by each Lender pursuant to Section 2.01(c) or Converted by each Lender to Term B Advances of a different Type pursuant to Section 2.02(b). "Term B Commitment" means, for each Lender, the amount set opposite such ----------------- Lender's name on Schedule 1.01(a) as its Term B Commitment or, if such Lender has entered into any Assignment and Acceptance after the Effective Date, set forth for such Lender as its Term B Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(b); provided, however, that after -------- the date the initial Term B Borrowing is made, the Term B Commitment for such Lender shall be zero. "Term B Required Lenders" means Non-Defaulting Lenders the sum of whose ----------------------- outstanding Term B Advances (and, prior to the termination thereof, Term B Commitments) represent at least 51% of the sum of all outstanding Term B Advances (and, if prior to the termination thereof, Term B Commitments) of Non- Defaulting Lenders. "Term B Maturity Date" means January 31, 2004. -------------------- -43- "Term B Note" means a promissory note of the Borrower payable to the order ----------- of any Lender in substantially the form of the attached Exhibit A-2, evidencing indebtedness of the Borrower to such Lender resulting from any Term Advance from such Lender, and "Term B Notes" means all such Term B Notes. ------------ "Term B Share" means, at any time with respect to any Lender with an ------------ outstanding Term B Advance, the ratio (expressed as a percentage) of such Lender's outstanding Term B Advances at such time to the aggregate outstanding Term B Advances at such time. "Termination Event" means (a) the occurrence of a Reportable Event with ----------------- respect to a Plan, as described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of the Borrower or any of the Controlled Group from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the giving of a notice of intent to terminate a Plan under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Indebtedness" of any Person means the sum of the following (without ------------------ duplication): (a) all Indebtedness of such Person and its Subsidiaries on a Consolidated basis, plus (b) such Person's Unconsolidated Entity Percentage of ---- Indebtedness (including Secured Non-Recourse Indebtedness) of such Person's Unconsolidated Entities, plus (c) to the extent not already included in the ---- calculation of either of the preceding clauses (a) or (b), the aggregate amount of letters of credit for which such Person or any of its Subsidiaries would have a direct or contingent obligation to reimburse the issuers of such letters of credit upon a drawing under such letters of credit, minus (d) to the extent ----- included in the calculation of either of the preceding clauses (a), (b), or (c), the amount of any minority interests. "TT Leasing" means Twin Towers Leasing, L.P., a Delaware limited ---------- partnership. "Type" has the meaning set forth in Section 1.04. ---- "Unconsolidated Entity" means, with respect to any Person, at any date, any --------------------- other Person in whom such Person holds an Investment, which Investment is accounted for in the financial statements of such Person on an equity basis of accounting and whose financial results would not -44- be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person, if such statements were prepared as of such date. "Unconsolidated Entity Percentage" means, for any Person, with respect to a -------------------------------- Person's Unconsolidated Entity, the percentage ownership interest of such Person in such Unconsolidated Entity, provided that, in the event that such Person is -------------- the general partner of such Unconsolidated Entity, such Person's Unconsolidated Entity Percentage with respect to the Indebtedness of such Unconsolidated Entity shall be the percentage of such Indebtedness for which recourse may be made against any general partner of such Unconsolidated Entity. "Unconsolidated Entity Property" means a Hotel Property owned or leased by ------------------------------ an Unconsolidated Entity in which the Parent or one of the Parent's Subsidiaries has an Investment, and "Unconsolidated Entity Properties" means all such Hotel -------------------------------- Properties. "Unencumbered" means, with respect to any Hotel Property, at any date of ------------ determination, the circumstance that such Hotel Property or the interest of the Borrower or a Guarantor therein on such date: (a) is not subject to any Liens (including restrictions on transferability or assignability except for restrictions on the transferability of ground leases) of any kind (including any such Lien or restriction imposed by (i) any agreement governing Indebtedness, or (ii) the organizational documents of the Borrower or any of its Subsidiaries), but excluding Permitted Encumbrances; (b) is not subject to any agreement (including (i) any agreement governing Indebtedness, and (ii) if applicable, the organizational documents of the Borrower or any of its Subsidiaries) which prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon such Hotel Property, other than Permitted Encumbrances (excluding any agreement or organizational document which limits generally the amount of Indebtedness which may be incurred by the Borrower or its Subsidiaries); and (c) is not subject to any agreement (including any agreement governing Indebtedness) which entitles any Person to the benefit of any Lien (other than Permitted Encumbrances) on such Hotel Property, or would entitle any Person to the benefit of any such Lien upon the occurrence of any contingency (including, without limitation, pursuant to an "equal and ratable" clause). -45- For the purposes of this Agreement, (a) any Hotel Property owned by a Subsidiary of the Borrower shall not be deemed to be Unencumbered unless both (i) such Hotel Property and (ii) all Stock owned directly or indirectly by Borrower in such Subsidiary is Unencumbered and (b) any Hotel Property leased by the Borrower or a Subsidiary of the Borrower, as lessee, which lease constitutes Indebtedness of such lessee shall not be deemed "Unencumbered." "Unencumbered EBITDA" means for any Person for any period for which such ------------------- amount is being determined, an amount equal to the EBITDA for such Person for such period derived from Unencumbered Hotel Properties; provided that with -------- respect to EBITDA attributable to an Unconsolidated Entity which owns or leases Unencumbered Hotel Properties, (a) for any such Unconsolidated Entity for which the Unconsolidated Entity Percentage is equal to or greater than 20%, such Person shall only be deemed to have received the Unconsolidated Entity Percentage of such Unconsolidated Entity's EBITDA derived from Unencumbered Hotel Properties to the extent not subject to (i) any limitation or restriction (except for the obligation to repay Indebtedness of such Person) on the right to distribute such EBITDA to such Person's owners or (ii) any decision by another Person to not distribute the available cash of such Unconsolidated Entity to the owners of such Unconsolidated Entity, and (b) for any such Unconsolidated Entity for which the Unconsolidated Entity Percentage is less than 20%, such Person shall only be deemed to have received that actual sums paid by such Unconsolidated Entity to such Person derived from Unencumbered Hotel Properties. "Unencumbered Hotel Property" means a Hotel Property which is Unencumbered. --------------------------- "Unsecured Indebtedness" of any Person means any Total Indebtedness of such ---------------------- Person except for any Secured Non-Recourse Indebtedness and Secured Recourse Indebtedness of such Person. "Unsecured Interest Coverage Ratio" means, as of the end of any Rolling --------------------------------- Period, a ratio of (a) the Parent's Unencumbered EBITDA to (b) Parent's Unsecured Interest Expense, for such Rolling Period. "Unsecured Interest Expense" means, for any Person for any period, the -------------------------- greater of (a) the total interest expense in respect of all Unsecured Indebtedness of such Person for such Period and (b) 7.5% times the average outstanding balance of all Unsecured Indebtedness of such Person for such period. -46- Section 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 means "to but excluding". Section 1.3 Accounting Terms; Changes in GAAP. --------------------------------- (a) All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP applied on a consistent basis with those applied in the preparation of the Registration Statements. (b) Unless otherwise indicated, all financial statements of the Borrower and the Parent, all calculations for compliance with covenants in this Agreement, and all calculations of any amounts to be calculated under the definitions in Section 1.01 shall be based upon the Consolidated accounts of the Borrower, the Parent and their respective Subsidiaries (as applicable) in accordance with GAAP. (c) If any change in accounting principles after June 30, 1998 required by GAAP or the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or similar agencies results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found in this Agreement, then the parties shall enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to equitably reflect such change, with the desired result that the criteria for evaluating the financial condition of Borrower and its Subsidiaries (determined on a Consolidated basis) shall be the same after such change as if such change had not been made. Section 1.4 Classes and Types of Advances. Advances are distinguished ----------------------------- by "Class" and "Type". The "Class" of an Advance refers to the determination whether such Advance is a Term A Advance, a Term B Advance, a Revolving Advance, or a Swingline Advance, each of which constitutes a Class. The "Type" of an Advance refers to the determination whether such Advance is an LIBOR Advance or Base Rate Advance, each of which constitutes a Type. Section 1.5 Miscellaneous. Article, Section, Schedule and Exhibit ------------- references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. -47- Section 1.6 Recitals. The matters set forth in the recitals at the -------- beginning of this Agreement are agreed to by the parties to this Agreement and incorporated into this Agreement as if set forth in their entirety herein. Section 1.7 Amendment and Restatement. The parties hereto agree to use ------------------------- reasonable efforts to accomplish the matters set forth in the recitals at the beginning of this Agreement and, without limitation, agree to the following: (a) For each Lender which has an Existing AGH Note, (i) the Borrower shall execute incremental promissory notes (the "Incremental Notes") in such amounts and payable to such of such Lenders that with the Existing AGH Notes payable to such Lenders will provide for each such Lender Notes which have an aggregate stated principal amount equal to such Lender's respective Commitments, and (ii) the Borrower will execute a Revolving Note, a Term A Note and/or a Term B Note, as applicable, payable to such Lender in the amount of such Lender's respective Commitments which Note or Notes (i) will replace in its entirety the Existing AGH Note, and, if such Lender also has an Incremental Note, consolidate such Lender's Incremental Note with its Existing AGH Note and (ii) constitute the Note or Notes the Borrower is obligated to deliver to such Lender as provided in Sections 2.02(g) and 3.01. (b) For each Lender which does not require such a consolidation of Notes, the Borrower will deliver to such Lender the Note or Notes as provided in Sections 2.02(g) and 3.01. (c) Within a reasonable period of time following the Closing Date at the Borrower's cost the Administrative Agent, together, if necessary, with Bank One, Texas, N.A., in its capacity as administrative agent under the Existing AGH Credit Agreement prior to its amendment and restatement by this Agreement shall amend the Florida Liens to reflect the change in the Person acting as Administrative Agent and all other matters reasonably requested by the Borrower or the Administrative Agent, all in documentation reasonably acceptable to the Administrative Agent and the Borrower. Section 1.8 Senior Indebtedness. The Obligations and all renewals and ------------------- extensions of the Obligations are designated as "Designated Senior Indebtedness" under the Convertible Indebtedness Indenture and the Existing Subordinate Indebtedness Indenture. -48- ARTICLE II THE ADVANCES AND THE LETTERS OF CREDIT Section 2.10 The Advances. ------------ (a) Revolving Advances. Each Lender severally agrees, on the terms and ------------------ conditions set forth in this Agreement, to make Revolving Advances to the Borrower from time to time on any Business Day up to 15 days prior to the Revolving Maturity Date in an aggregate amount not to exceed at any time outstanding an amount equal to such Lender's Revolving Commitment less such ---- Lender's Revolving Share of the Letter of Credit Exposure at such time; provided that the sum of (i) the aggregate outstanding principal amount of the Revolving Advances plus (ii) the Letter of Credit Exposure plus (iii) the aggregate ---- ---- outstanding principal amount of the Swingline Advances at any time may not exceed the aggregate Revolving Commitments at such time. Within the limits of each Lender's Revolving Commitment, the Borrower may from time to time prepay pursuant to Section 2.07 and reborrow under this Section 2.01(a). (b) Term A Advances. Each Lender severally agrees, on the terms and --------------- conditions set forth in this Agreement, to make Term A Advances to the Borrower on August 3, 1998 in an aggregate amount not to exceed at any time such Lender's Term A Commitment. No amount of any Term A Borrowing that has been repaid may be reborrowed. (c) Term B Advances. Each Lender severally agrees, on the terms and --------------- conditions set forth in this Agreement, to make Term B Advances to the Borrower on August 3, 1998 in an aggregate amount not to exceed at any time such Lender's Term B Commitment. No amount of any Term B Borrowing that has been repaid may be reborrowed. (d) Swingline Advances. On the terms and conditions set forth in this ------------------ Agreement, the Swingline Lender agrees to from time-to-time on any Business Day during the period from the date of this Agreement until the last Business Day up to 15 days prior to the Swingline Maturity Date, make Swingline Advances under the Swingline Note to the Borrower for periods of up to 10 Business Days, bearing interest as provided in Section 2.06, and in an aggregate principal amount outstanding at any time not to exceed the Swingline Commitment; provided -------- that the sum of (i) the aggregate outstanding principal amount of the Revolving Advances plus (ii) the Letter of Credit Exposure plus (iii) the aggregate ---- ---- outstanding principal amount of the Swingline Advances at any -49- time may not exceed the aggregate Revolving Commitments at such time; and provided further that no Swingline Advance shall be made by the Swingline Lender - -------- ------- if the statements set forth in Section 3.02 are not true on the date of such Swingline Advance, it being agreed by the Borrower that the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Swingline Advance shall constitute a representation and warranty by the Borrower that on the date of such Swingline Advance such statements are true. Subject to the other provisions hereof, the Borrower may from time-to-time borrow, prepay (in whole or in part) and reborrow Swingline Advances. No Swingline Advance shall be used for the purpose of funding the payment of principal of any other Swingline Advance. Each Swingline Advance shall be in an amount of $1,000,000 or an integral multiple of $100,000 in excess thereof. Within the limits of the Swingline Commitment, the Borrower may from time to time prepay pursuant to Section 2.07 and reborrow under this Section 2.01(d). (i) Except as provided in the following clause (ii) below, each request for a Swingline Advance shall be made pursuant to telephone notice to the Swingline Lender given no later than 11:00 a.m. (Dallas, Texas time) on the date of the proposed Swingline Advance, promptly confirmed by a completed and executed Notice of Borrowing telecopied to the Administrative Agent, specifying therein the requested (A) date of such Swingline Advance, (B) amount of such Swingline Advance and (C) maturity of such Swingline Advance (which maturity shall be no later than the earlier of the Swingline Maturity Date and the 10th Business Days after the requested date of such Swingline Advance). The Swingline Lender will on the date requested make the Swingline Advance available to the Borrower as agreed between the Swingline Lender and Borrower. (ii) The Borrower and the Lenders agree that upon written demand by the Swingline Lender to the Administrative Agent (which may be given at any time and shall be deemed given if any Swingline Advance is not repaid on the date required by this Agreement), the Administrative Agent shall give each Lender a notice of Mandatory Revolving Borrowing, and upon receipt of such notice, each Lender having a Revolving Commitment shall pay to the Administrative Agent its Revolving Share of such Swingline Advance and such payment shall be deemed to be a Base Rate Advance made pursuant to such Lender's Revolving Commitment, whether made before or after termination of the Revolving Commitments, acceleration of the Revolving Advances, or otherwise, and whether or not the conditions precedent in Section 3.02 have been satisfied at the time of such Mandatory Revolving Borrowing. The Administrative Agent shall give each Lender notice of such Mandatory Revolving Borrowing by 11:00 a.m. (Dallas, Texas time) on the date the Mandatory -50- Revolving Borrowing is to be made. Each Lender having a Revolving Commitment shall, regardless of whether the conditions in Section 3.02 have been met at the time of such Mandatory Revolving Borrowing and regardless of whether there exists any Default or Event of Default, make its Revolving Advance available to the Administrative Agent for the account of the Swingline Lender in immediately available funds by 3:00 p.m. (Dallas, Texas time) on the date requested, and the Borrower hereby irrevocably instructs the Swingline Lender to apply the proceeds of such Mandatory Revolving Borrowing to the payment of the outstanding Swingline Advances. (iii) In the event that any Mandatory Revolving Borrowing cannot be made upon the day required in the preceding clause (ii), upon written demand by the Swingline Lender, with a copy of such demand to the Administrative Agent, each other Lender shall purchase from the Swingline Lender, a participating interest in each Swingline Advance in an amount equal to such other Lender's Revolving Share of each Swingline Advance as of the date of such purchase. Each Lender agrees to purchase its Revolving Share of each Swingline Advance on (A) the Business Day on which demand therefor is made by the Swingline Lender, provided notice of such demand is given not later than 11:00 A.M. (Dallas, Texas time) on such Business Day or (B) the first Business Day next succeeding such demand if notice of such demand is given after such time, by making available to the Administrative Agent for the account of the Swingline Lender in immediately available funds by 3:00 p.m. (Dallas, Texas time) on such date, an amount equal to such Lender's Revolving Share of the outstanding principal amount of and interest on the Swingline Advances to be purchased by such other Lender. The Borrower hereby agrees to each such purchase. Promptly after receipt of such funds from the purchasing Lenders, the Administrative Agent shall transfer such funds to the Swingline Lender. Upon any sale by the Swingline Lender to any other Lender of a participating interest in any Swingline Advance pursuant to this Section 2.04, the Swingline Lender represents and warrants to such other Lender that the Swingline Lender is the legal and beneficial owner of such interest being sold by it, free and clear of any liens, but makes no other representation or warranty. Except for such representation and warranty, the Swingline Lender shall have no responsibility or liability to any other Lender with respect to the Swingline Advances, any participation sold, this Agreement or any party hereto, and no Lender shall have any recourse against the Swingline Lender with respect to the Swingline Advances, any participation sold, this Agreement or any party hereto, except that the Swingline Lender shall pay to each Lender that purchases a participation in a Swingline Advance pursuant to this Section 2.01(d)(iii) such Lender's ratable share of the payments, if any, actually received by the Swingline Lender on such Swingline Advance. Any sale of a participating interest pursuant to this Section 2.01(d)(iii) may, at the Swingline -51- Lender's option, be evidenced by a participation agreement or other document in substantially the same form as any participation agreement or other document customarily used by the Swingline Lender to evidence its sale of a participating interest in a loan. If and to the extent that any Lender shall not have so made the amount required by this Section 2.01(d)(iii) available to the Administrative Agent, such Lender agrees to pay to the Administrative Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount was originally due until the date such amount is paid to the Administrative Agent, at the Federal Funds Rate for the account of the Swingline Lender. (e) Extension of Revolving Maturity Date. The Borrower shall have two ------------------------------------ options, exercisable as hereinafter provided, to extend the then current Revolving Maturity Date for an additional one-year period to the first anniversary of the then current Revolving Maturity Date upon the completion by the Borrower of the following conditions prior to or as of the current Revolving Maturity Date to the satisfaction of the Administrative Agent. (i) No Default which has not been cured or waived in writing by the Administrative Agent as set forth in Section 9.01 shall have occurred. (ii) The Administrative Agent shall have received no later than ninety (90) days prior to the current Revolving Maturity Date written notice from the Borrower that it intends to exercise its option to extend the Revolving Maturity Date. (iii) The Borrower shall have paid to the Administrative Agent for the account of each Lender an extension fee for each one year extension equal to the product of (A) one eighth of one percent (1/8%) times (B) the aggregate amount of such Lender's Revolving Commitment as of the current Revolving Maturity Date. (iv) If the Borrower is obligated to repay any Advances, the Borrower shall have repaid such Advances. (v) The representations and warranties of the Borrower, the Parent and the Guarantors in the Credit Documents remain true and correct in all material respects as of the Revolving Maturity Date. Under no circumstances may the Revolving Maturity Date be extended beyond July 31, 2003. -52- Section 2.0 Method of Borrowing. ------------------- -53- (a) Notice. Each Borrowing shall be made pursuant to a Notice of ------ Borrowing, given not later than 11:00 a.m. (Dallas, Texas time) (i) on the third Business Day before the date of the proposed Borrowing, in the case of a Borrowing consisting of LIBOR Advances, or (ii) on the Business Day before the date of the proposed Borrowing, in the case of a Borrowing consisting of Base Rate Advances, by the Borrower to the Administrative Agent, which shall give each Lender prompt notice on the day of receipt of such timely Notice of Borrowing of such proposed Borrowing by telecopier. Each Notice of Borrowing shall be in writing or by telecopier specifying the requested (i) date of such Borrowing, (ii) Class and Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) if such Borrowing is to be comprised of LIBOR Advances, the Interest Period for each such Advance. The Administrative Agent shall promptly notify each Lender who is obligated to fund an Advance under such Notice of Borrowing of such Notice of Borrowing not later than 5:00 p.m. (Dallas, Texas time) on the day such Notice of Borrowing is deemed received by the Administrative Agent. In the case of a proposed Borrowing comprised of LIBOR Advances, the Administrative Agent shall also so notify each Lender who is obligated to fund an Advance under such Notice of Borrowing and the Borrower of the applicable interest rate under Section 2.06(b). Each Lender shall, before 11:00 a.m. (Dallas, Texas time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 10.02, or such other location as the Administrative Agent may specify by notice to the Lenders, in same day funds, such Lender's Revolving Share, Term A Share or Term B Share, as applicable, of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at its account with the Administrative Agent. Notwithstanding the foregoing, the Borrower may for Base Rate Advances requested on August 3, 1998 only request that such Advances be made on the same day as the Notice of Borrowing, provided that such Notice of Borrowing shall be given not later than -------- 8:00 a.m. (Dallas, Texas time) on August 3, 1998. If such Notice of Borrowing on August 3, 1998 is delivered to the Administrative Agent by such time, (a) the Administrative Agent will promptly notify each Lender who is obligated to fund an Advance under such Notice of Borrowing of such Notice of Borrowing not later than 11:00 a.m. (Dallas, Texas time) on August 3, 1998 and (b) each Lender shall, before 2:00 p.m. (Dallas, Texas time) on August 3, 1998, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 10.02, or such other location as the Administrative Agent may specify by notice to the Lenders, in same day funds, such Lender's Revolving Share, Term A Share or Term B Share, as applicable, of such Borrowing. -54- (b) Conversions and Continuations. In order to elect to Convert or ----------------------------- continue Advances comprising part of the same Borrowing under this Section, the Borrower shall deliver an irrevocable Notice of Conversion or Continuation to the Administrative Agent at the Administrative Agent's office no later than 11:00 a.m. (Dallas, Texas time) (i) on the date which is at least three Business Days in advance of the proposed Conversion or continuation date in the case of a Conversion to or a continuation of a Borrowing comprised of LIBOR Advances and (ii) on the Business Day prior to the proposed conversion date in the case of a Conversion to a Borrowing comprised of Base Rate Advances. Each such Notice of Conversion or Continuation shall be in writing or by telecopier, specifying (i) the requested Conversion or continuation date (which shall be a Business Day), (ii) the Borrowing amount, Class and Type of the Advances to be Converted or continued, (iii) whether a Conversion or continuation is requested, and if a Conversion, into what Type of Advances, and (iv) in the case of a Conversion to, or a continuation of, LIBOR Advances, the requested Interest Period. Not later than 5:00 p.m. (Dallas, Texas time) on the day such Notice of Conversion or Continuation is deemed received by the Administrative Agent, the Administrative Agent shall provide each Lender who has an Advance affected by such Notice of Conversion or Continuation with a copy thereof and, in the case of a Conversion to or a continuation of LIBOR Advances, notify each Lender who has an Advance affected by such Notice of Conversion or Continuation and the Borrower of the applicable interest rate under Section 2.06(b). For purposes other than the conditions set forth in Section 3.02, the portion of Advances comprising part of the same Borrowing that are Converted to Advances of another Type shall constitute a new Borrowing. If the Borrower shall fail to specify an Interest Period for a LIBOR Advance including the continuation of a LIBOR Advance, the Borrower shall be deemed to have selected a Base Rate Advance. Under no circumstances may the Borrower convert one Class of Borrowing into another Class of Borrowing. (c) Certain Limitations. Notwithstanding anything in paragraphs (a) and ------------------- (b) above: (i) in the case of LIBOR Advances each Borrowing shall be in an aggregate amount of not less than $2,000,000 or greater multiples of $100,000; (ii) in the case of Base Rate Advances each Borrowing shall be in an aggregate amount of not less than $1,000,000 or greater multiples of $100,000; (iii) except for Borrowings for the acquisition of Future Properties by the -55- Borrower or its Subsidiary, the Borrower may not request Borrowings on more than four days in any calendar month. (iv) at no time shall there be more than eight Interest Periods applicable to outstanding LIBOR Advances; (v) the Borrower may not select LIBOR Advances for any Borrowing to be made, Converted or continued if a Default has occurred and is continuing; (vi) if any Lender shall, at any time prior to the making of any requested Borrowing comprised of LIBOR Advances, notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other governmental authority asserts that it is unlawful, for such Lender or its LIBOR Lending Office to perform its obligations under this Agreement to make LIBOR Advances or to fund or maintain LIBOR Advances, then such Lender's Revolving Share, Term A Share or Term B Share, as applicable, of such Borrowing shall be made as a Base Rate Advance, provided that such Base Rate Advance shall be considered part of the same Borrowing and interest on such Base Rate Advance shall be due and payable at the same time that interest on the LIBOR Advances comprising the remainder of such Borrowing shall be due and payable; and such Lender agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Lender, be otherwise materially disadvantageous to such Lender; (vii) if the Administrative Agent is unable to determine the LIBOR for LIBOR Advances comprising any requested Borrowing, the right of the Borrower to select LIBOR Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Base Rate Advance; (viii) if the Required Lenders shall, at least one Business Day before the date of any requested Borrowing, notify the Administrative Agent that the LIBOR for LIBOR -56- Advances comprising such Borrowing will not adequately reflect the cost to such Lenders of making or funding their respective LIBOR Advances, as the case may be, for such Borrowing, the right of the Borrower to select LIBOR Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Base Rate Advance; and (ix) if the Borrower shall fail to select the duration or continuation of any Interest Period for any LIBOR Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and paragraph (a) or (b) above, the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will be made available to the Borrower on the date of such Borrowing as Base Rate Advances or, if an existing Advance, Converted into Base Rate Advances. (d) Notices Irrevocable. Each Notice of Borrowing and Notice of ------------------- Conversion or Continuation shall be irrevocable and binding on the Borrower. In the case of any Borrowing which the related Notice of Borrowing specifies is to be comprised of LIBOR Advances, the Borrower shall indemnify each Lender against any loss, out-of-pocket cost or expense incurred by such Lender as a result of any condition precedent for Borrowing set forth in Article III not being satisfied for any reason, including, without limitation, any loss, cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (e) Administrative Agent Reliance. Unless the Administrative Agent shall ----------------------------- have received notice from a Lender before the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's Revolving Share, Term A Share or Term B Share, as applicable, of the Borrowing, the Administrative Agent may assume that such Lender has made its Revolving Share, Term A Share or Term B Share, as applicable, of such Borrowing available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made its Revolving Share, Term A Share or Term B Share, as applicable, of such Borrowing available to the Administrative Agent, such Lender and the Borrower severally agree to immediately repay to the Administrative Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable on each such day to Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate for each such day. If such Lender shall repay to the Administrative Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing. (f) Lender Obligations Several. The failure of any Lender to make the -------------------------- Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, to make its Advance on the date of such Borrowing. No Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (g) Notes. The indebtedness of the Borrower to each Lender resulting from ----- Revolving Advances owing to such Lender shall be evidenced by a Revolving Note of the Borrower payable to the order of such Lender in substantially the form of Exhibit A-1. The indebtedness of the Borrower to each Lender resulting from Term A Advances owing to such Lender shall be evidenced by a Term A Note of the Borrower payable to the order of such Lender in substantially the form of Exhibit A -2. The indebtedness of the Borrower to each Lender resulting from Term B Advances owing to such Lender shall be evidenced by a Term B Note of the Borrower payable to the order of such Lender in substantially the form of Exhibit A -3. The indebtedness of the Borrower to the Swingline Lender resulting from Swingline Advances owing to the Swingline Lender shall be evidenced by the Swingline Note. Section 2.0 Fees. ---- (a) Commitment Fees. For the period from the Effective Date until the --------------- Revolving Maturity Date the Borrower agrees to pay to the Administrative Agent for the account of each Lender with a Revolving Commitment a commitment fee on the average daily amount by which such Lender's Revolving Commitment exceeds the sum of such Lender's outstanding Revolving Advances and Revolving Share of the Letter of Credit Exposure at a rate per annum equal to the Applicable Margin (computed on the actual number of days elapsed, including the first day and excluding the last, based upon a 360-day year). Such fees shall be due and payable quarterly in arrears (i) on the date which is 30 days following the end of the last Business Day of each March, June, September and December and (ii) on the Revolving Maturity Date. (b) Letter of Credit Fees. The Borrower agrees to pay to the --------------------- Administrative Agent for the benefit of the Lenders with a Revolving Commitment, fees in respect of all Letters of Credit outstanding at a rate per annum equal to the Applicable Margin (computed on the actual number of days elapsed, including the first day and excluding the last, based upon a 360-day year) on the average daily amount of the aggregate undrawn maximum amount of each Letter of Credit outstanding, payable in arrears (i) on the date which is 30 days following the last Business Day of each March, June, September and December and (ii) on the Maturity Date. In addition, the Borrower agrees to pay to the Issuing Bank for its own account a fee on the average daily amount of the aggregate undrawn maximum amount of each Letter of Credit issued by such Issuing Bank at a rate per annum equal to .0625%, such fees due and payable quarterly in arrears (i) on the date which is 30 days following the last Business Day of each March, June, September and December and (ii) on the Revolving Maturity Date. (c) Administrative Agent's and Facilitators' Fees. The Borrower agrees to --------------------------------------------- pay (i) to the Facilitators for their benefit the fees set forth in the Fee Letter as and when the same are due and payable pursuant to the terms of the Fee Letter, and (ii) to the Administrative Agent for its benefit the fees set forth in the Administrative Agent Fee Letter as and when the same are due and payable pursuant to the terms of the Administrative Agent Fee Letter. Section 2.4 Reduction of the Commitments. ---------------------------- (a) Upon the occurrence of a Change in Control in the Parent or the Borrower, then, in such event the Required Lenders may, at their sole option upon written notice to the Borrower -59- (a "Termination Notice"), declare the obligation of each Lender to make Advances and the obligation of the Issuing Bank to issue, increase, or extend Letters of Credit to be terminated, whereupon the same shall forthwith terminate and the Commitments shall reduce to zero. (b) The Borrower may, upon at least three Business Days' prior notice to the Administrative Agent, permanently terminate in whole or permanently reduce ratably in part the Revolving Commitments of the Lenders; provided, however, -------- ------- that (i) each partial reduction shall be in the aggregate amount of not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) no such reduction shall result in an overdraft status as provided in Section 2.07(c)(ii), and (iii) no such reduction shall result in the total aggregate Revolving Commitments of the Lenders being less than $300,000,000. Section 2.5 Repayment of Advances. The Borrower shall repay the --------------------- outstanding principal amount of each Advance on the applicable Maturity Date; provided that the Borrower shall repay to the Administrative Agent for the account of the Swingline Lender the outstanding principal amount of each Swingline Advance made by it on the maturity date specified for the applicable Swingline Advance. Section 2.6 Interest, Late Payment Fee. The Borrower shall pay interest -------------------------- on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances and Swingline Advances. If such Advance is a Base ----------------------------------------- Rate Advance or a Swingline Advance, a rate per annum (computed on the actual number of days elapsed, including the first day and excluding the last, based on a 365 day year) equal at all times to the lesser of (i) the Adjusted Base Rate in effect from time to time plus the Applicable Margin and (ii) the Maximum ---- Rate, payable in arrears on the first Business Day of each calendar month and on the date such Base Rate Advance or Swingline Advance, as applicable, shall be paid in full, provided that during the continuance of an Event of Default, Base -------- Rate Advances and Swingline Advances shall bear interest at a rate per annum equal at all times to the lesser of (i) the rate required to be paid on such Advance immediately prior to the date on which such amount becomes due plus ---- three percent (3%) and (ii) the Maximum Rate. (b) LIBOR Advances. If such Advance is a LIBOR Advance, a rate per annum -------------- (computed on the actual number of days elapsed, including the first day and excluding the last, based on a 360 day year) equal at all times during the Interest Period for such Advance to the -60- lesser of (i) the LIBOR for such Interest Period plus the Applicable Margin and ---- (ii) the Maximum Rate, payable in arrears on the last day of such Interest Period, and on the date such LIBOR Advance shall be paid in full, and, with respect to LIBOR Advances having an Interest Period in excess of 30 days, the first day of each calendar month during such Interest Period excluding the month in which such LIBOR Advance shall be paid in full; provided that during the -------- continuance of an Event of Default, LIBOR Advances shall bear interest at a rate per annum equal at all times to the lesser of (i) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus three percent (3%) and (ii) the Maximum Rate. - ---- (c) Usury Recapture. In the event the rate of interest chargeable under --------------- this Agreement or the Notes at any time is greater than the Maximum Rate, the unpaid principal amount of the Notes shall bear interest at the Maximum Rate until the total amount of interest paid or accrued on the Notes equals the amount of interest which would have been paid or accrued on the Notes if the stated rates of interest set forth in this Agreement had at all times been in effect. In the event, upon payment in full of the Notes, the total amount of interest paid or accrued under the terms of this Agreement and the Notes is less than the total amount of interest which would have been paid or accrued if the rates of interest set forth in this Agreement had, at all times, been in effect, then the Borrower shall, to the extent permitted by applicable law, pay the Administrative Agent for the account of the Lenders an amount equal to the difference between (i) the lesser of (A) the amount of interest which would have been charged on the Notes if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued on the Notes if the rates of interest set forth in this Agreement had at all times been in effect and (ii) the amount of interest actually paid or accrued under this Agreement on the Notes. In the event the Lenders ever receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall, to the extent permitted by law, be applied to the reduction of the principal balance of the Notes, and if no such principal is then outstanding, such excess or part thereof remaining shall be paid to the Borrower. (d) Other Amounts Overdue. If any amount payable under this Agreement --------------------- other than the Advances is not paid when due and payable, including without limitation, accrued interest and fees, then such overdue amount shall accrue interest hereon due and payable on demand at a rate per annum equal to the Adjusted Base Rate plus three percent (3%), from the date such amount became due ---- until the date such amount is paid in full. (e) Late Payment Fee. Subject to the provisions of Section 10.14, if any ---------------- interest -61- payable under this Agreement is not paid when due and payable (after taking into account any applicable grace period), then the Borrower will pay to the Administrative Agent for the account of the Lenders contemporaneously with the payment of such past due interest a late payment fee equal to an amount equal to the product of (i) such overdue interest times (ii) four percent (4%). ----- Section 2.7 Prepayments. ----------- (a) Right to Prepay. The Borrower shall have no right to prepay any --------------- principal amount of any Advance except as provided in this Section 2.07. (b) Optional Prepayments. The Borrower may elect to prepay any of the -------------------- Advances, after giving by 11:00 a.m. (Dallas, Texas time) (i) in the case of LIBOR Advances, at least three Business Days' or (ii) in case of Base Rate Advances and Swingline Advances, at least one Business Day's prior written notice to the Administrative Agent stating the Class or Classes to be repaid, the proposed date and aggregate principal amount of such prepayment, and if applicable, the relevant Interest Period for the Advances to be prepaid; provided, however, that any such proposed prepayment of Term A Advances or Term - -------- ------- B Advances must be made equally to Term A Advances and Term B Advances and in the inverse order of maturity for each Class. If any such notice is given, the Borrower shall prepay Advances comprising part of the same Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, and shall also pay accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date; provided, however, that each partial prepayment shall be in an aggregate -------- ------- principal amount not less than $1,000,000 and in integral multiples of $100,000. (c) Mandatory Prepayments. --------------------- (i) Change of Control. On the fifth Business Day following the ----------------- Borrower's receipt of a Termination Notice pursuant to Section 2.04(a) hereof, the Borrower shall be required to prepay all outstanding Advances in full and to deposit with the Administrative Agent into the Cash Collateral Account an amount equal to the Letter of Credit Exposure. (ii) Overdraft. On any date on which the outstanding principal --------- amount of the Revolving Advances plus the Letter of Credit Exposure plus ---- ---- the outstanding principal amount of the Swingline Advances exceeds the aggregate Revolving Commitments, the -62- Borrower agrees to make a prepayment of the Revolving Advances in the amount of such excess. (iii) Repayment Event. Upon the occurrence of any Repayment Event, --------------- the Borrower shall prepay Advances on the Business Day the Net Cash Proceeds from such Repayment Event are received by the Borrower or the Parent, as applicable, in an amount equal to the lesser of (A) the amount of the outstanding Advances on such Business Day and (B) 100% of the Net Cash Proceeds of such Repayment Event. If, in connection with an Asset Disposition which qualifies as a Repayment Event for which the Borrower has not used the Net Cash Proceeds to repay the Obligations, the Borrower has failed to make an Investment or Investments in the Hospitality/Leisure- Related Business with such Net Cash Proceeds within one year from the date of such Asset Disposition, then the Borrower shall prepay Advances on the first anniversary of the Business Day such Net Cash Proceeds are received by the Borrower or the Parent, as applicable, in the amount equal to the lesser of (A) the amount of the outstanding Advances on such first anniversary and (B) 100% of the Net Cash Proceeds of such Repayment Event which have not been used to make an Investment or Investments in the Hospitality/Leisure-Related Business. Any Net Cash Proceeds utilized to repay Advances will be applied in the following order: (a) first, to repay the outstanding principal of Swingline Advances, (b) second, to repay the outstanding principal of Revolving Advances, (c) third, to repay the outstanding principal of Term A Advances in the inverse order of maturity, and (d) fourth, to repay the outstanding principal of Term B Advances in the inverse order of maturity. (iv) Term A Advances. Commencing with August 1, 2001 and on each --------------- November 1, February 1, May 1 and August 1 thereafter, the Borrower shall repay the Term A Advances by an amount equal to $7,500,000. (v) Term B Advances. Commencing with February 1, 1999 and on each --------------- August 1 and February 1 thereafter, the Borrower shall repay the Term B Advances by an amount equal to $1,000,000. (vi) Accrued Interest. Each prepayment pursuant to this Section ---------------- 2.07(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such prepayment being made on such date. -63- (vii) Avoidance of Breakage Costs. In the event that the amount of --------------------------- any mandatory prepayment of Advances under this Section 2.07(c) exceeds the aggregate principal amount of Advances in any Class which consist of Base Rate Advances (the amount of such excess being the "Excess Amount"), the ------------- Borrower shall have the right, in lieu of making such prepayment in full, to prepay such outstanding Advances which are Base Rate Advances and to deposit an amount equal to the Excess Amount with the Administrative Agent in the Cash Collateral Account maintained by and in the sole dominion and control of the Administrative Agent for the ratable benefit of the Lenders. Any amount so deposited shall be held by the Administrative Agent as collateral for the Obligations, earn interest on behalf of the Borrower and be applied to the prepayment of Advances which are LIBOR Advances at the end of the current Interest Period(s) applicable thereto. On any day on which amounts collected in the Cash Collateral Account remain on deposit in or to the credit of the Cash Collateral Account after giving effect to the payment made on such day pursuant to this Section 2.07(c), and the Borrower shall have delivered to the Administrative Agent a written request or a telephonic request (which shall be promptly confirmed in writing) prior to 11:00 am (Dallas, Texas time) that such remaining collected amounts be invested in cash equivalents specified in such request, the Administrative Agent shall invest such funds, to the extent the Administrative Agent is reasonably able to do so, in such cash equivalents as are acceptable to, and with no risk to, the Administrative Agent on an overnight basis or with maturities such that amounts will be available to pay the Obligations secured thereby as they become due, whether at maturity, by acceleration or otherwise; provided, however, that any loss resulting from such investments -------- ------- shall be charged to and be immediately payable by the Borrower on demand by the Administrative Agent. (d) Ratable Payments. Each payment of any Advance pursuant to this ---------------- Section 2.07 or any other provision of this Agreement shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part. (e) Effect of Notice. All notices given pursuant to this Section 2.07 ---------------- shall be irrevocable and binding upon the Borrower. (f) Payments with respect to Florida Liens. Notwithstanding anything in --------------------------------------- this Agreement or any other Credit Document to the contrary, each payment of any Advance pursuant -64- to this Section 2.07 or any other provision of this Agreement shall be made in a manner such that all Advances secured by Florida Liens shall be deemed the last Advances repaid. Section II.8 Breakage Costs. If (a) any payment of principal of any -------------- LIBOR Advance is made other than on the last day of the Interest Period for such Advance as a result of any payment pursuant to Section 2.07 or the acceleration of the maturity of the Notes pursuant to Article VIII or otherwise; (b) any Conversion of a LIBOR Advance is made other than on the last day of the Interest Period for such Advance pursuant to Section 2.12 or otherwise; or (c) the Borrower fails to make a principal or interest payment with respect to any LIBOR Advance on the date such payment is due and payable, the Borrower shall, within 10 days of any written demand sent by any Lender to the Borrower through the Administrative Agent, pay to the Administrative Agent for the account of such Lender any amounts (without duplication of any other amounts payable in respect of breakage costs) required to compensate such Lender for any additional losses, out-of-pocket costs or expenses which it may reasonably incur as a result of such payment or nonpayment, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. Section II.9 Increased Costs. --------------- -65- (a) LIBOR Advances. If, due to either (i) the introduction of or any -------------- change (other than any change by way of imposition or increase of reserve requirements included in the calculation of the LIBOR) in or in the interpretation of any law or regulation following the date of this Agreement or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) not complied with prior to the date of this Agreement, there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining LIBOR Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), immediately pay to the Administrative Agent for the account of such Lender additional amounts (without duplication of any other amounts payable in respect of increased costs) sufficient to compensate such Lender for such increased cost; provided, however, -------- ------- that, before making any such demand, each Lender agrees to use commercially reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate as to the amount of such increased cost and detailing the calculation of such cost submitted to the Borrower and the Administrative Agent by such Lender at the time such Lender demands payment under this Section shall be conclusive and binding for all purposes, absent manifest error. (b) Capital Adequacy. If any Lender or the Issuing Bank determines in ---------------- good faith that compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) implemented or effective after the date of this Agreement affects or would affect the amount of capital required or expected to be maintained by such Lender or the Issuing Bank and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend or the Issuing Bank's commitment to issue Letters of Credit or any Lender's commitment to risk participate in Letters of Credit and other commitments of this type, then, upon 30 days prior written notice by such Lender or the Issuing Bank (with a copy of any such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender or to the Issuing Bank, as the case may be, from time to time as specified by such Lender or the Issuing Bank, additional amounts (without duplication of any other amounts payable in respect of increased costs) sufficient to compensate such Lender or the Issuing Bank, in light of such circumstances, (i) with respect to such Lender, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment -66- to lend under this Agreement or its commitment to risk participate in Letters of Credit and (ii) with respect to the Issuing Bank, to the extent that such Issuing Bank reasonably determines such increase in capital to be allocable to the issuance or maintenance of the Letters of Credit. A certificate as to such amounts and detailing the calculation of such amounts submitted to the Borrower and the Administrative Agent by such Lender or the Issuing Bank shall be conclusive and binding for all purposes, absent manifest error. (c) Letters of Credit. If any change in any law or regulation or in the ----------------- interpretation thereof by any court or administrative or Governmental Authority charged with the administration thereof following the date of this Agreement shall either (i) impose, modify, or deem applicable any reserve, special deposit, or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, Issuing Bank or any Lender or (ii) impose on Issuing Bank or any Lender any other condition regarding the provisions of this Agreement relating to the Letters of Credit or any Letter of Credit Obligations, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to Issuing Bank of issuing or maintaining any Letter of Credit, or increase the cost to such Lender of its risk participation in any Letter of Credit (which increase in cost shall be determined by Issuing Bank's or such Lender's reasonable allocation of the aggregate of such cost increases resulting from such event), then, upon demand by Issuing Bank or such Lender (with a copy sent to the Administrative Agent), as the case may be, the Borrower shall pay to the Administrative Agent for the account of Issuing Bank or Lender, as the case may be, from time to time as specified by Issuing Bank or such Lender, additional amounts which shall be sufficient to compensate such Issuing Bank or such Lender for such increased cost. Issuing Bank and each Lender agrees to use commercially reasonable efforts (consistent with internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office for the booking of its Letters of Credit or risk participations if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of Issuing Bank or such Lender, be otherwise disadvantageous to Issuing Bank or such Lender, as the case may be. A certificate as to such increased cost incurred by Issuing Bank or such Lender, as the case may be, as a result of any event mentioned in clause (i) or (ii) above, and detailing the calculation of such increased costs submitted by Issuing Bank or such Lender to the Borrower and the Administrative Agent, shall be conclusive and binding for all purposes, absent manifest error. Section II.10 Payments and Computations. ------------------------- -67- (a) Payment Procedures. Except if otherwise set forth herein, the ------------------ Borrower shall make each payment under this Agreement and under the Notes not later than 11:00 a.m. (Dallas, Texas time) on the day when due in Dollars to the Administrative Agent at the location referred to in the Notes (or such other location as the Administrative Agent shall designate in writing to the Borrower) in same day funds. The Administrative Agent will on the same day cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to the Administrative Agent, the Issuing Banks, or a specific Lender pursuant to Section 2.03(b), 2.03(c), 2.06(c), 2.08, 2.09, 2.11, 2.12, or 2.13(c) but after taking into account payments effected pursuant to Section 10.04) to the Lenders in accordance with, in the case of a payment made in respect of a Revolving Borrowing, each Lender's Revolving Share, in the case of a payment made in respect of Term A Borrowing, each Lender's Term A Share, and in the case of a payment made in respect of Term B Borrowing, each Lender's Term B Share for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender or Issuing Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Computations. All computations of interest based on the Adjusted Base ------------ Rate shall be made by the Administrative Agent on the basis of a year of 365 days and all computations of fees and interest based on the LIBOR and the Federal Funds Rate shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Administrative Agent of an interest rate shall be conclusive and binding for all purposes, absent manifest error. (c) Non-Business Day Payments. Whenever any payment 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 fees, as the case may be; provided, however, that if such extension would cause payment of interest on or - -------- principal of LIBOR Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Administrative Agent Reliance. Unless the Administrative Agent shall ----------------------------- have received written notice from the Borrower prior to the date on which any payment is due to the Lenders that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date -68- and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate for each such day. (e) Application of Payments. Unless otherwise specified in Section 2.07 ----------------------- hereof, whenever any payment received by the Administrative Agent under this Agreement is insufficient to pay in full all amounts then due and payable under this Agreement and the Notes, such payment shall be distributed and applied by the Administrative Agent and the Lenders in the following order: first, to the ----- payment of fees and expenses due and payable to the Administrative Agent under and in connection with this Agreement or any other Credit Document; second, to ------ the payment of all expenses due and payable under Section 2.11(c), ratably among the Lenders in accordance with the aggregate amount of such payments owed to each such Lender; third, to the payment of fees due and payable to the Issuing ----- Bank pursuant to Section 2.03(b); fourth, to the payment of all other fees due ------ and payable under Section 2.03; and fifth, to the payment of the interest ----- accrued on and the principal amount of all of the Notes and the interest accrued on and all Letter of Credit Obligations, regardless of whether any such amount is then due and payable, ratably among the Lenders in accordance with the aggregate accrued interest plus the aggregate principal amount owed to such Lender. (f) Register. The Administrative Agent shall record in the Register the -------- Commitment and the Advances from time to time of each Lender and each repayment or prepayment in respect to the principal amount of such Advances of each Lender. Any such recordation shall be conclusive and binding on the Borrower and each Lender, absent manifest error; provided however, that failure to make any -------- ------- such recordation, or any error in such recordation, shall not affect the Borrower's obligations hereunder in respect of such Advances. Section II.11 Taxes. ----- -69- (a) No Deduction for Certain Taxes. Any and all payments by the Borrower ------------------------------ shall be made, in accordance with Section 2.10, 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, in the case of each Lender, Issuing Bank, and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender, Issuing Bank, or the Administrative Agent (as the case may be) is organized or any political subdivision of the jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes") and, in the case of each Lender and Issuing Bank, Taxes by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision of such jurisdiction. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to any Lender, Issuing Bank, or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.11), such Lender, Issuing Bank, or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, -------- that if the Borrower's obligation to deduct or withhold Taxes is caused solely by such Lender's, Issuing Bank's, or the Administrative Agent's failure to provide the forms described in paragraph (e) of this Section 2.11 and such Lender, Issuing Bank, or the Administrative Agent could have provided such forms, no such increase shall be required; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Legal Requirements. (b) Other Taxes. In addition, the Borrower agrees to pay any present or ----------- future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes"). (c) Indemnification. The Borrower indemnifies each Lender, Issuing Bank, --------------- and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any Governmental Authority on amounts payable under this Section 2.11) paid by such Lender, Issuing Bank, or the Administrative Agent (as the case may be) and any liability (including interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Each payment -70- required to be made by the Borrower in respect of this indemnification shall be made to the Administrative Agent for the benefit of any party claiming such indemnification within 30 days from the date the Borrower receives written demand detailing the calculation of such amounts therefor from the Administrative Agent on behalf of itself as Administrative Agent, Issuing Bank, or any such Lender. If any Lender, the Administrative Agent, or Issuing Bank receives a refund in respect of any Taxes or Other Taxes paid by the Borrower under this paragraph (c), such Lender, the Administrative Agent, or Issuing Bank, as the case may be, shall promptly pay to the Borrower the Borrower's share of such refund. (d) Evidence of Tax Payments. The Borrower will pay prior to delinquency ------------------------ all Taxes and Other Taxes payable in respect of any payment. Within 30 days after the date of any payment of Taxes, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 10.02, the original or a certified copy of a receipt evidencing payment of such Taxes or Other Taxes. (e) Foreign Lender Withholding Exemption. Each Lender and each Issuing ------------------------------------ Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Administrative Agent on the date of this Agreement or upon the effectiveness of any Assignment and Acceptance (i) if such Lender is a "bank" within the meaning of Section 881(c)(3)(A) of the Code, (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Lender is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (B) if applicable, an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax, and (C) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower or, (ii) if such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and intends to claim exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within -71- the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. Federal withholding tax on payments of interest by the Borrower under this Agreement and the other Credit Documents. Each Lender which delivers to the Borrower and the Administrative Agent a Form 1001 or 4224 and/or Form W-8 or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrower and the Administrative Agent two further copies of Form 1001 or 4224 and/or Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower and the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower and the Administrative Agent certifying in the case of a Form 1001 or 4224 that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Lender from duly completing and delivering any such letter or form with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Lender shall not be required to deliver such forms. The Borrower shall withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Lender failing to timely provide the requisite Internal Revenue Service forms. Section II.12 Illegality. If any Lender shall notify the Administrative ---------- Agent and the Borrower that the introduction of or any change in or in the interpretation of any Legal Requirement makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Lender or its LIBOR Lending Office to perform its obligations under this Agreement to maintain any LIBOR Advances of such Lender then outstanding hereunder, then, notwithstanding anything herein to the contrary, the Borrower shall, if demanded by such Lender by notice to the Borrower and the Administrative Agent no later than 11:00 a.m. (Dallas, Texas time), (a) if not prohibited by Legal Requirement to maintain such LIBOR Advances for the duration of the Interest Period, on the last day of the Interest Period for each outstanding LIBOR Advance of such Lender or (b) if prohibited by Legal Requirement to maintain such LIBOR Advances for the duration of the Interest Period, on the second Business Day following its receipt -72- of such notice from such Lender, Convert all LIBOR Advances of such Lender then outstanding to Base Rate Advances, and pay accrued interest on the principal amount Converted to the date of such Conversion and amounts, if any, required to be paid pursuant to Section 2.08 as a result of such Conversion being made on such date. Each Lender agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. Section II.13 Letters of Credit. ----------------- -73- (a) Issuance. From time to time from the date of this Agreement until -------- three months before the Revolving Maturity Date, at the request of the Borrower, the Issuing Bank shall, on any Business Day and on the terms and conditions hereinafter set forth, issue, increase, decrease, amend, or extend the expiration date of Letters of Credit for the account of the Borrower (for its own benefit or for the benefit of any of its Subsidiaries). Upon the Effective Date, but subject to the limitations contained in the following sentence, each Existing AGH Letter of Credit shall be automatically converted to a Letter of Credit. No Letter of Credit will be issued, increased, or extended and no Existing AGH Letter of Credit will be converted to a Letter of Credit (i) if such issuance, increase, extension or conversion would cause the Letter of Credit Exposure to exceed the lesser of (x) $100,000,000 or (y) an amount equal to (A) the aggregate Revolving Commitments less (B) the sum of the aggregate ---- outstanding principal amount of the Revolving Advances, the Letter of Credit Exposure, and the aggregate outstanding principal amount of the Swingline Advances at such time; (ii) unless such Letter of Credit has an Expiration Date not later than the earlier of (A) one year after the date of issuance thereof and (B) one day prior to the Revolving Maturity Date; (iii) unless such Letter of Credit is in form and substance acceptable to the respective Issuing Bank; (iv) unless such Letter of Credit is a standby letter of credit not supporting the repayment of indebtedness for borrowed money of any Person; (v) unless the Borrower has delivered to the respective Issuing Bank the completed and executed Letter of Credit Documents (other than the Letter of Credit) on such Issuing Bank's standard form, which shall contain terms no more restrictive than the terms of this Agreement; (vi) unless such Letter of Credit is governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 ("UCP") or any successor to the UCP; and (vii) unless no Default has occurred and is continuing or would result from the issuance of such Letter of Credit. If the terms of any of the Letter of Credit Documents referred to in the foregoing clause (v) conflicts with the terms of this Agreement, the terms of this Agreement shall control. (b) Participations. On the date of the issuance or increase of any Letter -------------- of Credit on or after the Effective Date or the conversion of any Existing AGH Letter of Credit to a Letter of Credit in accordance with provisions of the preceding Section 2.13(a), each Issuing Bank shall be deemed to have sold to each other Lender and each other Lender shall have been deemed to have purchased from such Issuing Bank a participation in the Letter of Credit Exposure related to the Letters of Credit issued by such Issuing Bank equal to such Lender's Revolving Share at such date and such sale and purchase shall otherwise be in accordance with the terms of this Agreement. Each Issuing Bank shall promptly notify each such participant Lender by telex, telephone, or -74- telecopy of each Letter of Credit of such Issuing Bank issued, increased or decreased, and the actual dollar amount of such Lender's participation in such Letter of Credit. Each Lender's obligation to purchase participating interests pursuant to this Section and to reimburse the respective Issuing Bank for such Lender's Revolving Share of any payment under a Letter of Credit by such Issuing Bank not reimbursed in full by the Borrower shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any of the circumstances described in paragraph (d) below, (ii) the occurrence and continuance of a Default, (iii) an adverse change in the financial condition of the Borrower or any Guarantor, or (iv) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing, except for any such circumstance, happening or event constituting or arising from gross negligence or willful misconduct on the part of such Issuing Bank. (c) Reimbursement. The Borrower shall have the right (but not the ------------- obligation) to pay promptly on demand to each Issuing Bank in respect of each Letter of Credit issued by such Issuing Bank an amount equal to any amount paid by such Issuing Bank under or in respect of such Letter of Credit. In the event any Issuing Bank makes a payment pursuant to a request for draw presented under a Letter of Credit and such payment is not promptly reimbursed by the Borrower upon demand, such Issuing Bank shall give notice of such payment to the Administrative Agent and, upon receipt of such notice, the Administrative Agent shall give notice of such payment to the Lenders, and each Lender shall promptly reimburse such Issuing Bank for such Lender's Revolving Share of such payment, and such reimbursement shall be deemed for all purposes of this Agreement to constitute a Base Rate Advance to the Borrower from such Lender. If such reimbursement is not made by any Lender to any Issuing Bank on the same day on which such Issuing Bank shall have made payment on any such draw, such Lender shall pay interest thereon to such Issuing Bank for each such day from the date such payment should have been made until the date repaid at a rate per annum equal to the Federal Funds Rate for each such day. The Borrower hereby unconditionally and irrevocably authorizes, empowers, and directs the Administrative Agent and the Lenders with Revolving Commitments to record and otherwise treat each payment under a Letter of Credit not immediately reimbursed by the Borrower as a Borrowing comprised of Base Rate Advances made by such Lenders to the Borrower on the day of payment under such Letter of Credit and such Lenders shall be entitled to the interest from its Base Rate Advance in connection with such Borrowing from the day of payment under such Letter of Credit. (d) Obligations Unconditional. The obligations of the Borrower under this ------------------------- Agreement -75- in respect of each Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, notwithstanding the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit Documents; (ii) any amendment or waiver of or any consent to departure from any Letter of Credit Documents; (iii) the existence of any claim, set-off, defense or other right which the Borrower or any Lender or any other Person may have at any time against any beneficiary or transferee of such Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the respective Issuing Bank or any other Person or entity, whether in connection with this Agreement, the transactions contemplated in this Agreement or in any Letter of Credit Documents or any unrelated transaction; (iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect to the extent the respective Issuing Bank would not be liable therefor pursuant to the following paragraph (e); (v) payment by the respective Issuing Bank under such Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; or (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (e) Liability of Issuing Banks. The Borrower assumes all risks of the -------------------------- acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. No Issuing Bank, nor any other Lender, nor any of their respective officers or directors shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; -76- (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by such Issuing Bank against presentation of documents which do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the relevant Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit (including such Issuing Bank's own negligence), except that the Borrower shall have a claim against such Issuing Bank, and such - ------ Issuing Bank shall be liable to, and shall promptly pay to, the Borrower, to the extent of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (A) such Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under a Letter of Credit comply with the terms of such Letter of Credit or (B) such Issuing Bank's gross negligence in failing to make lawful payment under any Letter of Credit after the presentation to it of a draft and certificate strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, any Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation. Section II.14 Determination of Leverage Ratio. The Leverage Ratio shall ------------------------------- be determined by the Administrative Agent, as follows: (a) Quarterly. On the Status Reset Date the Administrative Agent shall --------- determine the Leverage Ratio as of the last day of the immediately preceding Fiscal Quarter upon receipt of a Compliance Certificate setting forth the components of the Leverage Ratio as of such date. (b) Adjustments. Following each acquisition or disposition by the Parent ----------- or its Subsidiary of a Hotel Property or any of the Parent's or its Subsidiary's other Investments with an Investment Amount in excess of $5,000,000 or the incurrence by the Parent or its Subsidiary of additional Indebtedness (excluding any Obligations) in excess of $5,000,000 (an "Adjustment Event"), and the ---------------- Administrative Agent's receipt of an Adjustment Report with respect thereto, the -77- Administrative Agent shall adjust the Leverage Ratio accordingly solely for purposes of Section 7.04 and the definition of "Repayment Event", not for the definition of "Status." (c) Notice of Leverage Ratio Change. Promptly following any date the ------------------------------- Leverage Ratio is redetermined in accordance with the preceding paragraphs, the Administrative Agent shall give notice to the Lenders and the Borrower of the new Leverage Ratio. Section II.15 Lender Replacement. ------------------ (a) Right to Replace. The Borrower shall have the right to replace each ---------------- Lender either (i) affected by a condition under Section 2.02(c)(vi), 2.09, 2.11, or 2.12 for more than 90 days or (ii) that refuses to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required Lenders as (and to the extent) provided in Section 10.01 (each such affected or non-consenting Lender, an "Affected Lender") in accordance with the procedures in this Section 2.15 and provided that no reduction of the total Commitments occurs as a result thereof. (b) Replacement Allocation. ---------------------- (i) Upon the occurrence of any condition permitting the replacement of a Lender, the Administrative Agent in its sole discretion shall have the right to reallocate the amount of the Commitments of the Affected Lenders to Persons who desire to increase their Commitments, including without limitation to Persons which are not already party to this Agreement but which qualify as Eligible Assignees, which election shall be made by written notice within 30 days after the date such condition occurs. (ii) If the aggregate amount of the reallocated Commitments is less than the Commitments of the Affected Lenders, (A) the respective Commitments of the Lenders which have received such reallocated Commitments shall be increased by the respective amounts of their proposed reallocations to the extent any such Lender agrees to such increase, and (B) the Borrower shall have the right to add additional Lenders which are Eligible Assignees to this Agreement to replace such Affected Lenders, which additional Lenders would have aggregate Commitments no greater than those of the Affected Lenders minus the amounts of the Commitments already ----- reallocated. -78- (c) Procedure. Any assumptions of Commitments pursuant to this Section --------- 2.15 shall be (i) made by the purchasing Lender or Eligible Assignee and the selling Lender entering into an Assignment and Assumption and by following the procedures in Section 10.06 for adding a Lender. In connection with the reallocation of the Commitments of any Lender pursuant to the foregoing paragraph (b), each Lender with a reallocated Commitment shall purchase from the Affected Lenders at par such Lender's ratable share of the outstanding Advances of the Affected Lenders and assume such Lender's ratable share of the Affected Lenders' Letter of Credit Exposure. Section II.16 Sharing of Payments, Etc. If any Lender shall obtain any ------------------------ payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) (i) on account of the Revolving Advances made by it in excess of its Revolving Share of payments or collateral on account of the Revolving Advances or Letter of Credit Obligations obtained by all the Lenders, (ii) on account of the Term A Advances made by it in excess of its Term A Share of payments or collateral on account of the Term A Advances obtained by all the Lenders or (iii) on account of the Term B Advances made by it in excess of its Term B Share of payments or collateral on account of the Term B Advances obtained by all the Lenders, such Lender shall notify the Administrative Agent and forthwith purchase from the other Lenders such participations in the Revolving Advances, Term A Advances or Term B Advances, as applicable, made by them or Letter of Credit Obligations held by them as shall be necessary to cause such purchasing Lender to share the excess payment or benefits of such collateral or proceeds ratably in accordance with the requirements of this Agreement with each of them; provided, however, that if all or any portion of -------- such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such Lender's ratable share (according to the proportion of (a) the amount of the participation sold by such Lender to the purchasing Lender as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (a) the amount of such Lender's required repayment to the purchasing Lender to (b) the total amount of all such required repayments to the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by Legal Requirement, unless and until rescinded as provided above, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. -79- ARTICLE III CONDITIONS OF LENDING Section III.1 Conditions Precedent to Amendment and Restatement and ----------------------------------------------------- Additional Advances. The effectiveness of this amendment and restatement of the - ------------------- Existing AGH Credit Agreement and the obligation of each Lender to make any Advances not already outstanding under the Existing AGH Credit Agreement and of the Issuing Bank to issue any additional Letters of Credit are subject to the following conditions precedent being satisfied on or prior to August 3, 1998: (a) Documentation. The Administrative Agent shall have received ------------- counterparts of this Agreement executed by the Borrower and the Lenders, and the following duly executed by all the parties thereto, in form and substance satisfactory to the Administrative Agent, and, with respect to this Agreement, all Guaranties and the Environmental Indemnity, in sufficient copies for each Lender: (i) the Notes (including without limitation the Swingline Note payable to the order of the Swingline Lender), all Guaranties, and the Environmental Indemnity; (ii) Pledge Agreements executed by the Borrower, the Parent and the other Guarantors pledging to the Administrative Agent for the benefit of the Lenders, all Collateral, together with stock certificates, stock powers executed in blank, UCC-1 financing statements and any other documents, agreements or instruments necessary to create an Acceptable Security Interest in such pledged stock, limited liability interests and partnership interests, together with any other Security Documents; (iii) a certificate from a Responsible Officer of the Parent on behalf of the Borrower dated as of the Effective Date stating that as of the Effective Date (A) all representations and warranties of the Borrower set forth in this Agreement and the Credit Documents are true and correct in all material respects; (B) no Default has occurred and is continuing; (C) the conditions in this Section 3.01 have been met or waived in writing; and (D) to the best of the Borrower's knowledge there are no claims, defenses, counterclaims or offsets against the Lenders under the Credit Documents; -80- (iv) a certificate of the Secretary or an Assistant Secretary of the Parent on behalf of the Borrower and each corporation or limited liability company that is either a Guarantor or a general partner of a Guarantor dated as of the date of this Agreement certifying as of the date of this Agreement (A) the names and true signatures of officers or authorized representatives of the Parent and such other Persons authorized to sign the Credit Documents to which such Person is a party in the capacity therein indicated, (B) resolutions of the Board of Directors or the members of the Parent and such other Persons with respect to the transactions herein contemplated, (C) either (x) the copies of the organizational documents of the Parent and such other Persons delivered to the Lenders are still true and correct and have not been amended or modified since such date or (y) copies of any modification or amendment to the organizational documents of the Parent or any such other Persons made since such date, (D) a true and correct copy of the partnership agreement for the Borrower and each Guarantor which is a partnership, (E) a true and correct copy of all partnership authorizations necessary or desirable in connection with the transactions herein contemplated, and (F) a true and correct copy of the Merger Agreement, the Intercompany Agreement, and all Material Credit Documents; (v) a certificate of the Secretary or an Assistant Secretary of AGH REIT certifying as of the date immediately preceding the date of the Merger (A) resolutions of the Board of Directors of such Person and the shareholders' vote with respect to the transactions contemplated in the Merger Agreement and the Registration Statements, and (B) the copies of the charter and bylaws of AGH REIT and any modification or amendment to the articles or certificate of incorporation or bylaws of AGH REIT made on or prior to such date; (vi) a certificate of the Secretary or an Assistant Secretary of CapStar certifying as of the date immediately preceding the date of the Merger (A) resolutions of the Board of Directors of such Person and the shareholders' vote with respect to the transactions contemplated in the Merger Agreement and the Registration Statements, and (B) the copies of the charter and bylaws of CapStar and any modification or amendment to the articles or certificate of incorporation or bylaws of CapStar made on or prior to such date; (vii) (A) one or more favorable written opinions of DeCampo, Diamond & Ash, special counsel for the Borrower, the Parent, and their Subsidiaries, in a form reasonably -81- acceptable to the Administrative Agent, in each case dated as of the Closing Date and with such changes as the Administrative Agent may approve, (B) one or more favorable written opinions of Ballard, Spahr, Andrews & Ingersoll, special Maryland counsel for the Parent, and their Subsidiaries, in a form reasonably acceptable to the Administrative Agent, in each case dated as of the Closing Date and with such changes as the Administrative Agent may approve, and (C) such other legal opinions as the Administrative Agent shall reasonably request, in each case dated as of the Closing Date and with such changes as the Administrative Agent may approve; (viii) a Compliance Certificate dated as of the Closing Date reflecting for the financial tests covered therein the pro forma financial performance for the Borrower for the Rolling Period ended June 30, 1998, together with a certificate of the pro forma balance sheet of the Parent as of the Closing Date assuming the Merger was consummated and the Existing CapStar Indebtedness to be Repaid had been repaid, duly completed and executed by the Chief Financial Officer or Treasurer of the Parent; (ix) evidence reasonable satisfactory to the Administrative Agent that the Merger and the other transactions contemplated by the Merger Agreement and the Registration Statements have been consummated in accordance with the terms of the Merger Agreement, all Legal Requirements and all corporate and partnership governance requirements; and (x) such other documents, governmental certificates, agreements, and lien searches as the Administrative Agent may reasonably request. (b) Representations and Warranties. The representations and warranties ------------------------------ contained in Article IV hereof, the Guaranties, and the Environmental Indemnities shall be true and correct in all material respects. (c) Certain Payments. The Borrower shall have paid the fees required to be ---------------- paid as of the execution of this Agreement pursuant to the Fee Letter and the Administrative Agent Fee Letter. (d) Security Documents. The Administrative Agent shall have received all ------------------ appropriate evidence required by the Administrative Agent in its sole discretion necessary to determine that the -82- Administrative Agent has an Acceptable Security Interest in the Collateral, including, without limitation, lien searches conducted on the Borrower and the Guarantors and lien releases with respect to any Collateral currently subject to a Lien. Section III.2 Conditions Precedent for Each Borrowing or Letter of ---------------------------------------------------- Credit. The obligation of each Lender to fund an Advance on the occasion of each - ------ Borrowing (other than the Conversion or continuation of any existing Borrowing) and of any Issuing Bank to issue or increase or extend any Letter of Credit shall be subject to the further conditions precedent that on the date of such Borrowing or the issuance, increase or extension of such Letter of Credit: (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing or the issuance or increase or extension of such Letter of Credit shall constitute a representation and warranty by the Borrower that on the date of such Borrowing or the issuance or increase or extension of such Letter of Credit such statements are true): (i) the representations and warranties contained in Article IV hereof, the Guaranties, the Environmental Indemnities and the other Credit Documents, as such representations and warranties may change based upon events or activities permitted by this Agreement, are correct in all material respects on and as of the date of such Borrowing or the issuance or increase or extension of such Letter of Credit, before and after giving effect to such Borrowing or to the issuance or increase or extension of such Letter of Credit and to the application of the proceeds from such Borrowing, as though made on and as of such date; and (ii) no Default has occurred and is continuing or would result from such Borrowing or from the application of the proceeds therefrom, as evidenced by a Compliance Certificate executed and delivered by the Borrower to the Administrative Agent dated as of the date of the Notice of Borrowing; provided that the financial tests in such Compliance Certificate -------- except for the Leverage Ratio do not need to be updated from the last Compliance Certificate delivered by the Borrower; and (b) the Administrative Agent shall have received such other approvals, opinions or documents deemed necessary or desirable by any Lender or the Administrative Agent as such party may reasonably request. -83- ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: Section IV.1 Existence; Qualification; Partners; Subsidiaries. ------------------------------------------------ (a) The Borrower is a limited partnership duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not cause a Material Adverse Change to the Borrower. The Borrower is the survivor by merger of AGH OP and the CapStar Hotel LLCs. The CapStar Hotel LLCs were newly-formed Delaware limited liability companies which were the successors of CapStar Management Company, L.P. and CapStar Management Company II, L.P., respectively, as more particularly described in the Registration Statements. (b) The Parent is a corporation duly organized, validly existing, and in good standing under the laws of Maryland and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not cause a Material Adverse Change to the Parent. The Parent owns 100% of the outstanding stock in MeriStar LP, Inc. and is the sole general partner of the Borrower. MeriStar LP, Inc. owns at least 88% of the outstanding partnership interests in the Borrower and is the sole limited partner of the Borrower. The Parent has no first tier Subsidiaries except for the Borrower, MeriStar LP, Inc., and certain Permitted Other Subsidiaries. The Parent is the successor by merger of AGH REIT and CapStar. Prior to the Merger, AGH GP and AGH LP were merged into AGH REIT. The Merger has been consummated in accordance with the terms of the Merger Agreement, all Legal Requirements and all corporate and partnership governance requirements. (c) The address of the principal office of each of the Borrower and the Parent is 1010 Wisconsin Avenue, N.W., Suite 650, Washington, D.C. 20007. (d) OPCO is a newly-formed corporation duly organized, validly existing, and in good -84- standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not cause a Material Adverse Change to OPCO. OPCO owns approximately 83% of the partnership interest in the OPCO OP and is the sole general partner of OPCO OP. In connection with the Merger, CapStar Management Company, L.P. and CapStar Management Company II, L.P. assigned to OPCO all management agreements and participating leases to which such Persons were a party. In connection with the Merger, OPCO OP has acquired 100% of the outstanding partnership interests in AGH Leasing and the outstanding management agreements of American General Hospitality, Inc. (e) Each Subsidiary of the Borrower is a corporation, limited partnership, general partnership or limited liability company duly organized, validly existing, and in good standing under the laws of its jurisdiction of formation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not cause a Material Adverse Change to such Subsidiary. The Borrower has no Subsidiaries on the date of this Agreement other than the Subsidiaries listed on the attached Schedule 4.01, and Schedule 4.01 lists the jurisdiction of formation, and the address of the principal office of each such Subsidiary existing on the date of this Agreement. As of the date of this Agreement, the Borrower owns, directly or indirectly, at least the percentage interests in each such Subsidiary listed on the attached Schedule 4.01. (f) To the knowledge of the Borrower, each Approved Participating Lessee is a limited partnership duly organized, validly existing, and in good standing under the laws of the state of its creation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the Approved Participating Lessee. To the knowledge of the Borrower, OPCO is duly listed on the New York Stock Exchange, Inc. Section IV.2 Partnership and Corporate Power. The execution, delivery, ------------------------------- and performance by the Borrower, the Parent, and each Guarantor of the Credit Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby (a) are within such Persons' partnership, limited liability company and corporate powers, as applicable, (b) have been duly authorized by all necessary corporate, limited liability company and partnership action, as applicable, (c) do not contravene (i) such Person's certificate or articles, as the case -85- may be, of incorporation or by-laws, operating agreement or partnership agreement, as applicable, or (ii) any law or any contractual restriction binding on or affecting any such Person, the contravention of which could reasonably be expected to cause a Material Adverse Change, and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Borrowing, such Borrowing and the use of the proceeds of such Borrowing will be within the Borrower's partnership powers, will have been duly authorized by all necessary partnership action, (a) will not contravene (i) the Borrower's partnership agreement or (ii) any law or any contractual restriction binding on or affecting the Borrower, the contravention of which could reasonably be expected to cause a Material Adverse Change, and (b) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. Section IV.3 Authorization and Approvals. No authorization or approval --------------------------- or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrower, the Parent, or any Guarantor of the Credit Documents to which it is a party or the consummation of the transactions contemplated thereby. At the time of each Borrowing, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Borrowing or the use of the proceeds of such Borrowing the absence of which could reasonably be expected to cause a Material Adverse Change. Section IV.4 Enforceable Obligations. This Agreement, the Notes, and ----------------------- the other Credit Documents to which the Borrower is a party have been duly executed and delivered by the Borrower; each Guaranty and the other Credit Documents to which each Guarantor and the Parent is a party have been duly executed and delivered by such Guarantor; and the Environmental Indemnity and Pledge Agreement have been duly executed and delivered by the respective parties thereto. Each Credit Document is the legal, valid, and binding obligation of the Borrower, the Parent, and each Guarantor which is a party to it enforceable against the Borrower, the Parent, and each such Guarantor in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general principles of equity (whether considered in proceeding at law or in equity). Section IV.5 Parent Common Stock. The entire authorized capital stock ------------------- of the Parent consists of 100,000,000 shares of Parent Common Stock of which approximately 45,500,000 -86- shares of Parent Common Stock are duly and validly issued and outstanding, fully paid and nonassessable as of consummation of the Merger. The issuance and sale of such Parent Common Stock either (i) has been registered under applicable federal and state securities laws or (ii) was issued pursuant to an exemption therefrom. The Parent Common Stock is duly listed on the New York Stock Exchange, Inc. and the Parent has timely filed all reports required to be filed by it with the New York Stock Exchange, Inc. and the Securities and Exchange Commission. The Parent qualifies as a REIT. Section IV.6 Financial Statements and Registration Statements. The ------------------------------------------------ respective Consolidated balance sheets of AGH REIT and its Subsidiaries and CapStar and its Subsidiaries, and the respective related Consolidated statements of operations, shareholders' equity and cash flows, of the Parent and its Subsidiaries and CapStar and its Subsidiaries contained in the Financial Statements and the Registration Statements, and the corresponding pro forma financial statements for the Borrower, fairly present the financial condition in all material respects and reflects the Indebtedness of such Persons and their respective Subsidiaries as of the dates indicated in the Financial Statements and the Registration Statements and the respective results of the operations of such Persons and their respective Subsidiaries for the periods indicated, and such balance sheets and statements were prepared in accordance with GAAP, subject to year-end adjustments. Since December 31, 1997 (assuming the Merger had occurred on or before such date) there has been no development or event which has had or could reasonably be expected to cause a Material Adverse Change. The OP Adjustment amount as of June 30, 1998 is approximately $10,300,000. Section IV.7 True and Complete Disclosure. No representation, warranty, ---------------------------- or other statement made by the Borrower (or on behalf of the Borrower) in this Agreement or any other Credit Document contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made as of the date of this Agreement. There is no fact known to any Responsible Officer of the Borrower or the Parent on the date of this Agreement that has not been disclosed to the Administrative Agent which could reasonably be expected to cause a Material Adverse Change. All projections, estimates, and pro forma financial information furnished by the Borrower and the Parent or on behalf of the Borrower or the Parent were prepared on the basis of assumptions, data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were furnished; it being agreed that such projections and estimates are not guaranties of results. No representation, warranty or other statement made in AGH REIT's or CapStar's latest 10K, the 10Q or the annual report contains any -87- untrue statement of material fact or omits to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made as of the date same were made. Borrower and/or Parent have made all filings required by the Exchange Act. Section IV.8 Litigation. Except as set forth in the attached Schedule ---------- 4.08, there is no pending or, to the best knowledge of the Borrower, threatened action or proceeding affecting the Borrower, the Parent, any Approved Participating Lessee or any of their respective Subsidiaries before any court, Governmental Authority or arbitrator in which the amount in dispute is over $500,000 or in Borrower's good faith judgment the anticipated loss is over $500,000 (provided that with respect to the giving of this representation after the date of this Agreement, the representation shall only be deemed to apply to those matters for which Administrative Agent would have been entitled to notice under Section 5.05(m)). Section IV.9 Use of Proceeds. --------------- (a) Advances. The proceeds of the Advances have been, and will be used by -------- CapStar to repay the Existing CapStar Indebtedness to be Repaid and by the Borrower (i) to repay the Existing AGH Lenders who are not Lenders, (ii) to refinance other existing Indebtedness, (iii) to make investments permitted pursuant to the provisions of Section 6.07, (iv) to finance the renovation, repair, restoration and expansion of Hotel Properties, Capital Expenditures for and expenditures for FF&E for any Hotel Properties in accordance with the provisions of Section 5.06 and as permitted pursuant to the provisions of Sections 6.07 and 6.13, (v) for general corporate purposes of the Borrower and its Subsidiaries, and (vi) for costs incurred in connection with the Merger and with the Parent's or any of its Subsidiary's sale or issuance of equity securities or incurrence of Indebtedness done in compliance with this Agreement. (b) Regulations. No proceeds of Advances will be used to purchase or ----------- carry any margin stock in violation of Regulations T, U or X of the Federal Reserve Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Federal Reserve Board). Section IV.10 Investment Company Act. Neither the Borrower, the Parent ---------------------- nor any of their respective Subsidiaries is an "investment company" or a company "controlled" by an "investment -88- company" within the meaning of the Investment Company Act of 1940, as amended. Section IV.11 Taxes. All federal, state, local and foreign tax returns, ----- reports and statements required to be filed (after giving effect to any extension granted in the time for filing) by the Parent, the Borrower, their respective Subsidiaries, or any member of a Controlled Group have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and where the failure to file could reasonably be expected to cause a Material Adverse Change, except where contested in good faith and by appropriate proceedings; and all taxes and other impositions due and payable (which are material in amount) have been timely paid prior to the date on which any fine, penalty, interest, late charge or loss (which are material in amount) may be added thereto for non-payment thereof except where contested in good faith and by appropriate proceedings. As of the date of this Agreement, neither the Parent, the Borrower nor any member of a Controlled Group has given, or been requested to give, a waiver of the statute of limitations relating to the payment of any federal, state, local or foreign taxes or other impositions. None of the Property owned by the Parent, the Borrower or any other member of a Controlled Group is Property which the Parent, the Borrower or any member of a Controlled Group is required to be treated as being owned by any other Person pursuant to the provisions of Section 168(f)(8) of the Code. Proper and accurate amounts have been withheld by the Borrower and all members of each Controlled Group from their employees for all periods to comply in all material respects with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law. Timely payment of all material sales and use taxes required by applicable law have been made by the Parent, the Borrower and all other members of each Controlled Group, the failure to timely pay of which could reasonably be expected to cause a Material Adverse Change. The amounts shown on all tax returns to be due and payable have been paid in full or adequate provision therefor is included on the books of the appropriate member of the applicable Controlled Group. Section IV.12 Pension Plans. All Plans are in compliance in all material ------------- respects with all applicable provisions of ERISA. No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code. Except where the failure would not cause a Material Adverse Change, no "accumulated funding deficiency" (as defined in Section 302 of ERISA) has occurred and there has been no excise tax imposed under Section 4971 of the Code. No Reportable Event has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with -89- applicable provisions of ERISA and the Code. Neither the Parent, the Borrower, nor any member of a Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any material withdrawal liability. As of the most recent valuation date applicable thereto, neither the Parent, the Borrower nor any member of a Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization. Section IV.14 Condition of Hotel Property; Casualties; Condemnation. ----------------------------------------------------- Except as disclosed in an Engineering Report, each Initial Property and any Future Property (a) is and will continue to be in good repair, working order and condition, normal wear and tear excepted, (b) is free of structural defects other than those being addressed by the Borrower and for which the Borrower has sufficient funds to address, (c) is not subject to material deferred maintenance and (d) has and will have all building systems contained therein and all other FF&E in good repair, working order and condition, normal wear and tear excepted. No condemnation or other like proceedings that has had, or could reasonably be expected to cause, a Material Adverse Change, are pending nor, to the knowledge of the Borrower, threatened against any Property in any manner whatsoever. No casualty has occurred to any Property that could reasonably be expected to cause a Material Adverse Change. Section IV.14 Insurance. The Borrower and each of its Subsidiaries carry --------- the insurance required pursuant to the provisions of Section 5.07. Section IV.15 No Burdensome Restrictions; No Defaults. --------------------------------------- (a) Except in connection with Indebtedness which is (i) either permitted pursuant to the provisions of Section 6.02, including without limitation the Convertible Indebtedness and the Existing Subordinate Indebtedness, or (ii) being repaid with the proceeds of the initial Borrowing, neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit agreement. Neither the Borrower, the Parent nor any of their respective Subsidiaries is a party to any agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation which could reasonably be expected to cause a Material Adverse Change. Neither the Borrower, the Parent nor any of their Subsidiaries is in default under or with respect to (i) any contract, agreement, lease or other instrument which could reasonably be expected to cause a Material Adverse Change or (ii) any ground lease, participating lease, franchise agreement, license agreement or management agreement which could reasonably be expected to cause a Material Adverse Change. Neither the Borrower, the Parent nor any of their Subsidiaries has received any written notice of default under any ground lease, participating -90- lease, franchise agreement, license agreement or management agreement. Neither the Borrower, the Parent nor any of their Subsidiaries has received any notice of default under any other material contract, agreement, lease or other instrument which is continuing and which, if not cured, could reasonably be expected to cause a Material Adverse Change. (b) No Default has occurred and is continuing (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Administrative Agent in writing after the date of this Agreement and prior to the date such representation is deemed given). Section IV.16 Environmental Condition. ----------------------- (a) Except as disclosed in the Environmental Reports (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Administrative Agent in writing after the date of this Agreement and prior to the date such representation is deemed given), to the knowledge of the Borrower, the Borrower and its Subsidiaries (i) have obtained all Environmental Permits material for the ownership and operation of their respective Properties and the conduct of their respective businesses; (ii) have been and are in material compliance with all terms and conditions of such Environmental Permits and with all other requirements of applicable Environmental Laws; (iii) have not received written notice of any violation or alleged violation of any Environmental Law or Environmental Permit; and (iv) are not subject to any actual or contingent Environmental Claim. To the knowledge of the Borrower (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Administrative Agent in writing after the date of this Agreement and prior to the date such representation is deemed given), the Borrower and its Subsidiaries are not subject to any actual or contingent Environmental Claim which the Borrower believes in good faith will involve cost or expense to the Borrower or its Subsidiaries in excess of $1,000,000 for any single Environmental Claim, or in excess of $10,000,000 for all such Environmental Claims in the aggregate. (b) Except as set forth in the Environmental Reports or the surveys for the Hotel Properties, to the knowledge of Borrower, none of the present or previously owned or operated Property of the Borrower or of any of its present or former Subsidiaries, wherever located, (i) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local -91- analogs, or have been otherwise investigated, designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws which could reasonably be expected to cause a Material Adverse Change; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property owned or operated by the Borrower or any of its Subsidiaries, wherever located; (iii) has been the site of any Release, use or storage of Hazardous Substances or Hazardous Wastes from present or past operations except for Permitted Hazardous Substances, which Permitted Hazardous Substances have not caused at the site or at any third-party site any condition that has resulted in or could reasonably be expected to result in the need for Response or (iv) none of the Improvements are constructed on land designated by any Governmental Authority having land use jurisdiction as wetlands. Section IV.17 Legal Requirements, Zoning, Utilities, Access. Except as --------------------------------------------- set forth on Schedule 4.17 attached hereto, the use and operation of each Hotel Property as a commercial hotel with related uses constitutes a legal use under applicable zoning regulations (as the same may be modified by special use permits or the granting of variances or "grand fathering") and complies in all material respects with all Legal Requirements, and does not violate in any material respect any material approvals, material restrictions of record or any material agreement affecting any Hotel Property (or any portion thereof). The Borrower and its Subsidiaries possess all certificates of public convenience, authorizations, permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights (collectively "Permits") required by Governmental Authority to own and operate the Hotel Properties, except for those Permits that if not obtained would not cause a Material Adverse Change. The Borrower and its Subsidiaries own and operate their business in material compliance with all applicable Legal Requirements and are otherwise in compliance with all Legal Requirements except for non- compliance which in the aggregate would not cause a Material Adverse Change. To the extent necessary for the full utilization of each Hotel Property in accordance with its current use, telephone services, gas, steam, electric power, storm sewers, sanitary sewers and water facilities and all other utility services are available to each Hotel Property, are adequate to serve each such Hotel Property, exist at the boundaries of the Land and are not subject to any conditions, other than normal charges to the utility supplier, which would limit the use of such utilities. All streets and easements necessary for the occupancy and operation of each Hotel Property are available to the boundaries of the Land. Section IV.18 Existing Indebtedness. Except for the Obligations, the only --------------------- Indebtedness of the Borrower, the Parent or any of their respective Subsidiaries existing as of the Effective Date is the Unsecured Indebtedness, Secured Non-Recourse Indebtedness and Secured Recourse Indebtedness set forth on Schedule 4.18 attached hereto. No "default" or "event of default", however defined, has occurred and is continuing under any such Indebtedness (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Administrative Agent in writing after the date of this Agreement and prior to the date such representation is deemed given). Section IV.9 Title; Encumbrances. With respect to the Initial ------------------- Properties, the Borrower or any Subsidiary, as the case may be, has (i) good and marketable fee simple title to the Real Property (other than for Real Property subject to a ground lease, as to which it has a valid leasehold or subleasehold interest) and (ii) good and marketable title to the Personal Property (other than Personal Property for any Hotel Property for which the Property Owner has a valid leasehold interest) free and clear of all Liens except Permitted Encumbrances, and there exists no Liens or other charges against such Property or leasehold interest or any of the real or personal, tangible or intangible, Property of the Borrower or any Guarantor (including without limitation statutory and other Liens of mechanics, workers, contractors, subcontractors, suppliers, taxing authorities and others; provided that certain Capital Expenditures have been made to the Hotel Properties prior to the Effective Date for which the payment is not past due), except (A) Permitted Encumbrances and (B) the Personal Property (plus any replacements thereof) owned by an Approved Participating Lessee. Section IV.20 Leasing Arrangements. The only material leases of Real -------------------- Property for which either the Borrower or a Subsidiary is a lessee are the ground leases listed on Schedule 4.20 attached hereto. The Property Owner for a Real Property subject to a ground lease is the lessee under such ground lease and no consent is necessary to such Person being the lessee under such ground lease which has not already been obtained. Such ground leases are in full force and effect and no defaults exist thereunder. The only material leases burdening the Hotel Properties for which the lessee is entitled to participate in the increased revenues of the Hotel Properties are the Approved Participating Leases. The Approved Participating Leases are in full force and effect and no defaults by the Borrower or any Subsidiary exist thereunder. Section IV.21 Franchise Agreements. The only hotel franchise agreements -------------------- or license agreements burdening the Initial Properties are those certain agreements listed on Schedule 4.21 attached hereto. The Property Owner or Approved Participating Lessee for a Hotel Property subject to a franchise or license agreement is the licensee under such agreement and no consent -93- is necessary to such Person being the licensee under such agreement or for the consummation of the Merger and the other transactions contemplated thereby which has not already been obtained except for those consents, if any, which are set forth on Schedule 4.21. Such franchise and license agreements are in full force and effect and no defaults by the Borrower or any Subsidiary exist thereunder (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Administrative Agent in writing after the date of this Agreement and prior to the date such representation is deemed given). Section IV.22 Management Agreements. The only management agreements --------------------- burdening the Initial Properties (excluding management agreements for parking facilities) with Persons other than Approved Participating Lessees are those certain management agreements listed on Schedule 4.22 attached hereto. To the knowledge of the Borrower, the Approved Participating Lessee for a Hotel Property subject to a management agreement is the owner under such management agreement and no consent is necessary to such Person being the owner under such management agreement which has not already been obtained. To the knowledge of the Borrower, the management agreements are in full force and effect and no material defaults by the Approved Participating Lessee exist thereunder (or with respect to the giving of this representation after the date of this Agreement, as otherwise disclosed to the Administrative Agent in writing after the date of this Agreement and prior to the date such representation is deemed given). Section IV.23 Senior Indebtedness. The Obligations and all renewals and ------------------- extensions of the Obligations constitute "Designated Senior Indebtedness" under the Convertible Indebtedness Indenture and the Existing Subordinate Indebtedness Indenture. Section IV.24 Specified Secured Indebtedness. As of the Closing Date, ------------------------------ Permitted Other Subsidiaries are incurring approximately $250,000,000 in Specified Secured Indebtedness which Indebtedness qualifies as Secured Non- Recourse Indebtedness permitted pursuant to the provisions of Section 6.02(b). The documents evidencing and securing the Specified Secured Indebtedness are in full force and effect and no material defaults by the Permitted Other Subsidiaries party thereto exist thereunder. ARTICLE V AFFIRMATIVE COVENANTS -94- So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Lender shall have any Commitment hereunder, unless the Administrative Agent shall otherwise consent in writing, the Borrower agrees to comply with the following covenants. Section V.1 Compliance with Laws, Etc. The Borrower will comply, and ------------------------- cause the Parent and each of its Subsidiaries to comply, in all material respects with all Legal Requirements. Section V.2 Preservation of Existence; Separateness, Etc. -------------------------------------------- (a) The Borrower will preserve and maintain, and cause each of its Subsidiaries (as long as a Subsidiary owns assets) to preserve and maintain, its partnership, limited liability company or corporate (as applicable) existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified, and cause each such Subsidiary to qualify and remain qualified, as a foreign partnership or corporation as applicable in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its properties, and, in each case, where failure to qualify or preserve and maintain its rights and franchises could reasonably be expected to cause a Material Adverse Change. (b) (i) The Parent Common Stock shall at all times be duly listed on the New York Stock Exchange, Inc. and (ii) the Parent shall timely file all reports required to be filed by it with the New York Stock Exchange, Inc. and the Securities and Exchange Commission. (c) The Borrower shall cause the Permitted Other Subsidiaries which have Indebtedness and own a Hotel Property to, (i) maintain financial statements, accounting records and other corporate records and other documents separate from all non-Permitted Other Subsidiaries, (ii) maintain their own bank accounts in their own name, separate from all non-Permitted Other Subsidiaries, (iii) pay their own expenses and other liabilities from their own assets and incur (or endeavor to incur) obligations to other Persons based solely upon their own assets and creditworthiness and not upon the creditworthiness of each other or any other Person, and (iv) file their own tax returns or, if part of a consolidated group, join in the consolidated tax return of such group as a separate member thereof. (d) The Borrower shall, and shall cause the Permitted Other Subsidiaries which have Indebtedness and own a Hotel Property to, take all actions necessary to keep such Permitted Other -95- Subsidiaries, separate from the Borrower and the Borrower's other Subsidiaries, including, without limitation, (i) the taking of action under the direction of the Board of Directors, members or partners, as applicable, of such Permitted Other Subsidiaries and, if so required by the Certificate of Incorporation or the Bylaws, operating agreement or partnership agreement, as applicable, of such Permitted Other Subsidiaries or by any Legal Requirement, the approval or consent of the stockholders, members or partners, as applicable, of such Permitted Other Subsidiaries, (ii) the preparation of corporate, partnership or limited liability company minutes for or other appropriate evidence of each significant transaction engaged in by such Permitted Other Subsidiaries, (iii) the observance of separate approval procedures for the adoption of resolutions by the Board of Directors or consents by the partners, as applicable, of such Permitted Other Subsidiaries, on the one hand, and of the Borrower and the Borrower's other Subsidiaries, on the other hand, and (iv) preventing the cash, cash equivalents, credit card receipts or other revenues of the Hotel Properties owned by such Permitted Other Subsidiaries or any other assets of such Permitted Other Subsidiaries from being commingled with the cash, cash equivalents, credit card receipts or other revenues collected by the Borrower or the Borrower's other Subsidiaries. (e) The Borrower shall take all steps reasonably necessary to avoid (i) misleading any other Person as to the identity of the entity with which such Person is transacting business or (ii) implying that the Borrower is, directly or indirectly, absolutely or contingently, responsible for the Indebtedness or other obligations of the Permitted Other Subsidiaries or any other Person. Section V.3 Payment of Taxes, Etc. The Borrower will pay and discharge, --------------------- and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by Legal Requirement become a Lien upon its Property; provided, however, that neither the Borrower -------- ------- nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim (a) which is being contested in good faith and by appropriate proceedings, (b) with respect to which reserves in conformity with GAAP have been provided, (c) such charge or claim does not constitute and is not secured by any choate Lien on any portion of any Hotel Property and no portion of any Hotel Property is in jeopardy of being sold, forfeited or lost during or as a result of such contest, (d) neither the Administrative Agent nor any Lender could become subject to any civil fine or penalty or criminal fine or penalty, in each case as a result of non-payment of such charge or claim and (e) such contest does not, and could not reasonably be expected to, result in a Material Adverse Change. -96- Section V.4 Visitation Rights; Lender Meeting. At any reasonable time --------------------------------- and from time to time and so long as any visit or inspection will not unreasonably interfere with the Borrower's or any of its Subsidiaries' operations, upon reasonable notice, the Borrower will, and will cause the Parent and its Subsidiaries and those Persons operating the Hotel Properties, to, permit the Administrative Agent and any Lender or any of its agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit and inspect at its reasonable discretion the properties of, the Borrower, the Parent and any of their respective Subsidiaries; to inspect such other records and documents of the Borrower, the Parent and any of their respective Subsidiaries as shareholders of the Parent are entitled; and to discuss the affairs, finances and accounts of such Persons with any of their respective officers or directors. Without in any way limiting the foregoing, the Borrower will, upon the request of the Administrative Agent, participate in a meeting with the Administrative Agent and the Lenders once during each calendar year to be held at the Borrower's office in the District of Columbia or Dallas, Texas (or such other location as may be agreed to by the Borrower and the Administrative Agent) at such time as may be agreed to by the Borrower and the Administrative Agent. Section V.5 Reporting Requirements. The Borrower will furnish to the ---------------------- Administrative Agent and, with respect to those items set forth in clauses (a)- (e) and (k), each Lender: (a) Quarterly Financials. As soon as available and in any event not later -------------------- than 50 days after the end of each Fiscal Quarter of the Parent, the unaudited Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such quarter and the related unaudited statements of income, shareholders' equity and cash flows of the Parent and its Subsidiaries for such Fiscal Quarter and the period commencing at the end of the previous year and ending with the end of such Fiscal Quarter, and the corresponding figures as at the end of, and for, the corresponding periods in the preceding Fiscal Year, all duly certified with respect to such statements (subject to year-end audit adjustments) by a Responsible Officer of the Parent as having been prepared in accordance with GAAP, together with (i) a Compliance Certificate duly executed by a Responsible Officer of the Parent, (ii), written notice of any anticipated material variation to an operating budget prepared pursuant to Section 5.05(d) and (iii) a report certified by a Responsible Officer of the Parent setting forth for each of the Hotel Properties owned or leased by the Parent or any of its Subsidiaries for both the Fiscal Quarter and Rolling Period just ended the revenues, the expenses, the Net Income and the EBITDA for such Hotel Properties for such Fiscal Quarter or Rolling Period, as applicable. -97- (b) Annual Financials. As soon as available and in any event not later ----------------- than 95 days after the end of each Fiscal Year of the Parent, a copy of the Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such Fiscal Year and the related Consolidated statements of income, shareholders' equity and cash flows of the Parent and its Subsidiaries for such Fiscal Year, and the corresponding figures as at the end of, and for, the preceding Fiscal Year, and certified by independent certified public accountants of nationally recognized standing reasonably acceptable to the Administrative Agent in an opinion, without qualification as to the scope, and including, if requested by the Administrative Agent, any management letters delivered by such accountants to the Parent in connection with such audit, together with (i) a Compliance Certificate duly executed by a Responsible Officer of the Parent, and (ii) the documents required in clauses (ii) and (iii) of the preceding Section 5.05(a). (c) OPCO Financials. As soon as available and in any event not later than --------------- 50 days after the end of each Fiscal Quarter of OPCO, the unaudited Consolidated balance sheets of OPCO and its Subsidiaries as of the end of such quarter and the related unaudited statements of income, shareholders' equity and cash flows of OPCO and its Subsidiaries for the period commencing at the end of the previous year and ending with the end of such Fiscal Quarter, and the corresponding figures as at the end of, and for, the corresponding period in the preceding Fiscal Year, all duly certified with respect to such statements (subject to year-end audit adjustments) by a Responsible Officer of OPCO as having been prepared in accordance with GAAP. As soon as available and in any event not later than 120 days after the end of each fiscal year of OPCO, as applicable, (i) a copy of the annual audit report for such year for OPCO and its Subsidiaries, if any, including therein audited Consolidated balance sheets of OPCO and its Consolidated Subsidiaries as of the end of such fiscal year and the related Consolidated statements of income, shareholders' equity and cash flows of OPCO and its Subsidiaries for such fiscal year, and the corresponding figures as at the end of, and for, the preceding fiscal year, in each case certified by an independent certified public accountant reasonably acceptable to the Administrative Agent and including, if requested by the Administrative Agent, any management letters delivered by such accountants to OPCO in connection with such audit. (d) Annual Budgets. Prior to the start of each Fiscal Year, the -------------- Consolidated annual operating budget of the Parent and its Subsidiaries for such upcoming Fiscal Year and the Consolidated annual Capital Expenditure and FF&E expenditure budget (stating the total of each such expenditures for each Hotel Property) of the Parent and its Subsidiaries for such upcoming -98- Fiscal Year, both in reasonable detail and duly certified by a Responsible Officer of the Parent as the budgets presented or to be presented to the Parent's Board of Directors for their review. (e) Securities Law Filings. Promptly and in any event within 15 days ---------------------- after the sending or filing thereof, copies of all proxy material, reports and other information which the Borrower, the Parent or any of their respective Subsidiaries sends to or files with the United States Securities and Exchange Commission or sends to all shareholders of the Parent or partners of the Borrower. (f) Defaults. As soon as possible and in any event within five days after -------- the occurrence of each Default known to a Responsible Officer of the Borrower, the Parent or any of their respective Subsidiaries, a statement of an authorized financial officer or Responsible Officer of the Borrower setting forth the details of such Default and the actions which the Borrower has taken and proposes to take with respect thereto. (g) ERISA Notices. As soon as possible and in any event (i) within 30 ------------- days after the Parent, the Borrower or any of a Controlled Group knows that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, (ii) within 10 days after the Parent, the Borrower or any of a Controlled Group knows that any other Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer of the Parent describing such Termination Event and the action, if any, which the Parent, the Borrower or such member of such Controlled Group proposes to take with respect thereto; (iii) within 10 days after receipt thereof by the Parent, the Borrower or any of a Controlled Group from the PBGC, copies of each notice received by the Parent, the Borrower or any such member of such Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; and (iv) within 10 days after receipt thereof by the Parent, the Borrower or any member of a Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by the Parent, the Borrower or any member of such Controlled Group concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA. (h) Environmental Notices. Promptly upon the knowledge of any --------------------- Responsible Officer of the Borrower of receipt thereof by the Borrower or any of its Subsidiaries, a copy of any form of notice, summons or citation received from the United States Environmental Protection Agency, or any other Governmental Authority concerning (i) violations or alleged violations of Environmental Laws, which seeks to impose liability therefor, (ii) any action or omission on the part of the Parent or Borrower or any of their present or former Subsidiaries in connection with -99- Hazardous Waste or Hazardous Substances which, based upon information reasonably available to the Borrower, could reasonably be expected to cause a Material Adverse Change or an Environmental Claim in excess of $1,000,000, (iii) any notice of potential responsibility under CERCLA, or (iv) concerning the filing of a Lien upon, against or in connection with the Parent, Borrower, their present or former Subsidiaries, any of their leased or owned Property, wherever located. (i) Other Governmental Notices or Actions. Promptly and in any event ------------------------------------- within five Business Days after receipt thereof by the Borrower, the Parent or any of their respective Subsidiaries, (i) a copy of any notice, summons, citation, or proceeding seeking to adversely modify in any material respect, revoke, or suspend any license, permit, or other authorization from any Governmental Authority, which action could reasonably be expected to cause a Material Adverse Change, and (ii) any revocation or involuntary termination of any license, permit or other authorization from any Governmental Authority, which revocation or termination could reasonably be expected to cause a Material Adverse Change. (j) Reports Affecting the Leverage Ratio. On or prior to the 15th day ------------------------------------ following any Adjustment Event, an Adjustment Report with respect to such Adjustment Event. (k) Press Releases. Promptly and in any event within 5 days after the -------------- sending or releasing thereof, copies of all press releases or other releases of information to the public by the Borrower, the Parent or any of their respective Subsidiaries or releases of information to the Parent's shareholders. (l) Corporate Activity. Promptly following any merger or dissolution of ------------------ any Subsidiary of the Borrower which is permitted hereunder or event which would make any of the representations in Section 4.01-4.04 untrue, notice thereof. (m) Material Litigation. As soon as possible and in any event within five ------------------- days of any Responsible Officer of the Borrower, the Parent or any of their respective Subsidiaries having knowledge thereof, notice of any litigation, claim or any other event which could reasonably be expected to cause a Material Adverse Change. (n) Other Information. Such other information respecting the business or ----------------- Properties, or the condition or operations, financial or otherwise, of the Borrower, the Parent or any of their -100- respective Subsidiaries, as any Lender through the Administrative Agent may from time to time reasonably request. Section V.6 Maintenance of Property and Required Work. The Borrower ----------------------------------------- will, and will cause each of its Subsidiaries to, (a) maintain their owned, leased, or operated Property in a manner consistent for hotel properties and related property of the same quality and character and shall keep or cause to be kept every part thereof and its other properties in good condition and repair, reasonable wear and tear excepted, and make all reasonably necessary repairs, renewals or replacements thereto as may be reasonably necessary to conduct the business of the Borrower and its Subsidiaries, (b) not renovate or expand any of the Improvements except as permitted by Section 6.07(h), (c) not knowingly or willfully permit the commission of waste or other injury, or the occurrence of pollution, contamination or any other condition in, on or about any Hotel Property, (d) substantially maintain and repair each Hotel Property as required by any franchise agreement, license agreement, management agreement or ground lease for such Hotel Property, and (e) commence the Required Work for any Hotel Property by a date which would allow a reasonable period of time to complete such work on or prior to the deadline set for such Required Work in Schedule 5.06 or otherwise agreed to by the Borrower and the Administrative Agent, (f) after any commencement of any work for any Hotel Property diligently perform such work (i) for the Required Work, by the required deadline and as described in the Engineering Reports and/or the Environmental Reports referred to in Schedule 5.06 or as otherwise described for any Future Property, (ii) in a good and workmanlike manner and (iii) in compliance in all material respects with all Legal Requirements. Except as may be required to maintain the Parent's status as a REIT under the Code, any Capital Expenditures or expenditures or leases for FF&E made for any Hotel Property shall be in the name of the Property Owner for such Hotel Property. Within 30 days of the Closing Date, the Borrower shall obtain or cause the applicable Property Owner or Approved Participating Lessee for a Hotel Property to obtain from the applicable Approved Franchisor any consent which has not already been obtained necessary to cure any default under the license or franchise agreement for such Hotel Property arising out of the consummation of the Merger and the other transactions contemplated thereby which would allow such Approved Franchisor to terminate such agreement. Section V.7 Insurance. The Borrower will maintain, and cause each of its --------- Subsidiaries to maintain, the insurance required pursuant to Schedule 5.07. Section V.8 Interest Rate Agreements. From the date 90 days following ------------------------ the Closing -101- Date until the Term B Maturity Date, the Borrower shall cause the Parent to obtain and thereafter maintain Interest Rate Agreements reasonably satisfactory to the Administrative Agent, sufficient to ensure that 30% of the Parent's Total Indebtedness, measured as of each day during such period, shall be covered by such Interest Rate Agreements or shall have a fixed rate of interest reasonably satisfactory to the Administrative Agent. Section V.9 Approved Participating Leases. Upon knowledge of a material ----------------------------- default by an Approved Participating Lessee under an Approved Participating Lease, the Borrower will send, or will cause the Guarantor who is a party to such Approved Participating Lease to send, a notice of such default to such Approved Participating Lessee as provided in the document under which such default has occurred unless in Borrower's good faith judgment such Approved Participating Lessee is curing or has agreed to cure such default and thereafter diligently proceeds to cure such default. Section V.10 Use of Proceeds. The proceeds of the Advances have been, --------------- and will be used by the Borrower for the purposes set forth in Section 4.09(a). Section V.12. Collateral. If an Investment Grade Rating Status does not ---------- exist, then the Parent will cause (a) the Administrative Agent to have an Acceptable Security Interest in the Collateral and (b) all material provisions of the Security Documents to be valid and binding on the Persons executing such Security Documents. The Administrative Agent and the Lenders agree that if an Investment Grade Rating Status exists, then such Persons shall not exercise any of such Persons' rights and remedies against the Collateral under the Security Documents; provided, however, that if the Investment Grade Rating Status shall thereafter cease to exist, then such Person shall again be entitled to exercise all of such rights and remedies. Section V.12 New Subsidiaries. If an Investment Grade Rating Status does ---------------- not exist, then within 30 days after either (a) the date that any Subsidiary of the Parent that was not a Material Subsidiary becomes a Material Subsidiary, or (b) the purchase by the Parent or any of its Subsidiaries of the capital stock, membership interests or partnership interests of any Person, which purchase results in such Person becoming a Material Subsidiary the Parent shall, in each case, cause (i) such Material Subsidiary to execute and deliver to the Administrative Agent either (A) a Guaranty, an Environmental Indemnity and a Pledge Agreement or (B) an Accession Agreement, (ii) any of the Borrower and any Guarantor who is a direct owner of the capital stock, membership interests or partnership interests of such Material Subsidiary to execute and deliver to the Administrative Agent a Pledge Agreement, if necessary, and such other documents as are necessary -102- to create an Acceptable Security Interest in the stock, limited liability interests or partnership interests, as applicable, in the Material Subsidiary owned by such Person (and such other Security Documents as the Administrative Agent may reasonably request) and (iii) the Persons who are party to the documents delivered pursuant to the provisions of this Section 5.11 to provide such evidence of authority to enter into such documents as the Administrative Agent may reasonably request. Section V.13 Year 2000 Compatibility. Take good faith actions necessary ----------------------- to attempt to assure that from and after January 1, 2000 the computer-based systems of the Borrower, the Parent, each Approved Participating Lessee, each major contractor of the Borrower and their respective Subsidiaries are able to operate and effectively process data that includes dates on and after January 1, 2000; provided that the Borrower shall not be obligated to assure that software of an Approved Franchisor in connection with such Approved Franchisor' reservation system so comply. At the request of the Administrative Agent, the Borrower shall provide to the Administrative Agent assurance reasonably acceptable to the Administrative Agent of compliance with the requirements of this Section 5.13. Section V.14 Excluded Foreign Subsidiaries. Notwithstanding the other ----------------------------- provisions of this Agreement or the other Credit Documents to the contrary, as long as no Event of Default exists, to the extent that any such action would cause the Parent, the Borrower or any of their Subsidiaries any increase in taxes (a) no Excluded Foreign Subsidiary must execute the Guaranty, the Pledge Agreement, or the Environmental Indemnity or otherwise act as an obligor or guarantor of any of the Obligations and (b) neither the Borrower, nor any Guarantor who is a direct owner of the capital stock, membership interests or partnership interests of any Excluded Foreign Subsidiary must pledge such ownership interest to secure the Obligations. ARTICLE VI NEGATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Lender shall have any Commitment, the Borrower agrees, unless the Administrative Agent shall otherwise consent in writing, to comply with the following covenants. -103- Section V1.1 Liens, Etc. The Borrower, the Parent and their respective ---------- Subsidiaries (except for or with respect to Permitted Other Subsidiaries) will not create, assume, incur or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrower and its Subsidiaries may create, incur, assume or suffer to exist Liens: (a) securing the Obligations; (b) for taxes, assessments or governmental charges or levies on Property of the Borrower or any Guarantor to the extent not required to be paid pursuant to Sections 5.03; (c) imposed by law (such as landlords', carriers', warehousemen's and mechanics' liens or otherwise arising from litigation) (i) which are being contested in good faith and by appropriate proceedings, (ii) with respect to which reserves in conformity with GAAP have been provided, (iii) which have not resulted in any Hotel Property being in jeopardy of being sold, forfeited or lost during or as a result of such contest, (iv) neither the Administrative Agent nor any Lender could become subject to any civil fine or penalty or criminal fine or penalty, in each case as a result of non-payment of such charge or claim and (v) such contest does not, and could not reasonably be expected to, result in a Material Adverse Change, provided that the Borrower does not have to -------- comply with clauses (i) and (ii) if the Borrower has caused a title company to insure over such Lien in a manner reasonably satisfactory to the Administrative Agent; (d) on leased personal property to secure solely the lease obligations associated with such property; (e) securing Secured Recourse Indebtedness and Secured Non-Recourse Indebtedness permitted pursuant to the provisions of Section 6.02; (f) under the Permitted Non-Voting Stock Mortgages; (g) on Permitted Timeshare Receivables securing Permitted Timeshare Indebtedness; and (h) on Borrower's or its Subsidiary's interest, if any, in a Hotel Property disposed of by the Borrower or its Subsidiary to incur Permitted Sale/Leaseback Indebtedness which secures such Permitted Sale/Leaseback Indebtedness. -104- Section VI.2 Indebtedness. The Borrower, the Parent and their respective ------------ Subsidiaries will not incur or permit to exist any Indebtedness other than the Obligations and the following: (a) Unsecured Indebtedness in an amount that does not cause a breach at any time of the covenants contained in Article VII; (b) Secured Recourse Indebtedness and Secured Non-Recourse Indebtedness (excluding the Obligations) incurred by Permitted Other Subsidiaries (and possibly guaranteed by the Parent) to the extent: (i) the amount thereof does not cause a breach at any time of the covenants contained in Article VII; (ii) the Secured Recourse Indebtedness secured by a Hotel Property does not exceed 65% of the Market Value of such Hotel Property (or with respect to Secured Recourse Indebtedness which is secured by more than one Hotel Property, such Secured Recourse Indebtedness does not exceed 65% of the aggregate Market Value of all Hotel Properties which secure such Secured Recourse Indebtedness which do not also secure other Indebtedness) and all Secured Recourse Indebtedness in the aggregate secured by Hotel Properties does not exceed 65% of the aggregate Market Value of such Hotel Properties; (iii) except for Permitted Sale/Leaseback Indebtedness and Permitted Timeshare Indebtedness, the Secured Non-Recourse Indebtedness secured by a Hotel Property located in the United States does not exceed 70% of the Market Value of such Hotel Property (or with respect to Secured Non- Recourse Indebtedness which is secured by more than one Hotel Property, such Secured Non-Recourse Indebtedness does not exceed 70% of the aggregate Market Value of all Hotel Properties which secure such Secured Recourse Indebtedness which do not also secure other Indebtedness) and all Secured Non-Recourse Indebtedness in the aggregate secured by Hotel Properties located in the United States does not exceed 70% of the aggregate Market Value of such Hotel Properties; and (iv) the Secured Non-Recourse Indebtedness secured by a Hotel Property located outside the United States does not exceed 65% of the Market Value of such Hotel Property -105- (or with respect to Secured Non-Recourse Indebtedness which is secured by more than one Hotel Property located outside the United States, such Secured Non-Recourse Indebtedness does not exceed 65% of the aggregate Market Value of all Hotel Properties which secure such Secured Recourse Indebtedness which do not also secure other Indebtedness) and all Secured Non-Recourse Indebtedness in the aggregate secured by Hotel Properties located outside the United States does not exceed the lesser of (A) 65% of the aggregate Market Value of such Hotel Properties or (B) $100,000,000; provided that for purposes of this Section 6.02(b) the Borrower shall not -------- be deemed to be in default of this Section 6.02(b) solely because of a decrease in the Market Value of a Hotel Property after the date of incurrence of the Indebtedness secured by such Hotel Property if the Borrower was not in default of this Section 6.02(b) at the time of incurrence of such Indebtedness; (c) Permitted Sale/Leaseback Indebtedness; (d) Permitted Timeshare Indebtedness; (e) Capital Leases for Personal Property; (f) Interest Rate Agreements; provided that (i) such agreements shall be unsecured except as provided in Section 10.17 and the Pledge Agreement, (ii) the dollar amount of indebtedness subject to such agreements and the indebtedness subject to Interest Rate Agreements in the aggregate shall not exceed the sum of the amount of the Revolving Commitments and the amount of the other Indebtedness of the Borrower or its Affiliates which bears interest at a variable rate, and (iii) the agreements shall be at such interest rates and otherwise in form and substance reasonably acceptable to the Administrative Agent. (g) Any of the following Indebtedness incurred by the Parent or the Borrower: (i) guaranties in connection with the Indebtedness secured by a Hotel Property or interest in a Person owning a Hotel Property of (A) if the Hotel Property is subject to a ground lease, the payment of rent and performance of obligations under such ground lease, (B) real estate taxes relating to such Hotel Property, (C) capital reserves required under such Indebtedness, and (D) after a default under such Indebtedness, the rent under the applicable Approved Participating Lease will be applied to such Indebtedness; -106- (ii) customary indemnities for acts of malfeasance, misappropriation and misconduct and an environmental indemnity for the lender under Indebtedness permitted under this Agreement; (iii) customary indemnities for acts of malfeasance, misappropriation and misconduct by the Permitted Other Subsidiaries and environmental indemnities, all for the benefit of the lenders of other Permitted Other Subsidiary Indebtedness in connection with such Indebtedness; and (iv) guaranties of franchise and license agreements. (h) extensions, renewals and refinancing of any of the Indebtedness specified in paragraphs (b) - (g) above so long as the principal amount of such Indebtedness is not thereby increased. Section VI.3 Agreements Restricting Distributions From Subsidiaries. The ------------------------------------------------------ Borrower will not, nor will it permit any of its Subsidiaries (other than Permitted Other Subsidiaries) to, enter into any agreement (other than a Credit Document) which limits distributions to or any advance by any of the Borrower's Subsidiaries to the Borrower. Section VI.4 Restricted Payments. Neither the Parent, the Borrower, nor ------------------- any of their respective Subsidiaries, will make any Restricted Payment, except that: (a) provided no Default has occurred and is continuing or would result therefrom, the Parent may in any Fiscal Quarter, based on the immediately preceding Rolling Period, make cash payments to its shareholders (including in connection with the repurchase of Stock or Stock Equivalents) which with the previous such cash payments in the three immediately preceding Fiscal Quarters are not in excess of the greater of (i) the lesser of (A) ninety percent (90%) of the Funds From Operations of the Parent during such Rolling Period or (B) one hundred percent (100%) of Free Cash Flow of the Parent during such Rolling Period and (ii) the amount required for the Parent to maintain its status as a REIT; (b) provided no Default has occurred and is continuing or would result therefrom, the Borrower shall be entitled to make cash distributions to its partners including the Parent; -107- (c) a Subsidiary of the Borrower may make a Restricted Payment to the Borrower, (d) the limited partners of the Borrower shall be entitled to exchange limited partnership interests in the Borrower for the Parent's stock, and Highgate Hotels and its Affiliates shall be entitled to exchange limited partnership interests in the Borrower which in the aggregate do not exceed $10,000,000 in market value for cash in accordance with the existing agreements currently in effect between such Persons and the Borrower and its Subsidiaries; and (e) the Borrower shall be entitled to issue limited partnership interests in the Borrower in exchange for ownership interests in Subsidiaries and Unconsolidated Entities which own a Future Property to the extent such Investment is permitted pursuant to the provisions of Section 6.07. Section VI.5 Fundamental Changes; Asset Dispositions. Neither the --------------------------------------- Parent, the Borrower, nor any of their respective Subsidiaries (other than the Permitted Other Subsidiaries) will, (a) merge or consolidate with or into any other Person, unless (i) a Guarantor is merged into the Borrower and the Borrower is the surviving Person or a Subsidiary (other than a Permitted Other Subsidiary which has Indebtedness other than the Obligations) is merged into any Subsidiary (other than a Permitted Other Subsidiary which has Indebtedness other than the Obligations), and (ii) immediately after giving effect to any such proposed transaction no Default would exist; (b) sell, transfer, or otherwise dispose of all or any of such Person's material property except for a Permitted Asset Disposition, a transfer to a Permitted Other Subsidiary to the extent such property acts as collateral for Secured Recourse Indebtedness or Secured Non- Recourse Indebtedness permitted pursuant to the provisions of Section 6.02, or dispositions or replacements of personal property in the ordinary course of business, provided that the Borrower and its Subsidiaries shall not sell or transfer FF&E to OPCO or OPCO's Subsidiaries which in the aggregate has a fair market value in excess of $5,000,000; (c) enter into, as lessor, a lease (other than an Approved Participating Lease or a lease which qualifies as a Permitted Asset Disposition) of all or substantially all of any Hotel Property with any Person without the consent of the Administrative Agent; (d) sell or otherwise dispose of any material shares of capital stock, membership interests or partnership interests of any Subsidiary (except for a Permitted Other Subsidiary or a sale which qualifies as a Permitted Asset Disposition); (e) except for sales of ownership interests permitted under this Agreement and the issuance of limited partnership interests in the Borrower in exchange for ownership interests in Subsidiaries and Unconsolidated Entities to the extent permitted pursuant to the provisions of Section 6.04, materially alter the corporate, capital or legal structure of any such Person (except for a Permitted Other Subsidiary); (f) enter into any forward sales of the -108- Parent Common Stock or limited partnership interests in the Borrower; (g) include any hotel room owned by the Borrower, its Subsidiary or its Unconsolidated Entity in a timeshare program except in connection with a Permitted Timeshare Conversion; (h) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) provided that nothing herein shall prohibit the Borrower from dissolving any Subsidiary which has no assets on the date of dissolution or (i) materially alter the character of their respective businesses from that conducted as of the date of this Agreement or otherwise engage in any material business activity outside of the Hospitality/Leisure- Related Business. Section VI.6 Personal Property Leases. For any Hotel Property, the ------------------------ Borrower will not, and will not permit any of its Subsidiaries to enter into leases of Personal Property except in the ordinary course of business. Section VI.7 Investments, Loans, Future Properties. Neither the Parent ------------------------------------- nor the Borrower shall, or shall permit any of their respective Subsidiaries to, acquire by purchase or otherwise all or substantially all the business, property or fixed assets of any Person or any Hotel Property, make or permit to exist any loans, advances or capital contributions to, or make any Investments in (including without limitation, loans and advances to, and other Investments in, Subsidiaries or Unconsolidated Entities), or purchase or commit to purchase any evidences of indebtedness of, stock or other securities, partnership interests, member interests or other interests in any Person, except the following (provided that after giving effect thereto there shall exist no Default): (a) the purchase of Liquid Investments with any Person which qualifies as an Eligible Assignee; (b) trade and customer accounts receivable (including in connection with the sale of used FF&E) which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms, and receivables purchased in connection with the acquisition of a Hotel Property; (c) a Future Property or a Subsidiary or Unconsolidated Entity which owns a Future Property for which the Borrower has provided the Administrative Agent the Property Information for such Future Property at least 10 days prior to the date of acquisition of such Future Property which Property Information does not reflect any material Environmental or structural problems with such Future Property, or if such Property Information does reflect a material Environmental -109- or structural problem, then the Borrower and the Administrative Agent shall have agreed upon the Required Work to correct or remediate such problem; (d) Investments in unimproved land that either (i) is under development for operation of a Hotel Property or with respect to which such Hotel Property development is planned to commence within twelve months of the acquisition of such land or (ii) does not qualify under the preceding clause (i) and does not in the aggregate then have an Investment Amount which exceeds $100,000,000; (e) Stock or Stock Equivalents (i) received in settlement of liabilities created in the ordinary course of business, and (ii) additional Stock or Stock Equivalents of publicly-traded Unconsolidated Entities engaged in the Hospitality/Leisure-Related Business which in the aggregate do not then have an Investment Amount which exceeds $100,000,000; (f) Stock, Stock Equivalents, and other Investments in Unconsolidated Entities engaged in the Hospitality/Leisure-Related Business which are not publicly-traded Persons, and Permitted Non-Voting Stock Investments for Permitted Non-Voting Stock Companies engaged in the Hospitality/Leisure-Related Business, provided that (i) the aggregate of all such Stock, Stock Equivalents, Investments and Permitted Non-Voting Stock Investments shall not exceed $250,000,000 in the aggregate without the approval of the Required Lenders and (ii) the aggregate of all such Permitted Non-Voting Stock Investments shall not exceed $125,000,000 in the aggregate without the approval of the Required Lenders; (g) Indebtedness of a Person to the Borrower or to a Subsidiary of the Borrower that is secured by a Lien on one or more Hotel Properties owned by such Person, which Hotel Properties (i) were previously owned by the Borrower or a Subsidiary of the Borrower or (ii) the Borrower reasonably expects to acquire (through trustee's sale, foreclosure, deed in lieu of foreclosure or otherwise), provided, however, that the aggregate amount of all Investments permitted under - -------- ------- this clause (g) shall not at any time exceed $200,000,000, excluding for purposes of such calculation the current Indebtedness owed the Borrower from its Subsidiaries which respectively own the Atlanta, Georgia Westin and the Cathedral City, California DoubleTree Hotel; (h) Investments in Hotel Properties which on the date tested are deemed Development Properties which do not have construction or development budgets which in the aggregate then exceed $200,000,000; -110- (i) a loan to OPCO which has an aggregate principal amount which does not exceed the Maximum OPCO Loan Amount and provides for an interest rate during any Fiscal Quarter equal to or greater than the anticipated average interest rate for outstanding Advances in such Fiscal Quarter based upon the Leverage Ratio in effect at the commencement of such Fiscal Quarter; (j) Permitted Timeshare Receivables; (k) any Indebtedness of a Guarantor to the Borrower, or vice-versa, provided such Indebtedness is subordinate to the Obligations in a manner reasonably acceptable to the Administrative Agent; and (l) other assets owned in the ordinary course of owning the Parent's and the Parent's Subsidiaries' Hotel Properties and Hospitality/Leisure-Related Business. Notwithstanding the foregoing, neither the Borrower, nor the Parent, nor their respective Subsidiaries shall make an Investment which would (a) cause the Parent Properties in the aggregate to violate in any way the Parent Property Requirements without the Administrative Agent's written consent, (b) if the Parent Deemed Investment Amount for Unconsolidated Entities was added to Investment Amounts for Parent Properties in determining whether the Parent Property Requirements had been met, cause the Parent Properties in the aggregate to violate in any material way the Parent Property Requirements without the Administrative Agent's written consent, (c) individually, and not on a portfolio basis, be in excess of $75,000,000 without the written consent of the Administrative Agent or in excess of $100,000,000 without the written consent of the Required Lenders, provided that, subject to the other terms and conditions -------- of this Agreement, the Lenders consent to the acquisition by the Borrower or its Subsidiary of the South Seas Portfolio, (d) cause a Default, or (e) cause or result in the Borrower or the Parent failing to comply with any of the financial covenants contained herein. Section VI.8 Affiliate Transactions. Except for the Intercompany ---------------------- Agreement, the Approved Participating Lease Agreements, certain liquor license agreements, and the transactions described in Section 6.07(i), the Borrower will not, and will not permit any of its Subsidiaries to, make, directly or indirectly: (a) any transfer, sale, lease, assignment or other disposal of any assets to any Affiliate of the Borrower which is not a Guarantor or any purchase or acquisition of assets from any such Affiliate except for sales of new Personal Property (i) which in any calendar year -111- do not exceed $1,000,000 in the aggregate and (ii) for which the sales price is the actual cost to the party selling; or (b) any arrangement or other transaction directly or indirectly with or for the benefit of any such Affiliate (including without limitation, guaranties and assumptions of obligations of an Affiliate), other than those matters set forth in either of the foregoing clauses (a) or (b) which are in the ordinary course of business and at market rates. Section VI.9 Sale and Leaseback. The Borrower will not, and will not ------------------ permit any of its Subsidiaries to, enter into any arrangement with any Person, whereby in contemporaneous transactions the Borrower or such Subsidiary sells essentially all of its right, title and interest in a material asset and the Borrower or such Subsidiary acquires or leases back the right to use such property except in connection with the incurrence of Permitted Sale/Leaseback Indebtedness. Section VI.10 Sale or Discount of Receivables. The Borrower will not, and ------------------------------- will not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. Section VI.11 No Further Negative Pledges. Neither the Borrower, nor the --------------------------- Parent, nor their respective Subsidiaries shall enter into or suffer to exist any agreement (other than this Agreement and the Credit Documents) (a) prohibiting the creation or assumption of any Lien upon the Properties of the Parent, the Borrower or any of their respective Subsidiaries (except for the Permitted Other Subsidiaries), whether now owned or hereafter acquired, or (b) requiring an obligation to be secured if some other obligation is or becomes secured. Section VI.12 Material Documents. The Borrower will not, nor will it ------------------ permit any of its Subsidiaries to without the Required Lender's written consent (a) amend the Borrower's partnership agreement in any material respect, (b) admit a new general partner to the Borrower, or (c) enter into any termination, material modification or amendment of any of the following: (i) the Intercompany Agreement; or (ii) the Merger Agreement. The Borrower will not, nor will it permit any of its Subsidiaries to without the written consent of two out of the three Arrangers amend or terminate (except in connection with a Permitted Asset Disposition) an Approved Participating Lease if the net affect of all such amendments and -112- terminations of Approved Participating Leases is reasonably expected to decrease the expected rentals under all of the Approved Participating Leases taken as a whole by more than 10% of the pro forma rentals for 1997 set forth in the Registration Statements, taking into account acquisitions and dispositions after the Closing Date. The Borrower will not, nor will it permit any of its Subsidiaries to without the written consent of the Super Required Lenders amend or terminate (except in connection with a Permitted Asset Disposition) an Approved Participating Lease if the net affect of all such amendments and terminations of Approved Participating Leases is reasonably expected to either (a) cause the Borrower to violate a covenant in Article VII or (b) cause the expected rentals under all of the Approved Participating Leases taken as a whole to decrease by more than 20% of the pro forma rentals for 1997 set forth in the Registration Statements, taking into account acquisitions and dispositions after the Closing Date. Any termination, modification or amendment prohibited under this Section 6.12 without the required written consent shall, to the extent permitted by applicable law, be void and of no force and effect. Section 6.13 Limitations on Development, Construction, Renovation and -------------------------------------------------------- Purchase of Hotel Properties. Neither the Parent nor the Borrower shall or - ---------------------------- shall permit any of their respective Subsidiaries to (a) engage in the development, construction or expansion of any Hotel Properties except for Development Properties permitted by the provisions of Section 6.07 or (b) enter into any agreements to purchase Hotel Properties or other assets, unless with respect to such purchase the Parent, the Borrower or such Subsidiary (as applicable) at all times has available sources of capital equal to pay in full the cost of the purchase of such Hotel Properties or other assets (to the extent that the payment of such cost of purchase constitutes a recourse obligation of the Parent, the Borrower or its Subsidiary), which available sources of capital may include Advances to the extent that the Borrower may borrow the same for the purposes required or other Indebtedness permitted by the terms of this Agreement. ARTICLE VII FINANCIAL COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Lender shall have any Commitment hereunder, -113- unless the Required Lenders shall otherwise consent in writing, the Borrower agrees to comply and cause the Parent and the Parent's Subsidiaries to comply with the following covenants. Section 7.1 Interest Coverage Ratio. The Parent shall maintain at the ----------------------- end of each Rolling Period (a) for the Rolling Periods ending on September 30, 1998 through March 31, 1999, an Interest Coverage Ratio of not less than 2.20 to 1.0 and (b) for any Rolling Period thereafter, an Interest Coverage Ratio of not less than 2.50 to 1.0. Section 7.2 Fixed Charge Coverage Ratio. The Parent shall maintain at --------------------------- the end of each Rolling Period (a) for the Rolling Periods ending on September 30, 1998 through March 31, 1999, a Fixed Charge Coverage Ratio of not less than 1.85 to 1.0 and (b) for any Rolling Period thereafter, a Fixed Charge Coverage Ratio of not less than 2.00 to 1.0. Section 7.3 Maintenance of Net Worth. The Parent shall at all times ------------------------ maintain an Adjusted Net Worth of not less than the Minimum Tangible Net Worth. Section 7.4 Leverage Ratio. The Parent shall not on any date permit the -------------- Leverage Ratio to exceed (a) prior to July 1, 1999, 5.5 to 1.0, (b) from July 1, 1999 through June 30, 2000, 5.0 to 1.0, and (c) on and after July 1, 2000, 4.5 to 1.0. Section 7.5 Limitations on Secured Indebtedness. The Parent shall not ----------------------------------- on any date permit the sum of the Secured Non-Recourse Indebtedness and Secured Recourse Indebtedness of the Parent and its Subsidiaries on a Consolidated basis (excluding the Obligations), to be secured by Liens on Hotel Properties or other Investments which for the Rolling Period immediately preceding such date (a) for any date prior to July 1, 1999, produced 40% or more of the EBITDA of the Parent and its Subsidiaries on a Consolidated basis and (b) for any date on or after July 1, 1999, produced 30% or more of the EBITDA of the Parent and its Subsidiaries on a Consolidated basis. The Parent shall not on any date permit the Secured Indebtedness Ratio to exceed (a) prior to July 1, 1999, 2.75 to 1.0, and (b) on and after July 1, 1999, 2.5 to 1.0. Section 7.6 Limitations on Secured Recourse Indebtedness. The Parent -------------------------------------------- shall not on any date permit the Secured Recourse Indebtedness of the Parent and its Subsidiaries on a Consolidated basis (excluding the Obligations), to be secured by Liens on Hotel Properties or other Investments which for the Rolling Period immediately preceding such date produced 20% or more of the EBITDA of the Parent and its Subsidiaries on a Consolidated basis. -114- Section 7.7 Unsecured Interest Coverage Ratio. The Parent shall --------------------------------- maintain at the end of each Rolling Period for the Rolling Periods ending on the dates indicated on the following chart an Unsecured Interest Coverage Ratio of not less than the amount set forth next to such dates: Ending Date of Rolling Period Unsecured Interest Coverage Ratio - ---------------------------------- --------------------------------- September 30, 1998 through June 30, 1999 1.50 to 1.0 September 30, 1999 through June 30, 2000 1.75 to 1.0 September 30, 2000 through June 30, 2001 2.00 to 1.0 September 30, 2001 through June 30, 2002 2.25 to 1.0 For any Rolling Period thereafter 2.50 to 1.0 Section 7.8 Permitted Non-Voting Stock Company Adjustment. If the --------------------------------------------- Parent or any of its Subsidiaries have a Permitted Non-Voting Stock Investment, then to the extent not already included in the EBITDA of the Parent and its Subsidiaries the lesser of (a) the dividends and interest received by the Parent or any of its Subsidiaries from a Permitted Non-Voting Stock Company and (b) the EBITDA of the Hotel Properties owned or leased by such Permitted Non-Voting Stock Company shall be included in EBITDA for purposes of the financial covenants in this Article VII. ARTICLE VIII EVENTS OF DEFAULT; REMEDIES Section 8.1 Events of Default. The occurrence of any of the following ----------------- events shall constitute an "Event of Default" under any Credit Document: (a) Principal or Letter of Credit Obligation Payment. The Borrower or any ------------------------------------------------ Guarantor shall fail to pay any principal of any Note or any Letter of Credit Obligation when the same becomes due and payable as set forth in this Agreement; (b) Interest or Other Obligation Payment. The Borrower or any Guarantor ------------------------------------ shall fail to pay any interest on any Note or any fee or other amount payable hereunder or under any other -115- Credit Document when the same becomes due and payable as set forth in this Agreement, provided however that the Borrower and the Guarantors will have a grace period of five days after the payments covered by this Section 8.01(b) becomes due and payable for the first two defaults of such Persons collectively under this Section 8.01(b) in every calendar year; (c) Representation and Warranties. Any representation or warranty made or ----------------------------- deemed to be made (i) by the Borrower in this Agreement or in any other Credit Document, (ii) by the Borrower (or any of its officers) in connection with this Agreement or any other Credit Document, or (iii) by any Subsidiary in any Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made; (d) Covenant Breaches. (i) The Borrower shall fail to perform or observe ----------------- any covenant contained in Section 5.02, Article VI or Article VII of this Agreement or the Borrower shall fail to perform or observe, or shall fail to cause any Guarantor to perform or observe any covenant in any Credit Document beyond any notice and/or cure period for such default expressly provided in such Credit Document or (ii) the Borrower or any Guarantor shall fail to perform or observe any term or covenant set forth in any Credit Document which is not covered by clause (i) above or any other provision of this Section 8.01, in each case if such failure shall remain unremedied for 30 days after the earlier of the date written notice of such default shall have been given to the Borrower or such Guarantor by the Administrative Agent or any Lender or the date a Responsible Officer of the Borrower or any Guarantor has actual knowledge of such default, unless such default in this clause (ii) cannot be cured in such 30 day period and the Borrower is diligently proceeding to cure such default, in which event the cure period shall be extended to 90 days; (e) Cross-Defaults. -------------- (i) with respect to (A) any Secured Non-Recourse Indebtedness which is outstanding in a principal amount of at least $20,000,000 individually or when aggregated with all such Secured Non-Recourse Indebtedness of the Borrower, the Parent or any of their respective Subsidiaries or (B) any other Indebtedness (but excluding Indebtedness evidenced by the Notes) which is outstanding in a principal amount of at least $5,000,000 individually or when aggregated with all such Indebtedness of the Borrower, the Parent or any of their respective Subsidiaries any of the following: (1) any such Indebtedness shall be declared to be due and payable, or -116- required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof, (2) the Borrower, the Parent or any of their respective Subsidiaries shall fail to pay any principal of or premium or interest of any of such Indebtedness (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or (3) any other event shall occur or condition shall exist under any agreement or instrument relating to such Indebtedness, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to permit the holders of such Indebtedness to accelerate the maturity of such Indebtedness; (f) Insolvency. The Borrower, the Parent, or any of their respective ---------- Subsidiaries 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 the Borrower, the Parent, or any of their respective 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 receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against the Borrower, the Parent, or any of their respective Subsidiaries, either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or the Borrower, the Parent, or any of their respective Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (f); (g) Judgments. Any judgment or order for the payment of money in excess of --------- $5,000,000 (reduced for purposes of this paragraph for the amount in respect of such judgment or order that a reputable insurer has acknowledged being payable any valid and enforceable insurance policy) shall be rendered against the Borrower, the Parent or any of their respective Subsidiaries which, within 30 days from the date such judgment is entered, shall not have been discharged or execution thereof stayed pending appeal; -117- (h) ERISA. (i) Any Person shall engage in any "prohibited transaction" (as ----- defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is likely to result in the termination of such Plan for purposes of Title IV of ERISA, unless such Reportable Event, proceedings or appointment are being contested by the Parent or the Borrower in good faith and by appropriate proceedings, (iv) any Plan shall terminate for purposes of Title IV of ERISA, (v) the Parent, the Borrower or any member of a Controlled Group shall incur any liability in connection with a withdrawal from a Multiemployer Plan or the insolvency (within the meaning of Section 4245 of ERISA) or reorganization (within the meaning of Section 4241 of ERISA) of a Multiemployer Plan, unless such liability is being contested by the Parent or the Borrower in good faith and by appropriate proceedings, or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Borrower or any Guarantor to any tax, penalty or other liabilities in the aggregate exceeding $10,000,000; (i) Guaranty. Any provision of any Guaranty except a Supplemental Guaranty -------- shall for any reason cease to be valid and binding on any Guarantor or any Guarantor shall so state in writing; (j) Environmental Indemnity. Any Environmental Indemnity shall for any ----------------------- reason cease to be valid and binding on any Person party thereto or any such Person shall so state in writing; (k) OPCO. Either (i) a Change of Control occurs for OPCO without the ---- written consent of the Borrower (which shall not be given without the consent of the Required Lenders) or (ii) OPCO 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 the OPCO 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 -118- entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against OPCO or any of its Subsidiaries, either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or OPCO or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (k); (l) Parent's REIT Status. There shall be a determination from the -------------------- applicable Governmental Authority from which no appeal can be taken that the Parent's tax status as a REIT has been lost; (m) Parent Common Stock; Repayment Event The Parent at any time hereafter ------------------------------------ fails to (i) cause the Parent Common Stock to be duly listed on the New York Stock Exchange, Inc. and (ii) file timely all reports required to be filed by the Parent with the New York Stock Exchange, Inc. and the Securities and Exchange Commission and, with respect to a failure under clause (ii), such failure remains uncured on the date which is the earlier of (A) the date 30 days following the initial occurrence of such failure and (B) the date specified by the New York Stock Exchange, Inc. or the Securities and Exchange Commission as the date such failure needs to be cured by. Upon the receipt by the Parent of any Net Cash Proceeds from a Repayment Event, (a) the Parent fails to immediately make a capital contribution or advance to the Borrower or a Subsidiary of the Borrower in the aggregate amount of such Net Cash Proceeds or (b) the Borrower fails to apply such Net Cash Proceeds in accordance with this Agreement either (i) to repay any outstanding principal of the Notes, and accrued and unpaid interest thereon and other amounts payable by the Borrower in respect thereof, or (ii) to make Investments permitted by this Agreement; or (n) Change in Management or Control. Any of the following occur without ------------------------------- the written consent of the Required Lenders: (a) a Change of Control occurs for either the Parent or the Borrower; (b) the Parent owns less than 100% of the legal or beneficial interest in MeriStar LP, Inc.; (c) the Parent, MeriStar LP, Inc. and any wholly-owned Subsidiary of the Parent collectively owns less than 70% of the legal or beneficial interest in the Borrower; or (d) the Parent shall cease to employ either Paul W. Whetsell or Steven D. Jorns as the chairman and chief executive officer of the Parent and, within 180 days following such occurrence for any reason, another person acceptable to the Required Lenders in their sole discretion is not employed as the chairman and chief executive officer of the Parent. -119- Section 8.2 Optional Acceleration of Maturity; Other Actions. If any ------------------------------------------------ Event of Default (other than an Event of Default pursuant to paragraph (f) of Section 8.01) shall have occurred and be continuing, then, and in any such event, (a) the Administrative Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances and the obligation of each Issuing Bank to issue, increase, or extend Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Notes, all interest thereon, the Letter of Credit Obligations, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest, all such Letter of Credit Obligations and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest or further notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrower, (b) the Borrower shall, on demand of the Administrative Agent at the request or with the consent of the Required Lenders, deposit into the Cash Collateral Account an amount of cash equal to the Letter of Credit Exposure as security for the Obligations to the extent the Letter of Credit Obligations are not otherwise paid at such time, and (c) the Administrative Agent shall at the request of, or may with the consent of, the Required Lenders proceed to enforce its rights and remedies under the Credit Documents for the ratable benefit of the Lenders by appropriate proceedings. Section 8.3 Automatic Acceleration of Maturity. If any Event of Default ---------------------------------- pursuant to paragraph (f) of Section 8.01 shall occur, (a) the obligation of each Lender to make Advances and the obligation of each Issuing Bank to issue, increase, or extend Letters of Credit shall immediately and automatically be terminated and the Notes, all interest on the Notes, all Letter of Credit Obligations, and all other amounts payable under this Agreement shall immediately and automatically become and be due and payable in full, without presentment, demand, protest or any notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrower and -120- (b) to the extent permitted by law or court order, the Borrower shall deposit with the Administrative Agent into the Cash Collateral Account an amount of cash equal to the outstanding Letter of Credit Exposure as security for the Obligations to the extent the Letter of Credit Obligations are not otherwise paid at such time. Section 8.4 Cash Collateral Account. ----------------------- (a) Pledge. The Borrower hereby pledges, and grants to the Administrative ------ Agent for the benefit of the Lenders, a security interest in all funds held in the Cash Collateral Account maintained with Societe Generale, New York Branch from time to time, but under the control of the Administrative Agent, and all proceeds thereof, as security for the payment of the Obligations, including without limitation all Letter of Credit Obligations owing to any Issuing Bank or any other Lender due and to become due from the Borrower to any Issuing Bank or any other Lender under this Agreement in connection with the Letters of Credit and the Borrower agrees to execute all cash management or cash collateral agreements and UCC-1 Financing Statements requested by the Administrative Agent as needed or desirable for the Administrative Agent to have a perfected first lien security interest in the Cash Collateral Account. (b) Application against Letter of Credit Obligations. The Administrative ------------------------------------------------ Agent may, at any time or from time to time apply funds then held in the Cash Collateral Account to the payment of any Letter of Credit Obligations owing to any Issuing Bank, in such order as the Administrative Agent may elect, as shall have become or shall become due and payable by the Borrower to any Issuing Bank under this Agreement in connection with the Letters of Credit. (c) Duty of Care. The Administrative Agent shall cause Societe Generale, ------------ New York Branch to exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and Societe Generale, New York Branch shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which Societe Generale, New York Branch accords its own property, it being understood that neither Societe Generale, New York Branch, nor the Administrative Agent shall have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds. Section 8.5 Swingline Advances and Commitment. If any Event of Default --------------------------------- shall have occurred and be continuing, then, and in any such event, the Swingline Lender may by notice to Borrower, cancel the Swingline Commitment (whereupon the Swingline Commitment shall be -121- deemed to be immediately canceled) and/or declare all Swingline Advances and all unpaid accrued interest thereon to be immediately due and payable (whereupon all Swingline Advances and all such interest shall be immediately due and payable). Section 8.6 Non-exclusivity of Remedies. No remedy conferred upon the --------------------------- Administrative Agent or the Lenders is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise. Section 8.7 Right of Set-off. Upon (a) the occurrence and during the ---------------- continuance of any Event of Default and (b) the making of the request or the granting of the consent, if any, specified by Section 8.02 to authorize the Administrative Agent to declare the Notes and any other amount payable hereunder due and payable pursuant to the provisions of Section 8.02 or the automatic acceleration of the Notes and all amounts payable under this Agreement pursuant to Section 8.03, each 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 such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement, the Note held by such Lender, and the other Credit Documents, irrespective of whether or not such Lender shall have made any demand under this Agreement, such Note, or such other Credit Documents, and although such obligations may be unmatured. Each Lender agrees to promptly notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. -122- ARTICLE IX AGENCY AND ISSUING BANK PROVISIONS Section 9.1 Authorization and Action. Each Lender hereby appoints and ------------------------ authorizes the Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under this Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders or Super Required Lenders, as applicable, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative -------- Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law. The functions of the Administrative Agent are administerial in nature and in no event shall the Administrative Agent have a fiduciary or trustee relation in respect of any Lender by reason of this Agreement or any other Credit Document. Within 5 Business Days of the Administrative Agent receiving actual notice (without any duty to investigate) of a Default, the Administrative Agent will provide written notice of such Default to the Lenders. Section 9.2 Administrative Agent's Reliance, Etc. Neither the ------------------------------------ Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken (including such Person's own negligence) by it or them under or in connection with this Agreement or the other Credit Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (a) may treat the payee of any Note as the holder thereof until the Administrative Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Administrative Agent; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made -123- in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Credit Document on the part of the Parent, the Borrower or their Subsidiaries or to inspect the property (including the books and records) of the Borrower or its Subsidiaries; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) reasonably believed by it to be genuine and signed or sent by the proper party or parties. Section 9.3 Each Agent and Its Affiliates. With respect to its ----------------------------- Commitment, the Advances made by it and the Notes issued to it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Administrative Agent. The term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower or any of its Subsidiaries, and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if the Administrative Agent were not an Administrative Agent hereunder and without any duty to account therefor to the Lenders. Section 9.4 Lender Credit Decision. Each Lender acknowledges that it ---------------------- has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.06 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 9.5 Indemnification. The Lenders severally agree to indemnify --------------- the Administrative Agent, the Arrangers, the Syndication Agent, each Documentation Agent and each Issuing Bank (to the extent not reimbursed by the Borrower), according to their respective Pro Rata Shares from and against any and all liabilities, obligations, losses, damages, penalties, -124- actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against such Person in any way relating to or arising out of this Agreement or any action taken or omitted by such Person under this Agreement or any other Credit Document (including such Person's own negligence), provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its Pro Rata Share of any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or any other Credit Document, to the extent that the Administrative Agent is not reimbursed for such expenses by the Borrower. Section 9.6 Successor Agent and Issuing Banks. The Administrative --------------------------------- Agent, any Arranger or any Issuing Bank may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with cause by the Required Lenders upon receipt of written notice from the Required Lenders to such effect. Upon receipt of notice of any such resignation or removal, the Required Lenders shall have the right to appoint a successor Administrative Agent, Arranger or Issuing Bank. If no successor Administrative Agent, Arranger or Issuing Bank shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's, Arranger's or Issuing Bank's giving of notice of resignation or the Required Lenders' removal of the retiring Administrative Agent, Arranger or Issuing Bank, then the retiring Administrative Agent, Arranger or Issuing Bank may, on behalf of the Lenders and the Borrower, appoint a successor Administrative Agent, Arranger or Issuing Bank, which shall be a commercial bank meeting the financial requirements of an Eligible Assignee and, to the extent that a Lender is willing to act in such capacity, a Lender. Upon the acceptance of any appointment as Administrative Agent, Arranger or Issuing Bank by a successor Administrative Agent or Issuing Bank, such successor Administrative Agent, Arranger or Issuing Bank shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, Arranger or Issuing Bank, and the retiring Administrative Agent, Arranger or Issuing Bank shall be discharged from its duties and obligations under this Agreement and the other Credit Documents, except that the retiring Issuing Bank shall remain an Issuing Bank with respect to any Letters of Credit issued by such Issuing Bank and outstanding on the effective date of its resignation or removal and the provisions -125- affecting such Issuing Bank with respect to such Letters of Credit shall inure to the benefit of the retiring Issuing Bank until the termination of all such Letters of Credit. After any retiring Administrative Agent's, Arranger's or Issuing Bank's resignation or removal hereunder as Administrative Agent, Arranger or Issuing Bank, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was such Administrative Agent, Arranger or Issuing Bank under this Agreement and the other Credit Documents. Section 9.7 Arrangers, Syndication Agent and Documentation Agents. ----------------------------------------------------- Bankers Trust Company shall be named an Arranger and a Syndication Agent under the Credit Documents; Lehman Commercial Paper Inc. shall be named an Arranger and a Documentation Agent under the Credit Documents; and Wells Fargo Bank, National Association shall be named a Documentation Agent under the Credit Documents, but such Persons in such capacities shall have no right or duty to act as agent on behalf of the Lenders except that the Arrangers will have the limited right to consent or decline to consent to certain matters set forth in the definition of "Approved Participating Lessee" and in Section 6.12. Societe Generale, Southwest Agency shall be named Arranger and Administrative Agent under the Credit Documents, but as the Arranger shall have no right or duty to act as agent on behalf of the Lenders in such capacity except that as Arranger will have the limited right to consent or decline to consent to certain matters set forth in the definition of "Approved Participating Lessee" and in Section 6.12; provided that the provisions of this sentence shall in no way effect Societe Generale, Southwest Agency's rights or duties as Administrative Agent on behalf of the Lenders. ARTICLE X MISCELLANEOUS -126- Section 10.1 Amendments, Etc. No amendment or waiver of any provision of --------------- this Agreement, the Notes, or any other Credit Document, nor consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent, as specified in the particular provisions of the Credit Documents, and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, -------- however, that no amendment shall increase the Commitment of any Lender without the written consent of such Lender, and no amendment, waiver or consent shall, unless in writing and signed by all the Lenders whose Commitments or Advances are directly modified thereby, do any of the following: (a) increase the aggregate Commitments of the Lenders (for which all Lenders' Commitments shall be deemed directly modified thereby; provided that no consent except for the unanimous consent of the Lenders holding Revolving Commitments and Advances shall be needed to increase the total Revolving Commitments by up to $200,000,000 in the aggregate for all such increases), (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Credit Document or otherwise release the Borrower from any Obligations, (c) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable here under, (d) amend this Section 10.01, (e) amend the definition of "Required Lenders" or "Super Required Lenders", (f) release the Parent from its obligations under the Guaranty (for which all Lenders' Advances shall be deemed directly modified thereby), or (g) except as provided in Section 5.11, release all or substantially all of the Collateral; and provided, further, that no amendment, ----------------- waiver or consent shall, unless in writing and signed by the Administrative Agent, or any Issuing Bank in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent or such Issuing Bank, as the case may be, under this Agreement or any other Credit Document. In addition, (a) the definition of "Revolver Required Lenders" cannot be amended without the unanimous written consent of all Lenders holding Revolving Commitments, (b) the definition of "Term A Required Lenders" cannot be amended without the unanimous written consent of all Lenders holding Term A Commitments and (c) the definition of "Term B Required Lenders" cannot be amended without the unanimous written consent of all Lenders holding Term B Commitments. In addition, no amendment, waiver or consent shall, unless in writing and signed by the Swingline Lender, amend, modify or waive any provision pertaining to the Swingline Lender, Swingline Commitment or the Swingline Advances, or otherwise affect any right or duty of the Swingline Lender. In addition, none of the following decisions shall be made without the written consent of the Super Required Lenders: -127- (a) release any Guarantor except the Parent from its obligations under any of the Guaranties, provided that the Administrative Agent can (i) release any Supplemental Guarantor from its obligations under any of the Supplemental Guaranties, (ii) if no Default then exists, release any Subsidiary of the Borrower which no longer is a Property Owner of a Hotel Property or no longer owns any assets and (iii) release a Guarantor pursuant to the provisions of Section 10.12; (b) any determination to make a Borrowing after the occurrence and during the continuance of an Event of Default; (c) any waiver or any amendment to the financial covenants contained in Article VII of this Agreement or any definitions used therein; (d) any amendment of any of the definitions that are used in the definition of "Leverage Ratio;" and (e) any amendment of any other provision of a Credit Document which expressly requires the consent of the Super Required Lenders. In addition, none of the following decisions shall be made without the written consent of the Required Lenders: (a) release any Person from its obligations under any of the Environmental Indemnities; (b) release any Collateral from its Lien securing the Obligations except in connection with a Permitted Asset Disposition; (c) increases the maximum duration of Interest Periods permitted under this Agreement; (d) any material waiver or modification of the covenants contained in Article V or Article VI; (e) any amendment, supplement or modification to, or waiver of, the provisions of Section 8.01 of this Agreement; -128- (f) any determination to send notice to the Borrower of, or otherwise declare, an Event of Default pursuant to Section 8.01 of this Agreement; (g) any determination to accelerate the Obligations pursuant to Section 8.02 of this Agreement; (h) any exercise of remedies under any Credit Document; (i) any material decision regarding the operation, maintenance, sale or other disposition of any Property after the foreclosure upon such Property, provided that Administrative Agent shall be able to take any action it determines necessary to preserve or maintain any such Property and provided further that if the Required Lenders cannot agree on the sale or disposition of such Property, the Administrative Agent shall not sell or dispose of such Property, but shall continue to hold such Property for the benefit of the Lenders; (j) any waiver for more than 45 days of, or any material amendment to, the reporting requirements set forth in clauses (a)-(d) of Section 5.05 of this Agreement; (k) any other material waiver or modification of the Credit Documents.; and (l) any amendment of any other provision of a Credit Document which expressly requires the consent of the Required Lenders. Any amendment to a covenant of the Parent or any of its Subsidiaries or amendment to a definition shall require the Borrower's written consent. If, in connection with any proposed change, waiver, discharge or termination to any of the provisions of this Agreement which requires unanimous consent of the Lenders or of a Class of the Lenders, the consent of the Super Required Lenders is obtained but the consent of one or more of such other Lenders whose consent is required is not obtained, then the Borrower shall have the right, so long as all non-consenting Lenders whose individual consent is required are treated as described below, to replace each such non-consenting Lender or Lenders with one or more Eligible Assignees pursuant to Section 2.15 so long as at the time of such replacement, each such Eligible Assignee consents to the proposed change, waiver, discharge or termination, provided further, that ---------------- in any event the Borrower shall not have the right to replace a Lender solely as a result of the exercise of -129- such Lender's rights (and the withholding of any required consent by such Lender) to increase any of such Lender's Commitments. Section 10.2 Notices, Etc. All notices and other communications shall be ------------ in writing (including telecopy or telex) and mailed, telecopied, telexed, hand delivered or delivered by a nationally recognized overnight courier, if to the Borrower, at its address at 1010 Wisconsin Avenue, N.W., Suite 650, Washington, D.C. 20007, Attn: Mr. John Emery; if to any Lender at its Domestic Lending Office specified opposite its name on Schedule 10.02; if to the Administrative Agent, at its address at 4900 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: Thomas K. Day, Director (telecopy: (214) 979-2727; telephone: (214) 979-2774); or, as to each party, at such other address or teletransmission number as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telexed or hand delivered or delivered by overnight courier, be effective three days after deposited in the mails, when telecopy transmission is completed, when confirmed by telex answer-back or when delivered, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or Article IX shall not be effective until received by the Administrative Agent. Section 10.3 No Waiver; Remedies. No failure on the part of any Lender, ------------------- any Agent, or any Issuing Bank to exercise, and no delay in exercising, any right hereunder or under any Note 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 provided in this Agreement and the other Credit Documents are cumulative and not exclusive of any remedies provided by law. -130- Section 10.4 Costs and Expenses. The Borrower agrees to pay on demand ------------------ all out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution, delivery, due diligence, administration, modification and amendment of this Agreement, the Notes and the other Credit Documents and syndication (syndication costs shall not exceed $5,000 per Eligible Assignee) of the Obligations including, without limitation, (a) the reasonable fees and out-of-pocket expenses of Bracewell & Patterson, L.L.P., counsel for the Administrative Agent, and (b) all reasonable out-of-pocket costs and expenses, if any, of the Administrative Agent, each Issuing Bank, and each Lender (including, without limitation, reasonable counsel fees and expenses of the Administrative Agent, such Issuing Bank, and each Lender) in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement and the other Credit Documents, and (d) to the extent not included in the foregoing, the costs of any local counsel, travel expenses, Engineering Reports, Environmental Reports, mortgage and intangible taxes (if any), and any title or Uniform Commercial Code search costs, any insurance consultant costs and other costs usual and customary in connection with a credit facility of this type. Section 10.5 Binding Effect. This Agreement shall become effective when -------------- it shall have been executed by the Borrower and the Administrative Agent, and when the Administrative Agent shall have, as to each Lender, either received a counterpart hereof executed by such Lender or been notified by such Lender that such Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, each Issuing Bank, and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Lender. Section 10.6 Lender Assignments and Participations. ------------------------------------- -131- (a) Assignments. Any Lender may assign to one or more banks or other ----------- entities all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, the Notes held by it, and the participation interest in the Letter of Credit Obligations held by it); provided, however, that (i) each -------- ------- such assignment shall be of a constant, and not a varying, percentage of all of such Lender's rights and obligations under this Agreement for a particular Class and shall involve a ratable assignment of such Lender's Commitment and Advances for a particular Class, (ii) the amount of the resulting Commitments and Advances of the assigning Lender (unless it is assigning all its Commitments and Advances) and the assignee Lender pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 in total (provided that with respect to assignments of Term B Advances by an Approved Fund to a Related Fund only, the amount of the resulting Term B Advances for the assigning Approved Fund and the assignee Related Fund may be for less than $5,000,000 if (A) the amount of the resulting Term B Advances for the assigning Approved Fund and the assignee Related Fund are not less than $1,000,000, (B) the amount of the aggregate resulting Term B Advances for the assigning Approved Fund and its Related Funds are not less than $5,000,000 and (C) such Approved Fund and all of its Related Funds shall only be entitled collectively to one notice for all purposes under the Credit Documents), shall in no event be less than $1,000,000 for each Class assigned and shall be an integral multiple of $1,000,000, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, (v) the Administrative Agent (and the case of assignments of all or a portion of a Lender's Revolving Commitments and Revolving Advances, the Issuing Bank for each Letter of Credit issued after the date of this Agreement and the Swingline Lender) shall consent to such assignment, which consent shall not be unreasonably withheld or delayed, and (vi) each Eligible Assignee (other than an Eligible Assignee which is an Affiliate of the assigning Lender) shall pay to the Administrative Agent a $2,500 administrative fee ; provided that, in the case of contemporaneous -------- assignments by a Lender to more than one Related Fund (which Related Funds are not then Lenders hereunder), only a single $2,500 such fee shall be payable for all such contemporaneous assignments. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof or earlier such earlier date as agreed to by the Administrative Agent, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations -132- of a Lender hereunder and (B) such Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). Notwithstanding anything herein to the contrary, (i) any Lender may assign or pledge, as collateral or otherwise, any of its rights under the Credit Documents to any Federal Reserve Bank and (ii) any Lender that is an Approved Fund or Related Fund may, without the consent of the Administrative Agent or the Borrower, pledge all or any portion of its Advances and Notes to any trustee for, or any other representative of, holders of obligations owed, or securities issued, by such Approved Fund or Related Fund, as security for such obligations or securities; provided that (A) any foreclosure or similar action by such -------- trustee or representative shall be subject to the provisions of this Section 10.06(a) concerning assignments, including without limitation the requirement that any assignee of such Notes and Advances must qualify as an Eligible Assignee and (B) such Lender shall not require such trustee's or representative's consent to any matter under this Agreement, except (1) for a change in the principal amount of any Note which has been so pledged, reductions in fees or interest, or extending the Maturity Date except as permitted in this Agreement or (2) as otherwise consented to by the Administrative Agent. (b) Term of Assignments. By executing and delivering an Assignment and ------------------- Acceptance, the Lender thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the Guarantors or the performance or observance by the Borrower or the Guarantors of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Sections 4.06 and 5.05, if applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, -133- continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Register. The Administrative Agent shall maintain at its address ------------ referred to in Section 10.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent, the Swingline Lender, the Issuing Banks, and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Procedures. Upon its receipt of an Assignment and Acceptance executed ---------- by a Lender and an Eligible Assignee, together with the Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit C, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Note or Notes, a new Note or Notes payable to the order of such Eligible Assignee in amount equal to, respectively, the Commitments and the outstanding Advances assumed by it pursuant to such Assignment and Acceptance, and if the assigning Lender has retained any Commitments hereunder, a new Note or Notes payable to the order of such Lender in an amount equal to, respectively, the Commitments and the outstanding Advances retained by it hereunder. Such new Note or Notes shall be dated the date of the original Notes executed pursuant to this Agreement and shall otherwise be in substantially the form of the attached Exhibits A-1, A-2, or A-3, as applicable. (e) Participations. Each Lender may sell participations to one or more -------------- banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, -134- without limitation, all or a portion of its Commitments, the Advances owing to it, its participation interest in the Letter of Credit Obligations, and the Notes held by it); provided, however, that (i) such Lender's obligations under -------- ------- this Agreement (including, without limitation, its Commitments to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent, and the Issuing Banks and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and (v) such Lender shall not require the participant's consent to any matter under this Agreement, except for change in the principal amount of any Note in which the participant has an interest, reductions in fees or interest, or extending the Maturity Date except as permitted in this Agreement. The Borrower hereby agrees that participants shall have the same rights under Sections 2.08, 2.09, 2.11(c), and 10.07 hereof as the Lender to the extent of their respective participations. (f) Confidentiality. Each Lender agrees to preserve the confidentiality of --------------- any confidential information relating to the Parent, the Borrower and their respective Subsidiaries received by Lender; provided that each Lender may furnish any such confidential information in the possession of such Lender from time to time to (i) assignees and participants (including prospective assignees and participants), (ii) its regulators, the National Association of Insurance Commissioners, governmental authorities and any self-governing organization to which is a member, (iii) any direct or indirect contractual counterparty to such Lender in swap agreements or such contractual counterparty's professional advisor and (iv) the Related Funds, Affiliates, directors, partners, officers, employees of such Person or its Affiliates or Related Funds; provided that, -------- prior to any such disclosure, such Person shall agree to preserve the confidentiality of any confidential information relating to the Borrower and its Subsidiaries received by it from or on behalf of such Lender. Section 10.7 Indemnification. The Borrower shall indemnify the --------------- Administrative Agent, the Arrangers, the Syndication Agent, each Documentation Agent, the Lenders (including any lender which was a Lender hereunder prior to any full assignment of its Commitment), the Swingline Lender, the Issuing Banks, and each affiliate thereof and their respective directors, officers, employees, trustees, advisors, and agents from, and discharge, release, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from -135- (i) any actual or proposed use by the Borrower or any Affiliate of the Borrower of the proceeds of any Advance, (ii) any breach by the Borrower or any Guarantor of any provision of this Agreement or any other Credit Document, (iii) any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing, or (iv) any Environmental Claim or requirement of Environmental Laws concerning or relating to the present or previously-owned or operated properties, or the operations or business, of the Borrower or any of its Subsidiaries, and the Borrower shall reimburse the Administrative Agent, the Arrangers, the Syndication Agent, each Documentation Agent, each Issuing Bank, the Swingline Lender, and each Lender, and each affiliate thereof and their respective directors, officers, employees and agents, upon demand for any reasonable out-of-pocket expenses (including legal fees) incurred in connection with any such investigation, litigation or other proceeding; and expressly including any such losses, liabilities, claims, damages, or expense incurred by reason of the Person being indemnified's own negligence, but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. Section 10.8 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. Section 10.9 Survival of Representations, Indemnifications, etc. All -------------------------------------------------- representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Lenders, none of which investigations shall diminish any Lender's right to rely on such representations and warranties. All obligations of the Borrower provided for in Sections 2.08, 2.09, 2.11(c), 9.05 and 10.07 shall survive any termination of this Agreement and repayment in full of the Obligations. Section 10.10 Severability. In case one or more provisions of this ------------ Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby. -136- Section 10.11 Florida Liens. The Lenders and the Administrative Agent ------------- agree that the Administrative Agent will release the Florida Liens or deposit releases of the Florida Liens with any Person designated by the Borrower within 5 Business Days of written request by the Borrower which the Borrower can make in its sole and absolute discretion. In addition, if no Default then exists, the Lenders and the Administrative Agent agree to cooperate with the Borrower in connection with a written request by the Borrower to assign all or a portion of the Florida Liens to another Person. Without limitation of the foregoing, (a) the Lenders and the Administrative Agent agree to sell without recourse a portion of the Revolving Notes to the Person directed by the Borrower in connection with such an assignment, (b) the Lenders and the Administrative Agent agree to temporarily reduce the Lenders' respective Revolving Commitments Pro Rata by the portion of the Revolving Notes sold, (c) the Lenders, the Administrative Agent and the Borrower agree to cause the portion of the Revolving Notes sold to be converted into term notes which are independent of this Credit Agreement, (d) the Lenders, the Administrative Agent and the Borrower agree to immediately thereafter cause the Lenders' respective Revolving Commitments to be increased to the amounts which existed prior to such assignment, and (e) the Lenders, the Administrative Agent and the Borrower agree to execute such documents as are necessary or desirable to accomplish the foregoing, all in form and substance reasonably acceptable to the Administrative Agent and the Borrower. Section 10.12 Release of Guarantors. The Borrower can request that the --------------------- Administrative Agent release a Guarantor (except the Parent) from such Guarantor's obligations under the Guaranty, the Environmental Indemnity, and the Pledge Agreement and release all interests in the Guarantor that are pledged to the Administrative Agent pursuant to the Pledge Agreement, and the Administrative Agent shall execute such releases if (a) such Guarantor is going to incur Indebtedness permitted pursuant to the provisions of Section 6.02(b) of this Agreement and such Indebtedness is to be secured by substantially all of the assets of such Guarantor, (b) the Borrower provides the Administrative Agent with 5 days prior written notice of the Borrower's request for such releases, together with evidence reasonably satisfactory to the Administrative Agent that the Borrower will be in compliance with the provisions of Section 6.02 of this Agreement following the incurrence of such Indebtedness by such Guarantor, and (c) no monetary Default or Event of Default exists under the Credit Documents and no Default or Event of Default would occur in connection with such release or the incurrence of such Indebtedness by such Guarantor. Section 10.13 Supplemental Guaranties. The Borrower has requested and the ----------------------- Lenders have agreed that any partner of the Borrower or any partner of any Subsidiary of the Borrower -137- except the Parent or any Guarantor may execute a Supplemental Guaranty. However, the execution of or release of any Supplemental Guaranty shall not be construed as a release or modification of any obligation of a Guarantor under a Guaranty or Environmental Indemnity. Section 10.14 Usury Not Intended. It is the intent of the Borrower and ------------------ each Lender in the execution and performance of this Agreement and the other Credit Documents to contract in strict compliance with applicable usury laws, including conflicts of law concepts, governing the Advances of each Lender including such applicable laws of the State of New York and the United States of America from time to time in effect. In furtherance thereof, the Lenders and the Borrower stipulate and agree that none of the terms and provisions contained in this Agreement or the other Credit Documents shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Rate and that for purposes hereof "interest" shall include the aggregate of all charges which constitute interest under such laws that are contracted for, charged or received under this Agreement; and in the event that, notwithstanding the foregoing, under any circumstances the aggregate amounts taken, reserved, charged, received or paid on the Advances, include amounts which by applicable law are deemed interest which would exceed the Maximum Rate, then such excess shall be deemed to be a mistake and each Lender receiving same shall credit the same on the principal of its Notes (or if such Notes shall have been paid in full, refund said excess to the Borrower). In the event that the maturity of the Notes is accelerated by reason of any election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the Maximum Rate and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the applicable Notes (or, if the applicable Notes shall have been paid in full, refunded to the Borrower). In determining whether or not the interest paid or payable under any specific contingencies exceeds the Maximum Rate, the Borrower and the Lenders shall to the maximum extent permitted under applicable law amortize, prorate, allocate and spread in equal parts during the period of the full stated term of the Notes all amounts considered to be interest under applicable law at any time contracted for, charged, received or reserved in connection with the Obligations. The provisions of this Section shall control over all other provisions of this Agreement or the other Credit Documents which may be in apparent conflict herewith. Section 10.15 GOVERNING LAW. THIS AGREEMENT AND THE OTHER ------------- -138- CREDIT DOCUMENTS SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED, AND ANY DISPUTE BETWEEN THE BORROWER, ANY AGENT, ANY LENDER, OR ANY INDEMNITEE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK; PROVIDED THAT THE PERFECTION OF THE LIENS OF THE ADMINISTRATIVE AGENT ON THE COLLATERAL AND THE EXERCISE OF REMEDIES AGAINST THE COLLATERAL SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE APPLICABLE JURISDICTION. SECTION 10.16 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. ------------------------------------------------------- (A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH ---------------------- -------------- OF THE PARTIES HERETO AGREES THAT ALL DISPUTES AMONG THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED EXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK, BUT THE PARTIES HERETO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK, NEW YORK. EACH OF THE PARTIES HERETO WAIVES IN ALL DISPUTES BROUGHT PURSUANT TO THIS SUBSECTION (A) ANY -------------- OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE. (B) OTHER JURISDICTIONS. THE BORROWER AGREES THAT ANY AGENT, ANY LENDER ------------------- OR ANY INDEMNITEE SHALL HAVE THE RIGHT TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE SUCH PERSON TO (1) OBTAIN PERSONAL JURISDICTION OVER THE -139- BORROWER OR (2) ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. THE BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY SUCH PERSON TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PERSON. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH SUCH PERSON HAS COMMENCED A PROCEEDING DESCRIBED IN THIS SUBSECTION (B). -------------- (C) SERVICE OF PROCESS. THE BORROWER WAIVES PERSONAL SERVICE OF ANY ------------------ PROCESS UPON IT AND IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY WRITS, PROCESS OR SUMMONSES IN ANY SUIT, ACTION OR PROCEEDING BY THE MAILING THEREOF BY ANY AGENT OR THE LENDERS BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER ADDRESSED AS PROVIDED HEREIN. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF ANY AGENT OR THE LENDERS TO SERVE ANY SUCH WRITS, PROCESS OR SUMMONSES IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON ----- --- CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH - ---------- ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE. (D) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES -------------------- ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY -140- COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (E) WAIVER OF BOND. THE BORROWER WAIVES THE POSTING OF ANY BOND -------------- OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO REALIZE ON THE COLLATERAL ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT. (F) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER ----------------- PARTY HERETO THAT IT HAS DISCUSSED THIS AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 10.16, WITH ITS COUNSEL. ------------- Section 10.17 Lender Interest Rate Agreements. As more fully set forth in ------------------------------- the Guaranty and the Pledge Agreement, if any Lender enters into an Interest Rate Agreement with the Borrower or the Parent, the obligations of such Person to such Lender under such Interest Rate Agreement shall (a) be pari passu with the Obligations and (b) be secured by the Collateral pursuant to the Pledge Agreement. Section 10.18 Knowledge of Borrower. For purposes of this Agreement, --------------------- "knowledge of the Borrower" means the actual knowledge of any of the executive officers and all other Responsible Officers of the Parent. Section 10.19 Lenders Not in Control. None of the covenants or other ---------------------- provisions contained in the Credit Documents shall or shall be deemed to, give the Lenders the rights or power to exercise control over the affairs and/or management of the Borrower, any of its Subsidiaries or any Guarantor, the power of the Lenders being limited to the right to exercise the remedies provided in the Credit Documents; provided, however, that if any Lender becomes the owner of any stock, or other equity interest in, any Person whether through foreclosure or otherwise, such Lender shall be entitled (subject to requirements of law) to exercise such legal rights as it may have by being owner of such stock, or other equity interest in, such Person. Section 10.20 Headings Descriptive. The headings of the several Sections -------------------- and paragraphs of the Agreement are inserted for convenience only and shall not in any way affect the meaning -141- or construction of any provision of this Agreement. Section 10.21 Time is of the Essence. Time is of the essence under the ---------------------- Credit Documents. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -142- [SIGNATURE PAGE OF SECOND AMENDED AND RESTATED SENIOR CREDIT AGREEMENT] EXECUTED as of the date first referenced above. BORROWER: -------- MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P. By: MeriStar Hospitality Corporation, its general partner By:___________________________________ Name:_________________________________ Title:________________________________ -143- [SIGNATURE PAGE OF SECOND AMENDED AND RESTATED SENIOR CREDIT AGREEMENT] SOCIETE GENERALE, SOUTHWEST AGENCY, individually and as Arranger and Administrative Agent ________________________________________________ By:_____________________________________________ Title:__________________________________________ -144- [SIGNATURE PAGE OF SECOND AMENDED AND RESTATED SENIOR CREDIT AGREEMENT] BANKERS TRUST COMPANY, individually and as Arranger and Syndication Agent _____________________________________________ By:__________________________________________ Title:_______________________________________ -145- [SIGNATURE PAGE OF SECOND AMENDED AND RESTATED SENIOR CREDIT AGREEMENT] LEHMAN COMMERCIAL PAPER INC., individually and as Arranger and Documentation Agent _____________________________________________ By:__________________________________________ Title:_______________________________________ -146- [SIGNATURE PAGE OF SECOND AMENDED AND RESTATED SENIOR CREDIT AGREEMENT] WELLS FARGO BANK, NATIONAL ASSOCIATION, individually and as Documentation Agent _____________________________________________ By:__________________________________________ Title:_______________________________________ -147- EX-10.5 4 LOAN AGREEMENT Exhibit 10.5 THE BORROWERS NAMED HEREIN (collectively, the Borrower) and SECORE FINANCIAL CORPORATION (Lender) __________________________ LOAN AGREEMENT __________________________ Dated: As of August 3, 1998 TABLE OF CONTENTS
Page - --------- 1. The Note and the Security Instruments.............. 1 2. Loan Documents..................................... 1 3. Property Releases.................................. 2 4. Substitution of Properties......................... 6 5. Lock-box Account................................... 12 6. Replacements and Replacement Reserve............... 14 7. Required repairs; required repair funds............ 21 8. Events of Default.................................. 24 9. Sale of Notes and Securitization; Indemnification.. 24 10. Incorporation of Provisions........................ 26 12. Representations and Warranties..................... 26 13. Construction of Agreement.......................... 27 14. Parties Bound, Etc................................. 27 15. Waivers............................................ 27 16. Governing Law...................................... 27 17. Severability....................................... 28 18. Notices........................................... 28 19. Fees and Expenses.................................. 28 20. Modification....................................... 28 21. No Oral Agreements................................. 28 22. Definitions........................................ 28 23. Recourse........................................... 29
THIS LOAN AGREEMENT made as of the 3rd day of August, 1998 between the undersigned borrowers listed on the signature pages hereto, each having an office at 1010 Wisconsin Avenue, N.W., Washington, D.C. 20007 (hereinafter referred to, individually and collectively, as the context may require, as a "Borrower") and SECORE FINANCIAL CORPORATION, having an office at Three Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814 (hereinafter referred to as "Lender"); W I T N E S S E T H : WHEREAS, at the request of Borrower, Lender has agreed to fund to Borrower a loan in the principal amount of $250,000,000 (the "Loan") pursuant to the terms of this Agreement; WHEREAS, the Loan is evidenced by that certain note of even date herewith made by Borrower to Lender in the original principal amount of $250,000,000 (the "Note") to be secured by sixteen (16) certain Mortgages, Deeds of Trust, Deeds to Secure Debt and other real estate security instruments, as the case may be, each of even date herewith, made by Borrower and each in the amount of $250,000,000 (collectively, the "Security Instruments"), covering sixteen (16) parcels of land more fully described in Schedule A attached hereto and made a part hereof (individually, a "Parcel" and collectively, the "Parcels"); WHEREAS, at the request of Borrower, Lender has agreed, among other things, to (i) permit Borrower to release certain Properties (defined below) from the lien of the Security Instruments and (ii) provide the establishment of a lockbox account upon the occurrence of an Event of Default (defined herein) under the Loan Documents (defined below). NOW, THEREFORE, in consideration of ten dollars ($10) and other good and valuable consideration, the receipt of which is hereby acknowledged, Lender and Borrower hereby covenant and agree as follows: 1. The Note and the Security Instruments. The indebtedness of Borrower shall ------------------------------------- be: (i) evidenced by the Note, and (ii) secured by, among other things, (a) the Security Instruments made by Borrower covering the fee estate of Borrower, in each Parcel, the Improvements (as such term is defined in the Security Instruments) located on each Parcel and other property, rights and interests of Borrower in the same (individually, a "Property" and collectively, the "Properties"), and (b) assignments of leases and rents each given by Borrower to Lender dated the date hereof and covering the Properties (the "Assignments of Rents"). 2. Loan Documents. The term "Loan Documents" as used in this Agreement shall -------------- collectively mean the Note, the Security Instruments, the Assignments of Rents, the Assignments of Agreements, Permits and Contracts, the Environmental Indemnity Agreement, and the Conditional Assignment of Management Agreement and Subordination of Management Fees, each dated the date hereof between Borrower and Lender, this 1 Agreement and all other documents and instruments of any nature whatsoever executed or delivered in connection with the Loan. 3. Property Releases. Subject to the terms and conditions set forth herein, ----------------- Borrower shall have the right, from time to time, on any Payment Date (as defined in the Note), or on any Business Day (as defined in the Note), to obtain a release (a "Property Release") of a Property from the lien of the related Security Instrument (i) provided that no default under this Agreement, the Note, the Security Instruments or any other Loan Document has occurred and is continuing and (ii) subject to compliance with the provisions set forth below in this Section 3, legal, record, economic and beneficial ownership of the Property for which a Property Release is being requested (the "Release Premises") is simultaneously with the granting of the Property Release transferred (a "Release Premises Transfer") to and shall be owned immediately after such Property Release by a person(s), party(ies) or entity(ies) other than Borrower, the Operating Tenant (as defined in the Security Instruments) or any affiliate of Borrower or of any Operating Tenant ("Release Premises Transferee"). In the event that the Borrower seeks to release a Property from the lien of the related Security Instrument, Lender shall release such Property from the lien of the related Security Instrument and the Loan Documents, but only upon receipt by Lender of the following: (a) At least thirty (30) days but no more than ninety (90) days prior written notice of Borrower's request to obtain a release of the Release Premises in the form attached hereto as Exhibit A; (b) A certificate of Borrower certifying the requirements set forth in Paragraph 3(g) of this Loan Agreement shall be true after giving effect to such transfer; (c) At least five (5) Business Days' prior to such Property Release notice of prepayment; (d) A wire transfer of immediately available federal funds in an amount equal to the sum of (i) one hundred twenty five percent (125%) of the Allocated Loan Amount for the Release Premises as set forth on Schedule B attached hereto (the "Release Amount") and (ii) all accrued and unpaid interest with respect to the Release Amount and any other amounts owing to Lender in connection with the Release Premises, including Breakage Costs, ( as defined in the Note) if any, as set forth in Article 2, Section (c) of the Note; (e) If applicable, all proposed documents related to the Release Premises Transferee and such documents, certificates and assurances that Lender shall reasonably request to evidence and confirm that the Release Premises is simultaneously with the Property Release being transferred to a Release Premises Transferee; (f) Payment of all Lender's costs and expenses, including due diligence review costs and reasonable counsel fees and disbursements incurred in connection with the Property Release 2 and the review and approval of the documents and information required to be delivered in connection therewith ("Property Release Expenses"); (g) Evidence satisfactory to Lender that the Aggregate Debt Service Coverage Ratio (hereinafter defined) for the twelve (12) month period immediately preceding the Property Release with respect to the Properties remaining encumbered by the liens of the Security Instruments after giving effect to the Property Release shall be equal to or greater than the greater of (i) the Aggregate Debt Service Coverage Ratio with respect to all of the Properties for the twelve (12) months immediately preceding the date hereof (1.66 to 1.00; the "Origination DSCR") or (ii) the Aggregate Debt Service Coverage Ratio with respect to all of the Properties then encumbered by the liens of the Security Instruments immediately prior to such release, for the twelve (12) months immediately preceding the second calendar month prior to the date of the proposed Property Release (the "Current DSCR"); (h) If the Securities (as defined herein) are then rated by the Rating Agencies (as defined in the Security Instruments), the written confirmation of the Rating Agencies that the Property Release shall not result in a downgrade, withdrawal or qualification of the then current ratings by the applicable Rating Agencies of the Securities and otherwise in form and substance reasonably satisfactory to Lender and its counsel; and (i) If the Operating Lease for the Release Premises (as defined in the related Security Instruments) has been terminated pursuant to Section 36.1 of the Operating Lease, and, after giving effect to such Release, the Borrower that owned the Release Premises prior thereto (the "Release Premises Transferor") is the owner of a Property that remains encumbered by the lien of the Security Instruments, an estoppel certificate from the Operating Tenant in form satisfactory to Lender stating that the Operating Lease has been terminated and that the Operating Tenant has released the Release Premises Transferor from all liability for the payment of any and all termination payments or any other payments due to the Operating Tenant pursuant to the terms of the Operating Lease and that the Release Premises Transferor has no further liability or obligation in connection with said Operating Lease or, if the Operating Lease on the Release Premises has not been terminated, an estoppel certificate from the Operating Tenant in form satisfactory to Lender that such Operating Lease, as it relates to the Release Premises, is and will remain in full force and effect following the Release Premises Transfer and that the Release Premises Transferor has no liability for the payment of any termination payments or any other payments due to the Operating Tenant pursuant to the terms of the Operating Lease and that the Release Premises Transferor has no further liability or obligation in connection with said Operating Lease. The term "Aggregate Debt Service Coverage Ratio" shall mean the ratio of (a) the sum of NOI (defined below) derived from the operation of each of the Properties, including Rents and Accounts Receivable, other than the Release Premises (if the calculation is being made in connection with a Property Release) and any Property which has, prior to any particular Property Release, been theretofore released, during the applicable period, to (b) the total Debt Service (defined below) that would be payable under the Note for the applicable period. For purposes of this calculation, "Debt Service" shall mean, for any given period during the term of the Loan, an 3 amount equal to the aggregate amount of interest payable on the outstanding principal balance of the Loan for such period, assuming an interest rate equal to the greater of (i) 10.25% per annum or (ii) the Applicable Interest Rate (as defined in the Note) for such period. The term "NOI" as used herein shall mean, with respect to any Property, for any given period, the Gross Income (defined below) for such Property for such period less Expenses (hereinafter defined) attributable to such Property for such period, as more particularly described on the operating statements for the Property delivered by Borrower to Lender pursuant to the Security Instruments. NOI shall include, only Rents and Accounts Receivable actually received and earned in accordance with the Uniform System of Accounts (as defined in the Security Instruments) and such other income, including any rent loss or business interruption insurance proceeds, laundry, parking, vending or concession income, late fees, forfeited security deposits and other miscellaneous tenant charges and Expenses actually paid or payable on an accrual basis attributable to such Property on an annualized basis during the applicable period ending on the last day of the month that is two calendar months prior to the month during which the NOI is being calculated, as set forth on operating statements satisfactory to Lender. NOI shall be calculated on an accrual basis in accordance with the Uniform System of Accounts (as defined in the Security Instruments). The term "Gross Income" as used herein shall mean with respect to any Property for any given period the gross income derived from the operation of such Property for such period, including Rents and Accounts Receivable. Notwithstanding the foregoing, NOI shall not include (a) condemnation or insurance proceeds (excluding rent or business interruption insurance proceeds); (b) any proceeds from the sale, exchange, transfer, financing or refinancing of all or any portion of the Property for which it is to be determined, (c) amounts received from tenants as security deposits; or (d) any other type of income otherwise includible in NOI but paid directly by any tenant to a person or entity other than Borrower or Operating Tenant or their respective agents or representatives, unless such amounts are included as an Expense. For purposes of calculating NOI herein, Rent payable under the Operating Lease shall not be included in the definition of Gross Income or Expenses. The term "Expenses" as used herein shall mean, with respect to any Property, for any given period (and shall include the pro rata portion for such period of all such expenses attributable to, but not paid during, such period), all expenses as determined in accordance with the Uniform System of Accounts, by Borrower or Operating Tenant under the Operating Lease, as applicable, during that period in connection with the operation of such Property for which it is to be determined, including without limitation: A. expenses for cleaning, repair, maintenance, decoration and painting of the Property (including, without limitation, parking lots and roadways), net of any insurance proceeds in respect of any of the foregoing; B. wages (including overtime payments), benefits, payroll taxes and all other related expenses for Borrower's on-site personnel, up to and including (but not above) the level 4 of the on-site manager, engaged in the repair, operation and maintenance of the Property and service to tenants and on-site personnel engaged in audit and accounting functions performed by Borrower; C. management fees equal to the greater of (i) the management fee pursuant to the Management Agreement (as defined in the Security Instruments) and (ii) four percent (4%) of Gross Income. Such fees shall include all fees for management services whether such services are performed at such Property or off-site; D. franchise fees, reservation fees and other royalties or similar payments equal to the greater of (i) such fees and payments due under the Franchise Agreement (as defined in the Security Instruments) and (ii) five percent (5%) of Gross Income; E. the cost of all electricity, oil, gas, water, steam, heat, ventilation, air conditioning and any other energy, utility or similar item and the cost of building and cleaning supplies; F. the cost of any leasing commissions and tenant concessions and improvements payable by Borrower pursuant to any Leases which are in effect for such Property during such period as such amounts are recognized in accordance with the Uniform System of Accounts, provided however that in no event less than on a straight line basis during the remaining respective base term (excluding extension, renewal or other option); G. Insurance Premiums (as defined in the Security Instruments); H. legal, accounting and other professional fees and expenses; I. the cost of all equipment to be used in the ordinary course of business, which is not capitalized in accordance with the Uniform System of Accounts; J. Taxes and Other Charges (as such terms are defined in the Security Instruments); K. advertising and other marketing costs and expenses; L. casualty losses to the extent not reimbursed by a third party; M. all amounts that are reserved for hereunder and the Security Instruments, including those funds which are deposited into the Replacement Reserve Account or would be required to be deposited in the Replacement Reserve Account in the event the Replacement Reserve Account is not yet established; N. all amounts that are required to be reserved for under the Operating Lease, including the Capital Expenditure Reserve (as defined in the Operating Lease), to the extent such amounts are not duplicative of the amounts set forth in clause (M) above; and 5 O. a furniture, fixtures and equipment reserve equal to the greater of (i) such reserves required under the Management Agreement and the Franchise Agreement and (ii) five percent (5%) of Gross Income, to the extent such amounts are not duplicative of the amounts set forth in clause (M) above. Notwithstanding the foregoing, Expenses shall not include (i) depreciation or amortization or any other non-cash item of expense unless approved by Lender; (ii) interest, principal, fees, costs and expense reimbursements of Lender in administering the Loan but not in exercising any of its rights under this Agreement or the other Loan Documents; or (iii) any expenditure (other than leasing commissions, tenant concessions and improvements and replacement reserves) which is properly treatable as a capital item under the Uniform System of Accounts. 4. Substitution of Properties. Provided that no Event of Default has occurred -------------------------- and is continuing, Borrower shall have the right to obtain a release of one or more of the Properties from the lien of the related Security Instrument and Loan Documents (a "Substitution Release") upon substitution of another fully licensed and operating hospitality property of comparable type and quality as the Property being released in the place of the Release Premises (a "Substitute Property") owned in fee simple (or leasehold) by a Borrower and leased to the Operating Tenant pursuant to an operating lease, substantially in the same form and content as the Operating Lease, and such Substitute Property is subjected to the lien of a new mortgage, deed of trust, deed to secure debt or similar security instruments, in the same form and substance as the Security Instruments ("Substitute Security Instrument") and to the lien of the Loan Documents, as a first lien thereon and managed by Manager (or an affiliate of Manager as provided for in the Management Agreement) pursuant to the terms of the Management Agreement or a Replacement Management Agreement (as defined in the Security Instruments) and, subject to a Franchise Agreement in compliance with the terms and conditions of Section 3.13 of the Security Instruments and upon compliance with and subject to the conditions set forth in this Section 4; provided, however, that Borrower's rights to such release and substitution shall be conditioned on receipt by Lender of the following: (a) evidence which would be satisfactory to a prudent institutional mortgage lender that title to the Release Property has been transferred to a Release Premises Transferee. (b) evidence which would be satisfactory to a prudent institutional mortgage lender that the Substitute Property is fully operational and is of similar or higher quality or value to the Release Premises. (c) a current Appraisal of the Substitute Property prepared within one hundred eighty (180) days prior to the release and substitution showing (1) an appraised value equal to or greater than the appraised value of the Release Premises as of the date hereof; and (2) an aggregate loan-to-value ratio with respect to the Properties remaining subject to the lien of the Security Instruments after the Substitution Release not greater than the ratio equal to the lesser of (A) the aggregate loan-to-value ratio as of the date hereof with respect to the Properties as set forth on 6 Schedule B attached and (B) the aggregate loan-to-value ratio with respect to the Properties remaining subject to the lien of the Security Instruments immediately prior to the proposed Substitution Release. (d) an opinion of the related Borrower's counsel which would be satisfactory to a prudent institutional mortgage lender stating that (i) the Substitute Security Instrument and the Loan Documents by which the Substitute Property will be encumbered have been duly authorized, executed and delivered by such Borrower and are valid and enforceable in accordance with their terms, subject to bankruptcy and equitable principles, (ii) the related Borrower and Operating Tenant are qualified to do business and in good standing under the laws of the jurisdiction where the Substitute Property is located, or that such Borrower, are not required by Applicable Law (defined in the Security Instruments) to qualify to do business in such jurisdiction, and (iii) based solely on a certificate of the related Borrower the encumbrance of the Substitute Property with the lien of the Substitute Security Instrument and the Loan Documents shall not cause a breach of, or a default under any agreement, document or instrument to which such Borrower is a party or to which it or its properties are bound or affected. (e) a certification by the related Borrower that (x) the certificates, opinions and other instruments which have been or are therewith delivered to or deposited with Lender in connection with such release and substitution conform to the requirements of this Agreement and the Security Instruments, (y) all conditions precedent herein have been complied with and (z) all conditions precedent to the delivery of the Substitute Security Instrument and Loan Documents contained in this Agreement have been fulfilled. (f) original executed counterparts of the Substitute Security Instrument and the Loan Documents encumbering the Substitute Property and the related operating lease and related collateral, including without limitation, any financing statements or other documents necessary to grant or perfect Lender's first priority security interest in the Personal Property (defined in the Security Instruments) located thereon and the Rents and Accounts Receivable derived therefrom; the principal amount of such Substitute Security Instrument shall equal the face amount of the Note, provided that in the event that the jurisdiction in which the Substitute Property is located imposes a mortgage recording intangibles or similar tax, and does not permit the allocation of indebtedness for the purpose of determining the amount of such tax payable, the principal amount of such Substitute Security Instrument shall equal 125% of the Substitute Allocated Loan Amount (defined below). (g) a title insurance policy issued by a title insurance company satisfactory to the Rating Agencies (or, if a Securitization has not occurred, to Lender) insuring the lien of the Substitute Security Instrument on the Substitute Property(ies), in form and substance which would be satisfactory to a prudent institutional mortgage lender insuring that the Substitute Security Instrument is a valid and enforceable first lien on the good and marketable fee simple or leasehold estate, title of the related Borrower to the Substitute Property in an amount equal to the amount of the Loan allocated to the Substitute Property (the "Substitute Allocated Loan Amount"), subject only to standard and customary exceptions and such other exceptions that would be approved by a prudent institutional mortgage lender, together with such affirmative insurance and other 7 endorsements customarily required by a prudent institutional mortgage lender, including a "tie-in" and first loss endorsement satisfactory to Lender, or, if such endorsement is not available in the state in which the Substitute Property is located, insurance in an amount equal to the greater of one hundred twenty five percent (125%) of the Substitute Allocated Loan Amount or the amount on which mortgage or intangibles tax was paid with respect to the Security Instrument for the Substitute Property, together with a "last dollar endorsement". Such title insurance policy shall not contain any exception for any state of facts that an accurate survey might show or that a survey made after the date of the survey referred to in Section 4(l) might show. (h) If the Operating Lease for the Release Premises has been terminated pursuant to Section 36.1 of the Operating Lease, and, after giving effect to such Release, the Release Premises Transferor is the owner of a Property that remains encumbered by the lien of the Security Instruments, an estoppel certificate from the Operating Tenant in form satisfactory to Lender stating that the Operating Lease has been terminated and that the Operating Tenant has released the Release Premises Transferor from all liability for the payment of any and all termination payments or any other payments due to the Operating Tenant pursuant to the terms of the Operating Lease and that the Release Premises Transferor has no further liability or obligation in connection with said Operating Lease or, if the Operating Lease on the Release Premises has not been terminated, an estoppel certificate from the Operating Tenant in form satisfactory to Lender that such Operating Lease, as it relates to the Release Premises, is and will remain in full force and effect following the Substitution Release and that the Release Premises Transferor has no liability for the payment of any termination payments or any other payments due to the Operating Tenant pursuant to the terms of the Operating Lease and that the Release Premises Transferor has no further liability or obligation in connection with said Operating Lease. (i) evidence which would be satisfactory to a prudent institutional mortgage lender to the effect that the Substitute Property and the use thereof are in substantial compliance with the applicable zoning, subdivision, and all other applicable federal, state or local laws and ordinances affecting the Substitute Property, and that all material building and operating licenses and permits necessary for the use and occupancy of the Substitute Property as a hospitality property or hotel including, but not limited to, current certificates of occupancy, have been obtained and are in full force and effect. (j) an environmental report dated within six (6) months prior to delivery which states that the Substitute Property does not contain any Hazardous Substances in violation of Applicable Law (as defined in the Security Instruments) or material risk of contamination from off-site Hazardous Substances. (k) payment of all costs and expenses incurred by Lender including reasonable counsel fees and disbursements in connection with the release of any Release Premises and the inclusion of the Substitute Property as collateral, all recording charges, filing fees, taxes, or other expenses, including but not limited to intangibles taxes and documentary stamp taxes in connection with the recording of the Substitute Security Instruments and the lien necessary to grant and perfect Lender a first priority lien on and security interest in the Substitute Property, the Personal Property located therein and the Rents derived therefrom. In the event that the jurisdiction in which the 8 Substitute Property is located imposes a mortgage recording or intangibles tax, or similar tax, and does not permit the allocation of indebtedness for the purpose of determining the amount of such tax payable, if permitted by applicable law in such jurisdiction, such tax shall be paid on an amount equal to 125% of the Substitute Allocated Loan Amount. (l) a recent survey of the Substitute Property(ies) prepared by a land surveyor licensed in the state where the Substitute Property is located pursuant to the then current American Land Title Association/American Congress of Surveying and Mapping standards for title surveys and which would be otherwise satisfactory to a prudent institutional mortgage lender, provided that no structural additions to the improvements shown on such survey or new structures have been made or built since the date of such survey and that there has been no change in the legal description of the Substitute Property since the date of such survey, whether due to sales, transfers, condemnation or otherwise. (m) evidence indicating whether the Substitute Property is located within a flood plain. (n) a property inspection report dated within six (6) months of delivery prepared by an independent licensed engineer approved by Lender, prepared in accordance with standards employed by prudent institutional mortgage lenders stating, among other things, that the Substitute Property is in good condition and repair and free of material damage or waste and complies in all material respects with the Americans with Disabilities Act, or which otherwise reveals a state of fact that would be satisfactory to a prudent institutional mortgage lender and provided that adequate reserves satisfactory to Lender and the Rating Agencies are established. (o) annual operating statements and occupancy statements for the Substitute Property for the recent fiscal year of the owner thereof, together with a year to date operating statement, current occupancy statements, and a budget for the current fiscal year, each certified by the related Borrower, and a certificate of no adverse change since the date thereof executed by the related Borrower, in each case in a form and substance which would be satisfactory to a prudent institutional mortgage lender. (p) original certificates and copies of policies of insurance required by Lender under the terms of the Substitute Security Instrument for the Substitute Property. (q) evidence of the qualification and good standing of the related Borrower and Operating Tenant (and the principals, if necessary) in the state where the Substitute Property is located unless such qualification is not required in such state by Applicable Law. (r) certified copies of all Leases (as defined in the Substitute Security Instrument) with respect to the Substitute Property and tenant estoppel certificates from tenants under Material Leases, as required by Lender, all in a form and substance which would be satisfactory to a prudent institutional mortgage lender. (s) certified copies of all material contracts and agreements relating to the management, leasing and operation of the Substitute Property, including, without limitation, the Franchise 9 Agreement and Management Agreement, each of which shall be in a form and substance which would be satisfactory to a prudent institutional mortgage lender in a transaction of similar type and which comply with the terms and conditions of Section 3.13 of the Security Instruments. (t) certified copies of all material consents, licenses and approvals, if any, required in connection with the substitution of a Substitute Property, including liquor licenses and evidence that such consents, licenses and approvals are in full force and effect or, in the event that a liquor license cannot be issued to Borrower until Borrower has acquired title to the Substitute Property or to the Operating Tenant until the Operating Tenant has taken possession of the Substitute Property under the related Operating Lease, certified copies of a temporary liquor license or concession arrangement that is in full force and effect that permits the sale and consumption of liquor and alcoholic beverages at the Substitute Property. (u) a certificate by the related Borrower and the other Borrowers certifying that all of the representations and warranties contained in the Security Instruments and in the other Loan Documents, after giving effect to the substitution of the Substitute Property, are true and correct in all material respects with respect to the Substitute Property and that there is no Event of Default hereunder. (v) a certificate of the related Borrower and the other Borrowers certifying, together with other evidence that would be satisfactory to a prudent institutional mortgage lender that, after the substitution of a Substitute Property and the release of the Release Premises, (i) the Aggregate Debt Service Coverage Ratio for the twelve (12) month period immediately preceding the calendar month prior to the date of the Substitution Release with respect to all Properties remaining subject to the lien of the Security Instruments shall be equal to or greater than (A) the Origination DSCR, and (B) the Current DSCR and (ii) the Debt Service Coverage Ratio (defined in the Substitute Security Instrument) for the twelve month period immediately preceding the Substitution Release with respect to the Substitute Property is equal or greater than the Debt Service Coverage Ratio at origination with respect to the Release Premises being replaced by the Substitute Property. (w) UCC Searches with respect to the Substitute Property and the related Borrower in the state where the Substitute Property is located and the jurisdictions where such person has its principal place of business. (x) a franchisor estoppel and recognition letter from the franchisor under the Franchise Agreement for the Substitute Property in a form and substance that would be satisfactory to a prudent institutional mortgage lender. (y) a certified copy of (i) the operating lease for the Substitute Property between the related Borrower and Operating Tenant or (ii) an amendment to the Operating Lease to include the Substitute Property, in either case in a form and substance that would be satisfactory to a prudent institutional mortgage lender, together with a Subordination, Non-Disturbance and Attornment Agreement with respect to such operating lease. 10 (z) a certified copy of (i) the management agreement for the Substitute Property between Operating Tenant and Manager or (ii) an amendment to the Management Agreement to include the Substitute Property, in either case in a form and substance that would be satisfactory to a prudent institutional lender together with an Assignment of Management Agreement and Subordination of Management Fees in the same form and substance as with respect to the Release Premises. (aa) a certificate of the related Borrower dated the date of the substitution, certifying (i) the names and true signatures of the incumbent officers of such person authorized to sign the applicable Loan Documents, (ii) the by-laws of such person as in effect on the date of the substitution of the Substitute Property, (iii) the resolutions of such person's board of directors approving and authorizing the execution, delivery and performance of all Loan Documents executed by such person, and (iv) that there have been no changes in the certificate of incorporation of such person since the date of the most recent certification thereof by the appropriate Secretary of State. (bb) certified copies of the most recent quality assurance reports or similar reports of inspection or compliance from the franchisor under any Franchise Agreement or Management Agreement (the "Quality Assurance Reports"), if any. (cc) if the related Borrower owns a leasehold estate in the Substitute Property, (i) a certified copy of the Ground Lease for the Substitute Property, together with all amendments and modifications thereto and a recorded memorandum thereof, which Ground Lease would be satisfactory in all respects to a prudent institutional mortgage lender and which contains customary leasehold mortgagee provisions and protections, and which shall provide, among other things, (A) for a remaining term of no less than 10 years from the Maturity Date, (B) that the Ground Lease shall not be terminated until Lender has received notice of a default thereunder and has had a reasonable opportunity to cure or complete foreclosure, and fails to do so in a diligent manner, (C) for a new lease on the same terms to the Lender as tenant if the Ground Lease is terminated for any reason, (D) the non-merger of fee and leasehold interests, and (E) that insurance proceeds and condemnation awards (from the fee interest as well as the leasehold interest) will be applied pursuant to the terms of the Substitute Security Instrument, and (ii) a ground lease estoppel executed by the fee owner and ground lessor of the Substitute Property, acceptable to Lender. (dd) if a Securitization has occurred, an opinion of the related Borrower's counsel reasonably satisfactory to Lender stating, among other things, that the tax qualification and status of the REMIC will not be adversely affected or impaired as a result of the substitution of the Substitute Property. (ee) such other certificates, opinions, documents and instruments relating to the substitution reasonably requested by Lender, its counsel or the Rating Agencies, and all corporate and other proceedings and all other documents (including, without limitation, all documents referred to herein and not appearing as exhibits hereto) and all legal matters in connection with the substitution shall be satisfactory in form and substance to Lender in its reasonable discretion. 11 (ff) if a Securitization has occurred, written confirmation from the Rating Agencies that the substitution of the Substitute Property for the related Release Premises shall not result in a withdrawal, downgrade or qualification of the then current ratings by the applicable Rating Agencies of the Securities and otherwise in form and substance satisfactory to Lender and its counsel. (gg) the aggregate Allocated Loan Amounts applicable to the total number of Release Premises which shall be the subject of any Substitution Release pursuant to this Section shall not exceed $83,500,000.00. Simultaneously with compliance of the conditions set forth above in this Section 4, Lender shall (i) release the lien of the related Security Instrument with respect to the Release Premises being replaced with the Substitute Property, and (ii) adjust the Allocated Loan Amounts as Lender deems reasonably necessary to incorporate the Substitute Allocated Loan Amount. Upon the substitution of a Substitute Property in accordance with the terms and conditions of this Section 4, such Substitute Property shall be deemed a Property, and the Substitute Allocated Loan Amount shall be deemed an Allocated Loan Amount for all purposes under this Agreement. 5. Lock-box Account. ---------------- (a) Upon the occurrence and continuance of an Event of Default, Borrower shall establish and maintain a segregated Eligible Account (defined below) (the "Lockbox Account") to be held by Lender, which Lockbox Account shall be under the sole dominion and control of Lender. Borrower hereby grants to Lender a first priority security interest in the Lockbox Account and all deposits at any time contained therein and the proceeds thereof and will take all actions necessary to maintain in favor of Lender a perfected first priority security interest in the Lockbox Account, including, without limitation, executing and filing UCC-1 Financing Statements and continuations thereof. Borrower will not in any way alter or modify the Lockbox Account and will notify Lender of the account number thereof. Lender and Servicer shall have the sole right to make withdrawals from the Lockbox Account and all costs and expenses for establishing and maintaining the Lockbox Account shall be paid by Borrower. (b) Upon the establishment of the Lockbox Account, Borrower shall, or shall cause the Operating Tenant to, deposit the Rent under the Operating Lease directly into the Lockbox Account, and, if the Operating Lease has been terminated and there is no Replacement Operating Lease (as defined in the Security Instruments), and with respect to the Office portion of the Property identified as the Radisson, in Chicago, Illinois, Borrower shall, or shall cause each Manager (as defined in the Security Instruments), to deliver written instructions to all tenants under Leases and credit card companies to deliver all Rents and Accounts Receivable payable thereunder directly to the Lockbox Account. Borrower shall, and shall cause each Manager, to deposit all amounts received by Borrower or Manager constituting Rents and Accounts Receivable into the Lockbox Account within one (1) Business Day of receipt thereof. 12 (c) All funds on deposit in the Lockbox Account shall be applied by Lender to the payment of any amounts then due and payable under the Loan Documents in such order and priority as Lender in sole discretion shall determine. (d) The insufficiency of funds on deposit in the Lockbox Account shall not absolve Borrower of the obligation to make any payments, as and when due pursuant to this Agreement and the other Loan Documents, and such obligations shall be separate and independent, and not conditioned on any event or circumstance whatsoever. (e) The following capitalized terms shall have the meanings set forth below: "Eligible Account" shall mean shall mean a separate and identifiable ---------------- account from all other funds held by the holding institution that is either (i) an account or accounts maintained with a federal or state-chartered depository institution or trust company which complies with the definition of Eligible Institution (defined below) or (ii) a segregated trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity which, in the case of a state chartered depository institution or trust company is subject to regulations substantially similar to 12 C.F.R. (S)9.10(b), having in either case a combined capital and surplus of at least Fifty Million and No/100 Dollars ($50,000,000) and subject to supervision or examination by federal and state authority. An Eligible Account will not be evidenced by a certificate of deposit, passbook or other instrument. "Eligible Institution" shall mean a depository institution or trust -------------------- company the short term unsecured debt obligations or commercial paper of which are rated at least A-1 by Standard & Poor's Ratings Group, P-1 by Moody's Investors Service, Inc., D-1 by Duff & Phelps Credit Rating Co. and F-1+ by Fitch Investors Service, L.P. in the case of accounts in which funds are held for thirty (30) days or less (or, in the case of accounts in which funds are held for more than thirty (30) days, the long term unsecured debt obligations of which are rated at least "AA" by Fitch Investors Service, L.P., Duff & Phelps Credit Rating Co. and Standard & Poor's Ratings Group and "Aaa" by Moody's Investors Service, Inc). 6. Replacements and Replacement Reserve. ------------------------------------ (a) Commencing on the First Payment Date and on each Payment Date thereafter, Borrower shall pay to Lender one twelfth of the amount (the "Replacement Reserve Monthly Deposit") equal to two (2) percent (2%) of the Gross Income for the Properties projected by Lender for the current calendar year, to be applied to maintain and replace the furniture, fixtures and equipment used in connection with the operation of each Property, including those items as set forth in the Approved Capital Budget (as defined in the Security Instruments) for each Property (collectively, the "Replacements"), and amounts so deposited shall hereinafter be referred to as the "Replacement Reserve Fund". Lender will maintain the Replacement Reserve Fund in a segregated account (the "Replacement Reserve Account") and the Replacement Reserve Fund shall be invested and reinvested by Lender, at Borrower's direction, in one or more Eligible Investments, subject to the following restrictions: (A) such Eligible Investments and the proceeds 13 thereof shall be deemed a part of the Replacement Reserve Fund; (B) each such Eligible Investments shall be made in the name of Lender (in its capacity as such) or in the name of a nominee of Lender under its complete and exclusive dominion and control or, if applicable law provides for perfection of pledges of an instrument not evidenced by a certificate or other instrument through registration of such pledge on books maintained by or on behalf of the issuer of such investment, such pledge may be so registered; (C) Lender shall have the sole control over such investment, the income thereon and the proceeds thereof; (D) other than investments described in clause (B) above, any certificate or other instrument evidencing such investment shall be delivered directly to Lender or its agent; (E) the proceeds of each investment shall be remitted by the purchaser thereof directly to Lender and (F) Lender shall not be liable for any loss sustained on the investment of any funds constituting a part of the Replacement Reserve Fund. (b) Borrower hereby grants a first priority security interest to Lender, as security for payment of all sums due under the Loan and the performance of all other terms, conditions and provisions to be paid and performed, of all Borrower's right, title and interest in and to the Replacement Reserve Fund and the Replacement Reserve Account and shall execute and deliver to Lender such UCC-1 Financing Statements and other documents or instruments as Lender may request in order to grant and perfect such security interest. Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in the Replacement Reserve Fund or the Replacement Reserve Account or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC-1 Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto. Upon the occurrence of an Event of Default, Lender may apply any sums then present in the Replacement Reserve Fund to the payment of the Debt (as defined in the Security Instruments) in any order in its sole discretion. Until expended or applied as above provided, the Replacement Reserve Fund shall constitute additional security for the Debt. (c) (i) After the commencement of Borrower's obligation to make the Replacement Reserve Monthly Deposit pursuant to Section 6(a), Lender shall make disbursements from the Replacement Reserve Account to pay Borrower only for Replacements. Lender shall not be obligated to make disbursements from the Replacement Reserve Account to pay for or to reimburse Borrower for the costs of routine maintenance (other than the regular replacement of furniture, fixtures and equipment constituting Replacements or as permitted pursuant to Section 6(e) hereof.) to an individual Property or for costs which are to be reimbursed from the Required Repair Fund (as such term is defined in Section 7 of this Agreement. (ii) Lender shall, upon written request from Borrower and satisfaction of the requirements set forth in Section 6(a) and Section 6(b) of this Agreement, disburse to Borrower amounts from the Replacement Reserve Account to pay for the actual approved costs of Replacements or to reimburse the Borrower therefor in accordance with the Approved Annual Budget within ten (10) days of Lender's receipt of a request for disbursement in accordance with Section 6(d). In no event shall Lender be obligated to disburse funds from the Replacement Reserve Account if an Event of Default exists. 14 (d) Each request for disbursement from the Replacement Reserve Account shall be in a form specified or approved by Lender and shall certify as to the following matters: (i) the specific Replacements for which the disbursement is requested, (ii) the amounts requested are for the costs of such Replacements that have been paid or incurred since the immediately preceding request; (iii) the Replacement for which the disbursement is requested is a Capital Expenditure (as defined in the related Operating Lease) that is a permitted expenditure on the current Approved Capital Budget, (iv) the amount requested is less than or equal to the amount budgeted for such Replacement in the current Approved Capital Budget, (v) that all Replacements that were the subject of the prior request for disbursement have been made in substantial accordance with all applicable Legal Requirements (defined below) of any Governmental Authority (defined below) having jurisdiction over the applicable Individual Property to which the Replacements are being provided and the cost of such Replacements has been paid in full. Each request for disbursement shall include a statement setting forth in reasonable detail the persons or entities to which payments were made for the Replacements that were the subject of the prior request for disbursement, together with evidence reasonably satisfactory to Lender of payment of all such amounts for which the prior request for disbursement was made, which evidence may include copies and paid invoices and lien waivers. Prior to Borrower's making of the initial Replacement Reserve Monthly Deposit in accordance with Section 6(a) or thereafter with respect to any calendar month during which a request for disbursement from the Replacement Reserve Fund is not submitted to Lender pursuant to this Section 6(d), Borrower shall deliver to Lender, as a part of the monthly reports to be delivered pursuant to Section 3.11 of the Security Instruments an Officer's Certificate setting forth the amounts paid during the preceding calendar month for Replacements and setting forth each person to whom such amounts were paid, the amount paid to each such person and the related Replacement provided by each such person. (e) In the event that Borrower requests a disbursement from the Replacement Reserve Account to pay or reimburse Borrower for labor or materials for replacements other than Replacements as defined in Section 6.1(a) above, Borrower shall disclose in writing to Lender why funds in the Replacement Reserve Account should be used to pay or reimburse Borrower for such replacements. If Lender determines that, (i) costs for such replacements are reasonable, (ii) the funds in the Replacement Reserve Account are sufficient to pay for such replacements, and (iii) all other conditions for disbursement under this Agreement have been met, Lender shall disburse funds from the Replacement Reserve Account for such replacements in accordance with the conditions set forth in this Section 6.. (f) Borrower shall not make a request for disbursement from the Replacement Reserve Account more frequently than once in any calendar month and (except in connection with the final disbursement) the total cost of all Replacements in any request shall not be less than Fifteen Thousand and No/Dollars ($15,000). (g) Borrower shall make Replacements when required in order to keep each individual Property in condition and repair consistent with other first class, full service hotel or first class, full service hotel and office properties, as applicable, in the same market segment and under the same franchisor in the metropolitan area in which the respective individual Property is located, and to keep each individual Property or any portion thereof from deteriorating. Borrower shall 15 complete all Replacements in a good and workmanlike manner as soon as practicable following the commencement of making each such Replacement. (h) Lender reserves the right, at its option, to approve all material contracts or work orders with materialmen, mechanics, suppliers, subcontractors, contractors or other parties providing labor or materials in connection with the Replacements. Upon Lender's request, Borrower shall assign any contract or subcontract to Lender. (i) In the event Lender determines in its reasonable discretion that any Replacement is not being performed in a workmanlike or timely manner or that any Replacement has not been completed in a workmanlike or timely manner, Lender shall have the option to withhold any further disbursements from the Replacement Reserve Account and, upon ten (10) days prior written notice, to proceed under existing contracts or to contract with third parties to complete such Replacement and to apply the Replacement Reserve Fund toward the labor and materials necessary to complete such Replacement and, without providing any prior notice to Borrower, to exercise any and all other remedies available to Lender upon an Event of Default hereunder. (j) In order to facilitate Lender's completion or making of the Replacements pursuant to Section 6(i) above, Borrower grants Lender the right, exercisable upon prior written notice to Borrower and during business hours or such other reasonable time, to enter onto any individual Property and perform any and all work and labor necessary to complete or make the Replacements and/or employ watchmen to protect such Individual Property from damage. All sums so expended by Lender shall be deemed to have been advanced under the Loan to Borrower and secured by the Security Instruments. For this purpose Borrower constitutes and appoints Lender its true and lawful attorney-in-fact with full power of substitution to complete or undertake the Replacements in the name of Borrower. Such power of attorney shall be deemed to be a power coupled with an interest and cannot be revoked. Borrower empowers said attorney-in-fact as follows: (i) to use any funds in the Replacement Reserve Account for the purpose of making or completing the Replacements; (ii) to make such additions, changes and corrections to the Replacements as shall be necessary or desirable to complete the Replacements; (iii) to employ such contractors, subcontractors, agents, architects and inspectors as shall be required for such purposes; (iv) to pay, settle or compromise all existing bills and claims which are or may become liens against any individual Property, or as may be necessary or desirable for the completion of the Replacements, or for clearance of title; (v) to execute all applications and certificates in the name of Borrower which may be required by any of the contract documents; (vi) to prosecute and defend all actions or proceedings in connection with any individual Property or the rehabilitation and repair of any individual Property; and (vii) to do any and every act which Borrower might do in its own behalf to fulfill the terms of this Agreement. (k) Nothing in this Section 6 shall: (i) make Lender responsible for making or completing the Replacements; (ii) require Lender to expend funds in addition to the Replacement Reserve Fund to make or complete any Replacement; (iii) obligate Lender to proceed with the Replacements; or (iv) obligate Lender to demand from Borrower additional sums to make or complete any Replacement. 16 (l) Upon reasonable prior notice by Lender, Borrower shall permit Lender and Lender's agents and representatives (including, without limitation, Lender's engineer, architect, or inspector) or third parties making Replacements pursuant to this Section 6 to enter onto each individual Property during normal business hours (subject to the rights of tenants under their Leases) to inspect the progress of any Replacements and all materials being used in connection therewith and to examine all plans and shop drawings relating to such Replacements which are or may be kept at each individual Property. Borrower shall cause all contractors and subcontractors to cooperate with Lender or Lender's representatives or such other persons described above in connection with inspections described in this Section 6(l), the completion of Replacements pursuant to this Section 6(j) or in connection with the inspections described in Section 6(m) below. (m) If Lender has determined in its reasonable discretion that any Replacements are not being completed in a timely and workmanlike manner or in the event that the amount disbursed for the completion of a single Replacement pursuant to a prior disbursement from the Replacement Reserve Account exceeded Two Hundred Thousand and No/100 Dollars ($200,000), Lender may require an inspection of the applicable individual Property at Borrower's expense prior to making a monthly disbursement from the Replacement Reserve Account in order to verify completion of such Replacements. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and/or may require a copy of a certificate of completion by an independent qualified professional acceptable to Lender prior to the disbursement of any amounts from the Replacement Reserve Account. Borrower shall pay the expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional. (n) The Replacements and all materials, equipment, fixtures, or any other item comprising a part of any Replacement shall be constructed, installed or completed, as applicable, free and clear of all mechanic's, materialman's or other liens (except for those liens which have been approved in writing by Lender and Permitted Financing (as defined in the Security Instruments). (o) In the event that the prior request for disbursement included any amount in excess of Three Hundred Fifty Thousand and No/100 Dollars ($350,000) for any single Replacement requiring construction, installation or completion, Lender may require Borrower to provide Lender with a search of title to the applicable individual Property prior to making any additional disbursements from the Replacement Reserve Account, which search shows that no mechanic's or materialmen's liens or other liens of any nature have been placed against the applicable individual Property since the date of recordation of the related Security Instruments and that title to such individual Property is free and clear of all liens (other than the lien of the related Security Instruments and any other liens previously approved in writing by the Lender, if any). (p) All Replacements shall comply in all material respects with all applicable Legal Requirements of all Governmental Authorities having jurisdiction over the applicable individual Property and applicable insurance requirements including, without limitation, applicable building codes, special use permits, environmental regulations, and requirements of insurance underwriters. 17 (q) In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen's compensation insurance, builder's risk, and public liability insurance and other insurance to the extent required under applicable law in connection with a particular Replacement. All such policies shall be in form and amount reasonably satisfactory to Lender. All such policies which can be endorsed with standard mortgagee clauses making loss payable to Lender or its assigns shall be so endorsed. Certified copies of such policies shall be delivered to Lender. (r) (i) It shall be an Event of Default under this Agreement if (i) Borrower fails to make the initial Replacement Reserve Monthly Deposit in accordance with this Section 6 or (ii) fails to comply with any other provision of this Section 6 and such failure is not cured within thirty (30) days after notice from Lender provided that, if such default cannot reasonably be cured within such 30 day period and Borrower shall have commenced to cure such default within such 30 days period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for so long as it shall require Borrower, in the exercise of due diligence to cure such default, it being agreed that no such extension shall be for a period in excess of 60 days. Upon the occurrence of an Event of Default, Lender may use the Replacement Reserve Fund (or any portion thereof) for any purpose, including but not limited to completion of the Replacements as provided in Section 6(j), or for any other repair or replacement to any individual Property or toward payment of the Debt in such order, proportion and priority as Lender may determine in its sole discretion. Lender's right to withdraw and apply the Replacement Reserve Funds shall be in addition to all other rights and remedies provided to Lender under this Agreement and the other Loan Documents. (ii) Nothing in this Agreement shall obligate Lender to apply all or any portion of the Replacement Reserve Fund on account of an Event of Default to payment of the Debt or in any specific order or priority. (s) The insufficiency of any balance in the Replacement Reserve Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents. (t) Borrower shall indemnify Lender and hold Lender harmless from and against any and all actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses (including litigation costs and reasonable attorneys fees and expenses) arising from or in any way connected with the performance of the Replacements. Borrower shall assign to Lender all rights and claims Borrower may have against all persons or entities supplying labor or materials in connection with the Replacements; provided, however, that Lender may not pursue any such right or claim unless an Event of Default has occurred and remains uncured. (u) The following capitalized terms shall have the meanings set forth below: "Eligible Investments" shall mean any one or more of the following investments in obligations or securities acquired at a purchase price of not greater than par, including those issued by Lender or any affiliate of Lender, provided that such obligations or 18 securities are either payable on demand or have a maturity not later than the Business Day immediately prior to the date on which the proceeds thereof are anticipated to be expended or applied pursuant to the terms of the Loan Documents: (i) direct obligations of, and obligations fully guaranteed as to payment of principal and interest by, the United States, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association or any agency or instrumentality of the United States of America provided such obligations are backed by the full faith and credit of the United States of America; (ii) general obligations of or obligations guaranteed by any state of the United States or the District of Columbia at all times having the highest long-term debt rating of the Rating Agencies, or such lower rating (but not lower than the second highest such rating category of the Rating Agencies) as will not or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by the Rating Agencies, as evidenced by a letter confirming such result by the Rating Agencies; (ii) commercial or finance company paper which is rated at all times by the Rating Agencies in its highest unsecured commercial or finance company paper rating category or such lower unsecured commercial or finance company paper rating category (but not lower than the second highest such rating category of the Rating Agencies) as will not or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by the Rating Agencies, as evidenced by a letter confirming such result by the Rating Agencies; (iv) certificates of deposit, demand or time deposits, federal funds or bankers' acceptances issued by any depository institution or trust company incorporated under the laws of the United States of America or of any state thereof and subject to supervision and examination by federal or state banking authorities, provided that the commercial paper or long-term unsecured debt obligations of such depository institution or trust company (or in the case of the principal depository institution or trust company in a holding company system, the commercial paper or long-term unsecured debt obligations of such holding company) are rated at all times in the highest rating category for such securities by the Rating Agencies, or such lower category for such securities (but not lower than the second highest such rating category of the Rating Agencies) as will not or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by the Rating Agencies, as evidenced by a letter confirming such result by the Rating Agencies; (v) guaranteed reinvestment agreements issued by any bank, insurance company or other corporation as will not or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by the Rating Agencies, as evidenced by a letter confirming such result by the Rating Agencies; (vi) repurchase obligations with respect to any security described in clauses (a) and (b) of this definition, in each case entered into with a depository institution or trust company (acting as principal) described in clause (d) above; (vii)securities (other than stripped bonds or stripped coupons) 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 which are rated at all times in the highest rating category of the Rating Agencies, or in such lower category (but not lower than the second highest such rating category of the Rating Agencies) as will not or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by 19 the Rating Agencies, as evidenced by a letter confirming such result by the Rating Agencies; (viii)interests in money market funds which at all times have a rating of "AAA" by the Rating Agencies, or such lower rating (but not lower than the second highest rating category of the Rating Agencies for money market funds) as will not or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by the Rating Agencies, as evidenced by a letter confirming such result from the Rating Agencies; and (ix) such other investment bearing interest or sold at a discount acceptable to Lender and the Rating Agencies as will or would not result in the qualification, reduction or withdrawal of the initial ratings assigned in connection with a Securitization by the Rating Agencies, as evidenced by a letter confirming such result from the Rating Agencies; provided that such investment shall be rated at all times by the Rating Agencies not lower than its second highest rating category for investments of such type. 20 No obligation or security set forth above shall be an Eligible Investment if (i) such obligation or security evidences a right to receive only interest payments or (ii) the right to receive principal and interest payments derived from the underlying investment provide a yield to maturity in excess of one hundred twenty percent (120%) of the yield to maturity at par of such underlying investment. "Governmental Authority" shall mean any court, board, agency, commission, office or authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence. "Legal Requirements" shall mean, with respect to each individual Property, all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting such Individual Property or any part thereof or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in force, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Borrower, at any time in force affecting such individual Property or any part thereof, including, without limitation, any which may (i) require repairs, modifications or alterations in or to such individual Property or any part thereof, or (ii) in any way limit the use and enjoyment thereof. 7. Required Repairs; Required Repair Funds. --------------------------------------- (a) Borrower shall perform the repairs at its Properties, as more particularly set forth on Schedule C hereto (such repairs hereinafter referred to as "Property Required Repairs"). Borrower shall complete each of the Property Required Repairs on or before August 1, 1999. On the date hereof, Borrower shall deposit with Lender an amount equal to 125% of the cost to perform the Property Required Repairs for each Property set forth on Schedule C hereto to the extent such Property Required Repairs have not yet been performed in accordance with this Section 7. Amounts so deposited shall hereinafter be referred to as the "Required Repair Fund". Lender will maintain the Required Repair Fund in a segregated account (the "Required Repair Account") and the Required Repair Fund shall be invested and reinvested by Lender, at Borrower's direction, in one or more Eligible Investments, subject to the following restrictions: (A) such Eligible Investments and the proceeds thereof shall be deemed a part of the Required Repair Fund; (B) each such Eligible Investment shall be made in the name of Lender (in its capacity as such) or in the name of a nominee of Lender under its complete and exclusive dominion and control or, if applicable law provides for perfection of pledges of an instrument not evidenced by a certificate or other instrument through registration of such pledge on books maintained by or on behalf of the issuer of such investment, such pledge may be so registered; (C) Lender shall have the sole control over such investment, the income thereon and the proceeds thereof; (D) other than investments described in clause (B) above, any certificate or other instrument evidencing such investment shall be delivered directly to Lender or its agent; (E) the proceeds of each investment shall be remitted by the purchaser thereof directly to Lender and (F) Lender shall not be liable for any loss sustained on the investment of any funds constituting a part of the Required Repair Fund. 21 (b) Borrower hereby grants a first priority security interest to Lender, as security for payment of all sums due under the Loan and the performance of all other terms, conditions and covenants on Borrower's part to be paid and performed, in all of Borrower's right, title and interest in and to the Required Repair Fund and the Required Repair Account and shall execute and deliver to Lender such UCC-1 Financing Statements and other documents or instruments as Lender may request in order to grant and perfect such security interest. Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in the Required Repair Fund or the Required Repair Account or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC-1 Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto. Upon the occurrence of an Event of Default, Lender may apply any sums then present in the Required Repair Fund to the payment of the Debt in any order in its sole discretion. Until expended or applied as herein provided, the Required Repair Fund shall constitute additional security for the Debt. (c) After Borrower's initial deposit into the Required Repair Account pursuant to paragraph (a) hereof, Lender shall disburse to Borrower the Required Repair Funds from the Required Repair Account from time to time upon satisfaction by Borrower of each of the following conditions: (a) Borrower shall submit a written request for payment to Lender at least ten (10) days prior to the date on which Borrower requests such payment be made and specifies the Property Required Repairs to be paid; (b) on the date such request is received by Lender and on the date such payment is to be made, no Event of Default shall exist and remain uncured; (c) Lender shall have received a certificate from Borrower (i) stating that all Property Required Repairs at the applicable Property funded by the prior requested disbursement have been completed in good and workmanlike manner and in accordance with all applicable federal, state and local laws, rules and regulations, (ii) any license, permit or other approval by any Governmental Authority required to commence and/or complete the Property Required Repairs to be funded by the requested disbursement have been obtained, (iii) identifying each person that will supply materials or labor in connection with the Property Required Repairs to be performed at such Property and to be funded by the requested disbursement and including copies of invoices or statements from each such person or entity setting forth the costs for such materials or labor, and (iv) stating that each person or entity that supplied materials or labor in connection with the Property Required Repairs performed at a Property and funded by the prior requested disbursement has been paid all amounts to be paid to such person or entity as set forth in the written request with respect to such prior requested disbursement and setting forth the amount paid to each such person and, if such requested disbursement includes amounts constituting the final payment to any person on account of any Property Required Repairs, such certificate shall be accompanied by lien waivers or other evidence of payment satisfactory to Lender; (d) at Lender's option if the amount disbursed for Property Required Repairs with respect to an individual Property under the prior requested disbursement exceeded a total of Three Hundred Fifty Thousand and No/100 Dollars ($350,000), a title search for any such Property indicating that such Property is free from all liens, claims and other encumbrances not previously approved by Lender, and (e) Lender shall have received such other evidence as Lender shall reasonably request that the Property Required Repairs at any Property funded by the prior requested disbursement have been completed and the related costs and expenses have been paid. Lender shall not be required to 22 make disbursements from the Required Repair Account with respect to any such Property more frequently than once per calendar month and unless such requested disbursement is in an amount greater than Fifteen Thousand and No/100 Dollars ($15,000) (or a lesser amount if the total amount in the Required Repair Account is less than Fifteen Thousand and No/100 Dollars ($15,000), in which case only one disbursement of the amount remaining in the account shall be made) and such disbursement shall be made only upon satisfaction of each condition contained in this paragraph (c). Prior to Borrower's initial deposit of funds into the Required Repair Fund in accordance with paragraph (b) hereof or thereafter with respect to any calendar month during which a request for payment from the Required Repair Fund is not submitted to Lender pursuant to this paragraph (c), Borrower shall deliver to Lender, as a part of the monthly reports to be delivered pursuant to Section 3.11 of the Security Instruments, a certificate setting forth the amounts paid during the preceding calendar month for Property Required Repairs and setting forth each person to whom such amounts were paid, the amount paid to each such person or entity and the related Property Required Repairs performed by each such person. (d) Failure to Perform Required Repairs and Make Initial Deposit. It shall be an Event of Default under this Agreement if (i) Borrower does not exercise diligent efforts to complete the Property Required Repairs at each Property by the required deadline for each repair as set forth on Schedule C, or (ii) Borrower does not make the initial deposit into the Required Repair Fund in accordance with paragraph (b) hereof. Upon the occurrence of an Event of Default, Lender, at its option, may withdraw all Required Repair Funds from the Required Repair Account and Lender may apply such funds either to completion of the Property Required Repairs at one or more of the Properties or toward payment of the Debt in such order, proportion and priority as Lender may determine in its sole discretion. Lender's right to withdraw and apply Required Repair Funds shall be in addition to all other rights and remedies provided to Lender under this Agreement and the other Loan Documents. 8. Events of Default. The term "Event of Default" as used in this Agreement ----------------- shall have the meaning ascribed to such term in the Note and the Security Instruments. Upon the occurrence of an Event of Default or a default beyond applicable notice and grace periods, if any, under this Agreement and, if Lender shall not have exercised its option under clause (i) below, during the continuance thereof, Lender (i) may, at its option and in its sole discretion, declare the Debt immediately due and payable, and (ii) may pursue any and all remedies provided for in the Loan Documents, or otherwise available. 9. Sale of Notes and Securitization; Indemnification. ------------------------------------------------- (a) At the request of the holder of the Note and at Borrower's expense, and, to the extent not already required to be provided by Borrower under this Agreement, Borrower shall use reasonable efforts to satisfy the market standards to which the holder of the Note customarily adheres or which may be reasonably required in the marketplace or by the Rating Agencies in connection with the sale or transfer of the Note or participations or other interests therein or, subject to Section 9(c) below, the first successful securitization (such sale, transfer and/or securitization, the "Securitization") of rated single or multi- class securities (the "Securities") 23 secured by or evidencing ownership interests in the Note and the Security Instruments, including, without limitation, to: (i) (A) provide such financial and other information with respect to the Properties, the Borrower, the Operating Tenant, the Manager and the Franchisor as is reasonably available to Borrower, (B) provide existing budgets relating to the Properties and (C) to perform or permit or cause to be performed or permitted such site inspection, appraisals, market studies, environmental reviews and reports (Phase I's and, if appropriate, Phase II's), engineering reports (including updates of any such information delivered to Lender at the closing of the Loan) and other due diligence investigations of the Properties, as may be reasonably requested by the holder of the Note or the Rating Agencies or as may be necessary or appropriate in connection with the Securitization (the "Provided Information"), together, if customary, with appropriate verification and/or consents of the Provided Information through letters of independent auditors or opinions of counsel in form reasonably acceptable to the Lender and otherwise acceptable to the Rating Agencies; (ii) deliver an opinion of counsel that may be relied upon by Lender and any Rating Agency rating any Securities issued in connection with the Securitization, and their respective successors and assigns, as to nonconsolidation and true sale, if applicable, with respect to Borrower and their affiliates and the Properties, which opinion and counsel shall be reasonably satisfactory to Lender and satisfactory to any such Rating Agency (the "Insolvency Opinion") or any other opinion customary in securitization transactions with respect to the Properties and Borrower and its affiliates, which counsel and opinions shall be reasonably satisfactory to the holder of the Note and the Rating Agencies; (iii) (A) deliver one or more Officer's Certificates certifying as to the accuracy in all material respects of all representations made by Borrower in the Loan Documents as of the date of the closing of the Securitization setting forth any then existing facts conflicting with any such representations, (B) deliver certificates of the relevant Governmental Authorities in all relevant jurisdictions indicating the good standing and qualification of each individual Borrower and their respective general partners or managing members, as applicable, as of the date of the Securitization and (C) make such additional representations and warranties as of the closing date of the Securitization with respect to the Properties, Borrower, and the Loan Documents as are customarily provided in securitization transactions and as may be reasonably requested by the holder of the 24 Note or the Rating Agencies and consistent with the facts covered by such representations and warranties as they exist on the date thereof; and (iv) execute such amendments to the Loan Documents and organizational documents (including, without limitation, the inclusion of the single purpose entity covenants contained in Section 4.2 of the Security Instruments), and establish and fund such reserve funds as and to the extent provided herein or as otherwise may be requested by the Rating Agencies to effect the Securitization; provided, however, that the Borrower shall not be required to modify or amend any Loan Document if such modification or amendment would (i) change the interest rate, the stated maturity or the amortization of principal amount of the Loan set forth herein, or (ii) modify or amend any other economic term or other material term of any Loan Document in a manner that has a material adverse effect on Borrower other than as specifically set forth in this paragraph (iv). (b) Borrower understands that certain of the Provided Information and the financial statements, certificates, reports or information required to be provided by Borrower to Lender pursuant to Section 3.11 of the Security Instruments (collectively, the "Required Records") may be included in disclosure documents in connection with the Securitization and the Initial Securitization, (defined below) including, without limitation, a prospectus, prospectus supplement or private placement memorandum (each, a "Disclosure Document") and may also be included in filings with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act"), or the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and that such Disclosure Documents may be provided or made available to investors or prospective investors in the Securities, the Rating Agencies, and service providers relating to the Securitization and the Initial Securitization. If required by Lender, Borrower shall review such Disclosure Document and advise Lender in writing of any required revisions to correct inaccuracies with respect to the Provided Information and or the Required Records. In the event that any Disclosure Document is required to be revised prior to the sale of all Securities, the Borrower will use reasonable efforts to cooperate with Lender in updating the Disclosure Document by providing all current information necessary to keep the Disclosure Document accurate and complete in all material respects. Lender will promptly discontinue the use of any Disclosure Document upon such holder's receipt of written notice from Borrower that such Disclosure Document requires revision to correct any inaccuracy. (c) Borrower acknowledges and agrees that notwithstanding anything to the contrary herein or in any other Loan Document, the transfer of the Loan to LaSalle National Bank as Trustee for Restructured Asset Certificates with Enhanced Returns Series 1998-CML-2 Certificates and the issuance of certificates pursuant thereto (the "Initial Securitization") is not included in and shall not be deemed to be Securitization, as that term is defined herein. 25 10. Incorporation of Provisions. The Note, the Security Instruments and the --------------------------- other Loan Documents are subject to the conditions, stipulations, agreements and covenants contained herein to the same extent and effect as if fully set forth therein until this Agreement is terminated by the payment in full of the Debt. 11. Further Assurances. Borrower shall on demand of Lender do any act or ------------------ execute any additional documents required by Lender to confirm the lien of the Security Instruments. 12. Representations and Warranties. Borrower, represents and warrants to ------------------------------ Lender as follows: (a) Borrower is duly qualified to do business in the States in which the Properties are located unless such qualification is not necessary pursuant to the applicable laws of the States. (b) Borrower (and the undersigned representative, if any, of Borrower) has the full power and authority to execute and deliver this Agreement and the Loan Documents, and the same constitute the legal, valid and binding obligations of Borrower. (c) 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 such individual Borrower's assets or property, and no individual Borrower has knowledge of any person contemplating the filing of any such petition against it. (d) No statement of fact made by Borrower in this Agreement or in any of the other Loan Documents contains any untrue statement of a material fact or omits to state any material fact known to Borrower necessary to make statements contained herein or therein not misleading. There is no fact presently known to Borrower which has not been disclosed to Lender which materially and adversely affects, nor as far as Borrower can foresee, would materially and adversely affect, any of the Properties or the business, operations or condition (financial or otherwise) of Borrower. (e) 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 Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of this Agreement or the other Loan Documents. 13. Construction of Agreement. The titles and headings of the paragraphs of ------------------------- this Agreement have been inserted for convenience of reference only and are not intended to summarize or otherwise describe the subject matter of such paragraphs and shall not be given any consideration in the construction of this Agreement. 26 14. Parties Bound, Etc. The provisions of this Agreement shall be binding ------------------ upon and inure to the benefit of Borrower, Lender and their respective heirs, executors, legal representatives, successors and assigns (except as otherwise prohibited by this Agreement). 15. Waivers. Lender may at any time and from time to time waive any one or ------- more of the conditions contained herein, but any such waiver shall be deemed to be made in pursuance hereof and not in modification thereof, and any such waiver in any instance or under any particular circumstance shall not be considered a waiver of such condition in any other instance or any other circumstance. 16. Governing Law. (i) This Agreement shall be deemed to be a contract ------------- entered into pursuant to the laws of the State of New York and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the State of New York, provided however, that with respect to the creation, perfection, priority and enforcement of the lien of the Security Instruments, and the determination of deficiency judgments, the laws of the State where the related Property is located shall apply. (ii) Any legal action or proceeding with respect to this Agreement or any other Loan Document and any action for enforcement of any judgment in respect thereof 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, each for itself and in respect of its property, generally and unconditionally, the non- exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. Borrower irrevocably consents to the service of process out of any of the aforementioned 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 set forth in Article 15 of the Security Instruments. Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Loan Document brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of Lender, to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against Borrower in any other jurisdiction. 17. Severability. If any term, covenant or provision of this Agreement shall ------------ be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such term, covenant or provision. 18. Notices. All notices required to be given under the terms of this ------- Agreement shall be given in accordance with and to the addresses set forth in Article 15 of the Security Instruments. 19. Fees and Expenses. Borrower shall pay to Lender, upon demand, all ----------------- expenses incurred by Lender in connection with the collection of the Debt, the enforcement of the Loan Documents, and in curing any defaults under the Loan Documents(including, without 27 limitation, reasonable attorneys' fees, which shall include attorney's fees incurred in any trial, appellate or bankruptcy proceeding), with, if any such expenses are past due, interest thereon at a rate per annum equal to the rate of interest payable pursuant to the Note, provided that such interest rate shall in no event exceed the maximum interest rate which Borrower may by law pay, from the date of payment by Lender to the date of payment to Lender, which sums and interest shall be secured by the Security Instruments. 20. Modification. This Agreement may not be modified, amended or terminated, ------------ except by an agreement in writing executed by the parties hereto. 21. No Oral Agreements. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND ------------------ CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY AGREE IN WRITING TO MODIFY IT. 22. Definitions. Capitalized terms not defined herein shall have the meaning ----------- set forth in the Security Instruments. In addition to the foregoing, the word "person" shall include an individual, corporation, partnership, limited liability company, trust, unincorporated association, government, governmental authority and any other entity. 23. Recourse. The provisions of Article 14 of the Note are hereby -------- incorporated by reference to the fullest extent as if the text of such Article were set forth in its entirety herein. 28 IN WITNESS WHEREOF, Borrower and Lender have duly executed this Agreement the day and year first above written. BORROWERS: EQUISTAR IRVINE COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ______________________________ Name: Title: CAPSTAR SACRAMENTO COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: __________________________ Name: Title: 29 MERISTAR SECURED HOLDINGS LLC, a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: _______________________________ Name: Title: CAPSTAR SAN FRANCISCO COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ___________________________ Name: Title: EQUISTAR COLORADO COMPANY, L.L.C, a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ___________________________ Name: Title: 30 CAPSTAR ENGLEWOOD COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ___________________________ Name: Title: CAPSTAR CHICAGO COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ___________________________ Name: Title: CAPSTAR INDIANAPOLIS COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ___________________________ Name: Title: 31 CAPSTAR LAFAYETTE COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ________________________________ Name: Title: CAPSTAR ALBUQUERQUE COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ________________________________ Name: Title: EQUISTAR ARLINGTON PARTNERS, L.P., a Delaware limited partnership By: MeriStar SPE LLC, a Delaware limited liability company, its general partner By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, is general partner By: ______________________________ Name: Title: 32 EQUISTAR SALT LAKE COMPANY, L.L.C., a Delaware limited liability company By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: __________________________ Name: Title: MADISON MOTEL ASSOCIATES, LLP, a Wisconsin limited liability partnership By: MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership, its managing member By: MeriStar Hospitality Corporation, a Maryland corporation, its general partner By: ___________________________ Name: Title: 33 LENDER: SECORE FINANCIAL CORPORATION, a Pennsylvania corporation By: _____________________________________ Name: Title: 34 EX-10.10 5 FORM OF EMPLOYMENT Exhibit 10.10 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT, made as of August 3, 1998 by and between MERISTAR HOSPITALITY CORPORATION, a Maryland corporation (the "Company"), MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"), and BRUCE G. WILES (the "Executive"), an individual residing at 119 Pinehurst Lane, Mabank, Texas 75147. The Company and the Partnership desire to employ the Executive in the capacities of President and Chief Investment Officer, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the "Agreement"); Now, therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration the parties hereto hereby agree as follows: 1. Employment; Term. The Company and the Partnership each hereby ---------------- employs the Executive, and the Executive agrees to be employed by the Company and the Partnership, upon the terms and subject to the conditions set forth herein, for an initial term of one (1) year, commencing on the date of the consummation of the merger (the "Merger") contemplated by the Agreement and Plan of Merger among American General Hospitality Corporation and American General Hospitality Operating Partnership, L.P. and Capstar Hotel Company, Capstar Management Company, L.P. and Capstar Management Company II, L.P., dated as of March 15, 1998, as amended (the "Commencement Date"), unless terminated earlier in accordance with Section 5 of this Agreement; provided that such term shall -------- ---- automatically be extended for a period of one (1) calendar day for each day of services rendered, unless and until the Executive, on one hand, or the Company and the Partnership, on the other, gives notice to the other party or parties not less than 120 days prior to such date of termination of this Agreement. Notwithstanding the foregoing, in no event shall the term of this Agreement extend beyond December 31, 2003, except as extended by mutual agreement of the parties. (The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the "Term"). 2. Positions; Conduct. ------------------ (a) During the Term, the Executive will hold the titles and offices of, and serve in the positions of, President and Chief Investment Officer of the Company and the Partnership. The Executive shall undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity, and shall perform such other specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as shall be reasonably requested consistent with the Executive's positions. (b) During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and the Partnership and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder; provided, that the -------- Executive may devote his business time to providing services to Meristar Hotels & Resorts, Inc. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Board, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided that such activities do not involve -------- ---- any material conflict of interest with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement. Notwithstanding the foregoing and except as expressly provided herein, during the Term, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company or the Partnership. (c) The Executive's office and place of rendering his services under this Agreement shall be in the principal executive offices of the Company which shall be in the Washington, D.C. metropolitan area. Under no circumstances shall the Executive be required to relocate from the Washington, D.C. metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel. During the Term, the Company shall provide the Executive with executive office space, and administrative, secretarial and analytical assistance and other support services consistent with his position as President and Chief Investment Officer and with his duties and responsibilities hereunder. 3. Board of Directors. While it is understood that the right to ------------------ elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, during the Term the Executive will serve as a member of the Company's Board of Directors. 4. Salary; Additional Compensation; Perquisites and Benefits. --------------------------------------------------------- (a) During the Term, the Company and the Partnership will pay the Executive a base salary at an aggregate annual rate of not less than $300,000 per annum, subject to annual review by the Compensation Committee of the Board (the "Compensation Committee"), and in the discretion of such Committee, increased from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company's standard practice, but not less frequently than semi-monthly. (b) For each fiscal year during the Term, the Executive will be eligible to receive a bonus from the Company. The award and amount of such bonus shall be based upon 2 the achievement of predefined operating or performance goals and other criteria established by the Compensation Committee, which goals shall give the Executive the opportunity to earn a bonus in the following amounts: threshold target - 25% of base salary; target - 100% of base salary; and maximum bonus amount - 125% of base salary. (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted by the Company or the Partnership, for their management employees or the general benefit of their employees, such as any pension, profit-sharing, bonuses, stock option or other incentive compensation plans, life and health insurance plans, or other insurance plans and benefits on the same basis and subject to the same qualifications as other senior executive officers. (d) (1) The Executive shall be eligible for stock option grants from time to time pursuant to the Company's Incentive Plan in accordance with the terms thereof. (2) By executing this Agreement, the Executive hereby agrees to waive the accelerated vesting of unvested stock options and shares of restricted stock granted to the Executive under the American General Hospitality Corporation 1996 Incentive Plan, which would otherwise occur as a result of the consummation of the Merger. In consideration of this waiver, such unvested options and shares of restricted stock will vest in three (3) nearly equal installments beginning on the first anniversary of their respective original dates of grant, except with respect to grants made on July 31, 1996. In addition, all such pre-Merger grants of options and shares of restricted stock (the "Pre-Merger Awards") will become fully vested if the Executive's employment is terminated voluntarily or involuntarily within twenty-four (24) months of the Merger. (e) The Company and the Partnership will reimburse the Executive, in accordance with their standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties under this Agreement. The Company and the Partnership will reimburse the Executive for all normal and reasonable expenses incurred by the Executive in relocating his family and personal effects to the Washington, D.C. metropolitan area, including the expenses incurred in the sale of the Executive's primary and secondary homes in Texas, in accordance with the Company's policies and the agreement reached between the parties hereto. (f) The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company's policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year, and which shall include for calendar year 1998, vacation time accrued prior to the Merger. (g) The Executive shall be granted a car allowance of up to $700 per month for the expense of an automobile. 3 (h) To the fullest extent permitted by applicable law, the Executive shall be indemnified and held harmless by the Company and the Partnership against any and all judgments, penalties, fines, amounts paid in settlement, and other reasonable expenses (including, without limitation, reasonable attorneys' fees and disbursements) actually incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, investigative or other) for any action or omission in his capacity as a director, officer or employee of the Company or the Partnership. Indemnification under this Section 4(h) shall be in addition to, and not in substitution of, any other indemnification by the Company or the Partnership of its officers and directors. Expenses incurred by the Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 4(h) shall be paid by the Company or the Partnership, as the case may be, in advance of the final disposition of such action suit or proceeding upon the Company's or the Partnership's receipt of (x) a written affirmation by the Executive of his good faith belief that the standard of conduct necessary for his indemnification hereunder and under the provisions of applicable law has been met and (y) a written undertaking by or on behalf of the Executive to repay the amount advanced if it shall ultimately be determined by a court that the Executive engaged in conduct which precludes indemnification under the provisions of such applicable law. Such written undertaking in clause (y) shall be accepted by the Company or the Partnership, as the case may be, without security therefor and without reference to the financial ability of the Executive to make repayment thereunder. The Company and the Partnership shall use commercially reasonable efforts to maintain in effect for the Term of this Agreement a directors' and officers' liability insurance policy, with a policy limit of at least $5,000,000, subject to customary exclusions, with respect to claims made against officers and directors of the Company or the Partnership; provided, however, the Company or the -------- ------- Partnership, as the case may be, shall be relieved of this obligation to maintain directors' and officers' liability insurance if, in the good faith judgment of the Company or the Partnership, it cannot be obtained at a reasonable cost. 5. Termination. ----------- (a) The Term will terminate immediately upon the Executive's death or, upon thirty (30) days' prior written notice by the Company, in the case of a determination of the Executive's Disability. As used herein the term "Disability" means the Executive's inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A determination of Disability will be made by a physician reasonably satisfactory to both the Executive and the Company and paid for by the Company or the Partnership whose decision shall be final and binding on the Executive and the Company; provided -------- that if they cannot agree as to a physician, then each shall select a physician - ---- and these two together shall select and pay for a third physician whose fee shall be borne equally by the Executive and either the Company or the Partnership and whose determination of Disability shall be binding on the Executive and 4 the Company. Should the Executive become incapacitated, his employment shall continue and all base and other compensation due the Executive hereunder shall continue to be paid through the date upon which the Executive's employment is terminated for Disability in accordance with this section. (b) The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. (c) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. 6. Severance. --------- (a) If the Term is terminated by the Company for Cause, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (b) If the Term is terminated by the Executive other than because of death, Disability or for Good Reason, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (c) If the Term is terminated upon the Executive's death or Disability, the Company and the Partnership will pay to the Executive's estate or the Executive, as the case may be, a lump sum payment equal to the Executive's base salary through the termination date, plus a pro rata portion of the Executive's bonus for the fiscal year in which the termination occurred. In addition, the Company will make payments for one (1) year of all compensation otherwise payable to the Executive pursuant to this Agreement, including, but not limited to, base salary, bonus and welfare benefits. In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions. (d) Subject to Section 6(e) hereof, if the Agreement is terminated by the Company without Cause or other than by reason of his death or Disability, in addition to any other remedies available, or if the Executive terminates this Agreement for Good Reason, the Company and the Partnership shall pay the Executive, in accordance with regular payroll practices, an amount equal to the sum of (A) the Executive's then annual base salary for the 5 remainder of the Term and (B) in lieu of the bonus amount he would have received had he remained employed by the Company and the Partnership through the end of the Term, the bonus amount he received in the year immediately prior to his termination, or if the Term is terminated prior to December 31, 1999 the Executive's target bonus for such year (the "Severance Amount"). In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions, and the Company shall continue in effect the Executive's health insurance benefits until the earlier of (x) one (1) year from the end of the Term or (y) the date on which the Executive obtains health insurance coverage from a subsequent employer. (e) If, within eighteen (18) months following a Change in Control, the Term is terminated by the Executive for Good Reason or by the Company without Cause, in addition to any other rights which the Executive may have under law or otherwise, the Executive shall receive the same payments and benefits provided for under Section 6(d) hereof; provided, that in addition, he shall also receive -------- a lump sum payment in an amount equal to the Severance Amount. (f) Notwithstanding anything in this Section 6 to the contrary if the Term is terminated for any reason within twenty-four (24) months following the Merger, the Pre-Merger Awards will immediately vest and remain exercisable in accordance with their respective terms; provided, however, such pre-Merger -------- ------- Awards will have an exercise period of at least one (1) year from the date of termination. (g) As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the -------- ------- Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 6(g)(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) any willful and intentional act of the Executive involving malfeasance, fraud, theft, misappropriation of funds, embezzlement or dishonesty affecting the Company or the Partnership; or (iii) the Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony in the jurisdiction involved. 6 Termination of the Executive for Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean delivery to the Executive of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with counsel, to be heard before the Board prior to such vote) of finding that in the good faith opinion of the Board, the Executive was guilty of conduct constituting Cause and specifying the particulars thereof in detail, including, with respect to the conduct described in clause (i) above, that the Executive failed to cure such conduct during the thirty-day period following the date on which the Company gave written notice of the conduct referred to in such clause (i). For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination. (h) As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive of duties materially inconsistent with the Executive's positions as described in Section 2(a) hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) the failure of the Company to nominate the Executive to the Board or the failure of the Executive to be elected to the Board; (iii) the change in the location of the Company's principal executive offices to a location outside the Washington, D.C. metropolitan area or the change in the location of the Executive's principal place of employment to a location outside the Washington, D.C. metropolitan area; or (iv) any material breach of this Agreement by the Company or the Partnership which is continuing; provided, however, that the Executive shall not be deemed to have Good Reason - -------- ------- pursuant to clauses (i), (ii) or (iv) above unless the Executive gives the Company or the Partnership, as the case may be, written notice that the specified conduct or event has occurred and the Company or the Partnership fails to cure such conduct or event within thirty (30) days of the receipt of such notice. (i) As used herein, the term "Change in Control" means the occurrence of any one of the following events: 7 (i) the acquisition (other than from the Company) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty (50%) percent or more of the combined voting power of the Company's then outstanding voting securities; or (ii) the individuals who were members of the Board (the "Incumbent Board") during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board; provided, -------- however, that if the election, or nomination for election by the Company's ------- stockholders, of any new director was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (iii) approval by stockholders of the Company of (a) merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy (70%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (b) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control, shall not be deemed to occur pursuant to clause (i) above, solely because fifty (50%) percent or more of the combined voting power of the Company's then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (j) The amounts required to be paid and the benefits required to be made available to the Executive under this Section 6 are absolute. Under no circumstances shall the Executive, upon the termination of his employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 6. (k) In the event that any payment, benefit or other right or compensation due to the Executive hereunder or otherwise from the Company including, without limitation, the 8 accelerated vesting of the Executive's rights with respect to stock options, restricted stock or any other benefit or compensation, results in the imposition of an excise tax payable by the Executive under Section 4999 of the Internal Revenue Code, or any successor or other provision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company shall make a cash payment to the Executive in the amount of such excise tax (the "Excise Tax Payment") and shall also make a cash payment to the Executive in an amount equal to the total of federal, state and local income and excise taxes for which the Executive may be liable on account of such Excise Tax Payment. 7. Confidential Information. ------------------------ (a) The Executive acknowledges that the Company and its subsidiaries or affiliated ventures ("Company Affiliates") own and have developed and compile, and will in the future own, develop and compile certain Confidential Information and that during the course of his rendering services hereunder Confidential Information will be disclosed to the Executive by the Company Affiliates. The Executive hereby agrees that, during the Term and for a period of three years thereafter, he will not use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company Affiliates. (b) As used herein, the term "Confidential Information" means any trade secrets, confidential or proprietary information, or other knowledge, know-how, information, documents or materials, owned, developed or possessed by a Company Affiliate pertaining to its businesses the confidentiality of which such company takes reasonable measures to protect, including, but not limited to, trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, (iii) is or becomes available to the Executive from sources other than the Company Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company's sole expense, in seeking a protective order or other appropriate protection of such information). 9 8. Specific Performance. -------------------- (a) The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company Affiliates would sustain irreparable harm in the event of a violation by the Executive of Section 7 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages. (b) If any of the restrictions on activities of the Executive contained in Section 7 hereof shall for any reason be held by a court of competent jurisdiction to be excessively broad, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights. (c) Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 6 of this Agreement and such failure shall continue for twenty (20) days after notice thereof from the Executive, all restrictions on the activities of the Executive under Section 7 hereof shall be immediately and permanently terminated. 9. Withholding. The parties agree that all payments to be made to ----------- the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations of such company. 10. Notices. All notices required or permitted hereunder shall be in ------- writing and shall be deemed given and received when delivered personally, four (4) days after being mailed if sent by registered or certified mail, postage pre-paid, or by one (1) day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively: If to the Executive, to: 119 Pinehurst Lane Mabank, Texas 75147 10 If to the Company or to the Partnership, to: MeriStar Hospitality Corporation 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 or to any other address of which such party may have given notice to the other parties in the manner specified above. 11. Miscellaneous. ------------- (a) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive's rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company and the Partnership hereunder will be binding upon and run in favor of their respective successors and assigns. The Company will not be deemed to have breached this Agreement if any obligations of the Company to make payments to the Executive are satisfied by the Partnership. (b) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to conflict of laws principles. (c) Any controversy arising out of or relating to this Agreement or any breach hereof shall be settled by arbitration in Washington, D.C. by a single neutral arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any award rendered may be entered in any court having jurisdiction thereof, except in the event of a controversy relating to any alleged violation by the Executive of Section 7 hereof, in which case the Company shall be entitled to seek injunctive relief from a court of competent jurisdiction without the requirement to seek arbitration. (d) The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. (e) The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination. (f) The Company and the Partnership shall reimburse the Executive for all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including without limitation all costs of investigation and reasonable attorneys fees and expenses. 11 (g) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof, all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements and undertakings, both written and oral, among the parties hereto, or between the Executive and American General Hospitality Corporation, with respect to the subject matter hereof. (h) This Agreement is conditioned upon and subject to the consummation of the Merger and shall not be effective until the Merger is consummated. [SIGNATURE PAGE FOLLOWS] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, which may be executed in counterparts, all of which taken together shall be considered one and the same document, as of the date first above written. EXECUTIVE: __________________________________ Bruce G. Wiles COMPANY: MERISTAR HOSPITALITY CORPORATION By:_______________________________ Name: Title: PARTNERSHIP: MERISTAR HOSPITALITY OPERATING PARTNERSHIP L.P. By: MeriStar Hospitality Corporation, its general partner By:___________________________________ Name: Title: 13 EX-10.11 6 FORM OF EMPLOYMENT AGREEMENT Exhibit 10.11 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT, made as of August 3, 1998 by and between MERISTAR HOSPITALITY CORPORATION, a Maryland corporation (the "Company"), MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"), and JOHN EMERY (the "Executive"), an individual residing at 7308 Calvert Street, Annandale, Virginia 22003. The Company and the Partnership desire to employ the Executive in the capacity of Chief Financial Officer, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the "Agreement"); Now, therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration the parties hereto hereby agree as follows: 1. Employment; Term. The Company and the Partnership each hereby ---------------- employs the Executive, and the Executive agrees to be employed by the Company and the Partnership, upon the terms and subject to the conditions set forth herein, for an initial term of one (1) year, commencing on the date of the consummation of the merger (the "Merger") contemplated by the Agreement and Plan of Merger among American General Hospitality Corporation and American General Hospitality Operating Partnership, L.P., and Capstar Hotel Company ("CapStar"), CapStar Management Company, L.P. and Capstar Management Company II, L.P., dated as of March 15, 1998, as amended (the "Commencement Date"), unless terminated earlier in accordance with Section 4 of this Agreement; provided that such term -------- ---- shall automatically be extended for a period of one (1) calendar day for each day of services rendered, unless and until the Executive, on the one hand, or the Company and the Partnership, on the other, gives notice to the other party or parties not less than 120 days prior to such date of termination of this Agreement. Notwithstanding the foregoing, in no event shall the term of this Agreement extend beyond December 31, 2003, except as extended by mutual agreement of the parties hereto. (The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the "Term"). 2. Positions; Conduct. ------------------ (a) During the Term, the Executive will hold the title and office of, and serve in the position of, Chief Financial Officer of the Company and the Partnership. The Executive shall undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity, and shall perform such other specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as they shall reasonably request consistent with the Executive's position. (b) During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and the Partnership and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder; provided, that the -------- Executive may devote his business time to providing services to Meristar Hotels & Resorts, Inc. ("MHR"), and may provide services as described in Schedule A ---------- attached hereto, so long as such activity does not interfere with the performance of the Executive's duties hereunder. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Board, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided -------- that such activities do not involve any material conflict of interest with the - ---- interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement. Notwithstanding the foregoing and except as expressly provided herein, during the Term, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company or the Partnership. (c) The Executive's office and place of rendering his services under this Agreement shall be in the principal executive offices of the Company which shall be in the Washington, D.C. metropolitan area. Under no circumstances shall the Executive be required to relocate from the Washington, D.C. metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel. During the Term, the Company shall provide the Executive with executive office space, and administrative and secretarial assistance and other support services consistent with his position as Chief Financial Officer and with his duties and responsibilities hereunder. 3. Salary; Additional Compensation; Perquisites and Benefits. --------------------------------------------------------- (a) During the Term, the Company and the Partnership will pay the Executive a base salary at an aggregate annual rate of not less than $275,000 per annum, subject to annual review by the Compensation Committee of the Board (the "Compensation Committee"), and in the discretion of such Committee, increased from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company's standard practice, but not less frequently than semi-monthly. (b) For each fiscal year during the Term, the Executive will be eligible to receive a bonus from the Company. The award and amount of such bonus shall be based upon the achievement of predefined operating or performance goals and other criteria established by the Compensation Committee, which goals shall give the Executive the opportunity to earn a bonus in the following amounts: threshold target - 25% of base salary; target - 100% of base salary; and maximum bonus amount - 125% of base salary. 2 (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted by the Company or the Partnership for their management employees or the general benefit of their employees, such as any pension, profit-sharing, bonuses, stock option or other incentive compensation plans, life and health insurance plans, or other insurance plans and benefits on the same basis and subject to the same qualifications as other senior executive officers; provided, however, if superior benefits are provided by MHR to executives of MHR, the Executive will be provided benefits substantially equivalent to the MHR benefits. (d) (1) The Executive shall be eligible for stock option grants from time to time pursuant to the Company's Incentive Plan in accordance with the terms thereof. The Compensation Committee has granted to the Executive, effective on the Commencement Date, options to purchase 120,936 shares of the common stock of the Company at an exercise price equal to the fair market value at the time of grant. Subject to the terms of this Agreement as to the acceleration of vesting of stock options, such options shall vest as follows: First Anniversary of the Commencement Date 33-1/3% vested Second Anniversary of the Commencement Date 66-2/3% vested Third Anniversary of the Commencement Date 100% vested Such options shall be exercisable, subject to vesting and continued service, for ten (10) years from the date of grant and in all other respects shall be subject to the terms and conditions of the Incentive Plan. (2) By executing this Agreement, the Executive hereby agrees to waive the accelerated vesting of stock options granted to the Executive under the Capstar Hotel Company Equity Incentive Plan (the "Capstar Plan"), which would otherwise occur as a result of the consummation of the Merger, and such options shall continue to vest in accordance with their terms and the terms of the Capstar Plan. Such pre-Merger grants of options (the "Pre-Merger Awards") will become fully vested if the Executive's employment is terminated voluntarily or involuntarily within twenty-four (24) months of the Merger. (3) On the Commencement Date, the Company shall issue to the Executive 10,146 shares of common stock of the Company (the "Restricted Stock"). The Restricted Stock shall vest in three nearly equal installments on each of the first, second and third anniversaries of the Commencement Date, conditioned upon the Executive's continuing to be employed by the Company on such dates or as otherwise provided by this Agreement. 3 (e) The Company and the Partnership will reimburse the Executive, in accordance with their standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties under this Agreement. (f) The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company's policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year. (g) The Executive shall be provided with an automobile comparable to the automobile provided to Executive by CapStar. (h) To the fullest extent permitted by applicable law, the Executive shall be indemnified and held harmless by the Company and the Partnership against any and all judgments, penalties, fines, amounts paid in settlement, and other reasonable expenses (including, without limitation, reasonable attorneys' fees and disbursements) actually incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, investigative or other) for any action or omission in his capacity as a director, officer or employee of the Company or the Partnership. Indemnification under this Section 3(h) shall be in addition to, and not in substitution of, any other indemnification by the Company or the Partnership of its officers and directors. Expenses incurred by the Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 3(h) shall be paid by the Company or the Partnership, as the case may be, in advance of the final disposition of such action suit or proceeding upon the Company's or the Partnership's receipt of (x) a written affirmation by the Executive of his good faith belief that the standard of conduct necessary for his indemnification hereunder and under the provisions of applicable law has been met and (y) a written undertaking by or on behalf of the Executive to repay the amount advanced if it shall ultimately be determined by a court that the Executive engaged in conduct which precludes indemnification under the provisions of such applicable law. Such written undertaking in clause (y) shall be accepted by the Company or the Partnership, as the case may be, without security therefor and without reference to the financial ability of the Executive to make repayment thereunder. The Company and the Partnership shall use commercially reasonable efforts to maintain in effect for the Term of this Agreement a directors' and officers' liability insurance policy, with a policy limit of at least $5,000,000, subject to customary exclusions, with respect to claims made against officers and directors of the Company or the Partnership; provided, however, the Company or the -------- ------- Partnership, as the case may be, shall be relieved of this obligation to maintain directors' and officers' liability insurance if, in the good faith judgment of the Company or the Partnership, it cannot be obtained at a reasonable cost. 4 4. Termination. ----------- (a) The Term will terminate immediately upon the Executive's death or, upon thirty (30) days' prior written notice by the Company, in the case of a determination of the Executive's Disability. As used herein the term "Disability" means the Executive's inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A determination of Disability will be made by a physician reasonably satisfactory to both the Executive and the Company and paid for by the Company or the Partnership whose decision shall be final and binding on the Executive and the Company; provided -------- that if they cannot agree as to a physician, then each shall select and pay for - ---- a physician and these two together shall select a third physician whose fee shall be borne equally by the Executive and either the Company or the Partnership and whose determination of Disability shall be binding on the Executive and the Company. Should the Executive become incapacitated, his employment shall continue and all base and other compensation due the Executive hereunder shall continue to be paid through the date upon which the Executive's employment is terminated for Disability in accordance with this section. (b) The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. (c) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. 5. Severance. --------- (a) If the Term is terminated by the Company for Cause, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (b) If the Term is terminated by the Executive other than because of death, Disability or for Good Reason, the Company and the Partnership will pay to the Executive an aggregate amount equal to the Executive's accrued and unpaid base salary through the date of such termination, and all unvested options will terminate immediately and any vested options issued pursuant to the Company's Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date. (c) If the Term is terminated upon the Executive's death or Disability, the Company and the Partnership will pay to the Executive's estate or the Executive, as the case may be, a lump sum payment equal to the Executive's base salary through the termination date, 5 plus a pro rata portion of the Executive's bonus for the fiscal year in which the termination occurred. In addition, the Company will make payments for one (1) year of all compensation otherwise payable to the Executive pursuant to this Agreement, including, but not limited to, base salary, bonus and welfare benefits. In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions. (d) Subject to Section 5(e) hereof, if the Agreement is terminated by the Company without Cause or other than by reason of his death or Disability, in addition to any other remedies available, or if the Executive terminates this Agreement for Good Reason, the Company and the Partnership shall pay the Executive, in accordance with regular payroll practices, an amount equal to the sum of (A) the Executive's then annual base salary for the remainder of the Term and (B) in lieu of the bonus amount he would have received had he remained employed by the Company and the Partnership through the end of the Term, the bonus amount he received in the year immediately prior to his termination, or if the Term is terminated prior to December 31, 1999, the Executive's target bonus for such year (the "Severance Amount"). In addition, all of the Executive's unvested stock options and restricted stock awards will immediately vest and become exercisable for a period of one (1) year thereafter and shares of restricted stock of the Company previously granted to the Executive shall become free from all contractual restrictions, and the Company shall continue in effect the Executive's health insurance benefits until the earlier of (x) one (1) year from the end of the Term or (y) the date on which the Executive obtains health insurance coverage from a subsequent employer. (e) If, within eighteen (18) months following a Change in Control, the Term is terminated by the Executive for Good Reason or by the Company without Cause, in addition to any other rights which the Executive may have under law or otherwise, the Executive shall receive the same payments and benefits provided for under Section 5(d) hereof; provided, that in addition, he shall also receive -------- a lump sum payment in an amount equal to the Severance Amount. (f) Notwithstanding anything in this Section 5 to the contrary if the Term is terminated for any reason within twenty-four (24) months following the Merger, the Pre-Merger Awards will immediately vest and remain exercisable in accordance with their respective terms; provided, however, such pre-Merger -------- ------- Awards will have an exercise period of at least one (1) year from the date of termination. (g) As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the -------- ------- Company shall not be deemed to have 6 Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 6(g)(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) any willful and intentional act of the Executive involving malfeasance, fraud, theft, misappropriation of funds, embezzlement or dishonesty affecting the Company or the Partnership; or (iii) the Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony in the jurisdiction involved. Termination of the Executive for Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean delivery to the Executive of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Company's Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote) of finding that in the good faith opinion of the Board, the Executive was guilty of conduct constituting Cause and specifying the particulars thereof in detail, including, with respect to any termination based upon conduct described in clause (i) above that the Executive failed to cure such conduct during the thirty-day period following the date on which the Company gave written notice of the conduct referred to in such clause (i). For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination; (h) As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive of duties materially inconsistent with the Executive's positions as described in Section 2(a) hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) the change in the location of the Company's principal executive offices or of the Executive's principal place of employment to a location outside the Washington, D.C. metropolitan area; (iii) any material breach of this Agreement by the Company or the Partnership which is continuing; or 7 (iv) a Change in Control of MHR, as defined in Section 5(i)(B) of this Agreement; provided, however, that the Executive shall not be deemed to have Good Reason - -------- ------- pursuant to clauses (i) or (iii) above unless the Executive gives the Company or the Partnership, as the case may be, written notice that the specified conduct or event has occurred and the Company or the Partnership fails to cure such conduct or event within thirty (30) days of the receipt of such notice. (i) As used herein, the term "Change in Control" means the occurrence of any one of the following events: (A) (i) the acquisition (other than from the Company) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty (50%) percent or more of the combined voting power of the Company's then outstanding voting securities; or (ii) the individuals who were members of the Board (the "Incumbent Board") during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board; provided, -------- however, that if the election, or nomination for election by the Company's ------- stockholders, of any new director was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (iii) approval by stockholders of the Company of (a) merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy (70%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (b) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) above solely because fifty (50%) percent or more of the combined voting power of the Company's then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the 8 stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition; or (B) (i) the acquisition (other than from MHR) by any "Person" (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty (50%) percent or more of the combined voting power of MHR's then outstanding voting securities; or (ii) the individuals who were members of the Board of Directors of MHR (the "MHR Incumbent Board") during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board of Directors of MHR; provided, however, that if the election, or nomination -------- ------- for election by MHR's stockholders, of any new director was approved by a vote of at least two-thirds of the MHR Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the MHR Incumbent Board; or (iii) approval by stockholders of MHR of (a) merger or consolidation involving MHR if the stockholders of MHR, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than seventy (70%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of MHR outstanding immediately before such merger or consolidation or (b) a complete liquidation or dissolution of MHR or an agreement for the sale or other disposition of all or substantially all of the assets of MHR. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) above solely because fifty (50%) percent or more of the combined voting power of MHR's then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by MHR or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of MHR in the same proportion as their ownership of stock in MHR immediately prior to such acquisition. (j) The amounts required to be paid and the benefits required to be made available to the Executive under this Section 5 are absolute. Under no circumstances shall the Executive, upon the termination of his employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 5. 9 (k) In the event that any payment, benefit or other right or compensation due to the Executive hereunder or otherwise from the Company, including, without limitation, the accelerated vesting of the Executive's rights with respect to stock options, restricted stock or any other benefit or compensation, results in the imposition of an excise tax payable by the Executive under Section 4999 of the Internal Revenue Code, or any successor or other provision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company shall make a cash payment to the Executive in the amount of such excise tax (the "Excise Tax Payment") and shall also make a cash payment to the Executive in an amount equal to the total of federal, state and local income and excise taxes for which the Executive may be liable on account of such Excise Tax Payment. 6. Confidential Information. ------------------------ (a) The Executive acknowledges that the Company and its subsidiaries or affiliated ventures ("Company Affiliates") own and have developed and compile, and will in the future own, develop and compile certain Confidential Information and that during the course of his rendering services hereunder Confidential Information will be disclosed to the Executive by the Company Affiliates. The Executive hereby agrees that, during the Term and for a period of three years thereafter, he will not use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company Affiliates. (b) As used herein, the term "Confidential Information" means any trade secrets, confidential or proprietary information, or other knowledge, know-how, information, documents or materials, owned, developed or possessed by a Company Affiliate pertaining to its businesses the confidentiality of which such company takes reasonable measures to protect, including, but not limited to, trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, (iii) is or becomes available to the Executive from sources other than the Company Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company's sole expense, in seeking a protective order or other appropriate protection of such information). 10 7. Specific Performance. -------------------- (a) The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company Affiliates would sustain irreparable harm in the event of a violation by the Executive of Section 6 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages. (b) If any of the restrictions on activities of the Executive contained in Section 6 hereof shall for any reason be held by a court of competent jurisdiction to be excessively broad, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights. (c) Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 5 of this Agreement and such failure shall continue for twenty (20) days after notice thereof from the Executive, all restrictions on the activities of the Executive under Section 6 hereof shall be immediately and permanently terminated. 8. Withholding. The parties agree that all payments to be made to ----------- the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations of such company. 9. Notices. All notices required or permitted hereunder shall be in ------- writing and shall be deemed given and received when delivered personally, four (4) days after being mailed if sent by registered or certified mail, postage pre-paid, or by one (1) day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively: If to the Executive, to: 7308 Calvert Street Annandale, Virginia 22003 11 If to the Company or to the Partnership, to: MeriStar Hospitality Corporation 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 or to any other address of which such party may have given notice to the other parties in the manner specified above. 10. Miscellaneous. ------------- (a) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive's rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company and the Partnership hereunder will be binding upon and run in favor of their respective successors and assigns. The Company will not be deemed to have breached this Agreement if any obligations of the Company to make payments to the Executive are satisfied by the Partnership. (b) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to conflict of laws principles. (c) Any controversy arising out of or relating to this Agreement or any breach hereof shall be settled by arbitration in Washington, D.C. by a single neutral arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon any award rendered may be entered in any court having jurisdiction thereof, except in the event of a controversy relating to any alleged violation by the Executive of Section 6 hereof, in which case the Company shall be entitled to seek injunctive relief from a court of competent jurisdiction without the requirement to seek arbitration. (d) The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. (e) The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination. (f) The Company and the Partnership shall reimburse the Executive for all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including without limitation all costs of investigation and reasonable attorneys fees and expenses. 12 (g) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof, all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements and undertakings, both written and oral, among the parties hereto, or among the Executive, CapStar Hotel Company and CapStar Management Co., L.P., with respect to the subject matter hereof. (h) This Agreement is conditioned upon and subject to the consummation of the Merger and shall not be effective until the Merger is consummated. [SIGNATURE PAGE FOLLOWS] 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EXECUTIVE: _____________________________________ John Emery COMPANY: MERISTAR HOSPITALITY CORPORATION By:___________________________________ Name: Title: PARTNERSHIP: MERISTAR HOSPITALITY OPERATING PARTNERSHIP L.P. By:____________________________, its general partner By:___________________________________ Name: Title: 14 EX-12 7 STATEMENT REGARDING COMPUTATION OF RATIOS MERISTAR HOSPITALITY CORPORATION EXHIBIT 12 STATEMENT REGARDING COMPUTATION OF RATIOS
Year Ended December 31, ----------------------------------------------------------------------- 1994(1) 1995 1996 1997 1998 ----------------------------------------------------------------------- Income before minority interests, income tax expense and extraordinary items (2) $ - $ 213 $ 6,988 $ 40,488 $ 69,528 Fixed charges: Interest expense - 2,673 12,784 61,512 64,378 Interest capitalized - 67 461 442 5,182 Amortization of debt expense - 131 986 920 1,635 Preferred distributions to minority interests - - - 488 650 Rent deemed as interest - 16 22 26 11 ----------------------------------------------------------------------- Total fixed charges - 2,887 14,253 63,388 71,856 ----------------------------------------------------------------------- Income before minority interest, income tax expense, extraordinary items and fixed charges (excluding capitalized interest and preferred distributions to minority - 3,033 20,780 102,946 135,552 interests) Divided by fixed charges - 2,887 14,253 63,388 71,856 Ratio of earnings to fixed - 1.05x 1.46x 1.62x 1.89x charges
(1) Prior to 1995, the Company's predecessor entities had no fixed charges and therefore the ratio of earnings to fixed charges was not applicable. (2) This amount is before minority interests since the minority interests relate to majority-owned subsidiaries that have fixed charges. EX-21 8 SUBSIDIARIES OF THE COMPANY EXHIBIT 21
JURISDICTION OF INCORPORATION NAME OR ORGANIZATION - -------------------------------------------------------------------------------------------- 183 Hotel Associates, Ltd. Texas 2780 Atlanta Limited Partnership Texas 2929 Williams Limited Liability Company Delaware 3100 Glendale Joint Venture Ohio 339742 B.C. Ltd. British Columbia, Canada 339743 B.C. Ltd. British Columbia, Canada 455 Meadowlands Associates, Ltd Texas AGH 2780 Atlanta LLC Delaware AGH 75 Arlington Heights LLC Delaware AGH DFW South LLC Delaware AGH GP, Inc. Nevada AGH LP, Inc. Nevada AGH O'Hare Limited Partnership Illinois AGH O'Hare LLC Delaware AGH Portland/Shelton LLC Delaware AGH PSS I, Inc. Delaware AGH Secaucus LLC Delaware AGH UPREIT LLC Delaware BA Parkway Associates II, L.P. Delaware Ballston Parking Associates Virginia BCHI Acquisition, LLC Delaware Boykin Kansas City, L.L.C. Ohio BoyStar Ventures, L.P. Ohio CapStar Albuquerque Company, L.L.C. Delaware CapStar AP Partners, L.P. Delaware CapStar Austin, Inc. Delaware CapStar BK Company, L.L.C. Delaware CapStar C.S. Company, L.L.C. Delaware CapStar California Beverage Corporation California CapStar Cathedral City Company, L.L.C. Delaware CapStar Cherry Hill Company, L.L.C. Delaware CapStar Chicago Company, L.L.C. Delaware CapStar Columbia Company, L.L.C. Maryland CapStar Cross Keys Company, L.L.C. Maryland CapStar Dallas Beverage Corporation Texas CapStar Dallas Partners, L.P. Delaware CapStar Detroit Airport Company, L.L.C. Delaware CapStar Englewood Company, L.L.C. Delaware CapStar Forrestal Company, L.L.C. New Jersey CapStar Frazer Company, L.L.C. Delaware CapStar General Corp. Delaware CapStar Georgetown Company, L.L.C. Delaware
CapStar Hallmark Company, L.L.C. Missouri CapStar Hartford Company, L.L.C. Connecticut CapStar HGI Company, L.L.C. Delaware CapStar Hotel (Burnaby) Inc. British Columbia, Canada CapStar Hotel (Calgary Airport) Inc. Alberta, Canada CapStar Hotel (Surrey) Inc. British Columbia, Canada CapStar Hotel (Vancouver) Inc. British Columbia, Canada CapStar Houston SW Partners, L.P. Delaware CapStar Indianapolis Company, L.L.C. Delaware CapStar Jekyll Company, L.L.C. Delaware CapStar KC Company, L.L.C. Delaware CapStar Lafayette Company, L.L.C. Delaware CapStar LAJV Company, L.L.C. Delaware CapStar Lexington Company, L.L.C. Delaware CapStar Lexington, Inc. Delaware CapStar Limited Corp. Delaware CapStar Louisville Company, L.L.C. Delaware CapStar LP Corporation Delaware CapStar Management Company II, L.P. Delaware CapStar Management Company, L.P. Delaware CapStar Medallion Austin Partners, L.P. Delaware CapStar Medallion Dallas Partners, L.P. Delaware CapStar Medallion Houston Partners, L.P. Delaware CapStar Mesa Company, L.L.C. Delaware CapStar Metro Beverage Corporation Texas CapStar Midland Partners, L.P. Delaware CapStar Mockingbird Partners, L.P. Delaware CapStar Morristown Company, L.L.C. Delaware CapStar National Airport Company, L.L.C. Delaware CapStar New Mexico Beverage Corporation New Mexico CapStar New Orleans Company, L.L.C. Louisiana CapStar Oklahoma City Company, L.L.C. Delaware CapStar PA, Inc. Delaware CapStar Pontch Company, L.L.C. Michigan CapStar Roland Park Company, L.L.C. Maryland CapStar Sacramento Company, L.L.C. Delaware CapStar San Francisco Company, L.L.C. Delaware CapStar San Pedro Company, L.L.C. Delaware CapStar Santa Barbara Company, L.L.C. Delaware CapStar St. Louis Company, L.L.C. Delaware CapStar TF Company, L.L.C. Delaware CapStar Tucson Company, L.L.C. Delaware CapStar Washington Company, L.L.C. Delaware CapStar Westchase Acquisition Corp. Delaware CapStar Westchase Partners, L.P. Delaware CapStar Windsor Locks Company, L.L.C Delaware CapStar Winston Beverage Corporation Texas CapStar Wyandotte Company, L.L.C. Missouri CapStar York Company, L.L.C. Delaware
Centennial Hotel Ltd. British Columbia, Canada CMC Airport, Inc. New York DFW South I Limited Partnership Texas EquiStar Acquisition Corporation Delaware EquiStar Arlington Partners, L.P. Delaware EquiStar Atlanta Company, L.L.C. Delaware EquiStar Atlanta GP Company, L.L.C. Delaware EquiStar Atlanta LP Company, L.L.C. Delaware EquiStar Ballston Company, L.L.C. Delaware EquiStar Bellevue Company, L.L.C. Delaware EquiStar Charlotte Company, L.L.C. Delaware EquiStar Cleveland Company, L.L.C. Delaware EquiStar Colorado Company, L.L.C. Delaware EquiStar Irvine Company, L.L.C. Delaware EquiStar Latham Company, L.L.C. Delaware EquiStar Salt Lake Company, L.L.C. Delaware EquiStar Schaumburg Beverage Corporation Illinois EquiStar Schaumburg Company, L.L.C. Delaware EquiStar Somerset Company, L.L.C. Delaware EquiStar Texas Beverage Corporation Texas EquiStar Virginia Company, L.L.C. Delaware Lepercq Atlanta Renaissance Partners, L.P. Delaware Madison Motel Associates Wisconsin Madison Washington Associates Wisconsin MCV Venture, L.L.C. Kentucky MDV Limited Partnership Texas MeriStar Acquisition Company, L.L.C. Delaware MeriStar Austin SPE Corp. Delaware MeriStar Austin SPE, L.L.C. Delaware MeriStar Hospitality Corporation Maryland MeriStar Hospitality Operating Partnership, L.P. Delaware MeriStar Hotel (Burnaby), L.L.C. British Columbia, Canada MeriStar Hotel (Calgary Airport), L.L.C. Alberta, Canada MeriStar Hotel (Surrey), L.L.C. British Columbia, Canada MeriStar Hotel (Vancouver), L.L.C. British Columbia, Canada MeriStar LAX Company, L.L.C. Delaware MeriStar Lexington SPE Corp. Delaware MeriStar Lexington SPE, L.L.C. Delaware MeriStar LP, Inc. Delaware MeriStar Marco Island Company, L.L.C. Delaware MeriStar PA SPE Corp. Delaware MeriStar PA SPE, L.L.C. Delaware MeriStar Plantation Shopping Center Company, L.L.C. Delaware MeriStar Safety Harbor Company, L.L.C. Delaware MeriStar Sanibel Beach Company, L.L.C. Delaware MeriStar Sanibel Golf Company, L.L.C. Delaware MeriStar Sanibel Inn Company, L.L.C. Delaware MeriStar Seaside Inn Company, L.L.C. Delaware MeriStar Secured Holdings I, L.L.C. Delaware
MeriStar Secured Holdings, L.L.C. Delaware MeriStar Shirley's Parcel Company, L.L.C. Delaware MeriStar Song of the Sea Company, L.L.C. Delaware MeriStar South Seas Company, Inc. Florida MeriStar SPE Corp. Delaware MeriStar SPE, L.L.C. Delaware MeriStar SS Plantation Company, L.L.C. Delaware MeriStar Sundial Beach Company, L.L.C. Delaware Metrotown Overseas Holdings, Inc. British Columbia, Canada Mt. Arlington New Jersey, LLC Delaware Portland/Shelton Corp. Delaware Portland/Shelton LLC Delaware Richmond Williamsburg Associates, Ltd. Texas Westchase SPE, Corp. Delaware Westchase SPE, L.L.C. Delaware
EX-23 9 CONSENT EXHIBIT 23 Consent of Independent Auditors ------------------------------- The Board of Directors MeriStar Hospitality Corporation We consent to the incorporation by reference in the registration statement (No. 333-60463) on Form S-8 (MeriStar Hospitality Corporation Incentive Plan), the registration statement (No. 333-60465) on Form S-8 (MeriStar Hospitality Corporation Non-employee Directors' Incentive Plan), and the registration statement (No. 333-66229) on Form S-3 (for a shelf registration to register shares for certain operating partnership unitholders) of our reports on the consolidated balance sheets of MeriStar Hospitality Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1998, included herein. KPMG LLP Washington, D.C. March 1, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,180 0 3,044 0 0 0 2,909,439 83,797 2,998,460 0 1,602,352 0 0 467 1,150,525 2,998,460 0 525,297 0 145,375 246,016 0 21,024 64,407 15,699 48,708 0 4,080 921 43,703 1.30 1.26
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