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 The Fiscal Year Ended December 31, 2016
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 000-55619
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 46-1140492 |
| (State or other jurisdiction | (I.R.S. Employer Identification No.) |
| of incorporation or organization) |
| 1985 Cedar Bridge Avenue, Suite 1, Lakewood, NJ | 08701 |
| (Address of principal executive offices) | (Zip code) |
Registrant's telephone number, including area code: 732-367-0129
Securities registered under Section 12(b) of the Exchange Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| None | None |
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 that 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no established market for the Registrant’s common shares. As of June 30, 2016, the last business day of the most recently completed second quarter, there were 6.7 million shares of the registrant’s common stock held by non-affiliates of the registrant. On March 27, 2017, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $10.00 per share derived from the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities divided by the number of shares outstanding, all as of December 31, 2016. For a full description of the methodologies used to value the Registrant's assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” As of March 15, 2017, there were approximately 12.9 million shares of common stock held by non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.
Table of Contents
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Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K, together with other statements and information publicly disseminated by Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Lightstone REIT III”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions, (ii) the availability of suitable acquisition opportunities, (iii) financing risks, such as the inability to obtain equity, debt, or other sources of financing on favorable terms, (iv) the level and volatility of interest rates and foreign currency exchange rates, (v) increases in operating costs, (vi) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business and (vii) changes in governmental laws and regulations. Accordingly, there is no assurance that our expectations will be realized.
All forward-looking statements should be read in light of the factors identified herein at Part 1, Item 1A as well as in the “Risk Factors” section of the Registration Statement on Form S-11 (File No. 333-195292) of the Lightstone REIT III filed with the Securities and Exchange Commission (the “SEC”), as the same may be amended and supplemented from time to time.
General Description of Business
The Lightstone REIT III is a Maryland corporation, formed on October 5, 2012, which elected to qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2015. Through December 31, 2016, the Company has acquired nine wholly-owned hotels and it will continue to seek to acquire additional hotels and other commercial real estate assets primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate.
The Lightstone REIT III is structured as an umbrella partnership REIT (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”).
Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in this annual report refers to the Lightstone REIT III, its Operating Partnership or the Company as required by the context in which such pronoun is used.
Offering and Structure
Our sponsor, David Lichtenstein (“Lichtenstein”), who does business through The Lightstone Group, LLC (the “Sponsor”) and majority owns the limited liability company of that name, is one of the largest private residential and commercial real estate owners and operators in the United States today, with a diversified portfolio of over 120 properties containing approximately 10,000 multifamily units, 250,000 square feet of office space, 1.5 million square feet of industrial space, 31 hotels and 4.6 million square feet of retail space. The residential, office, industrial, hotel and retail properties are located in 26 states. Based in New York and supported by a regional office in New Jersey our Sponsor employs approximately 397 staff and professionals. Our Sponsor has extensive experience in the areas of investment selection, underwriting, due diligence, portfolio management, asset management, property management, leasing, disposition, finance, accounting and investor relations.
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Our advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by our Sponsor. Our Advisor, together with our board of directors (the “Board of Directors”), is and will continue to be primarily responsible for making investment decisions and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP III LLC, which has subordinated participation interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.
We do not have and will not have any employees that are not also employed by our Sponsor or its affiliates. We depend substantially on our Advisor, which generally has responsibility for our day-to-day operations. Under the terms of the advisory agreement, the Advisor also undertakes to use its reasonable best efforts to present to us investment opportunities consistent with our investment policies and objectives as adopted by our Board of Directors.
The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it is offering to sell up to 30,000,000 shares of its common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. Since inception, the Company had received gross proceeds of $112.8 million from the sale of 11.5 million shares of its common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor.)
The Company initially expected to offer the Common Shares offered in its Primary Offering over a two-year period, or until July 15, 2016. However, because the Company had not sold all the Common Shares offered in its Primary Offering within two years, the Company will continue the Primary Offering for an additional year, until July 15, 2017, provided that the Offering will be terminated if all 30.0 million shares of our common stock are sold before such date. The Company reserves the right to reallocate the shares of common stock it is offering between the Primary offering and the DRIP. Additionally, the Offering may be terminated at any time.
Orchard Securities, LLC (“Orchard Securities”) is the Dealer Manager of the Company’s Offering. Orchard Securities has a branch office that does business as “Lightstone Capital Markets” and focuses primarily on distributing interests in programs sponsored by our Sponsor.
As of December 31, 2016, the Advisor owned 20,000 shares of common stock which were issued on December 24, 2012 for $200,000, or $10.00 per share.
As of December 11, 2014, the Company had reached the minimum offering under its Offering by receiving subscriptions of its common shares, representing gross offering proceeds of more than $2.0 million, and effective December 11, 2014 investors were admitted as stockholders and the Operating Partnership commenced operations. Through December 31, 2016, cumulative gross offering proceeds of approximately $112.8 million were released to the Company. The Company invested the proceeds received from the Offering and the Advisor in the Operating Partnership, and as a result, held a 99% general partnership interest as of December 31, 2016 in the Operating Partnership’s common units.
The Company’s shares of common stock are not currently listed on a national securities exchange. The Company may seek to list its shares of common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares of common stock at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not begin the process of achieving a liquidity event prior to the eighth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.
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Noncontrolling Interest – Partners of Operating Partnership
On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. A limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.
Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and has committed to make a significant equity investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum amount of the Offering. Specifically, the Special Limited Partner has committed to purchase subordinated participation interests in the Operating Partnership (the “Subordinated Participation Interests”) quarterly in an amount equal to the product of (i) $10.00 minus our then current estimated Net Asset Value (“NAV”) per Common Share, multiplied by (ii) the number of our Common Shares outstanding. The Operating Partnership will issue one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributes. The Special Limited Partner’s obligation will continue until the earlier of: (i) the termination of the Offering; (ii) the Special Limited Partner’s purchase of an aggregate of $36.0 million of Subordinated Participation Interests and (iii) the receipt of gross offering proceeds of $300.0 million. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value.
Through December 31, 2016, the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million, including approximately 228 Subordinated Participation Interests in consideration of $11.4 million during the year ended December 31, 2016. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
Operations - Operating Partnership Activity
Our Operating Partnership commenced its operations on December 11, 2014. Since then we have and will continue to seek to primarily acquire and operate hospitality properties and to lesser extent, commercial and residential properties principally in North America through our Operating Partnership. Our commercial holdings will consist of full-service or select-service hotels, including extended-stay hotels and to a lesser extent, retail (primarily multi-tenanted shopping centers), industrial and office properties. All such properties may be acquired and operated by us alone or jointly with another party. In addition, we may invest up to 20% of our net assets in collateralized debt obligations, commercial mortgage-backed securities (“CMBS”) and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly.
The following summarizes our completed acquisitions through December 31, 2016:
| · | On February 4, 2015 we acquired a 120-room select service Hampton Inn Hotel (the “Hampton Inn – Des Moines”) located in Des Moines, Iowa; |
| · | On May 15, 2015 we acquired a 146-room select service Courtyard by Marriott Hotel (the “Courtyard - Durham”) located in Durham, North Carolina; |
| · | On March 10, 2016 we acquired an 86-room select service Hampton Inn Hotel (the “Hampton Inn – Lansing”) located in Lansing, Michigan; |
| · | On March 23, 2016 we acquired a 92-room select service Courtyard by Marriott Hotel (the “Courtyard - Warwick”) located in Warwick, Rhode Island; |
| · | On May 2, 2016 we acquired a 127-room select service SpringHill Suites by Marriott Hotel (the “SpringHill Suites – Green Bay”) located in Green Bay, Wisconsin; |
| · | On August 2, 2016 we acquired a portfolio of two select service Home2 Suites by Hilton Hotels, a 139-room select service hotel located in Tukwila, Washington (the “Home2 Suites – Tukwila”) and a 125-room select service hotel located in Salt Lake City, Utah (the “Home2 Suites – Salt Lake” and collectively the “Home2 Suites Hotel Portfolio”); |
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| · | On September 13, 2016 we acquired an 84-room select service Fairfield Inn & Suites by Marriott Hotel (the “Fairfield Inn – Austin”) located in Austin, Texas; and |
| · | On October 7, 2016 we acquired an 80-room select service Staybridge Suites Hotel (the “Staybridge Suites – Austin”) located Austin, Texas. |
The Cove Transaction
On January 31, 2017, we, through a subsidiary of our Operating Partnership and REIT IV COVE LLC (“REIT IV Cove”), a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment trust also sponsored by our Sponsor and a related party, collectively, the “Assignees”, entered into an Assignment and Assumption Agreement (the “Assignment”) with another of the Lightstone IV’s wholly owned subsidiaries, REIT COVE LLC (the “Assignor”). Under the terms of the Assignment, the Assignees were assigned the rights and obligations of the Assignor with respect to that certain Sale and Purchase Agreement (the “Purchase Agreement”), dated September 29, 2016, made between the Assignor, as the purchaser, LSG Cove LLC (“LSG Cove”), an affiliate of our Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party (collectively, the “Buyer”) and an unrelated third party, RP Cove, L.L.C (the “Seller”), pursuant to which the Buyer will acquire the Seller’s membership interest in RP Maximus Cove, L.L.C. (the “Joint Venture”) for approximately $255.0 million. The Joint Venture owns and operates The Cove at Tiburon (“The Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Joint Venture.
On January 31, 2017, REIT IV Cove, REIT III Cove, LSG Cove, and Maximus (the “Members”) completed the Cove Transaction for aggregate consideration of approximately $255.0 million, which consisted of $80 million of cash and $175 million of proceeds from a loan from a financial institution. We paid approximately $20.0 million for a 22.5% membership interest in the Joint Venture.
Our interest in the Joint Venture is a non-managing interest, because we exert significant influence over but do not control the Joint Venture, we will account for our ownership interest in the Joint Venture in accordance with the equity method of accounting. All distributions of earnings from the Joint Venture will be made on a pro rata basis in proportion to each Members’ equity interest percentage. Any distributions in excess of earnings from the Joint venture will be made to the Members pursuant to the terms of the Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of The Cove and receives certain fees as defined in the Property Management Agreement for the management of The Cove. We will commence recording our allocated portion of profit and cash distributions beginning as of January 31, 2017 with respect to our membership interest of 22.5% in the Joint Venture.
In connection with the closing of the Cove Transaction, the Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date. The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by The Cove and an affiliate of our Sponsor (the “Guarantor”) has guaranteed the Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The Members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which our share is up to approximately $10.9 million.
The Cove is a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres originally constructed in 1967. As of January 31, 2017, The Cove was 81.5% occupied. The average remaining term for existing leases in The Cove is 4 months and the average rental price per square foot is $4.47.
Starting in 2013, approximately $38 million has been invested in an extensive refurbishment of The Cove; of which to date, 97% of the apartment buildings have been completed. The Members intend to use the remaining proceeds from the Loan and to invest additional capital if necessary to complete the refurbishment of The Cove. The Guarantor provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide the necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which our share is up to approximately $3.3 million.
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Related Parties
Our Advisor and its affiliates and the Special Limited Partner are related parties of the Company. Certain of these entities have or will receive compensation and fees for services related to our offerings and will continue to receive compensation and fees and services for the investment and management of our assets. These entities have received and/or will receive fees during our offering, acquisition, operational and liquidation stages. The compensation levels during our offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements.
Primary Business Objectives and Strategies
Our primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk. We intend to achieve this goal primarily through investments in real estate properties. We intend to use substantially all of the net proceeds from our Offering to acquire and operate a diversified portfolio of real estate investments.
Acquisition and Investment Policies
We primarily intend to acquire full-service or select-service hotels, including extended-stay hotels. Full-service hotels generally provide a full complement of guest amenities including restaurants, concierge and room service, porter service or valet parking. Select-service hotels typically do not include these amenities. Extended-stay hotels offer upscale, high-quality, residential style lodging with a comprehensive package of guest services and amenities for extended-stay business and leisure travelers. We have no limitation as to the brand of franchise or license with which our hotels will be associated.
Even though we intend primarily to acquire hotels, we may use a portion of the offering proceeds to purchase other types of real estate. We believe that at least 75% of the net proceeds raised in the Offering will be used to acquire hotels and the remaining portion of the net proceeds raised in the Offering will be used to acquire properties and real estate-related assets other than hotels. However, we may use more or less than 75% of the net proceeds raised in the Offering to acquire hotels and are not bound to that limit. Assets other than hotels may include, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, single-tenant properties, multifamily properties, student housing properties, warehouses and distribution facilities and medical office properties. We expect to invest a significant portion of our funds in direct real estate investments and other equity interests, and the remainder of our funds in debt interests, which may include bridge or mezzanine loans, including in furtherance of a loan-to-own strategy. However, we are not prohibited from investing all our funds in debt interests.
We anticipate that our portfolio will provide consistent current income and may also provide capital appreciation resulting from our expectation that in certain circumstances we will be able to acquire properties at a discount to replacement cost or otherwise at less than what we perceive as the market value or to reposition or redevelop a property so as to increase its value over the amount of capital we deployed to acquire and rehabilitate the property. We may acquire properties that we believe would benefit from a change in management strategy, or that have incurred substantial deferred maintenance. We plan to diversify our portfolio by geographic region, investment size and investment risk with the goal of acquiring a portfolio of hotels and other income-producing real estate properties and real estate-related assets that provide attractive returns for our investors.
Our advisor intends to focus on markets that may be depressed or overbuilt and on sellers who are distressed or time-constrained. Our opportunistic real estate strategy involves more risk than real estate programs that have a targeted holding period for investments longer than ours, utilize leverage to a lesser degree or employ more conservative investment strategies, and, based upon these factors and the experience of our sponsor, The Lightstone Group, we believe that we have a potential for a higher rate of return than comparable real estate programs. The exact markets that will ultimately be targeted by our advisor will depend on its evaluation of property prices and other economic considerations impacting the particular markets.
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As part of our opportunistic real estate investment strategy, we may acquire hotels with low occupancy rates and reposition them by seeking to improve the property and occupancy rates and thereby increase average daily rates, revenue per available room and overall property value. Further, we may invest in hotels that we believe present an opportunity for enhanced future value because of delayed renovations or deferred maintenance that we believe we can remedy.
We intend to purchase properties that have been constructed and have operating histories; additionally, we may acquire properties that are newly constructed, under development or construction or not yet developed. Properties may include multifamily properties purchased for conversion into condominiums or cooperatives, ground leases and properties intended to be converted from one use to another use. Additionally, subject to applicable REIT requirements, as a property reaches a market value that would provide what our advisor believes to be an attractive return to our investors given the then prevailing market conditions, we will consider disposing of the property and may do so for the purpose of distributing the net sale proceeds to our stockholders. We anticipate that such dispositions typically would occur during the period from three to six years after the termination of the Offering. However, subject to provisions of the Code relating to “prohibited transactions,” we may consider investing in properties with a different anticipated holding period in the event such properties provide an opportunity for an attractive overall return. For example, we may acquire properties in markets that are depressed or overbuilt with the anticipation that, within our anticipated holding period, the markets will recover and favorably impact the value of these properties. In addition, we may acquire interests in other entities with similar real property investments or investment strategies. We expect to make our investments in real estate assets located in the United States and its territories, with an initial focus on the Northeast, Southeast, Midwest and Southwest regions of the United States.
Subject to the applicable REIT requirements, to the extent that our advisor determines that it is advantageous, we may originate or invest in real estate-related assets such as mortgage, mezzanine, bridge and other loans and debt and equity securities issued by other real estate companies. In each case, these real estate-related assets will have been identified as being opportunistic investments with significant possibilities for near-term capital appreciation or higher current income; however, we intend to limit these types of investments so that neither the Company nor any of its subsidiaries will be required to register as an investment company under the Investment Company Act.
We may enter into one or more joint ventures, tenant-in-common investments or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or certain affiliates of our advisor, including other present and future REITs and real estate limited partnerships sponsored by affiliates of our advisor.
Financing Strategy and Policies
We expect that once we have fully invested the proceeds of the Offering, assuming we sell the maximum amount, our portfolio-wide loan-to-value ratio (calculated after the close of the Offering) will be approximately 65%. For purposes of calculating our 65% target leverage, we will determine the loan-to-value ratio on our portfolio based on the greater of the aggregate cost and the fair market value of our investments and other assets. There is no limitation on the amount we may borrow for the purchase of any single asset. Our charter allows us to incur leverage up to 300% of our total “net assets” (as defined in Section I.B of the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. We may only exceed this 300% limit if a majority of our independent directors approves each borrowing in excess of this limit and we disclose such borrowing to our stockholders in our next quarterly report along with a justification for the excess borrowing. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.
We do not intend to exceed the leverage limit in our charter after we have fully invested the proceeds of the Offering, although we anticipate exceeding the leverage limit in the early stages of our development when the costs of our investments are most likely to exceed our net offering proceeds. Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. However, high levels of debt could cause us to incur higher interest charges and higher debt service payments, which would decrease the amount of cash available for distribution to our investors.
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Distribution Objectives
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States (“GAAP”)) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to qualify or continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are paid at the discretion of our Board of Directors. We may fund distributions with cash proceeds from the sale of shares of our common stock or borrowings if we do not generate sufficient cash flow from our operations to fund distributions. Our ability to pay regular distributions and the amount of distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distributions that we have established or may establish.
We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of our REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, but only to the extent of a stockholder’s adjusted tax basis in our shares, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for depreciation and other non-cash items, it is likely that a portion of each distribution will constitute a tax-deferred return of capital for U.S. federal income tax purposes.
On January 14, 2015, our Board of Directors authorized and we declared a distribution which is calculated based on stockholders of record each day during the applicable period at a rate of $0.00164383 per day, and equals a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00. Our first distribution began to accrue on December 11, 2014 (date of breaking escrow) through February 28, 2015 (the end of the month following our initial property acquisition) and subsequent distributions have been declared on a monthly basis thereafter. The first distribution was paid on March 15, 2015 and subsequent distributions have been paid on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month. Our stockholders may elect to have their distributions reinvested in additional shares of Common Shares under our DRIP.
Total distributions declared during the years ended December 31, 2016 and 2015 were $4.7 million and $1.0 million.
Distribution Reinvestment and Share Repurchase Programs
Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock, at an initial purchase price of $9.50 per common share, equal to 95% of our current Offering price of $10.00 per common share, by reinvesting their distributions. In connection with our Offering, 10,000,000 Common Shares were reserved for issuance under our DRIP and as of December 31, 2016, 220,847 shares of common stock had been issued under our DRIP and 9,779,153 shares remain available for issuance.
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. From our date of inception through December 31, 2015, we did not receive any requests to redeem shares of our common stock under our share repurchase program. For the year ended December 31, 2016 we repurchased 34,358 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.99 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.
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Our Board of Directors reserves the right to terminate either program for any reason without cause by providing 10 days written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders.
Tax Status
We elected to qualify and be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. As a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, (the “Code”), we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, which does not equal net income, as calculated in accordance with GAAP, determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
We engage in certain activities through taxable REIT subsidiaries ("TRSs"). When we purchase a hotel we establish a TRS which enters into an operating lease agreement for the hotel. As such, we may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2016 and 2015, we had no material uncertain income tax positions. Additionally, even as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To qualify or maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries TRSs. As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Competition
The hotel and other commercial real estate markets are highly competitive. This competition could reduce occupancy levels and rental revenues at our properties, which would adversely affect our operations. We face competition from many sources. We face competition from other hotels both in the immediate vicinity and the geographic market where our hotels will be located. Overbuilding in the hotel industry will increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in operating costs due to inflation may not be offset by increased room rates. We will also face competition from nationally recognized hotel brands with which we will not be associated.
We compete in all of our markets with other owners and operators of retail, office, industrial and residential real estate. The continued development of new retail, office, industrial and residential properties has intensified the competition among owners and operators of these types of real estate in many market areas in which we intend to operate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are also other REITs with asset acquisition objectives similar to ours and others that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we will have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by us. Therefore, we will compete for institutional investors in a market where funds for real estate investment may decrease.
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Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In addition, competition for desirable investments could delay the investment of proceeds from our Offering in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to commence or maintain distributions to stockholders.
We believe that our senior management’s experience, coupled with our financing, professionalism, diversity of properties and reputation in the industry enables us to compete with the other real estate investment companies.
Because we are organized as an UPREIT, we believe we are well positioned within the hospitality industry and any industries in which we may operate to offer existing property owners the opportunity to contribute their properties to us in tax-deferred transactions using our Operating Partnership units as transactional currency. As a result, we believe we have a competitive advantage over most of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.
Environmental
As an owner of real estate, we will be subject to various environmental laws of U.S. federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Employees
We do not have employees. We entered into an advisory agreement with our advisor pursuant to which our Advisor supervises and manages our day-to-day operations and selects our real estate and real estate-related investments, subject to oversight by our Board of Directors. We have and will continue to pay our Advisor fees for services related to the investment and management of our assets, and we have and will continue to reimburse our Advisor for certain expenses incurred on our behalf.
Economic Dependence
We are dependent upon the net proceeds received from our Offering to conduct our proposed activities. The capital required to acquire real estate and real estate related investments will be obtained from the proceeds from our Offering and from any indebtedness that we may incur in connection with the acquisition of any real estate and real estate related investments thereafter.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. Stockholders may obtain copies of our filings with the SEC, free of charge, from the website maintained by the SEC at http://www.sec.gov, or at the SEC's Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701. Our telephone number is (732) 367-0129. Our website is www.lightstonecapitalmarkets.com.
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Set forth below are the risk factors that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements on page 2. If any of the risk events described below actually occurs, our business, financial condition or results of operations could be adversely affected.
Risks Related to an Investment in Lightstone Value Plus Real Estate Investment Trust III, Inc.
There is no public trading market for our Common Shares, and there may never be one; therefore, it will be difficult for you to sell your Common Shares except pursuant to our share repurchase program. If you sell your Common Shares to us under our share repurchase program, you may receive less than the total price you paid for the Common Shares.
There currently is no public market for our Common Shares, and there may never be one. If you are able to find a buyer for your Common Shares, you may not sell your Common Shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of our outstanding Common Shares, unless exempted by our board of directors (prospectively or retroactively), which may inhibit large investors from desiring to purchase your Common Shares.
Repurchases of Common Shares through our share repurchase program may be the only way to dispose of your Common Shares, but there are a number of limitations placed on such repurchases. Therefore, you may be required to sell your Common Shares at a substantial discount to the price you originally paid. See ‘‘Share Repurchase Program’’ for a description of the initial repurchase price, as determined by our board of directors. Furthermore, our board of directors reserves the right, in its sole discretion, at any time and from time to time, to amend the terms of, suspend or terminate our share repurchase program. Additionally, our board of directors reserves the right, in its sole discretion, to reject an individual stockholder’s request for repurchase for any reason at any time. Therefore, it will be difficult for you to sell your Common Shares promptly or at all.
You are limited in your ability to sell your Common Shares pursuant to our share repurchase program and may have to hold your Common Shares for an indefinite period of time.
Repurchases of Common Shares through our share repurchase program may be the only way to dispose of your Common Shares, but there are a number of limitations placed on such repurchases. Our board of directors may amend the terms of our share repurchase program without stockholder approval. Our board of directors also is free to suspend or terminate the program or to reject any request for repurchase and there is no assurance our board of directors will not suspend or terminate the program or reject requests for repurchases. In addition, our share repurchase program includes numerous restrictions that would limit your ability to sell your Common Shares within the program. Importantly, funding for our share repurchase program will come exclusively from any proceeds we received from the sale of Common Shares under our DRIP that our board of directors may reserve for this purpose. In addition, we will limit the number of Common Shares repurchased pursuant to our share repurchase program as follows: during any 12-month period, we will not repurchase in excess of 5.0% of the weighted average number of Common Shares outstanding during the prior calendar year; provided, however, that Common Shares repurchased in the case of the death of a stockholder will not count against this 5.0% limit.
Our Offering is a partial “blind pool” offering, so you will not have the opportunity to evaluate all of our investments or our tenants before we engage in investment or leasing activity.
Our Offering is a partial “blind pool offering”. Therefore, we are not able to provide you with information to evaluate all of our investments prior to acquisition. Our board of directors will have wide discretion in implementing our policies relating to the creditworthiness of tenants, and you will not have the opportunity to evaluate potential tenants. In light of our investment strategy, we may lease to tenants that do not have strong credit.
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We may suffer from delays in locating suitable investments, which could adversely affect the return on your investment.
Our ability to achieve our investment objectives and to make distributions to our stockholders is dependent upon the performance of our advisor in the acquisition of our investments and the determination of any financing arrangements, as well as the performance of our property managers in the selection of tenants and the negotiation of leases. The current market for properties that meet our investment objectives is highly competitive, as is the leasing market for such properties. The more Common Shares we sell in our offering, the greater our challenge will be to invest all the net offering proceeds on attractive terms. You will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments. You must rely entirely on the oversight of our board of directors, the management ability of our advisor and the performance of our property managers for us to achieve our investment objectives. We cannot be sure that our advisor will be successful in obtaining suitable investments on financially attractive terms.
Additionally, as a public company, we are subject to ongoing reporting requirements under the Exchange Act. Pursuant to the Exchange Act, we may be required to file with the SEC financial statements of properties we acquire or, in certain cases, financial statements of the tenants of the acquired properties. To the extent any required financial statements are not available or cannot be obtained, we will not be able to acquire the property. As a result, we may not be able to acquire certain properties that otherwise would be a suitable investment. We could suffer delays in our property acquisitions due to these reporting requirements.
Furthermore, where we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, you could suffer delays in the receipt of distributions attributable to those particular properties.
Delays we encounter in the selection, acquisition and development of properties could adversely affect your returns. In addition, if we are unable to invest our offering proceeds in real properties in a timely manner, we will hold the proceeds of our offering in an interest-bearing account, invest the proceeds in short-term, investment-grade investments or, ultimately, liquidate. In such an event, our ability to pay distributions to our stockholders and the returns to our stockholders would be adversely affected.
Our sponsor has been involved with investments that have faced adverse business developments, including bankruptcies.
Our sponsor has been involved in prior programs and investment activities that faced adverse business developments, including bankruptcy filings. These adverse developments may negatively affect a potential investor’s assessment of our ability to meet our investment objectives, which in turn may hinder our ability to raise substantial funds in our Offering. If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make, which may negatively affect the value of your investment.
Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our Offering, will result in us having fewer funds available for the acquisition of real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders’ overall return.
Our cash flows provided by operations were approximately $3.7 million for the year ended December 31, 2016. During the year ended December 31, 2016, we declared distributions of approximately $4.7 million, of which $2.8 million, or 59%, was funded from cash flows from operations and approximately $1.9 million, or 41%, was funded from proceeds from common stock issued under the DRIP. Our cash flows provided by operations were approximately $0.7 million for the year ended December 31, 2015. During the year ended December 31, 2015, we declared distributions of approximately $1.0 million, of which $0.6 million, or 60%, was funded from cash flows from operations and approximately $0.4 million, or 40%, was funded from proceeds from common stock issued under the DRIP. Additionally, we may in the future pay distributions from sources other than from our cash flows from operations. Our organizational documents permit us to make distributions from any source, including from the proceeds of the Offering or other offerings, cash advances to us by our advisor, cash resulting from a waiver of fees, and borrowings, including borrowings secured by our assets.
We expect that future distributions will be paid from our cash flow from operations following the acquisition of additional real estate-related investments, but there can be no assurance we will be able to generate sufficient cash flow from operations to do so. We may continue in the future to pay distributions from sources other than from our cash flows from operations, including the net proceeds from our Offering. If we are unable to acquire additional real estate-related investments, it may result in a lower return on an investment in our shares. If we have not generated sufficient cash flows from our operations and other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, to fund distributions, we may use the proceeds from our Offering. Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. Distributions made from Offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with the Offering. We have not established any limit on the amount of proceeds from the Offering that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
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Funding distributions from the proceeds of our Offering results in us having less funds available for acquiring properties or other real estate-related investments and may impact the value of an investment in our Common Shares. As a result, the return realized on an investment in our shares may be reduced. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets or the proceeds of the Offering may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute our stockholders’ interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to you upon a liquidity event, any or all of which may have an adverse effect on our stockholders’ investment
To the extent offering proceeds are used to pay fees to our advisor or its affiliates or to fund distributions, our investors will realize dilution and later investors also may realize a lower rate of return than investors who invest earlier in our offering.
Our advisor and its affiliates provide services for us in connection with, among other things, the selection, financing and acquisition of our investments, the management and leasing of our properties, the servicing of our mortgage, bridge, mezzanine or other loans and the disposition of our assets. We pay them substantial upfront fees for some of these services, which reduces the amount of cash available for investment in real estate or distribution to you. We may use Offering proceeds to pay a portion of these fees.
In addition, we may use offering proceeds to fund distributions, and later investors who do not receive those distributions will therefore experience additional immediate dilution of their investment. Also, to the extent we incur debt to fund distributions earlier in our public offering, the amount of cash available for distributions in future periods will be decreased by the repayment of such debt.
The use of offering proceeds to pay fees to our advisor and its affiliates or to fund distributions increases the risk that the amount available for distribution to stockholders upon a liquidation of our portfolio would be less than the purchase price of the Common Shares in our offering.
We may have to make decisions on whether to invest in certain properties without detailed information on the property.
To effectively compete for the acquisition of properties and other investments, our advisor and board of directors may be required to make decisions or post substantial non-refundable deposits prior to the completion of our analysis and due diligence on property acquisitions. In such cases, the information available to our advisor and board of directors at the time of making any particular investment decision, including the decision to pay any non-refundable deposit and the decision to consummate any particular acquisition, may be limited, and our advisor and board of directors may not have access to detailed information regarding any particular investment property, such as physical characteristics, environmental matters, zoning regulations or other local conditions affecting the investment property. Therefore, no assurance can be given that our advisor and board of directors will have knowledge of all circumstances that may adversely affect an investment. In addition, our advisor and board of directors expect to rely upon independent consultants in connection with their evaluation of proposed investment properties, and no assurance can be given as to the accuracy or completeness of the information provided by such independent consultants.
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If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make, and the value of your investment in us will fluctuate with the performance of the specific investments we make.
Our Offering is being made on a ‘‘best efforts’’ basis, meaning that our dealer manager is only required to use its best efforts to sell our Common Shares and has no firm commitment or obligation to purchase any of the Common Shares. As a result, we cannot assure you of the amount of proceeds that will be raised in our Offering. We are dependent on funds from our Offering to make additional investments, resulting in greater diversification in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we acquire. If we do not raise significant additional funds in our Offering, the more likely it will be that we will not be able to achieve significant diversification and the likelihood of our profitability being affected by the performance of any one of our investments will increase. We are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. Your investment in our Common Shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments. In addition, to the extent we are not able to raise additional funds, our fixed operating expenses, as a percentage of gross income, would be higher, and our financial condition and ability to pay distributions could be adversely affected.
If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered.
Our success depends to a significant degree upon the continued contributions of our chairman, certain executive officers and other key personnel of us, our advisor and its affiliates. We do not have employment agreements with our chairman and executive officers, and we cannot guarantee that they will remain affiliated with us. If any of our key personnel were to cease their affiliation with us, our advisor or its affiliates, our operating results could suffer. We do not intend to maintain key person life insurance on any of our key personnel. We believe that our future success depends, in large part, upon our advisor’s and its affiliates’ ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for persons with these skills is intense, and we cannot assure you that our advisor will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered.
If we internalize our management functions, your interest in us could be diluted, and we could incur other significant costs associated with being self-managed.
Our strategy may involve becoming ‘‘self-managed’’ by internalizing our management functions, particularly if we seek to list our Common Shares on an exchange as a way of providing our stockholders with a liquidity event. The method by which we could internalize these functions could take many forms. We may hire our own group of executives and other employees or we may elect to negotiate to acquire our advisor’s and property managers’ assets and personnel. At this time, we cannot be sure of the form or amount of consideration or other terms relating to any such acquisition. Such consideration could take many forms, including cash payments, promissory notes and shares of our stock. An internalization transaction could result in significant payments to affiliates of our advisor irrespective of whether you enjoyed the returns on which we have conditioned our subordinated share of annual cash flows. The payment of such consideration could result in dilution of your interests as a stockholder and could reduce the net income per Common Share and modified funds from operations per Common Share attributable to your investment. We will not be required to seek a stockholder vote to become self-managed.
In addition, our direct expenses would include general and administrative costs, including legal, accounting and other expenses related to corporate governance and SEC reporting and compliance. If stockholders or other interested parties file a lawsuit related to, or challenging, an internalization transaction, we could incur high litigation costs that would adversely affect the value of your Common Shares. We also would incur the compensation and benefits costs of our officers and other employees and consultants that are now paid by our advisor or its affiliates. We cannot reasonably estimate the amount of fees to our advisor and its affiliates we would save and the costs we would incur if we became self-managed. If the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to our advisor and its affiliates, our net income per Common Share and funds from operations per Common Share would be lower as a result of the internalization than it otherwise would have been, potentially decreasing the amount of funds available to distribute to our stockholders and the value of our Common Shares.
As currently organized, we do not directly employ any employees. If we elect to internalize our management functions, we would employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances. Nothing in our charter prohibits us from entering into the transaction described above.
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Additionally, there is no assurance that internalizing our management functions will prove to be beneficial to us and our stockholders. We could have difficulty integrating our management functions as a stand-alone entity. Certain personnel of our advisor and its affiliates perform property management, asset management and general and administrative functions, including accounting and financial reporting, for multiple entities. We could fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs or suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our portfolio of investments.
If we were to internalize our management or if another investment program, whether sponsored by our sponsor or otherwise, hires the employees of our advisor or our property managers in connection with its own internalization transaction or otherwise, our ability to conduct our business may be adversely affected.
We rely on persons employed by our advisor and its affiliates to manage our day-to-day operations. If we were to effectuate an internalization of our advisor or our property managers, we may not be able to retain all the employees of our advisor or property managers or to maintain a relationship with our sponsor. In addition, some of the employees of the advisor or property managers may provide services to one or more other investment programs. These programs or third parties may decide to retain some of or all our advisor’s or property managers’ key employees in the future. If this occurs, these programs could hire certain of the persons currently employed by our advisor or property managers who are most familiar with our business and operations, thereby potentially adversely impacting our business.
Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that no independent director will be liable to us or our stockholders for monetary damages and that we will generally indemnify them for losses unless they are grossly negligent or engage in willful misconduct. As a result, you and we may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce your and our recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees and agents) in some cases, which would decrease the cash otherwise available for distributions to you.
If our advisor or its affiliates waive certain fees due to them, our results of operations and distributions may be artificially high.
From time to time, our advisor or its affiliates may agree to waive all or a portion of the acquisition, asset management or other fees, compensation or incentives due to them, pay general administrative expenses or otherwise supplement stockholder returns in order to increase the amount of cash available to make distributions to stockholders. If our advisor or its affiliates choose to no longer waive such fees and incentives, our results of operations will be lower than in previous periods and your return on your investment could be negatively affected.
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On March 27, 2017, our board of directors established our most current estimated NAV per share as of December 31, 2016. We currently expect that our advisor will estimate our NAV on a quarterly basis, but our advisor will estimate our NAV on at least an annual basis, and such estimated NAV per share may be lower than the purchase price you pay for Common Shares in our Offering. The estimated NAV per share may not be an accurate reflection of the fair value of our assets and liabilities and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved or completed a merger or other sale of our Company.
Recent amendments to rules promulgated by FINRA required us to disclose an estimated NAV per share of our Common Shares no later than May 10, 2017, which would have been 150 days following the second anniversary of the date on which we broke escrow in this offering. On May 13, 2016, our board of directors established our initial estimated NAV per Common Share as of March 31, 2016 and on March 27, 2017 our board of directors established our most current estimated NAV per Common Share as of December 31, 2016. We currently expect that our advisor will estimate our NAV on a quarterly basis, but our advisor will estimate our NAV on at least an annual basis. Our board of directors may determine to modify the offering price, including the price at which the shares are offered pursuant to the DRIP, to reflect the most current estimated NAV per Common Share.
The price at which you purchase shares and any subsequent estimated values are likely to differ from the price at which a stockholder could resell such shares because: (i) there is no public trading market for our shares at this time; (ii) the purchase price does not reflect, and will not reflect, the fair value of our assets as we acquire them, nor does it represent the amount of net proceeds that would result from an immediate liquidation of our assets or sale of our Company, because the amount of proceeds available for investment from our offering is net of selling commissions, dealer manager fees, other organizational and offering expense reimbursements and acquisition fees and expenses; (iii) the estimated value does not take into account how market fluctuations affect the value of our investments, including how the current conditions in the financial and real estate markets may affect the values of our investments; (iv) the estimated value does not take into account how developments related to individual assets may increase or decrease the value of our portfolio; and (v) the estimated value does not take into account any portfolio premium or premiums to value that may be achieved in a liquidation of our assets or sale of our portfolio or what a third party would pay to acquire our assets.
Risks Related to Conflicts of Interest
We will be subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
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Our advisor and its affiliates, including all our executive officers and some of our directors, will face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
Our advisor and its affiliates, including the special limited partner, are entitled to substantial fees and liquidation distributions from us. These fees could influence our advisor’s advice to us as well as the judgment of affiliates of our advisor performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
| • | the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and property management agreements, because our advisor and any of its affiliates that serve as property managers have an incentive to continue receiving fees under these agreements; |
| • | public offerings of equity by us, which will likely entitle our advisor to increased asset management subordinated participation and to increased acquisition, financing coordination and asset management fees; |
| • | property sales, which may result in compensation to our advisor in the form of real estate disposition commissions; |
| • | property acquisitions from third parties, which entitle our advisor to acquisition fees, asset management subordinated participation and asset management fees, which are not calculated based on investment quality, and which could encourage our advisor to purchase assets at higher prices; |
| • | whether to construct improvements on our properties, which would entitle our property managers to construction management fees, and whether to maximize the estimated costs of improvements, since construction management fees are initially calculated in part based on budgeted amounts; |
| • | whether to lease to a less creditworthy tenant, since our property managers will receive leasing fees regardless of tenant quality, and a default by a tenant under its lease obligations may give the respective property manager an opportunity to earn an additional leasing fee; |
| • | borrowings to acquire properties, which borrowings may increase the acquisition, asset management and financing coordination fees and the asset management subordinated participation payable to our advisor; |
| • | determining the compensation paid to employees for services provided to us, which could be influenced in part by whether our advisor is reimbursed by us for the related salaries and benefits; |
| • | whether we seek to internalize our management functions, which internalization could result in our retaining some of our advisor’s and its affiliates’ key officers and employees for compensation that is greater than that which they currently earn or which could require additional payments to affiliates |
of our advisor to purchase the assets and operations of our advisor and its affiliates;
| • | whether and when we seek to liquidate or to list our Common Shares on a national securities exchange, which events may entitle the special limited partner to receive liquidation distributions; and |
| • | whether and when to terminate the advisory agreement or to allow the advisory agreement to expire without renewal (even for poor performance by our advisor), in either case with or without cause, either of which may entitle the special limited partner to (a) receive cash in an amount equal to its net investment, or (b) retain the subordinated participation interests, and in the case of (a), to receive liquidation distributions as well. |
The fees our advisor receives in connection with transactions involving the purchase and management of an asset may be based on the contract purchase price or the book value of the investment rather than the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us.
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Our advisor and the special limited partner face conflicts of interest relating to the incentive fee structure, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under our advisory agreement and our operating partnership’s limited partnership agreement, our advisor and the special limited partner will be entitled to fees and distributions that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. However, because our advisor is entitled to receive substantial minimum compensation regardless of performance, our advisor’s interests are not wholly aligned with those of our stockholders. In that regard, our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance that would entitle our advisor or the special limited partner to incentive compensation. In addition, our advisor’s entitlement to fees upon the sale, other disposition or refinancing of our assets could result in our advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. The limited partnership agreement of our operating partnership requires us to pay a performance-based liquidation distribution to the special limited partner if we liquidate, list or terminate our advisor. To avoid paying this distribution, our independent directors may decide against the liquidation, listing or termination of our advisor even if, but for the liquidation distribution, such event would be in our best interest. Additionally, under the limited partnership agreement of our operating partnership, upon termination or non-renewal of the advisory agreement, even for poor performance by our advisor, the special limited partner will be entitled to (a) receive cash in an amount equal to its net investment, or (b) retain the subordinated participation interests, which also may influence our independent directors to decide against terminating our advisor. In addition, our advisor will be entitled to an annual subordinated performance fee for any year in which holders of our Common Shares receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on their respective net investments. Our advisor will be entitled to 15.0% of the amount in excess of such 6.0% per annum return; provided, that the amount paid to our advisor will not exceed 10.0% of the aggregate return for such year; and provided, further, that the amount paid to our advisor will not be paid unless holders of our Common Shares receive a return of their respective net investments. The potential to earn an annual subordinated performance fee may encourage our advisor to acquire riskier assets or to dispose of investments earlier than they should be disposed of.
Our advisor will receive an annual subordinated performance fee for years in which a specified return to holders of our Common Shares is achieved. However, if the return is not achieved in subsequent years, and even if our company suffers a loss, our advisor will not be obligated to return to our company any portion of the annual subordinated performance fee it has received.
We will pay our advisor an annual subordinated performance fee calculated on the basis of our annual return to stockholders, payable annually in arrears, such that for any year in which holders of our Common Shares receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on their respective net investments, our advisor will be entitled to 15.0% of the amount in excess of such 6.0% per annum return; provided, that the amount paid to our advisor will not exceed 10.0% of the aggregate return for such year; and provided, further, that the amount paid to our advisor will not be paid unless holders of our Common Shares receive a return of their respective net investments. This fee will be payable only out of realized appreciation in our assets upon their sale, other disposition or refinancing.
However, if such 6.0% per annum return is not achieved in subsequent years, and even if our company suffers a loss, our advisor will not be obligated to return to our company any portion of the annual subordinated performance fee it has received. We cannot assure you that we will provide such 6.0% per annum return, which we have disclosed solely as a measure for our advisor’s incentive compensation.
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Our sponsor’s other public programs, Lightstone I, Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), Lightstone Real Estate Income Trust Inc. (“Lightstone IV”) and Hamilton National Income Trust, Inc. (“HNIT”and collectively, “Sponsor’s Other Public Programs”), may be engaged in competitive activities, including the ownership of hotels in our target markets. Additionally, on February 10, 2017, an affiliate of our sponsor became the advisor of Behringer Harvard Opportunity REIT I, Inc. and Behringer Harvard Opportunity REIT II, Inc. which may also be engaged in competitive activities, including the ownership of hotels in our target markets.
Our advisor and its affiliates that serve as property managers and their respective affiliates, through activities of our Sponsor’s Other Public Programs, may be engaged in other activities that could result in potential conflicts of interest with the services that they will provide to us. Our Sponsor’s Other Public Programs may compete with us for both the acquisition and refinancing of hotels and other properties of a type suitable for our investment. In addition, we may compete with our Sponsor’s Other Public Programs for franchise or license arrangements with hotel brands in some of or all our target hotel markets.
Our advisor will face conflicts of interest relating to joint ventures, tenant-in-common investments or other co-ownership arrangements that we may enter into with affiliates of our sponsor or advisor or with other programs sponsored by our sponsor or advisor, which could result in a disproportionate benefit to affiliates of our sponsor or advisor or to another program.
We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with other programs also sponsored by The Lightstone Group, LLC (“Lightstone”) for the acquisition, development or improvement of properties as well as the acquisition of real estate-related investments. The executive officers of our advisor are also the executive officers of other real estate investment vehicles, and may in the future sponsor or be the executive officers of other REITs and their advisors, the general partners of other Lightstone-sponsored partnerships or the advisors or fiduciaries of other Lightstone-sponsored programs. These executive officers will face conflicts of interest in determining which Lightstone-sponsored program should enter into any particular joint venture, tenant-in-common or co-ownership arrangement. These persons also may have a conflict in structuring the terms of the relationship between our interests and the interests of the Lightstone-sponsored co-venturer, co-tenant or partner as well as conflicts of interest in managing the joint venture. Further, the fiduciary obligations that our advisor or our board of directors may owe to a co-venturer, co-tenant or partner affiliated with our sponsor or advisor may make it more difficult for us to enforce our rights.
If we enter into a joint venture, tenant-in-common investment or other co-ownership arrangements with another program (whether sponsored by our advisor or by our sponsor or its affiliates) or joint venture, our advisor and its affiliates may have a conflict of interest when determining when and whether to buy or sell a particular real estate property, exercise buy/sell rights or make other major decisions, and you may face certain additional risks. For example, if we become listed for trading on a national securities exchange, and any of the other programs sponsored by our advisor or our sponsor or its affiliates are not traded on any exchange, we may develop more divergent goals and objectives from such joint venturer with respect to the sale of properties in the future. In addition, if we enter into a joint venture with another program sponsored by our advisor or our sponsor or their respective affiliates that has a term shorter than ours, the joint venture may be required to sell its properties at the time of the other program’s liquidation. We may not desire to sell the properties at such time. Even if the terms of any joint venture agreement between us and another program sponsored by our advisor or our sponsor or their respective affiliates grant us a right of first refusal to buy such properties, we may not have sufficient funds to exercise our right of first refusal under these circumstances.
Because Lightstone and its affiliates control us and would control any other Lightstone-sponsored programs, agreements and transactions among the parties with respect to any joint venture, tenant-in-common investment or other co-ownership arrangement between or among such parties will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers. Under these joint ventures, neither co-venturer may have the power to control the venture, and under certain circumstances, an impasse could be reached regarding matters pertaining to the co-ownership arrangement, which might have a negative influence on the joint venture and decrease potential returns to you. If a co-venturer has a right of first refusal to buy out the other co-venturer, it may be unable to finance such buyout at that time. If our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase an interest of a co-venturer subject to the buy/sell right, in which case we may be forced to sell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest. Furthermore, we may not be able to sell our interest in a joint venture if we desire to exit the venture for any reason or, if our interest is likewise subject to a right of first refusal of our co-venturer or partner, our ability to sell such interest may be adversely impacted by such right.
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If we use debt to finance the acquisition of investments, we may pay our advisor twice with respect to such debt, which would adversely affect our operating results and may encourage our advisor to maximize its use of debt financing for acquisitions of investments.
We will pay to our advisor or its affiliates 1.0% of the contract purchase price of each property acquired, which amount includes our pro rata share (direct or indirect) of debt attributable to such property, or 1.0% of the amount advanced for a loan or other investment, which amount includes our pro rata share (direct or indirect) of debt attributable to such investment, as applicable. Further, if our advisor provides services in connection with the financing of an asset, assumption of a loan in connection with the acquisition of an asset or origination or refinancing of any loan on an asset, we will pay our advisor or its assignees a financing coordination fee equal to 0.75% of the amount available or outstanding under such financing. There is nothing to prevent our advisor from receiving both acquisition fees and financing coordination fees with respect to the amount of acquisition financing with respect to a property that we acquire. Such double payment would adversely affect our operating results and may encourage our advisor to maximize its use of debt financing for acquisitions of investments.
Our advisor’s executive officers and key personnel and the executive officers and key personnel of Lightstone-affiliated entities that conduct our day-to-day operations and our offering will face competing demands on their time, and this may cause our investment returns to suffer.
We rely upon the executive officers of our advisor and the executive officers and employees of Lightstone-affiliated entities to conduct our day-to-day operations and our offering. These persons also conduct the day-to-day operations of other investment programs and may in the future also conduct the day-to-day operations of other programs we sponsor and may have other business interests as well. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.
Our officers face conflicts of interest related to the positions they hold with entities affiliated with our advisor, which could diminish the value of the services they provide to us.
Certain of our executive officers are also officers of our advisor, our advisor’s affiliates that may serve as our property managers and other entities affiliated with our advisor, which may include the advisors and fiduciaries to other Lightstone-sponsored programs. As a result, these individuals owe fiduciary duties to these other entities and their investors, which may conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) the timing and terms of the investment in or sale of an asset, (c) development of our properties by affiliates of our advisor, (d) investments with affiliates of our advisor, (e) compensation to our advisor and its affiliates, and (f) our relationships with our property managers. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to you and to maintain or increase the value of our assets.
Because we rely on affiliates of Lightstone for the provision of advisory and property management services, if Lightstone or its majority owner are unable to meet their obligations, we may be required to find alternative providers of these services, which could result in a significant and costly disruption of our business.
David Lichtenstein, the majority owner of Lightstone, directly or indirectly owns and controls our advisor and its affiliates that may serve as our property managers. The operations of our advisor and its affiliates that serve as our property managers rely substantially on Mr. Lichtenstein and on Lightstone. Lightstone and its majority owner are dependent on fee income from their other sponsored real estate programs. Real estate market disruptions could adversely affect the amount of such fee income. If Lightstone or its majority owner become unable to meet their obligations as they become due, we might be required to find alternative service providers, which could result in a significant disruption of our business and would likely adversely affect the value of your investment in us.
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Because title insurance services may be provided by a related party, our advisor may face a conflict of interest when considering the terms of title insurance policies that it may purchase.
From time to time, we may purchase title insurance from an agent in which our sponsor owns a fifty percent limited partnership interest. Because this title insurance agent will receive significant fees for providing title insurance, our advisor may face a conflict of interest when considering the terms of title insurance policies that it may purchase.
Members of our board of directors are also on the board of directors of our Sponsor’s Other Public Programs.
Certain of our directors are also directors of our Sponsor’s Other Public Programs. Accordingly, each of our directors owes fiduciary duties to our Sponsor’s Other Public Programs and their respective stockholders. The duties of our directors to our Sponsor’s Other Public Programs may influence the judgment of our board of directors when considering issues that may affect us. For example, we are permitted to enter into a joint venture or preferred equity investment with our Sponsor’s Other Public Programs for the acquisition of property or real estate-related investments. Decisions of our board of directors regarding the terms of those transactions may be influenced by our directors’ duties to our Sponsor’s Other Public Programs and their respective stockholders.
Risks Related to Our Business in General
A limit on the number of shares a person may own may discourage a takeover of our company.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Our charter prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding Common Shares, unless exempted by our board of directors (prospectively or retroactively), which may inhibit large investors from purchasing your Common Shares. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide stockholders with the opportunity to receive a control premium for their Common Shares.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our Common Shares or discourage a third party from acquiring us.
Our charter permits our board of directors to issue up to 200.0 million Common Shares and up to 50.0 million shares of preferred stock, $0.01 par value per share. Our board of directors, without any action by our stockholders, may (a) amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series we have authority to issue or (b) classify or reclassify any unissued Common Shares or shares of preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms and conditions of the repurchase of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our Common Shares, or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our Common Shares.
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Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.
Under Maryland law, ‘‘business combinations’’ between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer, an issuance or reclassification of equity securities, liquidations or dissolutions in which an interested stockholder will receive something other than cash and any loans, advances, pledges, guarantees or similar arrangements in which an interested stockholder receives a benefit. An interested stockholder is defined as:
| • | any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the then outstanding voting stock of the corporation; or |
| • | an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation. |
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the expiration of the five-year period described above, any business combination between a Maryland corporation and an interested stockholder must generally be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
| • | 80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation voting together as a single group; and |
| • | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder voting together as a single group. |
These supermajority vote requirements do not apply if the corporation’s holders of voting stock receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law also limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors.
Maryland law provides that ‘‘control shares’’ of a Maryland corporation acquired in a ‘‘control share acquisition’’ have no voting rights except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the acquirer, by officers or by employees who are directors of the corporation, are excluded from the vote on whether to accord voting rights to the control shares. ‘‘Control shares’’ are voting shares of stock that would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A ‘‘control share acquisition’’ means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by a corporation’s charter or bylaws. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. We can offer no assurance that this provision will not be amended or eliminated at any time in the future. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our affiliates or any of their affiliates.
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Our charter includes a provision that may discourage a stockholder from launching a tender offer for our Common Shares.
Our charter provides that any tender offer made by a stockholder, including any ‘‘mini-tender’’ offer, must comply with most provisions of Regulation 14D of the Exchange Act. The offering stockholder must provide our company notice of such tender offer at least ten business days before initiating the tender offer. A stockholder may not transfer any shares to an offering stockholder who does not comply with these requirements unless such stockholder first offers such shares to us at a price equal to the greater of the tender offer price offered in such tender offer or the repurchase price under our share repurchase program as it is in effect at such time. In addition, the non-complying stockholder shall be responsible for all our company’s expenses in connection with that stockholder’s noncompliance. This provision of our charter may discourage a stockholder from initiating a tender offer for our Common Shares and prevent you from receiving a premium price for your Common Shares in such a transaction.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
The company is not registered, and does not intend to register itself or any of its subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register the company or any of its subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
| • | limitations on capital structure; |
| • | restrictions on specified investments; |
| • | prohibitions on transactions with affiliates; and |
| • | compliance with reporting, recordkeeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations. |
The company intends to conduct its operations, directly and through wholly owned or majority-owned subsidiaries, so that the company and each of its subsidiaries is not an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an ‘‘investment company’’ if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an ‘‘investment company’’ if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or propose to acquire ‘‘investment securities’’ having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. Rule 3a-1 under the Investment Company Act, however, generally provides that, notwithstanding Section 3(a)(1)(C) of the Investment Company Act, an issuer will not be deemed to be an ‘‘investment company’’ under the Investment Company Act; provided, that (a) it does not hold itself out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting or trading in securities, and (b) on an unconsolidated basis no more than 45% of the value of its total assets, consolidated with the assets of any wholly owned subsidiary (exclusive of U.S. government securities and cash items), consists of, and no more than 45% of its net income after taxes, consolidated with the net income of any wholly owned subsidiary (for the last four fiscal quarters combined), is derived from, securities other than U.S. government securities, securities issued by employees’ securities companies, securities issued by certain majority-owned subsidiaries of such company and securities issued by certain companies that are controlled primarily by such company. We believe that we, our operating partnership and the subsidiaries of our operating partnership will satisfy this exclusion.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of ‘‘investment company’’ and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. Our advisor will continually review our investment activity to attempt to ensure that we will not be regulated as an investment company.
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If we were required to register the company as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Rapid changes in the values of potential investments in real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or our exception from the Investment Company Act.
If the market value or income potential of our real estate-related investments declines, including as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income or liquidate our non-qualifying assets in order to maintain our REIT qualification or our exception from registration under the Investment Company Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under our charter and the Maryland General Corporation Law, our stockholders generally have a right to vote only on the following matters:
| • | the election or removal of directors; |
| • | any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to: |
| • | change our name; |
| • | increase or decrease the aggregate number of shares that we have the authority to issue; |
| • | increase or decrease the number of our shares of any class or series that we have the authority to issue; and |
| • | effect reverse stock splits; |
| • | our liquidation and dissolution; and |
| • | our being a party to any merger, consolidation, sale or other disposition of all or substantially all of our assets or statutory share exchange. |
All other matters are subject to the discretion of our board of directors.
Our board of directors may change our investment policies and objectives generally and at the individual investment level without stockholder approval, which could alter the nature of your investment.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of the stockholders. In addition to our investment policies and objectives, we also may change our stated strategy for any investment in an individual property. These policies may change over time. The methods of implementing our investment policies also may vary, as new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent.
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We may not successfully implement our exit strategy, in which case you may have to hold your investment for an indefinite period.
Depending upon then-prevailing market conditions, it is our intention to consider beginning the process of liquidating our assets and distributing the net proceeds to our stockholders within six to nine years after the termination of our initial public offering. If we do not begin the process of achieving a liquidity event by the eighth anniversary of the termination of our offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.
Market conditions and other factors could cause us to delay the commencement of our liquidation or to delay the listing of our Common Shares on a national securities exchange beyond eight years from the termination of our initial public offering. If so, our board of directors and our independent directors may conclude that it is not in our best interest to hold a stockholders meeting for the purpose of voting on a proposal for our orderly liquidation. Therefore, if we are not successful in implementing our exit strategy, your Common Shares will continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment into cash easily with minimum loss.
Your interest will be diluted if we issue additional securities.
Stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently authorizes us to issue 250.0 million shares of capital stock, of which 200.0 million shares are classified as Common Shares and 50.0 million shares are classified as preferred stock. Our board of directors may amend our charter from time to time to increase or decrease the number of authorized shares of capital stock, or the number of authorized shares of any class or series of stock designated, and may classify or reclassify any unissued shares into one or more classes or series without the necessity of obtaining stockholder approval. Shares will be issued at the discretion of our board of directors. Stockholders will likely experience dilution of their equity investment in us if we: (a) sell Common Shares in the Offering or sell additional Common Shares in the future, including those issued pursuant to our DRIP; (b) sell securities that are convertible into Common Shares; or (c) issue Common Shares to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our operating partnership. In addition, the operating partnership agreement for our operating partnership contains provisions that allow, under certain circumstances, other entities, including other Lightstone-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of our operating partnership. Because the limited partnership interests in our operating partnership may be exchanged for Common Shares, any merger, exchange or conversion of our operating partnership and another entity ultimately could result in the issuance of a substantial number of Common Shares, thereby diluting the percentage ownership interest of other stockholders.
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We are an ‘‘emerging growth company’’ under the federal securities laws and will be subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an ‘‘emerging growth company,’’ as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We could remain an ‘‘emerging growth company’’ for up to five years, or until the earliest to occur of (1) the last day of the first fiscal year in which we have total annual gross revenue of $1 billion or more, (2) December 31 of the fiscal year that we become a ‘‘large accelerated filer’’ as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our Common Shares held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) and (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with new audit rules adopted by the Public Company Accounting Oversight Board after April 5, 2012 ( unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold shareholder advisory votes on executive compensation. We have not yet made a decision as to whether to take advantage of some of the JOBS Act exemptions that are applicable to us. If we do avail ourselves of any of such exemptions, we do not know if some investors will find our common stock less attractive as a result.
Additionally, the JOBS Act provides that an ‘‘emerging growth company’’ may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an ‘‘emerging growth company’’ can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we are electing to ‘‘opt out’’ of such extended transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
We disclose funds from operations, or FFO, and modified funds from operations, or MFFO, which are non-GAAP financial measures, in communications with investors, including documents filed with the SEC; however, FFO and MFFO are not equivalent to our net income or loss as determined under GAAP, and you should consider GAAP measures to be more relevant to our
operating performance.
We use internally and disclose to investors FFO and MFFO, which are non-GAAP financial measures, as additional measures of our operating performance. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) a trade group. We compute MFFO in accordance with the definition established by the Investment Program Association, another trade group. However, our computation of FFO and MFFO may not be comparable to that of other REITs that do not calculate FFO or MFFO using these definitions without further adjustments.
Neither FFO nor MFFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP and should not be considered as an alternative to net income, as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
Payment of fees to our advisor and its affiliates reduces cash available for investment and payment of distributions.
Our advisor and its affiliates perform services for us in connection with, among other things, the selection, financing and acquisition of our investments, the construction, development, management and leasing of our properties, the servicing of our mortgage, bridge, mezzanine or other loans, the administration of our other investments and the disposition of our assets. They will be paid substantial fees for these services. These fees will reduce the amount of cash available for investment or distributions to stockholders.
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Distributions may be paid from capital and there can be no assurance that we will be able to achieve expected cash flows necessary to continue to pay initially established distributions or maintain distributions at any particular level, or that distributions will increase over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions generally will be based upon such factors as the amount of cash available or anticipated to be available from real estate investments and real estate-related securities, mortgage, bridge or mezzanine loans and other investments, current and projected cash requirements and tax considerations. Because we may receive income from interest or rents at various times during our fiscal year, distributions paid may not reflect our income earned in that particular distribution period. The amount of cash available for distributions will be affected by many factors, such as our ability to make acquisitions as offering proceeds become available, the income from those investments and yields on securities of other real estate programs that we invest in, and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We can give no assurance that we will be able to achieve our anticipated cash flow or that distributions will increase over time. Nor can we give any assurance that rents from the properties will increase, that the securities we buy will increase in value or provide constant or increased distributions over time, that loans we make will be repaid or paid on time, that loans will generate the interest payments that we expect, or that future acquisitions of real properties, mortgage, bridge or mezzanine loans, other investments or our investments in securities will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rates to stockholders.
Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to pay future distributions. For instance:
| • | If one or more tenants defaults or terminates its lease, there could be a decrease or cessation of rental payments, which would mean less cash available for distributions. |
| • | Any failure by a borrower under our mortgage, bridge or mezzanine loans to repay the loans or interest on the loans will reduce our income and distributions to stockholders. |
| • | Cash available for distributions may be reduced if we are required to spend money to correct defects or to make improvements to properties. |
| • | Cash available to make distributions may decrease if the assets we acquire have lower yields than expected. |
| • | There may be a delay between the sale of the Common Shares and our purchase of real properties. During that time, we may invest in lower-yielding short-term instruments, which could result in a lower yield on your investment. |
| • | If we lend money to others, such funds may not be repaid in accordance with the loan terms or at all, which could reduce cash available for distributions. |
| • | U.S. federal income tax law requires that a REIT distribute annually to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to dividends paid and excluding net capital gain, to maintain REIT status, and 100% of REIT taxable income and net capital gain to avoid U.S. federal income tax. This limits the earnings that we may retain for corporate growth, such as property acquisition, development or expansion and makes us more dependent upon additional debt or equity financing than corporations that are not REITs. If we borrow funds in the future, more of our operating cash will be needed to make debt payments and cash available for distributions may therefore decrease. |
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| • | In connection with future property acquisitions, we may issue additional Common Shares, interests in our operating partnership or interests in other entities that own our properties. We cannot predict the number of Common Shares, units or interests that we may issue, or the effect that these additional Common Shares might have on cash available for distributions to you. If we issue additional Common Shares, they could reduce the cash available for distributions to you. |
| • | In connection with future property acquisitions which are under development, construction or repositioning, we may experience budget overruns; delays in completion; failure of a contractor or sub-contractor, construction risks including damage, vandalism or accidents; a change in market conditions before such project is ready to be placed in use; the placement of liens on our properties as a result of construction disputes, and numerous additional development, construction and repositioning risks, any of which could require expenditure of more cash than anticipated, increase our borrowings and costs of such borrowings, delay the commencement of cash flow or reduce cash available for distribution. |
| • | We make distributions to our stockholders to comply with the distribution requirements of the Code and to eliminate, or at least minimize, exposure to federal income taxes and the nondeductible REIT excise tax. Differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. |
In addition, our board of directors, in its discretion, may retain any portion of our cash on hand for working capital. We cannot assure you that sufficient cash will be available to make distributions to you.
Development projects in which we invest may not be completed successfully or on time, and guarantors of the projects may not have the financial resources to perform their obligations under the guaranties
they provide.
We may make equity investments in, acquire options to purchase interests in or make mezzanine loans to the owners of real estate development projects. Our return on these investments is dependent upon the projects being completed successfully, on budget and on time. To help ensure performance by the developers of properties that are under construction, completion of these properties is generally guaranteed either by a completion bond or performance bond. Our advisor may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the entity entering into the construction or development contract as an alternative to a completion bond or performance bond. For a particular investment, we may obtain guaranties that the project will be completed on time, on budget and in accordance with the plans and specifications and that the mezzanine loan will be repaid. However, we may not obtain such guaranties and cannot ensure that the guarantors will have the financial resources to perform their obligations under the guaranties they provide. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to you will be adversely affected.
We are uncertain of our sources for funding of future capital needs, which could adversely affect the value of our investments.
Substantially all the gross proceeds of our offering will be used to make investments in real estate and real estate-related assets and to pay various fees and expenses related to our offering. We will establish capital reserves on a property-by-property basis, as we deem appropriate. In addition to any reserves we establish, a lender may require escrow of capital reserves in excess of our established reserves. If these reserves are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. Accordingly, if we develop a need for additional capital in the future for the improvement of our properties or for any other reason, we have not identified any sources for such funding, and we cannot assure you that such sources of funding will be available to us for potential capital needs in the future.
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We may suffer adverse consequences due to the financial difficulties, bankruptcy or insolvency of our tenants.
The current economic conditions may cause the tenants in any properties we own to experience financial difficulties, including bankruptcy, insolvency or a general downturn in their business. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.
The Federal Deposit Insurance Corporation, or FDIC, only insures limited amounts per depositor per insured bank. In the future, we may deposit cash, cash equivalents and restricted cash in certain financial institutions in excess of federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over the federally insured levels. The loss of our deposits could reduce the amount of cash we have available to distribute or invest and could result in a decline in the value of your investment.
Market disruptions could adversely impact aspects of our operating results and operating condition.
Market disruptions, including recessions, reduced consumer spending, sovereign downgrades and lack of credit, could reduce demand for hotel space and remove support for rents and property values. The value of our properties may decline if any such market conditions were to emerge.
Our business could be affected by future market and economic challenges experienced by the U.S. economy. These conditions could materially affect the value and performance of our properties, and could affect our ability to pay distributions, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due. Any such challenging economic conditions also could impact the ability of certain of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. Specifically, market disruptions could have any of the following adverse consequences:
| • | the financial condition of tenants occupying the properties we acquire could be adversely affected, which could result in us having to increase concessions, reduce rental rates or make capital improvements beyond those contemplated at the time we acquired the properties in order to maintain occupancy levels or to negotiate for reduced space needs, which could result in a decrease in our occupancy levels; |
| • | significant job losses could occur, which could decrease demand for office space, multifamily communities and hospitality properties and result in lower occupancy levels, which could result in decreased revenues for properties that we acquire, which could diminish the value of such properties that depend, in part, upon the cash flow generated by such properties; |
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| • | there could be an increase in the number of bankruptcies or insolvency proceedings of tenants and lease guarantors, which could delay our efforts to collect rent and any past due balances under the relevant leases and ultimately could preclude collection of these sums; |
| • | credit spreads for major sources of capital could widen if investors demanded higher risk premiums, resulting in lenders increasing the cost for debt financing; |
| • | our ability to borrow on terms and conditions that we found acceptable, or at all, could be limited, which could result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders, reduce our ability to pursue acquisition opportunities if any, and increase our interest expense; |
| • | there could be a reduction in the amount of capital available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real estate transaction activity, reduce the loan-to-value ratio upon which lenders are willing to lend, and make sourcing or refinancing our debt more difficult; |
| • | the value of certain properties we may acquire could decrease below the amounts we paid for them, which could limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and could reduce the availability of unsecured loans; |
| • | to the extent that we may use or purchase derivative financial instruments, one or more counterparties to such derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of those instruments; and |
| • | the value and liquidity of our short-term investments could be reduced as a result of dislocations in the markets for our short-term investments and increased volatility in market rates for such investments or other factors. |
To hedge against exchange rate and interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective and may reduce the overall returns on your investment and affect cash available for distribution to our stockholders.
We may use derivative financial instruments to hedge exposures to changes in exchange rates and interest rates on loans secured by our assets and investments in real estate-related assets. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time. Our hedging may fail to protect or could adversely affect us because, among other things:
| • | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |
| • | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; |
| • | the duration of the hedge may not match the duration of the related liability or asset; |
| • | the amount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by federal income tax provisions governing REITs; |
| • | the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; |
| • | the party owing money in the hedging transaction may default on its obligation to pay; and |
| • | we may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out of the money. |
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended accounting treatment and may expose us to risk of loss.
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To the extent that we use derivative financial instruments to hedge against exchange rate and interest rate fluctuations, we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to you will be adversely affected.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.
The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to recordkeeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then-current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot be certain that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
There can be no assurance that the direct or indirect effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010 for the purpose of stabilizing or reforming the financial markets, will not have an adverse effect on our interest rate hedging activities.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) became law in the United States. Title VII of the Dodd-Frank Act contains a sweeping overhaul of the regulation of privately negotiated derivatives. The provisions of Title VII became effective on July 16, 2011 or, with respect to particular provisions, on such other date specified in the Dodd-Frank Act or by subsequent rulemaking. While the full impact of the Dodd-Frank Act on our interest rate hedging activities cannot be assessed until implementing rules and regulations are promulgated, the requirements of Title VII may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions, and may result in us entering into such transactions on more unfavorable terms than prior to effectiveness of the Dodd-Frank Act. The occurrence of any of the foregoing events may have an adverse effect on our business.
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The provision of advisory services to us could require our advisor to register with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, (the “Advisers Act”) which could impact the types of investments that it recommends to us and cause us not to invest in opportunities that meet our investment criteria. If our advisor were required to register, it also could hinder our operating performance and negatively impact our business and subject our advisor to additional regulatory burdens and costs to which it is not currently subject.
Our advisor is not currently required to register as an investment adviser under the Advisers Act. Furthermore, we believe that if our advisor advises us consistent with the strategy adopted by our board of directors, our advisor will not be required to register under the Advisers Act even as a result of changes to the Advisers Act implemented by the Dodd-Frank Act, which became effective in July 2011. As a result of the Dodd-Frank Act, many investment advisers that previously relied on the private adviser exemption under the Advisers Act, which was repealed by the Dodd-Frank Act, may need to register as an investment adviser with the SEC, or seek an exemption from registration. Given the changes instituted by the Dodd-Frank Act, an investment adviser may be required to register with the SEC as an investment adviser if it has regulatory assets under management in excess of relevant statutory thresholds (or meets other statutory requirements), even if it manages only a single client. Whether an adviser has sufficient regulatory assets under management to require registration depends on the nature of the assets it manages. In calculating regulatory assets under management, we must include the value of each ‘‘securities portfolio’’ we manage. If our investments were to constitute a ‘‘securities portfolio’’ under the Advisers Act, then our advisor would be required to register. Specifically, we believe that our assets will not constitute a securities portfolio so long as a majority of the assets consist of originated loans, real estate and cash and the assets do not currently constitute a securities portfolio. Since we do not believe our assets will constitute a securities portfolio, we do not believe we have any regulatory assets under management, and therefore our advisor does not need to register. Our advisor intends to manage our investments so that they will continue not to constitute a securities portfolio in the future. In so doing, it is possible that we could determine not to seek certain commercial real estate debt and securities available on the secondary market that we might otherwise consider. In such a scenario, we may not invest in opportunities that could improve our operating performance. If our board of directors determines to modify our strategy in such a way as to make it likely that our advisor would be required to register under the Advisers Act, our business may be negatively affected because our advisor may, among other things, have to devote significant additional management time, may incur significant additional costs and may experience a reduction in revenue associated with compliance with the requirements of the Advisers Act.
Hotel Risk Factors
We are and will continue to be dependent on the third-party managers of our lodging facilities.
In order to qualify as a REIT, we are unable to operate any hotel properties that we acquire or participate in the decisions affecting the daily operations of our hotels. We will lease any hotels we acquire to a taxable REIT subsidiary (“TRS”), in which we may own up to a 100% interest. Our TRS will enter into management agreements with eligible independent contractors that are not our subsidiaries or otherwise controlled by us to manage the hotels. Thus, independent hotel operators, under management agreements with our TRS, will control the daily operations of our hotels.
We will depend on these independent management companies to adequately operate our hotels as provided in the management agreements. We will not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room and average daily rates, we may not be able to force the management company to change its method of operation of our hotels. We can only seek redress if a management company violates the terms of the applicable management agreement with the TRS, and then only to the extent of the remedies provided for under the terms of the management agreement. If we need to replace any of our management companies, we may be required by the terms of the management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
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Our probable lack of diversification in property type increases the risk of investment.
One of our primary areas of investment will be hotels. There is no limit on the number of properties of a particular hotel brand which we may acquire. The board of directors will review our properties and investments in terms of geographic and hotel brand diversification. Our profitability and our ability to diversify our investments, both geographically and by type of properties purchased, will be limited by the amount of further funds at our disposal. If our assets become geographically concentrated, an economic downturn in one or more of the markets in which we have invested could have an adverse effect on our financial condition and our ability to make distributions. A downturn in the hotel industry could have a more pronounced effect on the amount of cash available to us for distribution and on the value of our assets than if we had diversified our investments.
Adverse trends in the hotel industry may impact our properties.
Our hotels will be subject to all the risks and trends common to the hotel industry. Adverse trends in the hotel industry could adversely affect hotel occupancy and the rates that can be charged for hotel rooms. The success of our properties will depend largely on the property operators’ ability to adapt to dominant trends in the hotel industry. These trends include greater competitive pressures, increased consolidation, a supply of hotel rooms that exceeds demand due to industry overbuilding, dependence on consumer spending patterns and changing demographics, the introduction of new concepts and products, availability of labor, price levels and general economic conditions. The success of a particular hotel brand, the ability of a hotel brand to fulfill any obligations to operators of its business, and trends in the hotel industry may affect our income and the funds we have available to distribute to our stockholders.
An economic downturn and concern about terrorist activities could adversely affect the travel and lodging industries and may affect hotel operations for the hotels we acquire.
Due to an economic downturn or an increase in energy costs and other travel-related expenses, the lodging industry could experience a significant decline in business due to a reduction in travel for both business and pleasure. Consistent with the rest of the lodging industry, the hotels we acquire may experience declines in occupancy and average daily rates due to a decline in travel. Any kind of terrorist activity within the United States, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could lessen travel by the public, which could have a negative effect on any of our hotel operations. Any terrorist act directly against or affecting any of our properties would also negatively affect our operations. Our property insurance will typically cover losses for property damage to our properties if there are terrorist attacks against our properties. However, we will not be insured for losses arising from terrorist attacks against other properties or against modes of public transportation (such as airlines, trains or buses), even though such terrorist attacks may curtail travel generally and negatively affect our hotel operations.
Aggressive cost containment and a significant slowdown in the construction of new hotels could occur. In addition, continued U.S. military operations abroad or other significant military or possible terrorist activity could have additional adverse effects on the economy, including the travel and lodging industry. It is possible that these factors could have a material adverse effect on the value of the assets we acquire. Any hotels we acquire, and the business of the managers with which we contract, may be affected, including hotel occupancy and revenues, and, as a result, the revenues for the hotels we acquire may be at reduced levels to the extent that rents and other revenues received by us are calculated as a percentage of hotel revenues. Additionally, if the managers with which we contract default in their obligations to us, our revenues and cash flows may decline or be at reduced levels for extended periods. Operating with reduced revenues would have a negative impact on our cash available for distributions to stockholders.
The hotel industry is seasonal.
The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. As a result of the seasonality of the hotel industry, there may be quarterly fluctuations in results of operations of properties leased to subsidiaries. Quarterly financial results may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may need to enter into short-term borrowings in certain periods in order to offset these fluctuations in revenues and to make distributions to our stockholders.
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There may be operational limitations associated with management and franchise agreements affecting our properties and these limitations may prevent us from using these properties to their best advantage for our stockholders.
One or more TRSs will operate all our hotel properties pursuant to franchise or license agreements with nationally recognized hotel brands. These franchise agreements may contain specific standards for, and restrictions and limitations on, the operation and maintenance of our properties in order to maintain uniformity within the franchise system. We do not know whether those limitations may conflict with our ability to create specific business plans tailored to each property and to each market.
The standards are subject to change over time, in some cases at the direction of the franchisor, and may restrict our TRS’ ability, as franchisee, to make improvements or modifications to a property without the consent of the franchisor. In addition, compliance with the standards could require us or our applicable TRS, as franchisee, to incur significant expenses or capital expenditures. Action or inaction on our part or by our TRS could result in a breach of those standards or other terms and conditions of the franchise agreements and could result in the loss or cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a property, we may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the property covered by the franchise because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor.
We will face competition in the hotel industry, which may limit our profitability and return to our stockholders.
The hotel industry is highly competitive. This competition could reduce occupancy levels and rental revenues at our properties, which would adversely affect our operations. We expect to face competition from many sources. We will face competition from other hotels both in the immediate vicinity and the geographic market where our hotels will be located. Overbuilding in the hotel industry will increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in operating costs due to inflation may not be offset by increased room rates. We will also face competition from nationally recognized hotel brands with which we will not be associated.
We will also face competition for investment opportunities. Competitors may include other REITs, national hotel chains and other entities that may have substantially greater financial resources than we do. We will also face competition for investors from other REITs and real estate entities.
We may have to make significant capital expenditures to maintain our lodging properties.
Hotels have an ongoing need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. Generally, we will be responsible for the costs of these capital improvements, which gives rise to the following risks:
| • | the risk of cost overruns and delays; |
| • | the risk that renovations will be disruptive to operations and displace revenue at the hotels, including revenue lost while rooms under renovation are out of service; |
| • | risks regarding the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and |
| • | the risk that the return on our investment in these capital improvements will not be what we expect. If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow to fund future capital improvements. |
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Adverse weather conditions may affect operations of certain of the properties we acquire or reduce our operators’ ability to make scheduled rent payments to us, which could reduce our cash flow from such investments.
Adverse weather conditions may influence revenues at certain types of properties we acquire, such as some hotels and resorts. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or merely reduced rainfall levels), excessive rain and floods. For example, adverse weather could reduce the number of people that visit properties we acquire. Certain properties may be susceptible to damage from weather conditions such as hurricanes, which damage (including but not limited to property damage and loss of revenue) is not generally insurable at commercially reasonable rates. Poor weather conditions also could disrupt operations at properties we acquire and may adversely affect both the value of our investment in a property and the ability of our tenants and operators to make their scheduled rent payments to us.
Security breaches through cyber-attacks, cyber-intrusions, or otherwise, could disrupt our IT networks and related systems.
Risks associated with security breaches, whether through cyber-attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, or otherwise, against persons inside our organization, persons with access to systems inside our organization, the U.S. government, financial markets or institutions, or major businesses, including tenants, could disrupt or disable networks and related systems, other critical infrastructures, and the normal operation of business. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. Even though we may not be specifically targeted, cyber-attacks on the U.S. government, financial markets, financial institutions, or other major businesses, including tenants, could disrupt our normal business operations and networks, which may in turn have a material adverse impact on our financial condition and results of operations.
Our information technology (“IT”) networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations and they are subject to cybersecurity risks and threats. They also may be critical to the operations of certain of our tenants. Further, our Advisor provides our IT services, and there can be no assurance that their security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. It has been reported that unknown entities or groups have mounted cyber-attacks on businesses and other organizations solely to disable or disrupt computer systems, disrupt operations and, in some cases, steal data. Even the most well protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Due to the nature of cyber-attacks, breaches to our systems could go unnoticed for a prolonged period of time. These cybersecurity risks could disrupt our operations and result in downtime, loss of revenue, or the loss of critical data as well as result in higher costs to correct and remedy the effects of such incidents. If our systems for protecting against cyber incidents or attacks prove to be insufficient and an incident were to occur, it could have a material adverse effect on our business, financial condition, results of operations or cash flows. While, to date, we have not experienced a cyber-attack or cyber-intrusion, neither our Advisor nor we may be able to anticipate or implement adequate security barriers or other preventive measures. A security breach or other significant disruption involving our IT networks and related systems could:
| • | disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants; |
| • | result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines; |
| • | result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; |
| • | result in the unauthorized access to, and destruction, loss, theft, misappropriation, or release of proprietary, confidential, sensitive, or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive, or otherwise harmful purposes and outcomes; |
| • | result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space; |
| • | require significant management attention and resources to remedy any damages that result; |
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| • | subject us to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or |
| • | damage our reputation among our tenants and stockholders generally. |
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition, and cash flows.
General Risks Related to Investments in Real Estate
Part of our strategy for building our portfolio may involve acquiring assets opportunistically. This strategy will involve a higher risk of loss than more conservative investment strategies.
In order to meet our investment objectives we intend to embark on a strategy that may involve acquiring opportunistic assets which we can reposition, redevelop or remarket to create value enhancement and capital appreciation. Our strategy for acquiring properties may involve the acquisition of properties in markets that are depressed or overbuilt. As a result of our investment in these types of markets, we will face increased risks relating to changes in local market conditions and increased competition for similar properties in the same market, as well as increased risks that these markets will not recover and the value of our properties in these markets will not increase, or will decrease, over time. For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties, and as a result, our ability to make distributions to our stockholders could be affected. Our intended approach to acquiring and operating income-producing properties involves more risk than comparable real estate programs that have a targeted holding period for investments that is longer than ours, utilize leverage to a lesser degree or employ more conservative investment strategies.
Our revenue and net income may vary significantly from one period to another due to investments in opportunity-oriented properties and portfolio acquisitions, which could increase the variability of our cash available for distributions.
Our opportunistic property-acquisition strategy may include investments in properties in various phases of development, redevelopment or repositioning and portfolio acquisitions, which may cause our revenues and net income to fluctuate significantly from one period to another. Projects do not produce revenue while in development or redevelopment. During any period when our projects in development or redevelopment or those with significant capital requirements increase without a corresponding increase in stable revenue-producing properties, our revenues and net income will likely decrease. Many factors may have a negative impact on the level of revenues or net income produced by our portfolio of properties and projects, including higher-than-expected construction costs, failure to complete projects on a timely basis, failure of the properties to perform at expected levels upon completion of development or redevelopment, and increased borrowings necessary to fund higher-than-expected construction or other costs related to the project. Further, our net income and stockholders’ equity could be negatively affected during periods with large portfolio acquisitions, which generally require large cash outlays and may require the incurrence of additional financing. Any such reduction in our revenues and net income during such periods could cause a resulting decrease in our cash available for distributions during the same periods.
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
| • | changes in general economic or local conditions; |
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| • | changes in supply of or demand for similar or competing properties in an area; |
| • | changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive; |
| • | the illiquidity of real estate investments generally; |
| • | changes in tax, real estate, environmental and zoning laws; and |
| • | periods of high interest rates and tight money supply. |
For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
Properties that have significant vacancies could be difficult to sell, which could diminish the return on your investment.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in decreased distributions to stockholders. In addition, the value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
Our investments will be dependent on tenants for revenue, and lease expirations and terminations could reduce our ability to make distributions to stockholders.
The success of our real property investments will be materially dependent on the occupancy rates of our properties and the financial stability of our tenants. If we are unable to renew or extend expiring leases under similar terms or are unable to negotiate new leases, it would negatively impact our liquidity and consequently adversely affect our ability to fund our ongoing operations. In addition, lease payment defaults by tenants could cause us to reduce the amount of distributions to stockholders. A default by a significant tenant on its lease payments to us would cause us to lose the revenue associated with such lease and cause us to have to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. If there is a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If significant leases are terminated, we cannot assure you that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Additionally, loans that we make generally will relate to real estate. As a result, the borrower’s ability to repay the loan may be dependent on the financial stability of the tenants leasing the related real estate.
We may be unable to secure funds for future tenant improvements, which could adversely impact our ability to make cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. If we have insufficient capital reserves, we will have to obtain financing from other sources. We intend to establish capital reserves on a property-by-property basis, as we deem necessary. In addition to any reserves we establish, a lender may require escrow of capital reserves in excess of our established reserves. If these reserves or any reserves otherwise established are designated for other uses or are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Moreover, certain reserves required by lenders may be designated for specific uses and may not be available for capital purposes such as future tenant improvements. Additional borrowings for capital purposes will increase our interest expense, and therefore our financial condition and our ability to make cash distributions to our stockholders may be adversely affected.
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We may be unable to sell a property if or when we decide to do so, which could adversely impact our ability to make cash distributions to our stockholders.
We intend to hold the various real properties in which we invest until such time as our advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. Otherwise, our advisor, subject to approval of our board of directors, may exercise its discretion as to whether and when to sell a property, and we will have no obligation to sell properties at any particular time, except upon our liquidation. If we do not begin the process of achieving a liquidity event by the eighth anniversary of the termination of our offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio. The real estate market is affected, as discussed above, by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any asset for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of an asset. If we are unable to sell an asset when we determine to do so, it could have a significant adverse effect on our cash flow and results of operations.
Our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of an investment to us and lower your overall return.
We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with other Lightstone programs or third parties having investment objectives similar to ours for the acquisition, development or improvement of properties, as well as the acquisition of real estate-related investments. We also may purchase and develop properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with the sellers of the properties, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other forms of real estate investment, including, for example:
| • | the possibility that our co-venturer, co-tenant or partner in an investment might become bankrupt; |
| • | the possibility that the investment may require additional capital that we or our partner do not have, which lack of capital could affect the performance of the investment or dilute our interest if the partner were to contribute our share of the capital; |
| • | the possibility that a co-venturer, co-tenant or partner in an investment might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us or the investment; |
| • | that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals; |
| • | the possibility that we may incur liabilities as the result of the action taken by our partner or co-investor; |
| • | that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT; or |
| • | that such partner may exercise buy/sell rights that force us to either acquire the entire investment, or dispose of our share, at a time and price that may not be consistent with our investment objectives. |
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment. Furthermore, if there are disputes with our co-venturers, co-tenants or partners in an investment, we could incur high litigation costs that would adversely affect the value of your Common Shares or could result in liability.
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Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.
The nature of the activities at certain properties we may acquire will expose us and our operators to potential liability for personal injuries and, in certain instances, property damage claims. For instance, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, pollution, environmental matters or extreme weather conditions such as hurricanes, floods and snow storms that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally insist that specific coverage against terrorism be purchased by commercial property owners as a condition for providing mortgage, bridge or mezzanine loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss. In addition, other than the capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in decreased distributions to stockholders.
Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks, which could diminish the return on your investment.
We may invest some of or all the proceeds available for investment in the acquisition, development or redevelopment of properties upon which we will develop and construct improvements. We could incur substantial capital obligations in connection with these types of investments. We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities or community groups and our builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. The builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction also could give tenants the right to terminate preconstruction leases for space at a newly developed project. We may incur additional risks when we make periodic progress payments or other advances to such builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. Substantial capital obligations could delay our ability to make distributions. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
In addition, we may invest up to 10% of our total assets in unimproved real property. Returns from development of unimproved properties are also subject to risks and uncertainties associated with rezoning the land for development and environmental concerns of governmental entities or community groups. Your investment is subject to the risks associated with investments in unimproved real property.
Competition with third parties in acquiring properties and other assets may reduce our profitability and the return on your investment.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we have. Larger real estate programs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable properties may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and you may experience a lower return on your investment.
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Failure to succeed in new markets or in new property classes may have adverse consequences on our performance.
We may from time to time commence development activity or make acquisitions outside of our existing market areas or the property classes of our primary focus if appropriate opportunities arise. The experience of our sponsor in our existing markets in developing, owning and operating certain classes of property does not ensure that we will be able to operate successfully in new markets, should we choose to enter them, or that we will be successful in new property classes. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to evaluate accurately local market conditions, to obtain land for development or to identify appropriate acquisition opportunities, or to hire and retain key personnel, and a lack of familiarity with local governmental and permitting procedures. In addition, we may abandon opportunities to enter new markets or acquire new classes of property that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
From time to time, we may attempt to acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions also may result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns that we earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for distributions. Any of the foregoing events may have an adverse effect on our operations.
If we set aside insufficient capital reserves, we may be required to defer necessary capital improvements.
If we do not have enough capital reserves to supply needed funds for capital improvements throughout the life of the investment in a property, and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property, which may cause the property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.
In connection with the recent and ongoing economic concerns, to the extent we invest in apartment communities, we may face increased competition from single-family homes and condominiums for rent, which could limit our ability to retain residents, lease apartment units or increase or maintain rents.
Any apartment communities we may invest in may compete with numerous housing alternatives in attracting residents, including single-family homes and condominiums available for rent. Such competitive housing alternatives may become more prevalent in a particular area because of the tightening of mortgage lending underwriting criteria, homeowner foreclosures, the decline in single-family home and condominium sales and the lack of available credit. The number of single-family homes and condominiums for rent in a particular area could limit our ability to retain residents, lease apartment units or increase or maintain rents.
Our failure to integrate acquired properties and new personnel could create inefficiencies and reduce the return of your investment.
To grow successfully, we must be able to apply our experience in managing real estate to a larger number of properties. In addition, we must be able to integrate new management and operations personnel as our organization grows in size and complexity. Failures in either area will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.
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Our property managers’ failure to integrate their subcontractors into their operations in an efficient manner could reduce the return on your investment.
Our property managers may rely on multiple subcontractors for on-site property management of our properties. If our property managers are unable to integrate these subcontractors into their operations in an efficient manner, our property managers may have to expend substantial time and money coordinating with these subcontractors, which could have a negative impact on the revenues generated from such properties.
The costs of compliance with environmental laws and other laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowings.
Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, ‘‘green’’ building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management. Any such requirements could increase the costs of maintaining or improving our properties or developing new properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, ordinances and regulations (including those of foreign jurisdictions), a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. 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. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.
In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our projects could require us to undertake a costly remediation program to contain or remove the mold from the affected property or development project, which would reduce our operating results.
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The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to you.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.
Our properties are generally expected to be subject to the Americans with Disabilities Act of 1990, as amended (the “Disabilities Act”) or similar laws of foreign jurisdictions. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for ‘‘public accommodations’’ and ‘‘commercial facilities’’ that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. Our funds used for compliance with these laws may affect cash available for distributions and the amount of distributions to you.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
In some instances we may sell our properties by providing financing to purchasers. If we provide financing to purchasers, we will bear the risk of default by the purchaser and will be subject to remedies provided by law, which could negatively impact distributions to our stockholders. There are no limitations or restrictions on our ability to take purchase money obligations. We may, therefore, take a purchase money obligation secured by a mortgage as partial payment for the purchase price of a property. The terms of payment to us generally will be affected by custom in the area where the property being sold is located and the then-prevailing economic conditions. If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to make distributions to our stockholders.
Risks Associated with Debt Financing
We anticipate that we will incur mortgage indebtedness and other borrowings, which may increase our business risks.
We anticipate that we will acquire real properties and other real estate-related investments by borrowing new funds. In addition, we may incur or increase our mortgage debt by obtaining loans secured by some of or all our real properties to obtain funds to acquire additional properties and other investments and for payment of distributions to stockholders. We also may borrow funds for payment of distributions to stockholders, in particular, if necessary to satisfy the requirement that we distribute annually to stockholders at least 90% of our REIT taxable income, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT and U.S. federal income and excise tax.
There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment. Under our charter, the maximum amount of our indebtedness shall not exceed 300% of our ‘‘net assets’’ (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.
In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 65% of the greater of the aggregate cost and the fair market value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets and only will apply once we have ceased raising capital under this or any subsequent offering and invested substantially all of our capital. As a result, we expect to borrow more than 65% of the aggregate cost and the fair market value of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent. For these purposes, the value of our assets is based on methodologies and policies determined by our board of directors that may include, but do not require, independent appraisals.
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If there is a shortfall in cash flow available to service our mortgage debt, then the amount available for distributions to stockholders may be affected. In addition, incurring mortgage debt increases the risk of loss because (a) loss in investment value is generally borne entirely by the borrower until such time as the investment value declines below the principal balance of the associated debt, and (b) defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds from the foreclosure. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default. If any of our properties is foreclosed upon due to a default, our ability to make distributions to our stockholders will be adversely affected. In addition, because our goal is to be in a position to liquidate our assets within six to nine years after the termination of our initial public offering, our approach to investing in properties utilizing leverage in order to accomplish our investment objectives over this period of time may present more risks to investors than comparable real estate programs that have a longer intended duration and that do not utilize borrowing to the same degree.
If mortgage debt is unavailable at reasonable rates, we may not be able to refinance our properties, which could reduce the amount of cash distributions we can make.
When we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties at reasonable rates or at rates comparable to those which existed prior to such refinancing, and our income could be reduced. If this occurs, it would reduce cash available for distribution to our stockholders, and it may prevent us from borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with obtaining financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. In general, we expect our loan agreements to restrict our ability to encumber or otherwise transfer our interest in the respective property without the prior consent of the lender. Loan documents we enter may contain other customary negative covenants that may limit our ability to further mortgage the property, discontinue insurance coverage, replace Lightstone Value Plus REIT III LLC as our advisor or impose other limitations. Any such restriction or limitation may have an adverse effect on our operations and our ability to make distributions to you.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.
We may finance our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or ‘‘balloon’’ payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
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Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
We may incur indebtedness that bears interest at a variable rate. In addition, from time to time we may pay mortgage loans or finance and refinance our properties in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have an adverse effect on our operating cash flow and our ability to make distributions to you. In addition, if rising interest rates cause us to need additional capital to repay indebtedness in accordance with its terms or otherwise, we may need to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments. Prolonged interest rate increases also could negatively impact our ability to make investments with positive economic returns.
We have entered into financing arrangements involving balloon payment obligations, which may adversely affect our ability to make distributions.
We have entered into financing arrangements that require us to make a lump-sum or ‘‘balloon’’ payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT and minimize U.S. federal income and excise tax. Any of these results would have a significant, negative impact on your investment.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of your investment.
Our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 65% of the greater of the aggregate cost and the fair market value of our assets, but we may exceed this limit under some circumstances. Such debt may be at a level that is higher than REITs with similar investment objectives or criteria. High debt levels could cause us to incur higher interest charges, could result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.
Risks Related to Investments in Real Estate-Related Securities
Investments in real estate-related securities will be subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities, which may result in losses to us.
We may invest in real estate-related securities of both publicly traded and private real estate companies. Our investments in real estate-related securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments discussed in this filing, including risks relating to rising interest rates.
Real estate-related securities are often unsecured and also may be subordinated to other obligations of the issuer. As a result, investments in real estate-related securities are subject to risks of (a) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities, (b) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities, (c) subordination to the prior claims of banks and other senior lenders to the issuer, (d) the operation of mandatory sinking fund or call/repurchase provisions during periods of declining interest rates that could cause the issuer to reinvest repurchase proceeds in lower-yielding assets, (e) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (f) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic slowdown or downturn. These risks may adversely affect the value of outstanding real estate-related securities and the ability of the issuers thereof to repay principal and interest or make distribution payments.
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Investments in real estate-related preferred equity securities involve a greater risk of loss than traditional debt investments.
We may invest in real estate-related preferred equity securities, which may involve a higher degree of risk than traditional debt investments due to a variety of factors, including that such investments are subordinate to traditional loans and are not secured by property underlying the investment. Furthermore, should the issuer default on our investment, we would be able to proceed only against the entity in which we have an interest, and not the property owned by such entity and underlying our investment. As a result, we may not recover some of or all our investment.
We expect that a portion of any real estate-related securities investments we make will be illiquid, and we may not be able to adjust our portfolio in response to changes in economic and other conditions.
Certain of the real estate-related securities that we may purchase in connection with privately negotiated transactions will not be registered under the applicable securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited. The mezzanine and bridge loans we may purchase will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment following a borrower’s default.
We are subject to interest rate risk, which means that changing interest rates may reduce the value of our real estate-related securities investments.
Interest rate risk is the risk that prevailing market interest rates will change relative to the current yield on fixed-income securities such as preferred and debt securities, and to a lesser extent dividend-paying common stock. Generally, when interest rates rise, the market value of these securities declines, and vice versa. In addition, when interest rates fall, issuers are more likely to repurchase their existing preferred and debt securities to take advantage of the lower cost of financing. As repurchases occur, principal is returned to the holders of the securities sooner than expected, thereby lowering the effective yield on the investment. On the other hand, when interest rates rise, issuers are more likely to maintain their existing preferred and debt securities. As a result, repurchases decrease, thereby extending the average maturity of the securities. If we are unable to manage interest rate risk effectively, our results of operations, financial condition and ability to pay distributions to you will be adversely affected.
We may acquire real estate-related securities through tender offers, which may require us to spend significant amounts of time and money that otherwise could be allocated to our operations.
We may acquire real estate-related securities through tender offers, negotiated or otherwise, in which we solicit a target company’s stockholders to purchase their securities. The acquisition of these securities could require us to spend significant amounts of money that otherwise could be allocated to our operations. Additionally, in order to acquire the securities, the employees of our advisor likely will need to devote a substantial portion of their time to pursuing the tender offer — time that otherwise could be allocated to managing our business. These consequences could adversely affect our operations and reduce the cash available for distribution to our stockholders.
Our dependence on the management of other entities in which we invest may adversely affect our business.
We may not control the management, investment decisions or operations of the companies in which we may invest. Management of those enterprises may decide to change the nature of their assets, or management may otherwise change in a manner that is not satisfactory to us. We will have no ability to affect these management decisions, and we may have only limited ability to dispose of our investments.
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Our due diligence may not reveal all of a borrower’s liabilities and may not reveal other weaknesses in its business.
Before making a loan to a borrower or acquiring debt or equity securities of a company, we will assess the strength and skills of such entity’s management and other factors that we believe are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, we will rely on the resources available to us and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized or private entities because there may be little or no information publicly available about the entities. There can be no assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.
We will depend on debtors for our revenue, and, accordingly, our revenue and our ability to make distributions to you will be dependent upon the success and economic viability of such debtors.
The success of our investments in real estate-related loans, real estate-related debt securities and other real estate-related investments will materially depend on the financial stability of the debtors underlying such investments. The inability of a single major debtor or a number of smaller debtors to meet their payment obligations could result in reduced revenue or losses.
Risks Associated with Investments in Mortgage, Bridge and Mezzanine Loans
We have relatively less experience investing in mortgage, bridge, mezzanine or other loans as compared to investing directly in real property, which could adversely affect our return on loan investments.
The experience of our advisor and its affiliates with respect to investing in mortgage, bridge, mezzanine or other loans is not as extensive as it is with respect to investments directly in real properties. However, we may continue to make such loan investments to the extent our advisor determines that it is advantageous to us due to the state of the real estate market, as a strategic method of acquiring distressed assets, or in order to diversify our investment portfolio. Our less extensive experience with respect to mortgage, bridge, mezzanine or other loans could adversely affect our return on loan investments.
Our mortgage, bridge or mezzanine loans may be impacted by unfavorable real estate market conditions, which could decrease the value of those loans and the return on your investment.
If we make or invest in mortgage, bridge or mezzanine loans, we will be at risk of defaults on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the property securing the loans will remain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans.
Our mortgage, bridge or mezzanine loans will be subject to interest rate fluctuations, which could reduce our returns as compared to market interest rates and reduce the value of the loans if we sell them.
If we invest in fixed-rate, long-term mortgage, bridge or mezzanine loans and interest rates rise, the loans could yield a return lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that mortgage, bridge or mezzanine loans are prepaid, because we may not be able to make new loans at the previously higher interest rate. If we invest in variable-rate loans and interest rates decrease, our revenues also may decrease. Finally, if we invest in variable-rate loans and interest rates increase, the value of the loans we own at such time would decrease, which would lower the proceeds we would receive if we sell such assets. For these reasons, if we invest in mortgage, bridge or mezzanine loans, our returns on those loans and the value of your investment will be subject to fluctuations in interest rates.
Delays in liquidating defaulted mortgage, mezzanine or bridge loans could reduce our investment returns.
If there are defaults under our loans, we may not be able to repossess and sell quickly any properties securing such loans. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a property securing a loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of any lawsuit brought in connection with the foreclosure if the defendant raises defenses or counterclaims. If there is a default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan.
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The mezzanine loans in which we may invest would involve greater risks of loss than senior loans secured by income-producing real properties.
We may invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. If borrowers of these loans are real estate developers, our investments may involve additional risks, including dependence for repayment on successful completion and operation of the project, difficulties in estimating construction or rehabilitation costs and loan terms that often require little or no amortization. If there is a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our loan or on debt senior to our loan, or if there is a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through ‘‘standstill periods’’), and control decisions made in bankruptcy proceedings relating to borrowers. As a result, we may not recover some of or all our investment.
Returns on our mortgage, bridge or mezzanine loans may be limited by regulations.
The mortgage, bridge or mezzanine loans in which we invest, or that we may make, may be subject to regulation by federal, state and local authorities or regulation by foreign jurisdictions and subject to various laws and judicial and administrative decisions. We may determine not to make mortgage, bridge or mezzanine loans in any jurisdiction in which we believe we have not complied in all material respects with applicable requirements. If we decide not to make mortgage, bridge or mezzanine loans in several jurisdictions, it could reduce the amount of income we would otherwise receive.
Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments.
If we acquire property by foreclosure following defaults under our mortgage, bridge or mezzanine loans, we will have the economic and liability risks as the owner.
The liquidation of our assets may be delayed as a result of our investment in mortgage, bridge or mezzanine loans, which could delay distributions to our stockholders.
The mezzanine and bridge loans we may purchase will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment following a borrower’s default. If our advisor determines that it is in our best interests to make or invest in mortgage, bridge or mezzanine loans, any intended liquidation of us may be delayed beyond the time of the sale of all our properties until all mortgage, bridge or mezzanine loans expire or are sold, because we may enter into mortgage, bridge or mezzanine loans with terms that expire after the date we intend to have sold all
our properties.
Investments that are not U.S. government-insured involve risk of loss.
We may originate and acquire uninsured loans and assets as part of our investment strategy. Such loans and assets may include mortgage loans, mezzanine loans and bridge loans. While holding such interests, we are subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. If there is any default under loans, we bear the risk of loss of principal and nonpayment of interest and to the extent of any deficiency between the value of the collateral and the principal amount of the loan. To the extent we suffer such losses with respect to our investments in such loans, the value of our company and the price of our Common Shares may be adversely affected.
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U.S. Federal Income Tax Risks
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We elected to qualify and be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to qualify or remain qualified as a REIT is not binding on the IRS and is not a guarantee that we will qualify, or continue to qualify, as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can qualify or remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
As a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to you.
Even if we maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are ‘‘dealer’’ properties sold by a REIT (a ‘‘prohibited transaction’’ under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our operating partnership or at the level of the other companies through which we indirectly own our assets, such as our TRSs, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to you.
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To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce your overall return.
In order to qualify and maintain our status as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. It is possible that we might not always be able to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including our operating partnership, but generally excluding our TRSs, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a TRS (but such TRS would incur corporate rate income taxes with respect to any income or gain recognized by it), (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or indirectly through any subsidiary, will be treated as a prohibited transaction, or (3) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our operating partnership, but generally excluding TRSs, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our TRSs are subject to corporate-level taxes and our dealings with our TRSs may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the gross value of a REIT’s assets may consist of stock or securities of one or more TRSs.
A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. We must operate our ‘‘qualified lodging facilities’’ through one or more TRS that leases such properties from us. We may use our TRSs generally for other activities as well, such as to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A TRS will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, the rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
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If our leases to our TRSs are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests under which specified percentages of our gross income must be derived from certain sources, such as ‘‘rents from real property.’’ In order for such rent to qualify as ‘‘rents from real property’’ for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
If our operating partnership failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
We intend to maintain the status of the operating partnership as a partnership or a disregarded entity for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of the operating partnership as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on your investment. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
If our ‘‘qualified lodging facilities’’ are not properly leased to a TRS or the managers of such ‘‘qualified lodging facilities’’ do not qualify as ‘‘eligible independent contractors,’’ we could fail to qualify as a REIT.
In general, we cannot operate any lodging facilities and can only indirectly participate in the operation of ‘‘qualified lodging facilities’’ on an after-tax basis through leases of such properties to our TRSs. A ‘‘qualified lodging facility’’ is a hotel, motel, or other establishment in which more than one-half of the dwelling units are used on a transient basis at which or in connection with which wagering activities are not conducted. Rent paid by a lessee that is a ‘‘related party tenant’’ of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. A TRS that leases lodging facilities from us will not be treated as a ‘‘related party tenant’’ with respect to our lodging facilities that are managed by an independent management company, so long as the independent management company qualifies as an ‘‘eligible independent contractor.’’
Each of the management companies that enters into a management contract with our TRSs must qualify as an ‘‘eligible independent contractor’’ under the REIT rules in order for the rent paid to us by our TRSs to be qualifying income for purposes of the REIT gross income tests. An ‘‘eligible independent contractor’’ is an independent contractor that, at the time such contractor enters into a management or other agreement with a TRS to operate a ‘‘qualified lodging facility,’’ is actively engaged in the trade or business of operating ‘‘qualified lodging facilities’’ for any person not related, as defined in the Code, to us or the TRS. Among other requirements, in order to qualify as an independent contractor a manager must not own, directly or applying attribution provisions of the Code, more than 35% of our outstanding shares of stock (by value), and no person or group of persons can own more than 35% of our outstanding shares and 35% of the ownership interests of the manager (taking into account only owners of more than 5% of our shares and, with respect to ownership interest in such managers that are publicly traded, only holders of more than 5% of such ownership interests). The ownership attribution rules that apply for purposes of the 35% thresholds are complex. There can be no assurance that the levels of ownership of our stock by our managers and their owners will not be exceeded.
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Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms, (c) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (d) make a taxable distribution of our Common Shares as part of a distribution in which stockholders may elect to receive Common Shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are ‘‘significant modifications’’ under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt- for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the loan must be secured by real property or an interest in real property. We may acquire mezzanine loans that are not directly secured by real property or an interest in real property but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property or an interest in real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the gross income tests or asset test we may be disqualified as a REIT.
We may choose to make distributions in our own stock, in which case you may be required to pay U.S. federal income taxes in excess of the cash dividends you receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or our Common Shares (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received.
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Accordingly, U.S. Stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. Stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell our Common Shares in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our Common Shares.
Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income or constitute a return of capital, which may reduce your anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes, (2) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, or (3) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our TRSs. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our Common Shares. Due to our investment in real estate, depreciation deductions and interest expense may reduce our earnings and profits in our early years with the result that a large portion of distributions to our stockholders in early years may constitute a return of capital rather than ordinary income.
Our stockholders may have tax liability on distributions that they elect to reinvest in Common Shares, but they would not receive the cash from such distributions to pay such tax liability.
If our stockholders participate in our DRIP, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in our Common Shares to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the Common Shares received.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to qualified dividend income payable to U.S. Stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our Common Shares. Tax rates could be changed in future legislation.
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Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute ‘‘gross income’’ for purposes of the 75% gross income test or 95% gross income test. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Complying with REIT requirements may force us to forego and/or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets), and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we elected to be taxed as a REIT and qualify to be taxed as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in the best interests of our stockholders. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our Common Shares.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our Common Shares.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in our Common Shares. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
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Reform proposals have been recently put forth by members of Congress and the President which, if ultimately proposed as legislation and enacted as law, would substantially change the U.S. federal taxation of (among other things) individuals and businesses. Their proposals set forth a variety of principles to guide potential tax reform legislation. As of the date of this annual report, no legislation has been introduced in Congress. If ultimately reduced to legislation enacted by Congress and signed into law by the President in a form that is consistent with those principles, such reform could change dramatically the U.S. federal taxation applicable to us and our stockholders. No reform proposal specifically addresses the taxation of REITs, but because any tax reform is likely to significantly reduce the tax rates applicable to corporations and dividends received by stockholders, the tax benefits applicable to the REIT structure may be diminished in relation to corporations. Furthermore, proposed tax reform would limit the deductibility of net interest expense and would allow for the immediate deduction of any investment in tangible property (other than land) and intangible assets. Finally, the tax reform proposals do not include any principles regarding how to transition from our current system of taxation to a new tax system based on the principles in such proposed reform. Given how dramatic the changes could be, transition rules are crucial. While it is impossible to predict whether and to what extent any tax reform legislation (or other legislative, regulatory or administrative change to the U.S. federal tax laws) will be proposed or enacted, any such change in the U.S. federal tax laws could affect materially the value of any investment in our stock. You are encouraged to consult with your tax advisor regarding possible legislative and regulatory changes and the potential effect of such changes on an investment in our shares.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted, prospectively or retroactively, by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our Common Shares or otherwise be in the best interest of the stockholders.
Non-U.S. Stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as ‘‘effectively connected’’ with the conduct by the Non-U.S. Stockholder of a U.S. trade or business. Pursuant to Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) capital gain distributions attributable to sales or exchanges of ‘‘U.S. real property interests,’’ (“USRPIs”) generally will be taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. trade or business. However, a capital gain dividend will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (b) the Non-U.S. Stockholder does not own more than 5% of the class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be ‘‘regularly traded’’ on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.
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Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of our Common Shares generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our Common Shares will not constitute a USRPI so long as we are a ‘‘domestically-controlled qualified investment entity.’’ A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by Non-U.S. Stockholders. We believe, but cannot assure you, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a Non-U.S. Stockholder sells or exchanges our Common Shares, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if (a) our Common Shares are ‘‘regularly traded,’’ as defined by applicable Treasury regulations, on an established securities market, and (b) such Non-U.S. Stockholder owned, actually and constructively, 5% or less of our Common Shares at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our Common Shares will be ‘‘regularly traded’’ on an established market. We encourage you to consult your tax advisor to determine the tax consequences applicable to you if you are a Non-U.S. Stockholder.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a ‘‘pension-held REIT,’’ (b) a tax-exempt stockholder has incurred (or deemed to have incurred) debt to purchase or hold our Common Shares, or (c) a holder of Common Shares is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, Common Shares by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
ITEM 1B. UNRESOLVED STAFF COMMENTS:
None.
| Year to Date | Percentage Occupied for the Year Ended | Revenue per Available Room
for the Year | Average Daily Rate For the
Year Ended | |||||||||||||||||||
| Location | Year Built | Date Acquired | Available Rooms | December 31, 2016 | Ended December 31, 2016 | December 31, 2016 | ||||||||||||||||
| Hampton Inn – Des Moines | Des Moines, Iowa | 1987 | 2/4/2015 | 43,920 | 68 | % | $ | 82.77 | $ | 122.53 | ||||||||||||
| Courtyard - Durham | Durham, North Carolina | 1996 | 5/15/2015 | 53,436 | 74 | % | $ | 75.60 | $ | 102.61 | ||||||||||||
| Hampton Inn – Lansing | Lansing, Michigan | 2013 | 3/10/2016 | 25,542 | 75 | % | $ | 96.43 | $ | 129.20 | ||||||||||||
| Courtyard - Warwick | Warwick, Rhode Island | 2003 | 3/23/2016 | 26,128 | 81 | % | $ | 109.06 | $ | 134.95 | ||||||||||||
| SpringHill Suites - Green Bay | Green Bay, Wisconsin | 2007 | 5/2/2016 | 30,988 | 74 | % | $ | 115.80 | $ | 155.97 | ||||||||||||
| Home2 Suites – Salt Lake | Salt Lake City, Utah | 2013 | 8/2/2016 | 19,000 | 73 | % | $ | 82.49 | $ | 115.34 | ||||||||||||
| Home2 Suites – Tukwila | Tukwila, Washington | 2015 | 8/2/2016 | 21,128 | 74 | % | $ | 103.80 | $ | 140.30 | ||||||||||||
| Fairfield Inn – Austin | Austin, Texas | 2014 | 9/13/2016 | 9,240 | 67 | % | $ | 75.84 | $ | 113.49 | ||||||||||||
| Staybridge Suites – Austin | Austin, Texas | 2009 | 10/7/2016 | 6,960 | 77 | % | $ | 81.05 | $ | 105.90 | ||||||||||||
| Total | 236,342 | 73 | % | $ | 91.40 | $ | 124.90 | |||||||||||||||
From time to time in the ordinary course of business, we may become subject to legal proceedings, claims or disputes.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:
As of March 15, 2017, we had approximately 13.2 million shares of common stock outstanding, held by a total of 3,803 stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.
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Estimated Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)
On March 27, 2017, our board of directors approved our estimated NAV of approximately $116.6 million and resulting estimated NAV per Share of $10.00, both as of December 31, 2016 and both after the special limited partner’s purchase of subordinated participation interests. Through December 31, 2016, the special limited partner made cash purchases of subordinated participation interests totaling $12.1 million. In the calculation of our estimated NAV, an approximately $1.3 million allocation of value was made to the special limited partner’s subordinated participation interests representing the amount by which the estimated NAV per Share would have exceeded an aggregate $10.00 price per share plus a cumulative, pre-tax non-compounded annual return of 6.0% as of December 31, 2016. Accordingly, the net portion of the NAV attributable to the special limited partner’s cash purchases of subordinated participation interests was approximately $10.7 million as of December 31, 2016.
Process and Methodology
Our Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our NAV, which we currently expect will be done on a quarterly basis for as long as the special limited partner’s obligation to purchase subordinated participation interests continues and thereafter, will be done on at least an annual basis unless and until our Common Shares are approved for listing on a national securities exchange. Our board of directors will review each estimate of NAV and approve the resulting NAV per Share.
Our estimated NAV per Share as of December 31, 2016 was calculated with the assistance of both our Advisor and Marshall & Stevens Incorporated (‘‘M&S’’), an independent third-party valuation engaged by us to assist with the valuation of our assets, liabilities and any allocations of value to the special limited partner’s subordinated participation interests. The Advisor recommended and the board of directors established the estimated NAV per Share as of December 31, 2016 based upon the analyses and reports provided by our Advisor and M&S. The process for estimating the value of our assets, liabilities and allocations of value to the special limited partner’s subordinated participation interests is performed in accordance with the provisions of the Investment Program Association Practice Guideline 2013-01, ‘‘Valuation of Publicly Registered Non-Listed REITs.’’ We believe that our valuations were developed in a manner reasonably designed to ensure their reliability.
The engagement of M&S with respect to our NAV per Share as of December 31, 2016 was approved by our board of directors, including all of our independent directors. M&S has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate- related investments.
With respect to our NAV per Share as of December 31, 2016, M&S prepared appraisal reports (the ‘‘M&S December 2016 Appraisal Reports’’), summarizing key inputs and assumptions, on the nine properties (the ‘‘M&S Appraised Properties’’) in which we held ownership interests as of December 31, 2016. M&S also prepared a NAV report (the ‘‘December 2016 NAV Report’’) which estimated the NAV per Share as of December 31, 2016. The December 2016 NAV Report relied upon the M&S December 2016 Appraisal Reports for the M&S Appraised Properties, M&S’s estimated value of our mortgage notes payable, and the Advisor’s estimate of the value of our cash and cash equivalents, other assets, due to related parties, other liabilities and allocations of value to limited partner’s subordinated participation interests, to calculate estimated NAV per Share, all as of December 31, 2016.
The table below sets forth the calculation of our estimated NAV and resulting estimated NAV per Share as of December 31, 2016 compared to September 30, 2016 and June 30, 2016.
Dollar and share amounts are presented in thousands, except per share data.
| As of December 31, 2016 | As of September 30, 2016 | As of June 30, 2016 | ||||||||||||||||||||||
| Value | Per Share | Value | Per Share | Value | Per Share | |||||||||||||||||||
| Net Assets: | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Real Estate Properties | $ | 150,950 | $ | 12.95 | $ | 139,000 | $ | 13.71 | $ | 75,567 | $ | 10.89 | ||||||||||||
| Non-Real Estate Assets: | ||||||||||||||||||||||||
| Cash and cash equivalents | 55,065 | 10,638 | 10,998 | |||||||||||||||||||||
| Due from related parties | - | 4 | - | |||||||||||||||||||||
| Other assets | 2,530 | 2,575 | 3,949 | |||||||||||||||||||||
| Total non-real estate assets | 57,595 | 4.94 | 13,217 | 1.30 | 14,947 | 2.15 | ||||||||||||||||||
| Total Assets | 208,545 | 17.89 | 152,217 | 15.01 | 90,514 | 13.04 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Mortgages payable | (87,252 | ) | (45,370 | ) | - | |||||||||||||||||||
| Revolving promissory notes payable - related party | - | - | (16,200 | ) | ||||||||||||||||||||
| Due to related parties | (110 | ) | - | (198 | ) | |||||||||||||||||||
| Other liabilities | (3,267 | ) | (3,883 | ) | (3,190 | ) | ||||||||||||||||||
| Total liabilities | (90,629 | ) | (7.77 | ) | (49,253 | ) | (4.86 | ) | (19,588 | ) | (2.82 | ) | ||||||||||||
| Allocation of value to Special Limited Partner's Subordinated Participation | ||||||||||||||||||||||||
| Interests | (1,346 | ) | (0.12 | ) | (1,594 | ) | (0.15 | ) | (1,536 | ) | (0.22 | ) | ||||||||||||
| Adjusted NAV after giving effect to Special Limited Partner's Purchases of | ||||||||||||||||||||||||
| Subordinated Participation Interests | $ | 116,570 | $ | 10.00 | $ | 101,370 | $ | 10.00 | $ | 69,390 | $ | 10.00 | ||||||||||||
| Shares of Common Stock Outstanding | 11,657 | 10,137 | 6,939 | |||||||||||||||||||||
| NAV attributable to Special Limited Partner's Cash Purchase of Subordinated | ||||||||||||||||||||||||
| Participation Interests | $ | 10,745 | $ | 0.92 | $ | 10,497 | $ | 1.04 | $ | 9,555 | $ | 1.38 | ||||||||||||
| NAV without Special Limited Partner's Cash Purchases of Subordinated | ||||||||||||||||||||||||
| Participation Interests | $ | 105,825 | $ | 9.08 | $ | 90,873 | $ | 8.96 | $ | 59,835 | $ | 8.62 | ||||||||||||
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Use of Independent Valuation Firm:
As discussed above, our Advisor is responsible for calculating our NAV. In connection with determining our NAV, our Advisor may rely on the material assistance or confirmation of a third-party valuation expert or service. In this regard, M&S was selected by our board of directors to assist our Advisor in the calculation of our estimated NAV and resulting estimated NAV per Share as of December 31, 2016. M&S’s services included appraising the M&S Appraised Properties and preparing the December 2016 NAV Report. M&S is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to M&S was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The M&S December 2016 Appraisal Reports were reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its reports, M&S did not, and was not requested to; solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.
M&S collected reasonably available material information that it deemed relevant in appraising these real estate properties. M&S relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; and (ii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, M&S took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although M&S reviewed information supplied or otherwise made available by us or our Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. M&S assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with M&S were reasonably prepared in good faith on bases reflecting the then best currently available estimates and judgments of our management, our board of directors, and/or our Advisor. M&S relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
In performing its analyses, M&S made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. M&S also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, M&S assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, M&S’s analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the M&S December 2016 Appraisal Reports, and any material change in such circumstances and conditions may affect M&S’s analyses and conclusions. The M&S December 2016 Appraisal Reports contain other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from M&S’s analyses.
M&S is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between M&S, on the one hand, and us, our Sponsor, our Advisor, and our affiliates, on the other hand. Our Advisor engaged M&S on behalf of our board of directors to deliver their reports to assist in the NAV calculation as of December 31, 2016 and M&S received compensation for those efforts. In addition, we agreed to indemnify M&S against certain liabilities arising out of this engagement. M&S has previously assisted in our prior NAV calculations and has also been engaged by us for certain valuation services with respect to our acquisitions. M&S may from time to time in the future perform other services for us and our Sponsor or other affiliates of the Sponsor, so long as such other services do not adversely affect the independence of M&S as certified in the Appraisal Reports. During the past year M&S has also been engaged to provide appraisal services to another non-trade REIT sponsored by our Sponsor for which it was paid usual and customary fees.
Although M&S considered any comments received from us and our Advisor relating to their reports, the final appraised values of the M&S Appraised Properties were determined by M&S. The reports were addressed to our board of directors to assist our board of directors in calculating an estimated value per share of our common stock as of December 31, 2016. The reports were not addressed to the public, may not be relied upon by any other person to establish an estimated value per share of our common stock, and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
Our goal in calculating our estimated NAV is to arrive at values that are reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our valuation methodologies used to value our assets and liabilities by key component:
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Real Estate Properties: We have ownership interests in real estate properties (collectively, the ‘‘Real Estate Properties’’). As of December 31, 2016, on a collective basis, we wholly owned and consolidated the operating results and financial condition of nine hospitality properties, or select services hotels, containing a total of 999 rooms.
As described above, we engaged M&S to provide an appraisal of the M&S Appraised Properties, which consisted of the nine hospitality properties in which we held ownership interests as of December 31, 2016. In preparing the appraisal reports, M&S, among other things:
| • | performed a site visit of each property in connection with this assignment or other assignments; |
| • | interviewed our officers or the Advisor’s personnel to obtain information relating to the physical condition of each appraised property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties; and |
| • | reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer’s criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties. |
M&S employed the income approach and the sales comparison approach to estimate the value of the appraised properties. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis (‘‘DCF Analysis’’) and direct capitalization analysis was used in the income approach to determine the value of our interest in the portfolio. The indicated value by the income approach represents the amount an investor may pay for the expectation of receiving the net cash flow from the property.
The direct capitalization analysis is based upon the net operating income of the property capitalized at an appropriate capitalization rate for the property based upon property characteristics and competitive position and market conditions at the date of the appraisal.
In applying the DCF Analysis, pro forma statements of operations for the property including revenues and expenses are analyzed and projected over a multi-year period. The property is assumed to be sold at the end of the multi-year holding period. The reversion value of the property which can be realized upon sale at the end of the holding period is calculated based on the capitalization of the estimated net operating income of the property in the year of sale, utilizing a capitalization rate deemed appropriate in light of the age, anticipated functional and economic obsolescence and competitive position of the property at the time of sale. Net proceeds to owners are determined by deducting appropriate costs of sale. The discount rate selected for the DCF Analysis is based upon estimated target rates of return for buyers of similar properties.
The sales comparison approach utilizes indices of value derived from actual or proposed sales of comparable properties to estimate the value of the subject property. The appraiser analyzed such comparable sale data as was available to develop a market value conclusion for the subject property.
M&S prepared the M&S December 2016 Appraisal Reports, summarizing key inputs and assumptions, for each of the appraised properties using financial information provided by us and our Advisor. From such review, M&S selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate in the DCF Analysis, the appropriate capitalization rate in the direct capitalization analysis and the appropriate price per unit in the sales comparison analysis.
The following summarizes the key assumptions that were used in the discounted cash flow models to estimate the value of the M&S Appraised Properties included in our Real Estate Properties, as of December 31, 2016:
| Weighted-average: | ||||
| Exit capitalization rate | 9.29 | % | ||
| Discount rate | 10.09 | % | ||
| Annual market rent growth rate | 3.12 | % | ||
| Annual net operating income growth rate | 2.85 | % | ||
| Holding period (in years) | 10.0 |
While we believe that the assumptions made by M&S are reasonable, a change in these assumptions would impact the calculations of the estimated value of M&S Appraised Properties included in our Real Estate Properties. Assuming all other factors remain unchanged, the following table summarizes the estimated change in the values (dollars in thousands) of the M&S Appraised Properties included in our Real Estate Properties which would result from a 25 basis point increase or decrease in exit capitalization rates and discount rates:
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| Increase of 25 basis points: | ||||
| Exit capitalization rate | $ | (1,710 | ) |
| Discount rate | (2,404 | ) | ||
| Decrease of 25 basis points: | ||||
| Exit capitalization rate | $ | 1,798 | ||
| Discount rate | (2,369 | ) |
As of December 31, 2016, the aggregate estimated fair value of our interests in the Real Estate Properties was approximately $151.0 million and the aggregate cost of our Real Estate Properties was approximately $140.6 million, including approximately $3.3 million of capital and tenant improvements invested subsequent to acquisition. The estimated fair value of our Real Estate Properties compared to the original acquisition price plus subsequent capital improvements through December 31, 2016, results in an estimated overall increase in the real estate value of 7.3%.
Cash and Cash Equivalents: The estimated values of our cash and cash equivalents approximate their carrying values due to their short maturities.
Due from/(to) Related Parties: The estimated value of our due from/(to) related parties approximates its carrying value due to its short maturity.
Other Assets: Our other assets consist of tenant accounts receivable, deposits, and prepaid expenses, subscriptions receivable and other assets. The estimated values of these items approximate their carrying values due to their short maturities. Certain other items, primarily intangibles, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate properties or financial instruments.
Mortgages Payable: Our mortgages payable include both variable and fixed interest rate debt facilities. The estimated value of our variable rate facility was assumed to approximate its outstanding principal balance because it bears interest at a variable rate. The estimated values for our fixed rate facility was estimated using a discounted cash flow analysis, which used inputs based on the remaining loan term and estimated current market interest rate for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rate for our fixed rate facility was 5.40%.
Other Liabilities: Our other liabilities consist of our accounts payable and accrued expenses, deposits payable and distributions payable. The carrying values of these items were considered to equal their fair value due to their short maturities.
Allocations of Value to Special Limited Partner’s Subordinated Participation Interests: The special limited partner’s subordinated participation interests are classified in noncontrolling interests on our consolidated balance sheet. However, for purposes of our NAV, we do not estimate their fair value in accordance with GAAP. Rather, the IPA’s Practice Guideline 2013-01 provides for adjustments to the NAV for preferred securities, special interests and incentive fees based on the aggregate NAV of the company and payable to the sponsor in a hypothetical liquidation of the company as of the valuation date in accordance with the provisions of the partnership or advisory agreements and the terms of the preferred securities. Because our subordinated participation interests are only payable to the special limited partner in a liquidation event, we believe they should be valued for our NAV in accordance with these provisions.
Accordingly, pursuant to the terms of our operating agreement, no allocations of value are made to the special limited partner’s subordinated participation interests unless the estimated NAV per Share would have exceeded $10.00 per share plus a cumulative, pre-tax non-compounded annual return of 6.0% as of the indicated valuation date. Through December 31, 2016, the special limited partner made cash purchases of subordinated participation interests totaling approximately $12.1 million. In the calculation of our estimated NAV, an approximately $1.3 million allocation of value was made to the special limited partner’s subordinated participation interests representing the amount by which the estimated NAV per Share would have exceeded an aggregate $10.00 price per share plus a cumulative, pre-tax non-compounded annual return of 6.0% as of December 31, 2016. Accordingly, the net portion of the NAV attributable to the special limited partner’s cash purchases of subordinated participation interests was approximately $10.7 million as of December 31, 2016.
Limitations and Risks
As with any valuation methodology, the methodology used to determine our estimated NAV and resulting estimated NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different market participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive different estimated NAVs per share, which could be significantly different from the estimated NAV per Share approved by our board of directors. The estimated NAV per Share approved by our board of directors does not represent the fair value of our assets less liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:
| • | a stockholder would be able to resell his or her shares of common stock at the estimated NAV per Share; |
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| • | a stockholder would ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation of our assets and settlement of our liabilities or a sale of the Company; |
| • | our shares of common stock would trade at the estimated NAV per Share on a national securities exchange; |
| • | an independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or |
| • | the methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements. |
The Internal Revenue Service and the Department of Labor do not provide any guidance on the methodology an issuer must use to determine its estimated NAV per Share. FINRA guidance provides that NAV valuations be derived from a methodology that conforms to standard industry practice.
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. As of the date of this filing, although we have not sought stockholder approval to adopt a plan of liquidation of the Company, certain distributions may be payable to the special limited partner for its subordinated participation interests in connection with a liquidation event. Accordingly, our estimated NAV reflects any allocations of value to the subordinated participation interests representing the amount that would be payable to the special limited partner in connection with a liquidation event pursuant to the guidelines for estimating NAV contained in IPA Practice Guideline 2013-01, ‘‘Valuation of Publicly Registered Non-Listed REITs.’’ Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities less any allocations to the special limited partner’s subordinated participation interests divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive different NAVs and resulting estimated NAVs per share, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. We currently expect that our Advisor will estimate our NAV on a quarterly basis for as long as the special limited partner’s obligation to purchase subordinated participation interests continues and thereafter, our Advisor will estimate our NAV on at least an annual basis. Our board of directors will review and approve each estimate of NAV and resulting estimated NAV per Share.
The following factors may cause a stockholder not to ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation:
| • | The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation; |
| • | In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation; |
| • | In a liquidation, debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV; |
| • | In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV; |
| • | In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV; |
| • | If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (‘‘FFO’’) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend; and |
| • | If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties. |
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Share Repurchase Program
Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares of common stock back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares of common stock for at least one year prior to offering the shares of common stock for sale to us through the share repurchase program. Subject to certain limitations, we will also redeem shares of common stock upon the request of the estate, heir or beneficiary of a deceased stockholder.
The prices at which stockholders who have held shares of common stock for the required one-year period may sell shares of common stock back to us are as follows:
| • | in the case of the death of a stockholder: (a) before we have first disclosed a NAV per Common Share based on data supported by appraisals of our assets and operations, the price paid to acquire the Common Shares from us; and (b) after we have first disclosed an NAV per Common Share, our NAV per Common Share; |
| • | the below percentages, except for in the case of the death of a stockholder: (a) before we have first disclosed an NAV per Common Share based on data supported by appraisals of our assets and operations, the price paid to acquire the Common Shares from us; and (b) after we have first disclosed an NAV per Common Share, our estimated value per Common Share: |
| • | 92.5% for stockholders who have continuously held their Common Shares for at least one year; |
| • | 95% for stockholders who have continuously held their Common Shares for at least two years; |
| • | 97.5% for stockholders who have continuously held their Common Shares for at least three years; and |
| • | 100% for stockholders who have continuously held their Common Shares for at least four years. |
Pursuant to the terms of our share repurchase program, we will make repurchases, if requested, at least once quarterly provided repurchases do not impair our capital or operations, as discussed further below. Each stockholder whose repurchase request is granted will receive the repurchase amount 30 days after the fiscal quarter in which we grant his, her or its repurchase request. Subject to certain limitations, we will also repurchase Common Shares upon the request of the estate, heir or beneficiary of a deceased stockholder. We will limit the number of Common Shares repurchased pursuant to our share repurchase program as follows: during any 12-month period, we will not repurchase in excess of 5.0% of the weighted average number of Common Shares outstanding during the prior calendar year; provided, however, that Common Shares repurchased in the case of the death of a stockholder will not count against this 5.0% limit.
Our Board of Directors, in its sole discretion, may choose at any time to terminate our share repurchase program, or reduce or increase the number of Common Shares purchased under the program, if it determines that the funds allocated to our share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our board of directors to eliminate, reduce or increase our share repurchase program will require the affirmative vote of our independent directors. From our date of inception through December 31, 2015, we did not receive any requests to redeem shares of our common stock under our share repurchase program. For the year ended December 31, 2016 we repurchased 34,358 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.99 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.
Distributions
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify or qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are at the discretion of our Board of Directors. We may use cash proceeds from the sale of shares of our common stock to fund distributions. We may continue to fund such distributions with cash proceeds from the sale of shares of our common stock or borrowings if we do not generate sufficient cash flow from our operations to fund distributions. Our ability to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distributions that we have established or may establish.
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We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of our REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, but only to the extent of a stockholder’s adjusted tax basis in our shares, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for depreciation and other non-cash items, it is likely that a portion of each distribution will constitute a tax-deferred return of capital for U.S. federal income tax purposes.
Distributions Declared by our Board of Directors and Source of Distributions
On January 14, 2015, our Board of Directors authorized and we declared a distribution rate which is calculated based on stockholders of record each day during the applicable period at a rate of $0.00164383 per day, and equals a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00. The first distribution began to accrue on December 11, 2014 (date of breaking escrow) through February 28, 2015 (the end of the month following our initial property acquisition) and subsequent distributions have been declared on a monthly basis thereafter. The first distribution was paid on March 15, 2015 and subsequent distributions have been paid on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month. Our stockholders may elect to have their distributions reinvested in additional shares of Common Shares under our DRIP.
Total distributions declared during the years ended December 31, 2016 and 2015 were $4.7 million and $1.0 million.
The following tables provide a summary of the quarterly distributions declared during the periods indicated:
| Year Ended December 31, 2016 | Three Months Ended December 31, 2016 | Three Months Ended September 30, 2016 | Three Months Ended June 30, 2016 | Three Months Ended March 31, 2016 | ||||||||||||||||||||||||||||||||||||
| Distribution period: | 2016 Year | Percentage
of Distributions | Q4 2016 | Percentage of Distributions | Q3 2016 | Percentage of Distributions | Q2 2016 | Percentage
of Distributions | Q1 2016 | Percentage
of Distributions | ||||||||||||||||||||||||||||||
| Date distribution declared | August 4, 2016 | May 12, 2016 | May 12, 2016 | November 13, 2015 & March 14, 2016 | ||||||||||||||||||||||||||||||||||||
| Date distribution paid | November 15, 2016 | August 15, 2016 | May 16, 2016, | February 15, 2016, | ||||||||||||||||||||||||||||||||||||
| December 15, 2016 | September 15, 2016 | June 15, 2016, | March 15, 2016, | |||||||||||||||||||||||||||||||||||||
| January 13, 2017 | October 14, 2016 | July 15, 2016 | April 15, 2016 | |||||||||||||||||||||||||||||||||||||
| Distribution paid | $ | 2,792,996 | $ | 895,497 | $ | 708,655 | $ | 825,940 | $ | 362,904 | ||||||||||||||||||||||||||||||
| Distribution reinvested | 1,939,115 | 758,041 | 647,455 | 174,361 | 359,258 | |||||||||||||||||||||||||||||||||||
| Total Distributions | $ | 4,732,111 | $ | 1,653,538 | $ | 1,356,110 | $ | 1,000,301 | $ | 722,162 | ||||||||||||||||||||||||||||||
| Source of distributions: | ||||||||||||||||||||||||||||||||||||||||
| Cash flows provided by operations | $ | 2,792,996 | 59 | % | $ | 793,928 | 48 | % | $ | 708,655 | 52 | % | $ | 825,940 | 83 | % | $ | 242,327 | 34 | % | ||||||||||||||||||||
| Offering proceeds | - | 0 | % | 101,569 | 6 | % | - | 0 | % | - | 0 | % | 120,577 | 17 | % | |||||||||||||||||||||||||
| Proceeds from issuance of common stock through DRIP | 1,939,115 | 41 | % | 758,041 | 46 | % | 647,455 | 48 | % | 174,361 | 17 | % | 359,258 | 49 | % | |||||||||||||||||||||||||
| Total Sources | $ | 4,732,111 | 100 | % | $ | 1,653,538 | 100 | % | $ | 1,356,110 | 100 | % | $ | 1,000,301 | 100 | % | $ | 722,162 | 100 | % | ||||||||||||||||||||
| Cash flows provided by operations (GAAP basis) | $ | 3,671,011 | $ | 793,928 | $ | 998,979 | $ | 1,635,777 | $ | 242,327 | ||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||
| Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP | 205,073 | 79,794 | 68,153 | 19,309 | 37,817 | |||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2015 | Three Months Ended December 31, 2015 | Three Months Ended September 30, 2015 | Three Months Ended June 30, 2015 | Three Months Ended March 31, 2015 | ||||||||||||||||||||||||||||||||||||
| Distribution period: | Percentage
of Distributions | Q4 2015 | Percentage
of Distributions | Q3 2015 | Percentage
of Distributions | Q2 2015 | Percentage
of Distributions | Q1 2015 | Percentage
of Distributions | |||||||||||||||||||||||||||||||
| Date distribution declared | November 14, 2015 | August 14, 2015 | May 14, 2015 | January 14, 2015 | ||||||||||||||||||||||||||||||||||||
| Date distribution paid | November 15, 2015, | August 15, 2015, | May 15, 2015, | March 15, 2015 and | ||||||||||||||||||||||||||||||||||||
| December 15, 2015, and | September 15, 2015, and | June 15, 2015, and | April 15, 2015 | |||||||||||||||||||||||||||||||||||||
| January 15, 2016 | October 15, 2015 | July 15, 2015 | ||||||||||||||||||||||||||||||||||||||
| Distributions paid | $ | 598,419 | $ | 249,743 | $ | 167,976 | $ | 112,612 | $ | 68,088 | ||||||||||||||||||||||||||||||
| Distributions reinvested | $ | 416,169 | 219,572 | 117,554 | 59,605 | 19,438 | ||||||||||||||||||||||||||||||||||
| Total Distributions | $ | 1,014,588 | $ | 469,315 | $ | 285,530 | $ | 172,217 | $ | 87,526 | ||||||||||||||||||||||||||||||
| Source of distributions: | ||||||||||||||||||||||||||||||||||||||||
| Cash flows provided by operations | $ | 598,419 | 59 | % | $ | 118,431 | 25 | % | $ | 167,976 | 59 | % | $ | 112,612 | 65 | % | $ | - | 0 | % | ||||||||||||||||||||
| Offering proceeds | $ | - | 0 | % | 131,312 | 28 | % | - | 0 | % | - | 0 | % | 68,088 | 78 | % | ||||||||||||||||||||||||
| Proceeds from issuance of common | ||||||||||||||||||||||||||||||||||||||||
| stock through DRIP | $ | 416,169 | 41 | % | 219,572 | 47 | % | 117,554 | 41 | % | 59,605 | 35 | % | 19,438 | 22 | % | ||||||||||||||||||||||||
| Total Sources | $ | 1,014,588 | 100 | % | $ | 469,315 | 100 | % | $ | 285,530 | 100 | % | $ | 172,217 | 100 | % | $ | 87,526 | 100 | % | ||||||||||||||||||||
| Cash flows provided by/(used in) | ||||||||||||||||||||||||||||||||||||||||
| operations (GAAP basis) | $ | 697,917 | $ | 118,431 | $ | 400,038 | $ | 285,757 | $ | (106,309 | ) | |||||||||||||||||||||||||||||
| Number of shares (in thousands) | ||||||||||||||||||||||||||||||||||||||||
| of common stock issued pursuant | ||||||||||||||||||||||||||||||||||||||||
| to the Company's DRIP | 43,807 | 23,113 | 12,374 | 6,274 | 2,046 | |||||||||||||||||||||||||||||||||||
Recent Sales of Unregistered Securities
The description of the sale of Subordinated Participations Interests set forth under “- Use of Public Offering Proceeds” is incorporated herein by reference. The Subordinated Participation Interests were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
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Use of Public Offering Proceeds
Our registration statement on Form S-11 (the “Offering”), pursuant to which we are offering to sell up to 30,000,000 shares of our common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to our distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. Since inception, we had received gross proceeds of $112.8 million from the sale of 11.5 million shares of our common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in our Sponsor.)
We initially expected to offer the Common Shares offered in our Primary Offering over a two-year period, or until July 15, 2016. However, because we had not sold all the Common Shares offered in our Primary Offering within two years, we will continue the Primary Offering for an additional year, until July 15, 2017, provided that the Offering will be terminated if all 30.0 million shares of our common stock are sold before such date. We reserve the right to reallocate the shares of common stock we are offering between the Primary Offering and the DRIP. Additionally, the Offering may be terminated at any time.
As of December 31, 2016, our Advisor owned 20,000 shares of common stock which were issued on December 24, 2014 for $200,000 or $10.00 per share.
As of December 11, 2014, we had reached the minimum offering under our Offering by receiving subscriptions of our common shares, representing gross offering proceeds of more than $2.0 million, and effective December 11, 2014 investors were admitted as stockholders and our Operating Partnership commenced operations. Through December 31, 2016, cumulative gross offering proceeds of approximately $112.8 million have been released to us. We invested the proceeds received from the Offering and our Advisor in our Operating Partnership, and as a result, held a 99% general partnership interest as of December 31, 2016 in the Operating Partnership’s common units.
Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and has committed to make a significant equity investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum amount of the Offering. Specifically, the Special Limited Partner has committed to purchase subordinated participation interests in the Operating Partnership (the “Subordinated Participation Interests”) quarterly in an amount equal to the product of (i) $10.00 minus our then current estimated NAV per Common Share, multiplied by (ii) the number of our Common Shares outstanding. The Operating Partnership will issue one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributes. The Special Limited Partner’s obligation will continue until the earlier of: (i) the termination of the Offering; (ii) the Special Limited Partner’s purchase of an aggregate of $36.0 million of Subordinated Participation Interests and (iii) the receipt of gross offering proceeds of $300.0 million. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value.
Through December 31, 2016, the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million, including approximately 228 Subordinated Participation Interests in consideration of $11.4 million during the year ended December 31, 2016. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
We will utilize a portion of our public offering proceeds towards funding the dealer manager fees, selling commissions and organization and other offering costs of our Primary Offering.
Below is a summary of the expenses we have incurred in connection with the issuance and distribution of the registered securities since inception:
| (Dollars in Thousands) | ||||
| Type of Expense Amount | ||||
| Selling commissions and dealer manager fees | $ | 10,429 | ||
| Other offering costs | 4,781 | |||
| Total offering expenses incurred from inception through December 31, 2016 | $ | 15,210 |
From the Company’s inception date through December 31, 2016, it has used the cumulative net offering proceeds received of approximately $109.7 million (including the purchase of an aggregate of $12.1 million of Subordinated Participation Interests by the Special Limited Partner), after deducting the offering costs incurred of $15.2 million, as follows:
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| (Dollars in thousands) | ||||
| Purchase of investment properties, net of financings | $ | 55,157 | ||
| Cash and cash equivalents | 53,665 | |||
| Cash distributions not funded by operations | 422 | |||
| Funding of restricted escrows | 851 | |||
| Other uses (primarily timing of payables) | (429 | ) | ||
| Total uses | $ | 109,666 | ||
As of March 15, 2016, we have sold 13.2 million shares of common stock at an aggregate of price of $129.7 million, this includes, 306,841 shares of common stock at an aggregate price of $2.9 million under our DRIP.
ITEM 6. SELECTED FINANCIAL DATA:
The following selected consolidated financial data are qualified by reference to and should be read in conjunction with our consolidated financial statements and Notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
| As of and for the Years Ended December 31, | ||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | |||||||||||||
| Operating Data: | ||||||||||||||||
| Revenues | $ | 22,551,234 | $ | 6,203,341 | $ | - | $ | - | ||||||||
| Net loss | $ | (113,022 | ) | $ | (340,230 | ) | $ | (143,947 | ) | $ | (1,274 | ) | ||||
| Less: net (income)/loss attributable to noncontrolling interests | (7 | ) | 44 | 25 | - | |||||||||||
| Net loss applicable to Company's common shares | $ | (113,029 | ) | $ | (340,186 | ) | $ | (143,922 | ) | $ | (1,274 | ) | ||||
| Basic and diluted loss per Company's common shares | $ | (0.01 | ) | $ | (0.20 | ) | $ | (4.16 | ) | $ | (0.06 | ) | ||||
| Dividends declared on Company's common shares | $ | 4,732,111 | $ | 1,014,588 | $ | - | $ | - | ||||||||
| Weighted average common shares outstanding-basic and diluted | 7,865,348 | 1,675,534 | 34,605 | 20,000 | ||||||||||||
| Balance Sheet Data: | ||||||||||||||||
| Total assets | $ | 195,316,139 | $ | 35,615,560 | $ | 2,420,104 | $ | 198,726 | ||||||||
| Long-term obligations | $ | 86,870,343 | $ | - | $ | - | $ | - | ||||||||
| Revolving promissory notes payable – affiliate | $ | - | $ | 2,003,614 | $ | - | $ | - | ||||||||
| Company's Stockholders' Equity | $ | 92,976,233 | $ | 30,277,404 | $ | 313,551 | $ | 198,726 | ||||||||
| Other financial data: | ||||||||||||||||
| Funds from operations (FFO) attributable to Company's common shares (1) | $ | 3,071,199 | $ | 406,227 | $ | (143,922 | ) | $ | (1,274 | ) | ||||||
| 1. | For more information about FFO and MFFO, including a reconciliation to our GAAP net loss for each period reported, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Funds from Operations and Modified Funds from Operations.” |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of these risks and uncertainties.
Overview
Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Lightstone REIT III” or “Company”) primarily has and intends to continue to acquire and operate full-service or select-service hotels, including extended-stay hotels and to a lesser extent commercial and residential properties, principally in North America. Principally through the Lightstone Value Plus REIT III, LP, (the “Operating Partnership”), our acquisitions may include both portfolios and individual properties.
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Our registration statement on Form S-11 (the “Offering”), pursuant to which we are offering to sell up to 30,000,000 shares of our common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. As of December 31, 2016, we had received gross proceeds of $112.8 million from the sale of 11.5 million shares of its common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein (“Lichtenstein”) our sponsor, who does business through The Lightstone Group, LLC (the “Sponsor”) and majority owns the limited liability company of that name.
Capital required for the purchase of real estate and real estate related investments is expected to be obtained from the public offering of shares of our common stock, and from any indebtedness that we may incur in connection with the acquisition of any real estate and real estate related investments.
Even though we intend primarily to acquire hotels, we may use a portion of the offering proceeds to purchase other types of real estate. We believe that at least 75% of the net proceeds raised in the Offering will be used to acquire hotels and the remaining portion of the net proceeds raised in the Offering will be used to acquire properties and real estate-related assets other than hotels. However, we may use more or less than 75% of the net proceeds raised in the Offering to acquire hotels and are not bound to that limit. Assets other than hotels may include, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, single-tenant properties, multifamily properties, student housing properties, warehouses and distribution facilities and medical office properties. We expect to invest a significant portion of our funds in direct real estate investments and other equity interests, and the remainder of our funds in debt interests, which may include bridge or mezzanine loans, including in furtherance of a loan-to-own strategy. However, we are not prohibited from investing all our funds in debt interests.
We initially expected to offer the Common Shares offered in our Primary Offering over a two-year period, or until July 15, 2016. However, because we had not sold all the Common Shares offered in our Primary Offering within two years, we will continue the Primary Offering for an additional year, until July 15, 2017, provided that the Offering will be terminated if all 30.0 million shares of our common stock are sold before such date. We reserve the right to reallocate the shares of common stock we are offering between the Primary Offering and the DRIP. Additionally, the Offering may be terminated at any time.
We do not have employees. We entered into an advisory agreement with Lightstone Value Plus REIT III LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
To qualify or maintain our qualification as a REIT, we engage in certain activities through a wholly-owned taxable REIT subsidiary (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Acquisitions and Investment Strategy
We have made and intend to make direct or indirect real estate investments that will satisfy our primary investment objectives of preserving capital, paying regular cash distributions and achieving appreciation of our assets over the long term. The ability of our Advisor to identify and execute investment opportunities at a pace consistent with the capital raised through our public offerings will directly impact our financial performance.
We will continue to seek to acquire and operate hotels and other commercial real estate assets primarily located in the United States. We may acquire and operate all such properties alone or jointly with another party.
The following summarizes our completed acquisitions and investments from our inception through December 31, 2016:
| · | On February 4, 2015 we acquired a 120-room select service Hampton Inn Hotel (the “Hampton Inn – Des Moines”) located in Des Moines, Iowa; |
| · | On May 15, 2015 we acquired a 146-room select service Courtyard by Marriott Hotel (the “Courtyard - Durham”) located in Durham, North Carolina; |
| · | On March 10, 2016 we acquired an 86-room select service Hampton Inn Hotel (the “Hampton Inn – Lansing”) located in Lansing, Michigan; |
| · | On March 23, 2016 we acquired a 92-room select service Courtyard by Marriott Hotel (the “Courtyard - Warwick”) located in Warwick, Rhode Island; |
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| · | On May 2, 2016 we acquired a 127-room select service SpringHill Suites by Marriott Hotel (the “SpringHill Suites – Green Bay”) located in Green Bay, Wisconsin; |
| · | On August 2, 2016 we acquired a portfolio of two select service Home2 Suites by Hilton Hotels, a 139-room select service hotel located in Tukwila, Washington (the “Home2 Suites – Tukwila”) and a 125-room select service hotel located in Salt Lake City, Utah (the “Home2 Suites – Salt Lake” and collectively the “Home2 Suites Hotel Portfolio”); |
| · | On September 13, 2016 we acquired an 84-room select service Fairfield Inn & Suites by Marriott Hotel (the “Fairfield Inn – Austin”) located in Austin, Texas; and |
| · | On October 7, 2016 we acquired an 80-room select service Staybridge Suites Hotel (the “Staybridge Suites– Austin”) located Austin, Texas. |
Current Environment
Our operating results as well as our investment opportunities are impacted by the health of the North American economies. Our business and financial performance may be adversely affected by current and future economic conditions, such as availability of credit, financial markets volatility, and recession.
Our business may be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the value and performance of our properties, and may affect our ability to pay distributions, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due.
We are not aware of any other material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of real estate and real estate related investments, other than those referred to in this Form 10-K.
Critical Accounting Estimates and Policies
General.
Our consolidated financial statements included in this annual report include our accounts and the Operating Partnership (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require management's most difficult, subjective or complex judgments.
Investments in Real Estate
We record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of our real estate assets, which is approximately 39 years for buildings and improvements, 5 to 10 years for furniture and fixtures.
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We make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments will have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability will be based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows will consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the property.
We make subjective assessments as to whether there are impairments in the values of our investments in real estate. We will evaluate our ability to collect both interest and principal related to any real estate related investments in which we invest. If circumstances indicate that such investment is impaired, we reduce the carrying value of the investment to its net realizable value. Such reduction in value will be reflected as a charge to operations in the period in which the determination is made.
Real Estate Purchase Price Allocation
When we make an investment in real estate, the fair value of the real estate acquired will be allocated to the acquired tangible assets, consisting of land, building and tenant improvements, identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, for acquired in-place leases, and the value of tenant relationships, and certain liabilities such as assumed debt and contingent liabilities, based in each case on their fair values. Purchase accounting will be applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions will be expensed as incurred within general and administrative costs within the consolidated statements of operations. Transaction costs such as professional fees, commissions, acquisition fees and closing costs incurred related to our investment in unconsolidated real estate entities, accounted for under the equity method of accounting, will be capitalized as part of the cost of the investment.
Upon acquisition of real estate operating properties, we estimate the fair value of acquired tangible assets and identified intangible assets and liabilities, assumed debt and contingent liabilities at the date of acquisition, based upon an evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Based on these estimates, we evaluate the existence of goodwill or a gain from a bargain purchase and will allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interest, if any. As final information regarding fair value of the assets acquired and liabilities assumed and noncontrolling interest is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation. The allocations will be finalized within twelve months of the acquisition date.
Revenue Recognition and Valuation of Related Receivables
Our revenue is comprised primarily of revenue from the operations of hotels. Hotel revenue will be recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services.
Accounting for Organization and Other Offering Costs
We record selling commissions and dealer manager fees paid to our dealer manager, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs and professional fees as reduction against additional paid-in capital. Any organization costs are expensed to general and administrative costs.
Treatment of Management Compensation, Expense Reimbursements
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Fees for services performed that represent our period costs are expensed as incurred. Such fees include acquisition fees associated with the purchase of interests in real estate entities; asset management fees paid to our Advisor and property management fees paid to affiliates of our Advisor. These fees are expensed or capitalized to the basis of acquired assets, as appropriate.
Affiliates of our Advisor may also perform fee-based construction management services for both our development and redevelopment activities and tenant construction projects. These fees will be considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to development and redevelopment activities will be depreciated over the estimated useful life of the associated project.
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Leasing activity at our properties may be outsourced to affiliates of our Advisor. Any corresponding leasing fees we pay will be capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and affiliates of our Advisor will be expensed or capitalized to the basis of acquired assets, as appropriate.
Income Taxes
We elected to qualify and be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. As a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended (the “Code”) we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
We engage in certain activities through taxable REIT subsidiaries TRSs. When we purchase a hotel we establish a TRS and enter into an operating lease agreement for the hotel. As such, we may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2016 and 2015, we had no material uncertain income tax positions. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To qualify or maintain our qualification as a REIT, we engage in certain activities through TRSs. As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Results of Operations
During 2015, we acquired our first investment property, the Hampton Inn – Des Moines on February 4, 2015 and subsequently acquired the Courtyard – Durham on May 15, 2015. During 2016, we acquired the Hampton Inn – Lansing on March 10, 2016, the Courtyard – Warwick on March 23, 2016, the SpringHill Suites – Green Bay on May 2, 2016, the Home2 Suites Hotel Portfolio on August 2, 2016, the Fairfield Inn – Austin on September 13, 2016 and the Staybridge Suites – Austin on October 7, 2016. As a result, we have nine investment properties as of December 31, 2016. The operating results of these investment properties are reflected in our consolidated statements of operations commencing from their respective dates of acquisition.
Comparison of the year ended December 31, 2016 vs. December 31, 2015
Consolidated
The rental revenue, property operating expenses, real estate taxes and depreciation and amortization for the year ended December 31, 2016 is attributable to the Hampton Inn – Des Moines and the Courtyard – Durham and the Hampton Inn – Lansing, the Courtyard – Warwick, the SpringHill Suites – Green Bay, the Home2 Suites Hotel Portfolio, the Fairfield Inn – Austin and the Staybridge Suites – Austin from their respective dates of acquisition.
The rental revenue, property operating expenses, real estate taxes and depreciation and amortization for the year ended December 31, 2015 is attributable to the Hampton Inn – Des Moines and the Courtyard – Durham from their respective dates of acquisition.
Rental revenue
Rental revenue increased by $16.4 million to $22.6 million during the year ended December 31, 2016 compared to $6.2 million for the same period in 2015. Approximately $14.5 million of the increase was attributable to the hotels acquired subsequent to the 2015 period and $1.9 million of the increase was attributable to the Hampton Inn – Des Moines and the Courtyard – Durham which did not have a full year of operations in the 2015 period.
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Property operating expenses
Property operating expenses increased by $9.4 million to $13.1 million during the year ended December 31, 2016 compared to $3.7 million for the same period in 2015. Approximately $8.1 million of the increase was attributable to the hotels acquired subsequent to the 2015 period and $1.3 million of the increase was attributable to the Hampton Inn – Des Moines and the Courtyard – Durham which did not have a full year of operations in the 2015 period.
Real estate taxes
Real estate taxes increased by $0.6 million to $0.9 million during the year ended December 31, 2016 compared to $0.3 million for the same period in 2015. Approximately $0.4 million of the increase was attributable to the hotels acquired subsequent to the 2015 period and $0.2 million of the increase was attributable to the Hampton Inn – Des Moines and the Courtyard – Durham which did not have a full year of operations in the 2015 period.
General and administrative expense
General and administrative expense increased by $2.0 million to $2.9 million during the year ended December 31, 2016 compared to $0.9 million for the same period in 2015. The increase reflects (i) higher acquisition fees and acquisition-related costs of $1.7 million in the 2016 period and (ii) an increase in accounting and corporate filing fees.
Depreciation and amortization
Depreciation and amortization expense increased by $2.5 million to $3.2 million during the year ended December 31, 2016 compared to $0.7 million for the same period in 2015. Approximately $2.1 million of the increase was attributable to the hotels acquired subsequent to the 2015 period and $0.4 million of the increase was attributable to the Hampton Inn – Des Moines and the Courtyard – Durham which did not have a full year of operations in the 2015 period.
Interest expense
Interest expense was $2.5 million during the year ended December 31, 2016 compared to $0.9 million for the same period in 2015. Interest expense is attributable to financings associated with our hotels. During the years ended December 31, 2016 and 2015, interest expense of $0.6 million, which included origination fees of $0.3 million, and interest expense of $0.9 million, which included origination fees of $0.2 million, respectively, was paid to the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a REIT also sponsored by the Company’s Sponsor.
Financial Condition, Liquidity and Capital Resources
Overview:
For the year ended December 31, 2016, our primary source of funds were (i) $73.9 million of proceeds from our sale of shares of common stock under our Offering, (ii) $88.1 million in proceeds from our mortgage payable and (iii) $11.4 million received from the Special Limited Partner’s purchase of approximately 228 Subordinated Participation Interests. The primary source of capital required to fund our future purchases of real estate and/or real estate related investments will principally come from the proceeds related to our Offering, any additional proceeds received from the Special Limited Partner’s purchase of Subordinated Participation Interests, and from any indebtedness that we may incur in connection with the acquisition and operations of any real estate investments thereafter.
We have and intend to continue to utilize leverage either in connection with acquiring our properties or subsequent to their acquisition. The number of different properties we acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.
Our future sources of funds are expected to primarily consist of (i) proceeds from our sale of shares of common stock under our Offering, (ii) cash flows from our operations, (iii) proceeds from our borrowings and (iv) proceeds from the potential sale of additional Subordinated Participation Interests to the Special Limited Partner and (v) proceeds from our DRIP. We currently believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.
We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.
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Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of December 31, 2016, our total borrowings were $86.9 million which represented 81% of our net assets.
Our future borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
In general the type of future financing executed by us to a large extent will be dictated by the nature of the investment and current market conditions. For long-term real estate investments, it is our intent to finance future acquisitions using long-term fixed rate debt. However there may be certain types of investments and market circumstances which may result in variable rate debt being the more appropriate choice of financing. To the extent floating rate debt is used to finance the purchase of real estate, management will evaluate a number of protections against significant increases in interest rates, including the purchase of interest rate cap instruments.
We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from offering proceeds, proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We may draw upon lines of credit to acquire properties pending our receipt of proceeds from our public offerings. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.
In addition to making investments in accordance with our investment objectives, we have used and expect to continue use our capital resources to make certain payments to our Advisor, our Dealer Manager, and our Property Manager during the various phases of our organization and operation. During our organizational and offering stage, these payments include payments to our Dealer Manager for selling commissions and the dealer manager fee, and payments to our Advisor for the reimbursement of organization and other offering costs.
Selling commissions and dealer manager fees are paid to the Dealer Manager or soliciting dealers, as applicable, pursuant to various agreements, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital as costs are incurred. Any organizational costs are accounted for as general and administrative costs. The following table represents the selling commissions and dealer manager fees and other offering costs for the periods indicated:
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Selling commissions and dealer manager fees | $ | 7,008,694 | $ | 3,377,887 | ||||
| Other offering costs | $ | 770,493 | $ | 1,870,078 | ||||
We have agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor and its affiliates to perform such services as provided in these agreements. Furthermore, the Advisor has and is expected to continue to advance certain organization and offering costs on our behalf to the extent we do not have sufficient funds to pay such costs. As of December 31, 2016 and 2015, we owed the Advisor and its affiliated entities an aggregate of $109,532 and $1.2 million, respectively, which was principally for organization and offering costs paid on its behalf, and is classified as due to related parties on the consolidated balance sheets.
For the years ended December 31, 2016 and 2015, we paid the Advisor acquisition fees of approximately $1.1 million and $269,000, respectively.
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We currently expect that organization and offering expenses, other than selling commissions and dealer manager fee, will amount to approximately 2.0% of our gross offering proceeds assuming we sell the maximum amount of the Offering. In no event will organization and offering expenses ultimately exceed 15.0% of our gross offering proceeds. However, during the initial stage of our Offering, our organization and offering expenses may temporarily exceed 15.0% of gross offering proceeds since many of the expenses incurred in relation to the Offering were incurred prior to the sale of shares of our common stock.
During the acquisition and development stage, payments may include asset acquisition fees and financing coordination fees, and the reimbursement of acquisition related expenses to our Advisor. During our operational stage, we will pay affiliates of our Advisor and/or other third party property managers a property management fee and our Advisor an asset management fee or asset management participation or construction management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Upon liquidation of assets, we may pay our advisor or its affiliates a real estate disposition commission. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP III LLC, an affiliate of the Advisor.
Other Related Party Transactions
From time to time, we may purchase title insurance from an agent in which our Sponsor owns a 50% limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, before we purchase any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. This process results in terms similar to those that would be negotiated at an arm’s length basis. During the years ended December 31, 2016 and 2015, we paid approximately $154,000 and $21,000, respectively, to the title insurance agent.
During the years ended December 31, 2016 and 2015, we paid $36,298 and $403,589, respectively, to an affiliate of the Sponsor for the Sponsor’s marketing expenses related to the offering that were recorded as a reduction to additional paid in capital.
During the year ended December 31, 2016 and 2015, we recorded interest expense of $606,147 (including origination fees of $276,666) and $904,302 (including origination fees of $178,334), respectively, to the operating partnership of Lightstone II in connection with the Des Moines Promissory Note, the Durham Promissory Note, the Lansing Promissory Note and the Green Bay Promissory Note.
Summary of Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
| Cash flows provided by operating activities | $ | 3,671,011 | $ | 697,917 | ||||
| Cash flows used in investing activities | (112,982,860 | ) | (28,211,839 | ) | ||||
| Cash flows provided by financing activities | 157,628,955 | 32,523,297 | ||||||
| Net change in cash and cash equivalents | 48,317,106 | 5,009,375 | ||||||
| Cash and cash equivalents, beginning of the year | 6,747,401 | 1,738,026 | ||||||
| Cash and cash equivalents, end of the year | $ | 55,064,507 | $ | 6,747,401 | ||||
Our principal sources of cash flow were derived from proceeds received from our Offering, proceeds received from our borrowings, proceeds received from the Special Limited Partner’s purchase of Subordinated Participation Interests and operating cash flows provided by our properties. In the future, we expect to acquire additional properties which we expect to provide us with a relatively consistent stream of cash flow to sufficiently fund our operating expenses, any scheduled debt service and any monthly distributions authorized by our Board of Directors.
Our principal demands for liquidity currently are expected to be acquisition and development activities, distribution payments, scheduled debt service and costs associated with our Offering. The principal sources of funding for our operations are currently expected to be proceeds from the issuance of equity securities and financings.
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Operating activities
The net cash provided by operating activities of $3.7 million during the year ended December 31, 2016 consisted of our net loss of $0.1 million adjusted for depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $3.7 million and net changes in operating assets and liabilities of $0.1 million.
Investing activities
The cash used in investing activities of $113.0 million during the year ended December 31, 2016 primarily consisted of approximately $112.3 million for the purchase of investment property and refundable escrow deposits of $0.7 million.
Financing activities
The net cash provided by financing activities of $157.6 million during the year ended December 31, 2016 consisted of $73.9 million of offering proceeds, $88.1 million in proceeds from our mortgages payable and $11.4 million received from the Special Limited Partner’s purchase of approximately 228 Subordinated Participation Interests; partially offset by the payment of $9.2 million of commissions and offering costs, $2.1 million in net payments on our Revolving Promissory Notes Payable – Related Party, cash distributions of $2.6 million to our common stockholders, the payment of loan fees and expenses of $1.6 million and the redemptions and cancellations of shares of common stock of $0.3 million.
We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.
Distribution Reinvestment and Share Repurchase Programs
Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock, at an initial purchase price of $9.50 per share, equal to 95% of our Offering price of $10.00 per share, by reinvesting their distributions. In connection with our Offering, 10,000,000 Common Shares were reserved for issuance under our DRIP and as of December 31, 2016, 220,847 shares of common stock had been issued under our DRIP and 9,779,153 shares remain available for issuance.
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. From our date of inception through December 31, 2015, we did not receive any requests to redeem shares of our common stock under our share repurchase program. For the year ended December 31, 2016 we repurchased 34,358 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.99 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.
Our Board of Directors reserves the right to terminate either program for any reason without cause by providing 10 days written notice of termination of the distribution reinvestment program to all participants or written notice of termination of the share repurchase program to all stockholders.
Contractual Obligations
The following is a summary of our estimated contractual obligations outstanding over the next five years and thereafter as of December 31, 2016.
| Contractual Obligations | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||||||||
| Principal maturities | $ | 424,252 | $ | 445,052 | $ | 60,162,871 | $ | 486,092 | $ | 26,509,613 | $ | - | $ | 88,027,880 | ||||||||||||||
| Interest payments | 4,938,482 | 4,928,583 | 3,516,092 | 1,287,576 | 1,051,196 | - | 15,721,929 | |||||||||||||||||||||
| Total | $ | 5,362,734 | $ | 5,373,635 | $ | 63,678,963 | $ | 1,773,668 | $ | 27,560,809 | $ | - | $ | 103,749,809 | ||||||||||||||
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
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Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
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Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
The below table illustrates the items deducted from or added to net loss in the calculation of FFO and MFFO during the periods presented. The table discloses MFFO in the IPA recommended format and MFFO without the straight-line rent adjustment which management also uses as a performance measure. Items are presented net of non-controlling interest portions where applicable.
| For the Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Net loss | $ | (113,022 | ) | $ | (340,230 | ) | ||
| FFO adjustments: | ||||||||
| Depreciation and amortization of real estate assets | 3,184,298 | 746,492 | ||||||
| FFO | 3,071,276 | 406,262 | ||||||
| MFFO adjustments: | ||||||||
| Acquisition and other transaction related costs expensed | 2,152,938 | 597,327 | ||||||
| MFFO | 5,224,214 | 1,003,589 | ||||||
| Straight-line rent(1) | - | - | ||||||
| MFFO - IPA recommended format | $ | 5,224,214 | $ | 1,003,589 | ||||
| Net loss | $ | (113,022 | ) | $ | (340,230 | ) | ||
| Less: net (income)/loss attributable to noncontrolling interests | (7 | ) | 44 | |||||
| Net loss applicable to Company's common shares | $ | (113,029 | ) | $ | (340,186 | ) | ||
| Net loss per common share, basic and diluted | $ | (0.01 | ) | $ | (0.20 | ) | ||
| FFO | $ | 3,071,276 | $ | 406,262 | ||||
| Less: FFO attributable to noncontrolling interests | (77 | ) | (35 | ) | ||||
| FFO attributable to Company's common shares | $ | 3,071,199 | $ | 406,227 | ||||
| FFO per common share, basic and diluted | $ | 0.39 | $ | 0.24 | ||||
| MFFO - IPA recommended format | $ | 5,224,214 | $ | 1,003,589 | ||||
| Less: MFFO attributable to noncontrolling interests | (132 | ) | (131 | ) | ||||
| MFFO attributable to Company's common shares | $ | 5,224,082 | $ | 1,003,458 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 7,865,348 | 1,675,534 | ||||||
| (1) | Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance. |
The table below presents our cumulative distributions declared and cumulative FFO:
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| For the period October 5, 2012 | ||||
| (date of inception) through | ||||
| December 31, 2016 | ||||
| FFO attributable to Company's common shares | $ | 3,332,230 | ||
| Cumulative distributions declared | $ | 5,746,699 | ||
New Accounting Pronouncements
See Note 2 to the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2016 and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.
Subsequent Events
See Note 9 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from January 1, 2017 through the date of the financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary market risk to which we are currently and expect to continue to be exposed is interest rate risk.
We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of December 31, 2016, we did not have any derivative agreements outstanding. We do not anticipate having any foreign operations and thus we do not expect to be exposed to foreign currency fluctuations.
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable (included in other assets) and accounts payable and other accrued expenses approximated their fair values as of December 31, 2016 because of the short maturity of these instruments.
The following table shows our estimated principal maturities during the next five years and thereafter as of December 31, 2016:
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 424,252 | $ | 445,052 | $ | 60,162,871 | $ | 486,092 | $ | 26,509,613 | $ | - | $ | 88,027,880 | ||||||||||||||
As of December 31, 2016, approximately $59.7 million, or 68%, of our debt, is a variable rate instrument (not subject to an interest rate cap or swap) and our interest expense associated with this instrument is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in Libor or Prime rate) would increase annual interest expense by approximately $0.6 million
The estimated fair value of our mortgages payable is as follows:
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| As of December 31, 2016 | ||||||||
| Carrying Amount | Estimated Fair Value | |||||||
| Mortgages payable | $ | 88,027,880 | $ | 87,252,072 | ||||
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
As of December 31, 2015, the estimated fair value of our revolving promissory notes payable – related party approximated its carrying value ($2.1 million) because of its floating interest rate.
In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to obtain or refinance debt in the future. As of December 31, 2016, we had no off-balance sheet arrangements.
We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries
(a Maryland corporation)
Schedules not filed:
All schedules other than the one listed in the index have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Lightstone Value Plus Real Estate Investment Trust III, Inc.
We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years then ended. In connection with our audits of the consolidated financial statements, we have also audited financial statement schedule “Schedule III – Real Estate and Accumulated Depreciation” as of December 31, 2016. The financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries as of December 31, 2016 and 2015 and the consolidated results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.
/s/ EisnerAmper LLP
Iselin, New Jersey
March 27, 2017
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2016 | December 31, 2015 | |||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | 22,283,209 | $ | 2,205,864 | ||||
| Building and improvements | 103,080,704 | 22,258,087 | ||||||
| Furniture and fixtures | 15,133,479 | 2,501,282 | ||||||
| Construction in progress | 130,249 | 1,175,110 | ||||||
| Gross investment property | 140,627,641 | 28,140,343 | ||||||
| Less accumulated depreciation | (3,862,125 | ) | (731,289 | ) | ||||
| Net investment property | 136,765,516 | 27,409,054 | ||||||
| Cash | 55,064,507 | 6,747,401 | ||||||
| Deposits | 851,441 | 1,000,000 | ||||||
| Accounts receivable and other assets | 2,634,675 | 459,105 | ||||||
| Total Assets | $ | 195,316,139 | $ | 35,615,560 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Accounts payable and other accrued expenses | $ | 2,684,346 | $ | 1,285,160 | ||||
| Mortgages payable | 86,870,343 | - | ||||||
| Revolving promissory notes payable, net - related party | - | 2,003,614 | ||||||
| Due to related parties | 109,532 | 1,159,314 | ||||||
| Distributions payable | 583,113 | 188,253 | ||||||
| Total liabilities | 90,247,334 | 4,636,341 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Company's stockholders' equity: | ||||||||
| Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 200,000,000 shares authorized, 11,656,877 and 4,009,656 shares issued and outstanding, respectively | 116,569 | 40,097 | ||||||
| Additional paid-in-capital | 99,309,774 | 32,081,648 | ||||||
| Subscription receivable | (105,000 | ) | (344,371 | ) | ||||
| Accumulated deficit | (6,345,110 | ) | (1,499,970 | ) | ||||
| Total Company stockholders' equity | 92,976,233 | 30,277,404 | ||||||
| Noncontrolling interests | 12,092,572 | 701,815 | ||||||
| Total Stockholders' Equity | 105,068,805 | 30,979,219 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 195,316,139 | $ | 35,615,560 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 22,551,234 | $ | 6,203,341 | ||||
| Expenses: | ||||||||
| Property operating expenses | 13,111,144 | 3,685,843 | ||||||
| Real estate taxes | 926,424 | 251,400 | ||||||
| General and administrative costs | 2,869,290 | 946,228 | ||||||
| Depreciation and amortization | 3,184,298 | 746,492 | ||||||
| Total operating expenses | 20,091,156 | 5,629,963 | ||||||
| Operating income | 2,460,078 | 573,378 | ||||||
| Interest expense | (2,499,238 | ) | (904,302 | ) | ||||
| Other expense, net | (73,862 | ) | (9,306 | ) | ||||
| Net loss | (113,022 | ) | (340,230 | ) | ||||
| Less: net (income)/loss attributable to noncontrolling interests | (7 | ) | 44 | |||||
| Net loss applicable to Company's common shares | $ | (113,029 | ) | $ | (340,186 | ) | ||
| Net loss per Company's common shares, basic and diluted | $ | (0.01 | ) | $ | (0.20 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 7,865,348 | 1,675,534 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Shares | Additional Paid-In | Subscription | Total Noncontrolling | Total | ||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Accumulated Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2014 | 286,674 | $ | 2,867 | $ | 455,880 | $ | - | $ | (145,196 | ) | $ | 1,975 | $ | 315,526 | ||||||||||||||
| Net loss | - | - | - | - | (340,186 | ) | (44 | ) | (340,230 | ) | ||||||||||||||||||
| Distributions declared | - | - | - | - | (1,014,588 | ) | - | (1,014,588 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (116 | ) | (116 | ) | |||||||||||||||||||
| Contributions from noncontrolling interests | - | - | - | - | - | 700,000 | 700,000 | |||||||||||||||||||||
| Proceeds from offering | 3,688,657 | 36,887 | 36,547,987 | (344,371 | ) | - | - | 36,240,503 | ||||||||||||||||||||
| Selling commissions and dealer manager fees | - | - | (3,377,887 | ) | - | - | - | (3,377,887 | ) | |||||||||||||||||||
| Other offering costs | - | - | (1,870,078 | ) | - | - | - | (1,870,078 | ) | |||||||||||||||||||
| Shares issued from distribution reinvestment program | 34,325 | 343 | 325,746 | - | - | - | 326,089 | |||||||||||||||||||||
| BALANCE, December 31, 2015 | 4,009,656 | $ | 40,097 | $ | 32,081,648 | $ | (344,371 | ) | $ | (1,499,970 | ) | $ | 701,815 | $ | 30,979,219 | |||||||||||||
| Net (loss)/income | - | - | - | - | (113,029 | ) | 7 | (113,022 | ) | |||||||||||||||||||
| Distributions declared | - | - | - | - | (4,732,111 | ) | - | (4,732,111 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (120 | ) | (120 | ) | |||||||||||||||||||
| Contributions from noncontrolling interests | - | - | - | - | - | 11,390,870 | 11,390,870 | |||||||||||||||||||||
| Proceeds from offering | 7,495,057 | 74,951 | 73,589,137 | 239,371 | - | - | 73,903,459 | |||||||||||||||||||||
| Selling commissions and dealer manager fees | - | - | (7,008,694 | ) | - | - | - | (7,008,694 | ) | |||||||||||||||||||
| Other offering costs | - | - | (770,493 | ) | - | - | - | (770,493 | ) | |||||||||||||||||||
| Shares issued from distribution reinvestment program | 186,522 | 1,865 | 1,761,016 | - | - | 1,762,881 | ||||||||||||||||||||||
| Redemption and cancellation of shares | (34,358 | ) | (344 | ) | (342,840 | ) | - | - | - | (343,184 | ) | |||||||||||||||||
| BALANCE, December 31, 2016 | 11,656,877 | $ | 116,569 | $ | 99,309,774 | $ | (105,000 | ) | $ | (6,345,110 | ) | $ | 12,092,572 | $ | 105,068,805 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (113,022 | ) | $ | (340,230 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,184,298 | 746,492 | ||||||
| Amortization of deferred financing costs | 463,318 | 178,333 | ||||||
| Other non-cash adjustments | 19,334 | 13,029 | ||||||
| Changes in assets and liabilities: | ||||||||
| Increase in accounts receivable and other assets | (1,350,571 | ) | (175,260 | ) | ||||
| Increase in accounts payable and other accrued expenses | 1,456,349 | 271,992 | ||||||
| Increase in due to related parties | 11,305 | 3,561 | ||||||
| Net cash provided by operating activities | 3,671,011 | 697,917 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of investment property | (112,261,759 | ) | (27,211,839 | ) | ||||
| Funding of restricted escrows | (721,101 | ) | (1,000,000 | ) | ||||
| Net cash used in investing activities | (112,982,860 | ) | (28,211,839 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from mortgages payable | 88,096,000 | - | ||||||
| Payments on mortgages payable | (68,120 | ) | - | |||||
| Proceeds from revolving promissory notes payable - related party | 24,200,000 | 20,200,000 | ||||||
| Payments on revolving promissory notes payable - related party | (26,255,281 | ) | (18,144,719 | ) | ||||
| Payment of loan fees and expenses | (1,569,187 | ) | (230,000 | ) | ||||
| Proceeds from issuance of common stock | 73,903,459 | 36,240,503 | ||||||
| Payment of commissions and offering costs | (9,151,111 | ) | (5,042,125 | ) | ||||
| Proceeds from noncontrolling interests | 11,390,870 | - | ||||||
| Distributions to noncontrolling interests | (120 | ) | (116 | ) | ||||
| Distributions to common stockholders | (2,574,371 | ) | (500,246 | ) | ||||
| Redemption and cancellation of common shares | (343,184 | ) | - | |||||
| Net cash provided by financing activities | 157,628,955 | 32,523,297 | ||||||
| Net change in cash | 48,317,106 | 5,009,375 | ||||||
| Cash, beginning of year | 6,747,401 | 1,738,026 | ||||||
| Cash, end of year | $ | 55,064,507 | $ | 6,747,401 | ||||
| Supplemental cash flow information for the periods indicated is as follows: | ||||||||
| Cash paid for interest | $ | 1,650,513 | $ | 719,741 | ||||
| Distributions declared, but not paid | $ | 583,113 | $ | 188,253 | ||||
| Commissions and other offering costs accrued but not paid | $ | 109,540 | $ | 420,377 | ||||
| Subscription receivable | $ | 105,000 | $ | 344,371 | ||||
| Value of shares issued from distribution reinvestment program | $ | 1,762,881 | $ | 326,089 | ||||
| Application of deposit to acquisition of investment property | $ | 869,660 | $ | 500,000 | ||||
| Contribution of non-controlling interest received as offset to due to affiliate | $ | - | $ | 700,000 | ||||
| Investment property acquired but not paid | $ | - | $ | 296,040 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
1. Organization
Lightstone Value Plus Real Estate Investment Trust III, Inc. (‘‘Lightstone REIT III’’), incorporated on October 5, 2012, in Maryland, elected to qualify and be taxed as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. Through December 31, 2016, the Company has acquired nine wholly-owned hotels and it will continue to seek to acquire additional hotels and other commercial real estate assets primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate.
The Lightstone REIT III is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the ‘‘Operating Partnership’’).
Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns refers to Lightstone REIT III, its Operating Partnership or the Company as required by the context in such pronoun used.
Offering and Structure
Our sponsor David Lichtenstein (“Lichtenstein”), who does business as the Lightstone Group (the “Sponsor”) and majority owns the limited liability company of that name with a diversified portfolio of over 120 properties containing approximately 10,000 multifamily units, approximately 250,000 square feet of office space, 1.5 million square feet of industrial space, 31 hotels and 4.6 million square feet of retail space. The residential, office, industrial, hotel and retail properties are located in 26 states. Based in New York and supported by a regional office in New Jersey, our sponsor employs approximately 397 staff and professionals.
Our advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by our Sponsor. Our Advisor, together with our board of directors (the “Board of Directors”), is and will continue to be primarily responsible for making investment decisions and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP III LLC, which has subordinated participation interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.
We do not have and will not have any employees that are not also employed by our Sponsor or its affiliates. We depend substantially on our Advisor, which generally has responsibility for our day-to-day operations. Under the terms of the advisory agreement, the Advisor also undertakes to use its reasonable best efforts to present to us investment opportunities consistent with our investment policies and objectives as adopted by our Board of Directors.
Orchard Securities, LLC (the ‘‘Dealer Manager’’), a broker-dealer registered with FINRA, serves as the dealer manager of the Company’s public offering. The Dealer Manager also has opened an OSJ (“Office of Supervisory Jurisdiction”) that does business as “Lightstone Capital Markets” and focuses primarily on distributing interests in programs sponsored by our Sponsor.
Our Sponsor has various majority owned and controlled affiliated property managers, which may manage certain of the properties we acquire. However, we also contract with other unaffiliated third-party property managers, principally for the management of our hospitality properties.
Our registration statement on Form S-11 (the “Offering”), pursuant to which we are offering to sell up to 30.0 million shares of our common stock, par value $0.01 per share (which may be referred to herein as “shares of common stock” or as “Common Shares”) for an initial price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10.0 million shares of common stock available pursuant to our distribution reinvestment program (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014 and we began offering our shares of our common stock for sale to the public.
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As of December 31, 2016, we had received aggregate gross proceeds of approximately $112.8 million from the sale of 11.5 million shares of our common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in our Sponsor) in our Offering.
The Company initially expected to offer the Common Shares offered in its Primary Offering over a two-year period, or until July 15, 2016. However, because the Company had not sold all the Common Shares offered in its Primary Offering within two years, the Company will continue the Primary Offering for an additional year, until July 15, 2017, provided that the Offering will be terminated if all 30.0 million shares of our common stock are sold before such date. The Company reserves the right to reallocate the shares of common stock it is offering between the Primary offering and the DRIP. Additionally, the Offering may be terminated at any time.
As of December 31, 2016, our Advisor owned 20,000 shares of common stock which were issued on December 24, 2012 for $200,000 or $10.00 per share.
As of December 11, 2014, we had reached the minimum offering under our Offering by receiving subscriptions of our Common Shares, representing gross offering proceeds of approximately $2.0 million, and effective December 11, 2014 investors were admitted as stockholders and our Operating Partnership commenced operations. Through December 31, 2016, cumulative gross offering proceeds of approximately $112.8 million were released to us.
Our shares of common stock are not currently listed on a national securities exchange. We may seek to list our shares of common stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares of common stock at this time. We do not anticipate that there would be any market for our shares of common stock until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to the eighth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.
Noncontrolling Interests
Partners of Operating Partnership
On July 16, 2014, our Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. A limited partner has the right to convert operating partnership units into cash or, at our option, an equal number of our common shares, as allowed by the limited partnership agreement.
Lightstone REIT III invested the proceeds received from the Offering and its Advisor in the Operating Partnership, and as a result, held a 99% general partnership interest as of December 31, 2016 and 2015 in the Operating Partnership’s common units.
Special Limited Partner
Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and has committed to make a significant equity investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum amount of the Offering. Specifically, the Special Limited Partner has committed to purchase subordinated participation interests in the Operating Partnership (the “Subordinated Participation Interests”) quarterly in an amount equal to the product of (i) $10.00 minus our then current estimated NAV per Common Share, multiplied by (ii) the number of our Common Shares outstanding. The Operating Partnership will issue one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributes. The Special Limited Partner’s obligation will continue until the earlier of: (i) the termination of the Offering; (ii) the Special Limited Partner’s purchase of an aggregate of $36.0 million of Subordinated Participation Interests and (iii) the receipt of gross offering proceeds of $300.0 million.
Through December 31, 2016, the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million, including approximately 228 Subordinated Participation Interests in consideration of $11.4 million during the year ended December 31, 2016. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
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Related Parties
Our Advisor and its affiliates and the Special Limited Partner are related parties of the Company. Certain of these entities have or will receive compensation for services related to the Offering and will continue to receive compensation and services for the investment, management and disposition of our assets. These entities have and/or will receive compensation during the offering, acquisition, operational and liquidation stages. The compensation levels during our offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements. See Note 6 – Related Party Transactions for additional information.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which Lightstone REIT III exercises financial and operating control). As of December 31, 2016, the Company had a 99% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Investments in other real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary will be accounted for using the equity method. Investments in other real estate entities where the Company has virtually no influence will be accounted for using the cost method.
Revenue
Hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services.
Investments in Real Estate
Accounting for Acquisitions
When the Company makes an investment in real estate, the fair value of the real estate acquired will be allocated to the acquired tangible assets, consisting of land, building and improvements, furniture and fixtures and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases, and the value of tenant relationships, based in each case on their fair values. Purchase accounting will be applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions will be expensed as incurred and recorded in general and administrative costs in the consolidated statements of operations. Transaction costs incurred related to the Company’s investments in unconsolidated affiliated entities, accounted for under the equity method of accounting, will be capitalized as part of the cost of the investment.
Upon the acquisition of real estate operating properties, the Company will estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and certain liabilities such as assumed debt and contingent liabilities, at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Based on these estimates, the Company will evaluate the existence of goodwill or a gain from a bargain purchase and will allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation. The allocations will be finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date.
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Carrying Value of Assets
The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets will be depreciated or amortized, will be determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates.
Impairment Evaluation
Management will evaluate the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets will be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss will be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company will evaluate the long-lived assets for potential impairment on an annual basis and record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value will be based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial.
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Maintenance and repairs will be charged to expense as incurred.
Investments in Unconsolidated Entities
We will evaluate investments in other entities for consolidation. We will consider the percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining if the investment qualifies for consolidation.
Under the equity method, the investment will be recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of each investor will be allocated in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity will be amortized over the respective lives of the underlying assets as applicable. These items will be reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities.
Under the cost method of accounting, the investment will be recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Dividends earned from the underlying entity will be recorded as interest income.
On a quarterly basis, we will assess whether the value of our investments in unconsolidated entities has been impaired. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we will record an impairment charge.
Deferred Costs
We will capitalize initial direct costs associated with financing activities. The costs will be capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs will begin in the period during which the loan is originated using the effective interest method over the term of the loan.
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Income Taxes
The Company elected to qualify and be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2015. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its net taxable income that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at regular corporate rates, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.
The Company engages in certain activities through taxable REIT subsidiaries ("TRSs"). When the Company purchases a hotel it establishes a TRS and enters into an operating lease agreement for the hotel. As such, the Company may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2016 and 2015, we had no material uncertain income tax positions. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
Additionally, even if the Company qualifies as a REIT, it may still be subject to some U.S. federal, state and local taxes on its income and property and to U.S. federal income taxes and excise taxes on its undistributed income.
To maintain our qualification as a REIT, we may engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we will be subject to U.S. federal and state income and franchise taxes from these activities.
Selling Commission, Dealer Manager Fees and Organization and Offering Costs
Selling commissions and dealer manager fees paid to the Dealer Manager, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred. Any organization costs are expensed as general and administrative costs. Through December 31, 2016, the Company has incurred approximately $10.4 million in selling commissions and dealer manager fees and $4.8 million of other offering costs. From the commencement of the offering through December 31, 2016, the Company has recorded approximately $15.2 million of these costs against APIC.
Concentration of Risk
The Company maintains its cash in bank deposit accounts, which, at times, may exceed U.S. federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.
Basic and Diluted Net Earnings per Common Share
Net earnings per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share takes into account the effect of any dilutive instruments. The Company had no potentially dilutive securities outstanding during the periods presented.
Financial Instruments
The carrying amounts of cash, accounts receivable (included in other assets) and accounts payable and other accrued expenses approximate their fair values because of the short maturity of these instruments.
The estimated fair value of our mortgages payable is as follows:
| As of December 31, 2016 | ||||||||
| Carrying Amount | Estimated Fair Value | |||||||
| Mortgages payable | $ | 88,027,880 | $ | 87,252,072 | ||||
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The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
As of December 31, 2015, the estimated fair value of our revolving promissory notes payable – related party approximated its carrying value ($2.1 million) because of its floating interest rate.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the requirements and impact of this update on its financial statements.
In January 2017, FASB issued guidance that amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force meetings. The SEC guidance that specifically relates to our consolidated financial statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, on revenue and leases. Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The adoption this guidance did not have a material effect on the Company's consolidated financial statements.
In August 2016, the issued FASB an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. This guidance will not have a material impact on the Company’s consolidated financial statements.
In September 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to simplify the accounting for adjustments made to provisional amounts during the measurement period of a business combination. The amendment requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective with earlier application permitted for financial statements that have not been issued. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The SEC staff noted that this update did not address situations where a company has debt issuance costs related to line-of-credit arrangements. As a result, the FASB issued an additional update which states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted this standard during the quarter ended March 31, 2016. As a result of adopting this standard on a retrospective basis, $51,667 was reclassified out of prepaid expenses and other assets and was reclassified into revolving promissory notes payable, net - related party on the consolidated balance sheet as of December 31, 2015.
In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows.
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The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.
| 3. | Acquisitions |
2015 Acquisitions:
Hampton Inn – Des Moines
On February 4, 2015, the Company completed the acquisition of a 120-room select service hotel located in Des Moines, Iowa (the “Hampton Inn – Des Moines”) from an unrelated third party, for an aggregate purchase price of approximately $10.9 million less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $0.1 million. The acquisition was funded with approximately $2.7 million of offering proceeds and approximately $8.2 million of proceeds under a $10.0 million revolving promissory note (the “Des Moines Promissory Note”) from the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by the Company’s Sponsor.
The acquisition of the Hampton Inn – Des Moines was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Hampton Inn – Des Moines has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.2 million was allocated to land and improvements, $9.2 million was allocated to building and improvements, and $0.5 million was allocated to furniture and fixtures and other assets.
Courtyard – Durham
On May 15, 2015, the Company completed the acquisition of a 146-room select service hotel located in Durham, North Carolina (the “Courtyard – Durham”) from an unrelated third party, for an aggregate purchase price of $16.0 million, less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, $0.2 million. The acquisition was funded with $4.0 million of offering proceeds and $12.0 million of proceeds under a $13.0 million revolving promissory note (the “Durham Promissory Note”) from the operating partnership of Lightstone II.
The acquisition of the Courtyard – Durham was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Courtyard – Durham has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.0 million was allocated to land and improvements, $13.1 million was allocated to building and improvements, and $1.9 million was allocated to furniture and fixtures and other assets.
2016 Acquisitions:
Hampton Inn – Lansing
On March 10, 2016, the Company completed the acquisition of an 86-room select service hotel located in Lansing, Michigan (the “Hampton Inn – Lansing”) from an unrelated third party, for an aggregate purchase price of approximately $10.5 million less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, $105,000. The acquisition was funded with offering proceeds.
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The acquisition of the Hampton Inn – Lansing was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Hampton Inn – Lansing has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $0.4 million was allocated to land and improvements, $9.0 million was allocated to building and improvements, and $1.1 million was allocated to furniture and fixtures and other assets.
The capitalization rate for the acquisition of the Hampton Inn — Lansing was approximately 12.0% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended November 30, 2015. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.
Courtyard – Warwick
On March 23, 2016, the Company completed the acquisition of a 92-room select service hotel located in Warwick, Rhode Island (the “Courtyard – Warwick”) from an unrelated third party, for an aggregate purchase price of $12.4 million, less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, $124,000. The acquisition was funded with offering proceeds.
The acquisition of the Courtyard – Warwick was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Courtyard – Warwick has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $0.7 million was allocated to land and improvements, $11.1 million was allocated to building and improvements, and $0.6 million was allocated to furniture and fixtures and other assets.
The capitalization rate for the acquisition of the Courtyard – Warwick was approximately 8.3% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended January 31, 2016. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.
SpringHill Suites – Green Bay
On May 2, 2016, the Company completed the acquisition of a 127-room select service hotel located in Green Bay, Wisconsin (the “SpringHill Suites – Green Bay”) from an unrelated third party, for an aggregate purchase price of approximately $18.3 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $183,000. The acquisition was funded with approximately $8.1 million of offering proceeds and approximately $10.2 million of proceeds from a $14.5 million revolving promissory note (the “Green Bay Promissory Note”) from the operating partnership of Lightstone II (see Note 6 – Related Party Transactions for additional information).
The acquisition of the SpringHill Suites – Green Bay was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the SpringHill Suites – Green Bay has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $0.8 million was allocated to land and improvements, $15.2 million was allocated to building and improvements, and $2.3 million was allocated to furniture and fixtures and other assets.
The capitalization rate for the acquisition of the SpringHill Suites – Green Bay was approximately 9.8% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended November 30, 2015. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.
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Home2 Suites Hotel Portfolio
On August 2, 2016, the Company completed the portfolio acquisition of a 139-room select service hotel located in Tukwila, Washington (the “Home2 Suites – Tukwila”) and a 125-room select service hotel located in Salt Lake City, Utah (the “Home2 Suites – Salt Lake” and collectively the “Home2 Suites Hotel Portfolio”) from an unrelated third party, for an aggregate purchase price of approximately $47.3 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $473,000. The acquisition was funded with offering proceeds.
The acquisition of the Home2 Suites Hotel Portfolio was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Home2 Suites Hotel Portfolio has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $16.2 million was allocated to land and improvements, $26.4 million was allocated to building and improvements, and $4.7 million was allocated to furniture and fixtures and other assets.
The capitalization rate for the acquisition of the Home2 Suites Hotel Portfolio was approximately 8.4% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was determined using the projected or budgeted net operating income of the property based upon then-current projections. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.
Fairfield Inn– Austin
On September 13, 2016, the Company completed the acquisition of an 84-room select service hotel located in Austin, Texas (the “Fairfield Inn– Austin”) from an unrelated third party, for an aggregate purchase price of approximately $12.0 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $120,000. The acquisition was funded with offering proceeds.
The acquisition of the Fairfield Inn – Austin was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Fairfield Inn– Austin has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.5 million was allocated to land and improvements, $9.0 million was allocated to building and improvements, and $1.5 million was allocated to furniture and fixtures and other assets.
The capitalization rate for the acquisition of the Fairfield Inn – Austin was approximately 8.7% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended April 30, 2016. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.
Staybridge Suites – Austin
On October 7, 2016, the Company completed the acquisition of an 80-room select service hotel located in Austin, Texas (the “Staybridge Suites – Austin”) from an unrelated third party, for an aggregate purchase price of approximately $10.0 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $100,000. The acquisition was funded with offering proceeds.
The acquisition of the Staybridge Suites – Austin was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Staybridge Suites – Austin has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.9 million was allocated to land and improvements, $6.7 million was allocated to building and improvements, and $1.4 million was allocated to furniture and fixtures and other assets.
The capitalization rate for the acquisition of the Staybridge Suites – Austin was approximately 9.4% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended April 30, 2016. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.
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Financial Information
The following table provides the total amount of rental revenue and net income included in the Company’s consolidated statements of operations from the Hampton Inn – Des Moines, Courtyard – Durham, Hampton Inn – Lansing, Courtyard – Warwick, SpringHill Suites – Green Bay, Home2 Suites Hotel Portfolio, Fairfield Inn – Austin and Staybridge Suites – Austin since their respective dates of acquisition for the period indicated:
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Rental revenue | $ | 22,551,234 | $ | 6,203,341 | ||||
| Net income | $ | 618,623 | $ | 4,244 | ||||
The following table provides unaudited pro forma results of operations for the periods indicated, as if the Hampton Inn – Des Moines, Courtyard – Durham, Hampton Inn – Lansing, Courtyard – Warwick, SpringHill Suites – Green Bay, Home2 Suites Hotel Portfolio, Fairfield Inn – Austin and Staybridge Suites – Austin had been acquired at the beginning of each period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Pro forma rental revenue | $ | 34,445,574 | $ | 30,832,283 | ||||
| Pro forma net income (1) | $ | 1,247,195 | $ | 4,686,920 | ||||
| Pro forma net income per Company's common share, basic and diluted (1) | $ | 0.16 | $ | 2.80 | ||||
| (1) | Includes acquisition fees and acquisition-related expenses aggregating $2,152,938 and $597,327 during the years ended December 31, 2016 and 2015. |
4. Mortgages payable, net
Mortgages payable, net consisted of the following:
| Description | Interest Rate | Weighted Average Interest Rate as of December 31, 2016 | Maturity Date | Amount Due at Maturity | As of December 31, 2016 | As of December 31, 2015 | ||||||||||||||||
| Revolving Credit Facility, secured by seven properties | LIBOR + 4.95% | 5.95 | % | July 2019 | $ | 59,696,000 | $ | 59,696,000 | - | |||||||||||||
| Promissory Note, secured by two properties | 4.73% | 4.73 | % | October 2021 | 26,127,572 | $ | 28,331,880 | |||||||||||||||
| Total mortgages payable | 5.56 | % | $ | 85,823,572 | $ | 88,027,880 | $ | - | ||||||||||||||
| Less: Deferred financing costs | (1,157,537 | ) | ||||||||||||||||||||
| Total mortgage payable, net | $ | 86,870,343 | $ | - | ||||||||||||||||||
Principal Maturities
The following table, based on the initial terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of December 31, 2016:
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| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 424,252 | $ | 445,052 | $ | 60,162,871 | $ | 486,092 | $ | 26,509,613 | $ | - | $ | 88,027,880 | ||||||||||||||
| Less: Deferred financing costs | (1,157,537 | ) | ||||||||||||||||||||||||||
| Total principal maturiteis, net | $ | 86,870,343 | ||||||||||||||||||||||||||
On July 13, 2016, the Company, through certain subsidiaries, entered into a $60.0 million revolving credit facility (the “Revolving Credit Facility”), with a bank. The Revolving Credit Facility bears interest at Libor plus 4.95% and provides a line of credit over the next three years, with two, one-year options to extend solely at the discretion of the bank. Interest is payable monthly and the entire unpaid principal balance is due upon expiration of the Revolving Credit Facility. Under the terms of the Revolving Credit Facility, the Company may designate properties as collateral that allows it to borrow up to a 65.0% loan-to-value ratio of the properties. On July 13, 2016, we received an initial loan of $45.4 million under the Revolving Credit Facility which was secured by five hotel properties (SpringHill Suites - Green Bay, Hampton Inn – Des Moines, Hampton Inn - Lansing, Courtyard - Durham, and Courtyard – Warwick). On November 2, 2016, we received an additional loan of $14.3 million under the Revolving Credit Facility and added two more hotel properties (Fairfield Inn – Austin and Staybridge Suites – Austin) as additional collateral under the Revolving Credit Facility. As a result, the Revolving Credit Facility had an outstanding balance and remaining availability of $59.7 million and $0.3 million, respectively, as of December 31, 2016.
On October 5, 2016, the Company entered into a promissory note (the “Promissory Note”) for $28.4 million. The Promissory Note has a term of five years, bears interest at 4.73% and requires monthly interest and principal payments of $147,806 through its stated maturity with the entire unpaid balance due upon maturity. The Promissory Note is cross-collateralized by two hotel properties (Home2 Suites – Tukwila and Home2 Suites – Salt Lake City).
Debt Compliance
Pursuant to the Company’s debt agreements, approximately $0.9 million was held in restricted escrow accounts as of December 31, 2016. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios including debt service coverage and fixed leverage charge ratio. The Company is currently in compliance with respect to all of its financial debt covenants.
5. Stockholder’s Equity
Preferred Stock
The Company’s charter authorizes its board of directors to designate and issue one or more classes or series of preferred stock without approval of the stockholders of Common Shares. On July 11, 2014, the Company amended and restated its charter to authorize the issuance of 50,000,000 shares of preferred stock. Prior to the issuance of shares of each class or series, the Company’s board of directors is required by Maryland law and by the Company’s charter to set, subject to the Company’s charter restrictions on ownership and transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of each class or series of preferred stock so issued, which may be more beneficial than the rights, preferences and privileges attributable to Common Shares. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. As of December 31, 2016 and December 31, 2015, the Company had no outstanding shares of preferred stock.
Common Shares
All of the common stock being offered by the Company will be duly authorized, fully paid and nonassessable. Subject to the restrictions on ownership and transfer of stock contained in the Company’s charter and except as may otherwise be specified in the charter, the holders of Common Shares are entitled to one vote per Common Share on all matters submitted to a stockholder vote, including the election of the Company’s directors. There is no cumulative voting in the election of directors. Therefore, the holders of a majority of outstanding Common Shares can elect the Company’s entire board of directors. Except as the Company’s charter may provide with respect to any series of preferred stock that the Company may issue in the future, the holders of Common Shares will possess exclusive voting power.
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Holders of the Company’s Common Shares will be entitled to receive such distributions as authorized from time to time by the Company’s board of directors and declared out of legally available funds, subject to any preferential rights of any preferred stock that the Company issues in the future. In any liquidation, each outstanding Common Share entitles its holder to share (based on the percentage of Common Shares held) in the assets that remain after the Company pays its liabilities and any preferential distributions owed to preferred stockholders. Holders of Common Shares do not have preemptive rights, which means that there is no automatic option to purchase any new Common Shares that the Company issues, nor do holders of Common Shares have any preference, conversion, exchange, sinking fund or redemption rights. Holders of Common Shares will not have appraisal rights unless the board of directors determines that appraisal rights apply, with respect to all or any classes or series of stock, to a particular transaction or all transactions occurring after the date of such determination in connection with which holders of such Common Shares would otherwise be entitled to exercise appraisal rights. Common Shares will be nonassessable by the Company upon its receipt of the consideration for which the board of directors authorized its issuance.
On July 11, 2014, the Company amended and restated its charter to authorize the issuance of 200,000,000 Common Shares. Under its charter, the Company cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, and (3) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in which the Company is the acquirer, however, do not require stockholder approval.
Distributions
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are at the discretion of our Board of Directors. We may pay such distributions from the sale of shares of our common stock or borrowings if we do not generate sufficient cash flow from our operations to fund distributions. Our ability to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distributions that we have established or may establish.
We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of our REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, but only to the extent of a stockholder’s adjusted tax basis in our shares, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for depreciation and other non-cash items, it is likely that a portion of each distribution will constitute a tax-deferred return of capital for U.S. federal income tax purposes.
On January 14, 2015, the Board of Directors of the Company authorized and the Company declared a distribution rate calculated based on stockholders of record each day during the applicable period at a rate of $0.00164383 per day, and which equals a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00. The Company’s first distribution began to accrue on December 11, 2014 (date of breaking escrow) through February 28, 2015 (the end of the month following the Company’s initial property acquisition) and subsequent distributions have been declared on a monthly basis thereafter. The first distribution was payable on March 15, 2015 and subsequent distributions have been paid on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month. Our stockholders may elect to have their distributions reinvested in additional shares of Common Shares under our DRIP.
Total distributions declared during the years ended December 31, 2016 and 2015 were $4.7 million and $1.0 million.
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Distribution Payments
On November 15, 2016, December 15, 2016 and January 13, 2017, the Company paid distributions for the months ended October 31, 2016, November 30, 2016 and December 31, 2016, respectively, totaling $1.7 million. The distributions were paid in full using a combination of cash and 79,794 shares of the Company’s common stock issued pursuant to the Company’s DRIP, at a price of $9.50 per share, equal to 95% of the Company’s current Offering price of $10.00 per common share. The distributions were paid from a combination of cash flows provided by operations ($793,928 or 48%) offering proceeds ($101,569 or 6%) and excess cash proceeds from the issuance of common stock through the Company’s DRIP ($758,041 or 46%).
Distribution Declaration
On March 27, 2017, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending June 30, 2017. The distributions will be calculated based on shareholders of record at a rate of $0.00164383 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00 payable on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month. The Company’s stockholders have an option to elect the receipt of Common Shares under the Company’s distribution reinvestment program.
The amount of distributions to be paid to our stockholders in the future will be determined by our Board of Directors and are dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Code.
6. Related Party and Other Transactions
The Company has agreements with the Dealer Manager, the Advisor and its affiliates and the Special Limited Partner pursuant to which is has and/or will pay certain fees and liquidation distributions in exchange for services performed or consideration given by these entities and other affiliated entities. The following table summarizes all the compensation and fees the Company may pay to the Dealer Manager, the Advisor and its affiliates, including amounts to reimburse their costs in providing services. The Special Limited Partner has committed to contribute to the Operating Partnership cash or interests in real property in exchange for Subordinated Participation Interests in the Operating Partnership that may entitle the Special Limited Partner to subordinated distribution as described in the table below.
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| Organization and Offering Stage | ||
| Fees | Amount | |
| Selling Commissions | The Dealer Manager receives selling commissions in an amount of up to 7% of the gross proceeds in the primary offering. The Dealer Manager reallows all selling commissions to the participating broker-dealer or registered representative of the dealer manager who actually sold the Common Shares. Selling commissions are expected to be approximately $21.0 million if the maximum offering of 30.0 million shares of common stock is sold under the Offering. Alternatively, a participating broker-dealer or registered representative of the Dealer Manager who actually sold the shares of common stock may elect to receive a fee equal to 7.0% of the gross proceeds from the sale thereof, with either (a) 2.0% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale or (b) 3.0% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fourth anniversary of the closing of such sale. The total amount of all items of compensation from any source payable to our dealer manager or the participating broker-dealers will not exceed an amount that equals 10.0% of the gross proceeds of the offering (excluding Common Shares purchased through our DRIP). From the Company’s inception through December 31, 2016, $7.1 million of selling commissions have been incurred. | |
| Fees | Amount | |
| Dealer Manager Fee |
The Dealer Manager receives a dealer manager fee in an amount of up to 3% of gross proceeds in the primary offering. The Dealer Manager, in its sole discretion, may reallow all or any portion of the dealer manager fee to participating broker-dealers as a marketing fee. No dealer manager fee will be paid with respect to sales under the Company’s DRIP. The estimated dealer management fee is expected to be approximately $9.0 million if the maximum offering of 30.0 million shares of common stock are sold under the Offering. From the Company’s inception through December 31, 2016, $3.3 million of dealer manager fees have been incurred.
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Organization and Offering Expenses
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The Company reimburses the Advisor for all organization and offering expenses in connection with our offering, other than the selling commissions and dealer manager fee. The Company expects that such organization and offering expenses, other than selling commissions and dealer manager fee, will amount to approximately 2.0% of gross offering proceeds. In no event will organization and offering expenses exceed 15.0% of gross offering proceeds. From the Company’s inception through December 31, 2016, $4.8 of organization and offering expenses have been incurred. | |
| Operational Stage | ||
| Fees | Amount | |
| Acquisition Fee |
The Company pays to the Advisor or its affiliates 1.0% of the contract purchase price of each property acquired (including its pro rata share (direct or indirect) of debt attributable to such property) or 1.0% of the amount advanced for a loan or other investment (including its pro rata share (direct or indirect) of debt attributable to such investment), as applicable. From the Company’s inception through December 31, 2016, acquisition fees of $1.4 million have been incurred.
‘‘Contract purchase price’’ or the ‘‘amount advanced for a loan or other investment’’ means the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property, the amount of funds advanced with respect to a mortgage, or the amount actually paid or allocated in respect of the purchase of other real estate-related assets, in each case inclusive of any indebtedness assumed or incurred in respect of such asset but exclusive of acquisition fees and acquisition expenses.
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| Fees | Amount | |
| Acquisition Expenses |
The Company reimburses the Advisor for expenses actually incurred related to selecting or acquiring assets on the Company’s behalf, regardless of whether the Company actually acquires the related assets. In addition, the Company pays third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties, including, but not limited to legal fees and expenses, travel and communications expenses, cost of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses and title insurance premiums, regardless of whether the Company acquires the related assets. The Company estimates that total acquisition expenses (including those paid to third parties, as described above) will be approximately 0.6% of the contract purchase price of each property (including its pro rata share (direct or indirect) of debt attributable to such property) and 0.6% of the amount advanced for a loan or other investment (including its pro rata share (direct or indirect) of debt attributable to attributable to such investment), as applicable. In no event will the total of all acquisition fees, financing coordination fees and acquisition expenses (including those paid to third parties, as described above) payable with respect to a particular investment be unreasonable or exceed 5% of the contract purchase price of each property including its pro rata share (direct or indirect) of debt attributable to such property) or 5% of the amount advanced for a loan or other investment (including its pro rata share (direct or indirect) of debt attributable to attributable to such investment), as applicable.
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Construction Management Fee |
The Company expects to engage affiliates of the Advisor to provide construction management services for some of its properties. The Company will pay a construction management fee in an amount of up to 5% of the cost of any improvements that the affiliates of the Advisor may undertake. The affiliates of the Advisor may subcontract the performance of their duties to third parties. From the Company’s inception through December 31, 2016, no construction management fees have been incurred.
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| Fees | Amount | |
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Asset Management Subordinated Participation
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The following description of the asset management subordinated participation will apply until the date on which the initial public offering has ended and the Company has invested substantially all the net proceeds therefrom.
Within 30 days after the end of each calendar quarter (subject to the approval of the Company’s board of directors), the Company, as the general partner of the Operating Partnership, will pay an asset management subordinated participation by issuing a number of operating partnership units designated as Class B units of the Operating Partnership (‘‘Class B Units’’) to the Advisor equal to: (i) the cost of the Company’s assets multiplied by 0.1875%; divided by (ii) the value of one Common Share as of the last day of such calendar quarter, which is equal initially to $9.00 (the primary offering price minus selling commissions and dealer manager fees). The fair value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition (described below) to be probable.
The Advisor will be entitled to receive distributions on the vested and unvested Class B Units it receives in connection with its asset management subordinated participation at the same rate as distributions received on the Common Shares; such distributions will be in addition to the incentive fees and distributions the Advisor and its affiliates may receive from the Company, which consist of the annual subordinated performance fee payable to the Advisor and the liquidation distributions payable to the Special Limited Partner.
Class B Units are subject to forfeiture until such time as: (a) the value of the Operating Partnership’s assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pretax, non-compounded annual return thereon, or the ‘‘economic hurdle’’; (b) any one of the following events occurs concurrently with or subsequently to the achievement of the economic hurdle described above: (i) a listing of the Common Shares on a national securities exchange; (ii) a transaction to which the Company or the Operating Partnership shall be a party, as a result of which OP Units or Common Shares shall be exchanged for or converted into the right, or the holders of such securities shall otherwise be entitled, to receive cash, securities or other property or any combination thereof; or (iii) the termination of the advisory agreement without cause; and (c) the Advisor pursuant to the advisory agreement is providing services to the Company immediately prior to the occurrence of an event of the type described in clause (b) above, unless the failure to provide such services is attributable to the termination without cause of the advisory agreement by an affirmative vote of a majority of the Company’s independent directors after the economic hurdle described above has been met.
Any outstanding Class B Units will be forfeited immediately if the advisory agreement is terminated for any reason other than a termination without cause. Any outstanding Class B Units will be forfeited immediately if the advisory agreement is terminated without cause by an affirmative vote of a majority of the Company’s board of directors before the economic hurdle described above has been met.
From the Company’s inception through December 31, 2016, there has been no asset management subordinated participation approved by the Company’s board of directors. |
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| Fees | Amount | |
|
Asset Management Fee
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The following description of the asset management fee will apply beginning on the date on which the initial public offering has ended and the Company has invested substantially all the net proceeds therefrom.
The Company will pay the Advisor or its assignees a monthly asset management fee equal to one-twelfth (1⁄12) of 0.75% of the Company’s average invested assets. Average invested assets means, for a specified period, the average of the aggregate book value of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate, before deducting depreciation, bad debts or other non- cash reserves, computed by taking the average of such values at the end of each month during such period. From the Company’s inception through December 31, 2016, no asset management fees have been incurred. | |
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Property Management Fees |
Property management fees with respect to properties managed by affiliates of the Advisor are payable monthly in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of property managers in such area. The affiliates of the Advisor may subcontract the performance of their duties to third parties. The Company reimburses the affiliates of the Advisor for costs and expenses, which may include personnel costs for on-site personnel providing direct services for the properties and for roving maintenance personnel to the extent needed at the properties from time to time, and the cost of travel and entertainment, printing and stationery, advertising, marketing, signage, long distance phone calls and other expenses that are directly related to the management of specific properties. Notwithstanding the foregoing, the Company will not reimburse the affiliates of the Advisor for their general overhead costs or, other than as set forth above, for the wages and salaries and other employee-related expenses of their employees.
In addition, the Company will pay the affiliates of the Advisor a separate fee for the one- time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.
From the Company’s inception through December 31, 2016, no property management fees or separate fees have been incurred.
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| Operating Expenses |
Commencing 12 months after the commencement of the Offering, the Company reimburses the Advisor’s costs of providing administrative services at the end of each fiscal quarter, subject to the limitation that the Company will not reimburse the Advisor (except in limited circumstances) for any amount by which the total operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested assets (as defined above under ‘‘— Asset Management Fee’’) for that fiscal year, and (ii) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period.
Additionally, the Company reimburses the Advisor or its affiliates for personnel costs in connection with other services; however, the Company will not reimburse the Advisor for (a) services for which the Advisor or its affiliates are entitled to compensation in the form of a separate fee, or (b) the salaries and benefits of the named executive officers.
From the Company’s inception through December 31, 2016, none of these costs have been reimbursed. |
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| Fees | Amount | |
|
Financing Coordination Fee |
If the Advisor provides services in connection with the financing of an asset, assumption of a loan in connection with the acquisition of an asset or origination or refinancing of any loan on an asset, the Company will pay the Advisor or its assignees a financing coordination fee equal to 0.75% of the amount available or outstanding under such financing. The Advisor may reallow some of or all this financing coordination fee to reimburse third parties with whom it may subcontract to procure such financing. From the Company’s inception through December 31, 2016, no financing coordination fees have been charged. |
| Liquidation/Listing Stage | ||
| Fees | Amount | |
|
Real Estate Disposition Commissions
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For substantial services in connection with the sale of a property, the Company will pay to the Advisor or any of its affiliates a real estate disposition commission in an amount equal to the lesser of (a) one-half of a real estate commission that is reasonable, customary and competitive in light of the size, type and location of the property and (b) 2.0% of the contract sales price of the property; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price or a real estate commission that is reasonable, customary and competitive in light of the size, type and location of the property. The Company’s independent directors will determine whether the Advisor or its affiliates have provided a substantial amount of services to the Company in connection with the sale of a property. A substantial amount of services in connection with the sale of a property includes the preparation by the Advisor or its affiliates of an investment package for the property (including an investment analysis, an asset description and other due diligence information) or such other substantial services performed by the Advisor or its affiliates in connection with a sale. From the Company’s inception through December 31, 2016, no real estate disposition commissions have been incurred.
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Annual Subordinated Performance Fee |
The Company will pay the Advisor an annual subordinated performance fee calculated on the basis of the annual return to holders of Common Shares, payable annually in arrears, such that for any year in which holders of Common Shares receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on their respective net investments, the Advisor will be entitled to 15.0% of the total return in excess of such 6.0% per annum; provided, that the amount paid to the Advisor will not exceed 10.0% of the aggregate return for such year, and provided, further, that the amount paid to the Advisor will not be paid unless holders of Common Shares receive a return of their respective net investments. This fee will be payable only from realized appreciation in the Company’s assets upon their sale, other disposition or refinancing, which results in the return on stockholders’ respective net investments exceeding 6.0% per annum.
For purposes of the annual subordinated performance fee, “net investment” means $10.00 per Common Share, less a pro rata share of any proceeds received from the sale, other disposition or refinancing of assets.
From the Company’s inception through December 31, 2016, no annual subordinated performance fees have been incurred. | |
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| Fees | Amount | |
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Liquidation Distributions to the Special Limited Partner
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Distributions from the Operating Partnership in connection with its liquidation initially will be made to the Company (which the Company will distribute to holders of Common Shares), until holders of Common Shares have received liquidation distributions from the Operating Partnership equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 6.0% on their respective net investments.
Thereafter, the Special Limited Partner will be entitled to receive liquidation distributions from the Operating Partnership until it has received liquidation distributions from the Operating Partnership equal to its net investment plus cumulative, pre-tax, non-compounded annual return of 6.0% on its net investment.
Thereafter, 85.0% of the aggregate amount of any additional liquidation distributions by the Operating Partnership will be payable to the Company (which the Company will distribute to holders of Common Shares), and the remaining 15.0% will be payable to the Special Limited Partner.
With respect to holders of Common Shares, “net investment” means $10.00 per Common Share, less a pro rata share of any proceeds received from the sale, other disposition or refinancing of assets. With respect to the Special Limited Partner, “net investment” means the value of all contributions of cash or property the Special Limited Partner has made to the Operating Partnership in consideration for its subordinated participation interests, measured as of the respective times of contribution, less a pro rata share of any proceeds received from the sale, other disposition or refinancing of assets.
From the Company’s inception through December 31, 2016, no liquidation distributions have been made. |
The following table represents the selling commissions and dealer manager and other offering costs for the periods indicated:
| For the Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Selling commissions and dealer manager fees | $ | 7,008,694 | $ | 3,377,887 | ||||
| Other offering costs | $ | 770,493 | $ | 1,870,078 | ||||
Since commencement of its Offering through December 31, 2016, the Company has incurred $10.4 million in selling commissions and dealer manager fees and $4.8 million of other offering costs in connection with the public offering of shares of its common stock.
No amounts were paid to the affiliates of the Advisor for property management services for the years ended December 31, 2016 and 2015.
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Revolving promissory notes payable, net – related party
With the Company's acquisitions of the Hampton Inn – Des Moines, the Courtyard – Durham, the Hampton Inn – Lansing and the SpringHill Suites – Green Bay, the Company entered into various related party promissory notes payable. See Note 3 for details.
Des Moines Promissory Note
On February 4, 2015, the Company entered into the Des Moines Promissory Note with the operating partnership of Lightstone II. The Des Moines Promissory Note had a term of one year, bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $100,000 to Lightstone II in connection with the Des Moines Promissory Note and pledged its ownership interest in the Hampton Inn – Des Moines as collateral.
During the year ended December 31, 2015, the Company incurred interest expense of $421,651 (including origination fees of $91,667) on the Des Moines Promissory Note. During the year ended December 31, 2016, the Company incurred interest expense of $8,333 as a result of the amortization of the remaining origination fee. The Des Moines Promissory Note had no outstanding balance as of December 31, 2015 and expired on February 4, 2016.
Durham Promissory Note
On May 15, 2015, the Company entered into the Durham Promissory Note with the operating partnership of Lightstone II. The Durham Promissory Note had a term of one year, bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $130,000 to Lightstone II in connection with the Durham Promissory Note and pledged its ownership interest in the Courtyard – Durham as collateral.
On March 1, 2016, the Company took additional borrowings on the note of $8 million. On May 2, 2016, the Durham Promissory Note was repaid in full and has now expired. The outstanding principal balance was $2.1 million as of December 31, 2015. The Durham Promissory Note is included in revolving promissory note payable, net – related party on our consolidated balance sheet (net of debt issuance costs of $51,667 as of December 31, 2015).
During the year ended December 31, 2015, the Company incurred interest expense of $482,651 (including origination fees of $86,667) and during the year ended December 31, 2016, the Company incurred interest expense of $151,751 (including origination fees of $43,333) on the Durham Promissory Note.
Lansing Promissory Note
On May 2, 2016, the Company entered into an $8.0 million Revolving Promissory Note (the “Lansing Promissory Note”) with the operating partnership of Lightstone II. The Lansing Promissory Note had a term of one year (with an option for an additional year), bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $80,000 to Lightstone II in connection with the Lansing Promissory Note and pledged its ownership interest in the Hampton Inn – Lansing as collateral. On July 13, 2016, the Lansing Promissory Note was repaid in full and terminated.
During the year ended December 31, 2016, the Company incurred interest expense of $161,428, including origination fees expensed of $80,000 on the Lansing Promissory Note.
Green Bay Promissory Note
On May 2, 2016, the Company entered into the Green Bay Promissory Note with the operating partnership Lightstone II. The Green Bay Promissory Note had a term of one year (with an option for an additional year), bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $145,000 to Lightstone II in connection with the Green Bay Promissory Note and pledged its ownership interest in the SpringHill Suites – Green Bay as collateral. On July 13, 2016, the Green Bay Promissory Note was repaid in full and terminated.
During the year ended December 31, 2016, the Company incurred interest expense of $284,635, including origination fees expensed of $145,000 on the Green Bay Promissory Note.
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Due to related parties and other transactions
In addition to certain agreements with the Sponsor (see Note 1) and Dealer Manager, the Company has agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor and its affiliates to perform such services as provided in these agreements. Furthermore, the Advisor has and is expected to continue to advance certain organization and offering costs on behalf of the Company to the extent the Company does not have sufficient funds to pay such costs. As of December 31, 2016 and 2015, the Company owed the Advisor and its affiliated entities an aggregate of $109,532 and $1.2 million, respectively, which was principally for organization and offering costs paid on its behalf, and is classified as due to related parties on the consolidated balance sheets. During the year ended December 31, 2016 and 2015, the Company paid $36,298 and $403,589, respectively, to an affiliate of the Sponsor for the Sponsor’s marketing expenses related to the offering that were recorded as a reduction to APIC.
During the years ended December 31, 2016 and 2015, the Company paid the Advisor acquisition fees of approximately $1.1 million and $269,000, respectively.
During the years ended December 31, 2016 and 2015, the Company paid the advisor development fees of $19,847 and $0, respectively.
From time to time, the Company may purchase title insurance from an agent in which its Sponsor owns a 50% limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, before the Company purchases any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. During the years ended December 31, 2016 and 2015, the Company paid approximately $154,000 and $21,000, respectively, to the title insurance agent.
7. Commitments and Contingencies
Management Agreements
The Company’s hotels operate pursuant to management agreements with various third-party management companies. The management companies perform management functions including, but not limited to, hiring and supervising employees, establishing room prices, establishing administrative policies and procedures, managing expenditures and arranging and supervising public relations and advertising. The Management Agreements are for terms ranging from 1 year to 10 years however, the agreements can be cancelled for any reason by the Company after giving sixty days notice after the one year anniversary of the commencement of the agreements.
The Management Agreements provide for the payment of a base management fee equal to 3% to 3.5% of gross revenues, as defined, and an incentive management fee based on the operating results of the hotel, as defined. The base management fee and incentive management fee, if any, are recorded as property operating expenses in the consolidated statements of operations.
Franchise Agreements
As of December 31, 2016, the Company’s hotels operated pursuant to franchise agreements. Under the franchise agreements, the Company generally pays a fee equal to 3% to 5.5% of gross room sales, as defined, and a marketing fund charge from 2.0% to 2.5% of gross room sales. The franchise fee and marketing fund charge are recorded as property operating expenses in the consolidated statements of operations.
The franchise agreements are for terms ranging from 15 years to 20 years, expiring between 2028 and 2034.
Legal Proceedings
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
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8. Quarterly Financial Data (Unaudited)
The following table presents selected unaudited quarterly financial data for each quarter during the years ended December 31, 2016 and 2015:
| 2016 | ||||||||||||||||||||
| Year ended December 31, | Quarter ended December 31, | Quarter ended September 30, | Quarter ended June 30, | Quarter ended March 31, | ||||||||||||||||
| Total revenue | $ | 22,551,234 | $ | 8,002,767 | $ | 7,623,494 | $ | 4,953,528 | $ | 1,971,445 | ||||||||||
| Operating income/(loss) | $ | 2,460,078 | $ | 865,200 | $ | 1,479,384 | $ | 425,788 | $ | (310,294 | ) | |||||||||
| Net (loss)/income | $ | (113,022 | ) | $ | (429,371 | ) | $ | 580,516 | $ | 137,444 | $ | (401,611 | ) | |||||||
| Less (income)/loss attributable to noncontrolling interests | $ | (7 | ) | $ | 5 | $ | (14 | ) | $ | (8 | ) | $ | 10 | |||||||
| Net (loss)/income applicable to Company's common shares | $ | (113,029 | ) | $ | (429,366 | ) | $ | 580,502 | $ | 137,436 | $ | (401,601 | ) | |||||||
| Net (loss)/income per common share, basic and diluted | $ | (0.01 | ) | $ | (0.04 | ) | $ | 0.06 | $ | 0.02 | $ | (0.08 | ) | |||||||
| 2015 | ||||||||||||||||||||
| Year ended December 31, | Quarter ended December 31, | Quarter ended September 30, | Quarter ended June 30, | Quarter ended March 31, | ||||||||||||||||
| Total revenue | $ | 6,203,341 | $ | 1,860,740 | $ | 2,168,262 | $ | 1,620,917 | $ | 553,422 | ||||||||||
| Operating income/(loss) | $ | 573,378 | $ | 196,459 | $ | 450,803 | $ | 46,076 | $ | (119,960 | ) | |||||||||
| Net (loss)/income | $ | (340,230 | ) | $ | (31,724 | ) | $ | 122,075 | $ | (213,953 | ) | $ | (216,628 | ) | ||||||
| Less loss/(income) attributable to noncontrolling interests | 44 | (4 | ) | (25 | ) | 39 | 34 | |||||||||||||
| Net (loss)/income applicable to Company's common shares | $ | (340,186 | ) | $ | (31,728 | ) | $ | 122,050 | $ | (213,914 | ) | $ | (216,594 | ) | ||||||
| Net (loss)/income per common share, basic and diluted | $ | (0.20 | ) | $ | (0.01 | ) | $ | 0.06 | $ | (0.19 | ) | $ | (0.41 | ) | ||||||
9. Subsequent Events
The Cove Transaction
On January 31, 2017, the Company, through a subsidiary of the Operating Partnership, REIT III COVE LLC (“REIT III Cove”) and REIT IV COVE LLC (“REIT IV Cove”), a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment trust also sponsored by the Sponsor and a related party, collectively, the “Assignees”, entered into an Assignment and Assumption Agreement (the “Assignment”) with another of the Lightstone IV’s wholly owned subsidiaries, REIT COVE LLC (the “Assignor”). Under the terms of the Assignment, the Assignees were assigned the rights and obligations of the Assignor with respect to that certain Sale and Purchase Agreement (the “Purchase Agreement”), dated September 29, 2016, made between the Assignor, as the purchaser, LSG Cove LLC (“LSG Cove”), an affiliate of the Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party (collectively, the “Buyer”) and an unrelated third party, RP Cove, L.L.C (the “Seller”), pursuant to which the Buyer will acquire the Seller’s membership interest in RP Maximus Cove, L.L.C. (the “Joint Venture”) for approximately $255.0 million. The Joint Venture owns and operates The Cove at Tiburon (“The Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Joint Venture.
On January 31, 2017, REIT IV Cove, REIT III Cove, LSG Cove, and Maximus (the “Members”) completed the Cove Transaction for aggregate consideration of approximately $255.0 million, which consisted of $80 million of cash and $175 million of proceeds from a loan from a financial institution. The Company paid approximately $20.0 million for a 22.5% membership interest in the Joint Venture.
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The Company’s interest in the Joint Venture is a non-managing interest, because the Company exerts significant influence over but does not control the Joint Venture, it will account for its ownership interest in the Joint Venture in accordance with the equity method of accounting. All distributions of earnings from the Joint Venture will be made on a pro rata basis in proportion to each Members’ equity interest percentage. Any distributions in excess of earnings from the Joint venture will be made to the Members pursuant to the terms of the Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of The Cove and receives certain fees as defined in the Property Management Agreement for the management of The Cove. The Company will commence recording its allocated portion of profit and cash distributions beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Joint Venture.
In connection with the closing of the Cove Transaction, the Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date. The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by The Cove and an affiliate of the Sponsor (the “Guarantor”) has guaranteed the Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The Members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which the Company’s share is up to approximately $10.9 million.
The Cove is a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres originally constructed in 1967. As of January 31, 2017, The Cove was 81.5% occupied. The average remaining term for existing leases in The Cove is 4 months and the average rental price per square foot is $4.47.
Starting in 2013, approximately $38 million has been invested in an extensive refurbishment of The Cove; of which to date, 97% of the apartment buildings have been completed. The Members intend to use the remaining proceeds from the Loan and to invest additional capital if necessary to complete the refurbishment of The Cove. The Guarantor provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide the necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million.
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Real Estate and Accumulated Depreciation
December 31, 2016
| Gross amount at which | ||||||||||||||||||||||||||||||||||||
| Initial Cost (A) | carried at end of period | |||||||||||||||||||||||||||||||||||
| Encumbrance | Land | Buildings
and Improvements Including Furniture and Fixtures and CIP | Net
Costs Capitalized & Impairments Subsequent to Acquisition | Land
and Improvements | Buildings
and Improvements Including Furniture and Fixtures and CIP | Total (B) | Accumulated
Depreciation (C) | Date Acquired | Depreciable Life (D) | |||||||||||||||||||||||||||
| Revolving Credit Facility(1): | ||||||||||||||||||||||||||||||||||||
| Hampton Inn - Des Moines | $ | - | $ | 1,178,845 | $ | 9,721,155 | $ | 2,852,032 | $ | 1,194,896 | $ | 12,557,136 | $ | 13,752,032 | $ | (770,739 | ) | 2/4/2015 | (D) | |||||||||||||||||
| Des Moines, Iowa | ||||||||||||||||||||||||||||||||||||
| Courtyard - Durham | - | 1,027,019 | 14,972,981 | 94,997 | 1,027,019 | 15,067,978 | 16,094,997 | (1,057,464 | ) | 5/15/2015 | (D) | |||||||||||||||||||||||||
| Durham, North Carolina | ||||||||||||||||||||||||||||||||||||
| Hampton Inn - Lansing | - | 417,311 | 10,082,689 | 222,278 | 417,311 | 10,304,967 | 10,722,278 | (345,498 | ) | 3/10/2016 | (D) | |||||||||||||||||||||||||
| Lansing, Michigan | ||||||||||||||||||||||||||||||||||||
| Courtyard - Warwick | - | 693,601 | 11,706,399 | 134,296 | 693,601 | 11,840,695 | 12,534,296 | (288,752 | ) | 3/23/2016 | (D) | |||||||||||||||||||||||||
| Warwick, Rhode Island | ||||||||||||||||||||||||||||||||||||
| SpringHill Suites - Green Bay | - | 844,426 | 17,405,574 | 17,976 | 844,426 | 17,423,550 | 18,267,976 | (497,126 | ) | 5/2/2016 | (D) | |||||||||||||||||||||||||
| Green Bay, Wisconsin | ||||||||||||||||||||||||||||||||||||
| Fairfield Inn - Austin | - | 1,468,636 | 10,531,364 | - | 1,468,636 | 10,531,364 | 12,000,000 | (157,414 | ) | 9/13/2016 | (D) | |||||||||||||||||||||||||
| Austin, Texas | ||||||||||||||||||||||||||||||||||||
| Staybridge Suites - Austin | - | 1,937,591 | 8,062,409 | 6,062 | 1,937,591 | 8,068,471 | 10,006,062 | (100,968 | ) | 10/6/2016 | (D) | |||||||||||||||||||||||||
| Austin, Texas | ||||||||||||||||||||||||||||||||||||
| Unallocated | 58,817,791 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Total | 58,817,791 | 7,567,429 | 82,482,571 | 3,327,641 | 7,583,480 | 85,794,161 | 93,377,641 | (3,217,961 | ) | |||||||||||||||||||||||||||
| Promissory Note(2): | ||||||||||||||||||||||||||||||||||||
| Home2 Suites - Salt Lake City | 10,973,622 | 5,756,344 | 12,743,656 | - | 5,756,344 | 12,743,656 | 18,500,000 | (280,430 | ) | 8/2/2016 | (D) | |||||||||||||||||||||||||
| Salt Lake City, Utah | ||||||||||||||||||||||||||||||||||||
| Home2 Suites - Seattle | 17,078,930 | 8,943,385 | 19,806,615 | - | 8,943,385 | 19,806,615 | 28,750,000 | (363,734 | ) | 8/2/2016 | (D) | |||||||||||||||||||||||||
| Seattle, Washington | ||||||||||||||||||||||||||||||||||||
| Total | 28,052,552 | 14,699,729 | 32,550,271 | - | 14,699,729 | 32,550,271 | 47,250,000 | (644,164 | ) | |||||||||||||||||||||||||||
| Total | $ | 86,870,343 | $ | 22,267,158 | $ | 115,032,842 | $ | 3,327,641 | $ | 22,283,209 | $ | 118,344,432 | $ | 140,627,641 | $ | (3,862,125 | ) | |||||||||||||||||||
| Check: | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Notes:
(1) - The Company's Revolving Credit Facility is cross-collateralized by seven hotels.
(2) - The Company's Promissory Note is cross-collateralized by two hotels, each of which has an allocated loan amount.
Notes to Schedule III:
| (A) | The initial cost to the Company represents the original purchase price of the property, including amounts incurred subsequent to acquisition which were contemplated at the time the property was acquired. |
| (B) | Reconciliation of total real estate owned: |
| For the years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Balance at beginning of year | $ | 28,140,343 | $ | - | ||||
| Acquisitions, at cost | 110,400,000 | 26,900,000 | ||||||
| Improvements | 2,087,298 | 1,240,343 | ||||||
| Balance at end of year | $ | 140,627,641 | $ | 28,140,343 | ||||
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| (C) | Reconciliation of accumulated depreciation: |
| For the years ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Balance at beginning of year | $ | 731,289 | $ | - | ||||
| Depreciation expense | 3,130,836 | 731,289 | ||||||
| Balance at end of year | $ | 3,862,125 | $ | 731,289 | ||||
| (D) | Depreciation is computed based upon the following estimated lives: |
| Buildings and improvements | 39 years | |
| Furniture and fixtures | 5-10 years |
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PART II. CONTINUED:
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of December 31, 2016, we conducted an evaluation under the supervision and with the participation of the Advisor’s management, including our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2016 that our disclosure controls and procedures were adequate and effective.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is a process designed by, or under the supervision of, our Chairman and Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that:
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, they used the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission published in its report entitled Internal Control—Integrated Framework (2013). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2016.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT
Directors
The following table presents certain information as of March 15, 2017 concerning each of our directors serving in such capacity:
| Principal Occupation and | Year Term of | Served as a | ||||||
| Name | Age | Positions Held | Office Will Expire | Director Since | ||||
| David Lichtenstein | 56 | Chief Executive Officer and Chairman of the Board of Directors | 2017 | 2014 | ||||
| Edwin J. Glickman | 85 | Director | 2017 | 2014 | ||||
| George R. Whittemore | 67 | Director | 2017 | 2014 |
David Lichtenstein is our Chief Executive Officer and Chairman of our board of directors. Mr. Lichtenstein founded both American Shelter Corporation and The Lightstone Group. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of The Lightstone Group, directing all aspects of the acquisition, financing and management of a diverse portfolio of multifamily, lodging, retail and industrial properties located in 20 states and Puerto Rico. From June 2004 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”) and Chief Executive Officer of Lightstone Value Plus REIT LLC, its advisor. From April 2008 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Offer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited. From June 2015 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Hamilton National Income Trust, Inc. (“HNIT”) and Chief Executive Officer of Hamilton National Income Trust LLC, its advisor. Mr. Lichtenstein was the president and/or director of certain subsidiaries of Extended Stay Hotels, Inc. (“Extended Stay”) that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Lichtenstein is no longer affiliated with Extended Stay. From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation. Mr. Lichtenstein is also a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., an industry trade group, as well as a member of the Board of Directors of Touro College and New York Medical College. Mr. Lichtenstein has been selected to serve as a director due to his experience and networking relationships in the real estate industry, along with his experience in acquiring and financing real estate properties.
Edwin J. Glickman is one of our independent directors and the chairman of our audit committee. From April 2008 to the present, Mr. Glickman has served as a member of the board of directors of Lightstone II and from September 2014 to the present has served as a member of the board of directors of Lightstone IV. From December 2004 through January 2015, Mr. Glickman previously served as a member of the board of directors of Lightstone I. In January 1995, Mr. Glickman co-founded Capital Lease Funding, a leading mortgage lender for properties net leased to investment grade tenants, where he remained as Executive Vice President until May 2003 when he retired. Mr. Glickman was previously a trustee of publicly traded RPS Realty Trust from October 1980 through May 1996 and Atlantic Realty Trust from May 1996 to March 2006. Mr. Glickman graduated from Dartmouth College. Mr. Glickman has been selected to serve as an independent director due to his experience in mortgage lending and finance.
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George R. Whittemore From July 2006 to the present, Mr. Whittemore has served as a member of the board of directors of Lightstone I, and from April 2008 to the present has served as a member of the board of directors of Lightstone II. Mr. Whittemore also presently serves as a director of Village Bank Financial Corporation in Richmond, Virginia, a publicly traded company. Mr. Whittemore previously served as a director of Condor Hospitality, Inc. in Norfolk, Nebraska, a publicly traded company, from November 1994 to March 2016. Mr. Whittemore previously served as a director and audit committee chairman of Prime Group Realty Trust from July 2005 until December 2012. Mr. Whittemore previously served as President and Chief Executive Officer of Condor Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and Director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as Director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation, from September 1982 until August 1994, and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Mr. Whittemore has been selected to serve as an independent director due to his experience in accounting, banking, finance and real estate.
Executive Officers:
The following table presents certain information as of March 15, 2017 concerning each of our executive officers serving in such capacities:
| Name | Age | Principal Occupation and Positions Held | ||
| David Lichtenstein | 56 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Mitchell Hochberg | 64 | President and Chief Operating Officer | ||
| Joseph Teichman | 43 | General Counsel and Secretary | ||
| Donna Brandin | 60 | Chief Financial Officer and Treasurer |
David Lichtenstein for biographical information about Mr. Lichtenstein, see ‘‘Management — Directors.”
Mitchell Hochberg is our President and Chief Operating Officer and also serves as President of Lightstone I and its advisor and President and Chief Operating Officer of Lightstone II, Lightstone IV and HNIT and their advisors. Mr. Hochberg also serves as the President of our sponsor and as the President and Chief Operating Officer of our advisor. From October 2014 to the present, Mr. Hochberg has served as President of Lightstone Enterprises Limited. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury neighborhoods in the northeast of the United States, in 1985 where for 20 years he served as its President and Chief Executive Officer. Additionally, Mr. Hochberg serves on the board of directors of Orient-Express Hotels Ltd and as Chairman of the board of directors of Orleans Homebuilders, Inc. Mr. Hochberg received his law degree as a Harlan Fiske Stone Scholar from Columbia University School of Law and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.
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Joseph E. Teichman is our General Counsel and Secretary and also serves as General Counsel of Lightstone I, Lightstone II, Lightstone IV and HNIT and their respective advisors. Mr. Teichman also serves as Executive Vice President and General Counsel of our sponsor and as General Counsel of our advisor. From October 2014 to the present, Mr. Teichman has served as Secretary and a Director of Lightstone Enterprises Limited. Prior to joining The Lightstone Group in January 2007, Mr. Teichman practiced law at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September 2001 to January 2007. Mr. Teichman earned a J.D. from the University of Pennsylvania Law School and a B.A. from Beth Medrash Govoha, Lakewood, New Jersey. Mr. Teichman is licensed to practice law in New York and New Jersey. Mr. Teichman was also a director of certain subsidiaries of Extended Stay that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Teichman is no longer affiliated with Extended Stay. Mr. Teichman is also a member of the Board of Directors of Yeshiva Orchos Chaim, Lakewood, New Jersey and was appointed to the Ocean County College Board of Trustees in February 2016.
Donna Brandin is our Chief Financial Officer and Treasurer and also serves as the Chief Financial Officer and Treasurer of Lightstone I, Lightstone II, Lightstone IV and HNIT. Ms. Brandin also serves as the Executive Vice President, Chief Financial Officer and Treasurer of our sponsor and as the Chief Financial Officer and Treasurer of our advisor and the advisors of Lightstone I and Lightstone II. From October 2014 to the present, Ms. Brandin has served as a Director of Lightstone Enterprises Limited. Prior to joining The Lightstone Group in April 2008, Ms. Brandin held the position of Executive Vice President and Chief Financial Officer of US Power Generation from September 2007 through November 2007 and before that was the Executive Vice President and Chief Financial Officer of Equity Residential, the largest publicly traded apartment REIT in the country, from August 2004 through September 2007. Prior to joining Equity Residential, Ms. Brandin held the position of Senior Vice President and Treasurer for Cardinal Health from June 2000 through August 2004. Prior to 2000, Ms. Brandin held various executive-level positions at Campbell Soup, Emerson Electric Company and Peabody Holding Company. Ms. Brandin earned a Bachelor of Science at Kutztown University and a Masters in Finance at St. Louis University and is a certified public accountant.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer and individual beneficially owning more than 10% of our common stock to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of our common stock with the Securities Exchange Commission ("SEC"). Officers, directors and greater than 10% beneficial owners are required by Securities and Exchange Commission rules to furnish us with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2016, or written representations that no additional forms were required, we believe that all of our officers and directors and persons that beneficially own more than 10% of the outstanding shares of our common stock complied with these filing requirements in 2016.
Information Regarding Audit Committee
Our Board established an audit committee in June 2014. The charter of audit committee is available at www.lightstonecapitalmarkets.com/sec-filings or in print to any stockholder who requests it c/o Lightstone Value Plus Real Estate Investment Trust III, Inc., 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our audit committee consists of Messrs. Edwin J. Glickman and George R. Whittemore each of whom is “independent” within the meaning of the NYSE listing standards. The Board determined that Messrs. Glickman and Whittemore are qualified as audit committee financial experts as defined in Item 401 (h) of Regulation S-K. For more information regarding the relevant professional experience of Messrs. Glickman and Whittemore see “Directors”.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. Our Code of Conduct and Ethics can be found at www.lightstonecapitalmarkets.com/sec-filings
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
Our officers will not receive any cash compensation from us for their services as our officers. Our board of directors (including a majority of our independent directors) will determine if and when any of our officers will receive restricted shares of our common stock. Additionally, our officers are officers of one or more of our affiliates and are compensated by those entities (including our sponsor), in part, for their services rendered to us. From our inception through December 31, 2016, the Company has not compensated the officers.
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Compensation of Board of Directors
We pay our independent directors an annual fee of $40,000 and are responsible for reimbursement of their out-of-pocket expenses, as incurred.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Executive Officers:
The following table presents certain information as of March 15, 2017 concerning each of our directors and executive officers serving in such capacities:
| Name and Address of Beneficial Owner | Number of Shares of Common Stock of the Lightstone REIT III Beneficially Owned | Percent of All Common Shares of the Lightstone REIT III | ||||||
| David Lichtenstein (1) | 242,222 | 1.8 | % | |||||
| Edwin J. Glickman | - | - | ||||||
| George R. Whittemore | - | - | ||||||
| Mitchell Hochberg | - | - | ||||||
| Donna Brandin | - | - | ||||||
| Joseph Teichman | - | - | ||||||
| Our directors and executive officers as a group (6 persons) | 242,222 | 1.8 | % | |||||
| (1) | Includes 20,000 shares owned by our Advisor and 222,222 shares owned by an entity 100% owned by David Lichtenstein. Our Advisor is majority owned by David Lichtenstein. The beneficial owner’s business address is 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701. The Special Limited Partner, which is majority owned by Mr. Lichtenstein, will purchase subordinated participation interests in our operating partnership in exchange for cash or interest in real property. |
EQUITY COMPENSATION PLAN INFORMATION
Stock Incentive Plan
On June 9, 2015 our Board of Directors approved the termination of our stock incentive plan. No awards were granted under the plan prior to its termination.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Lichtenstein serves as the Chairman of our Board of Directors and our Chief Executive Officer. Our Advisor and its affiliates and the Special Limited Partner are majority owned and controlled by Mr. Lichtenstein. We have or may entered into agreements with our Advisor and its affiliates to pay certain fees, as described below, in exchange for services performed or consideration given by these and other affiliated entities. As a majority owner of those entities, Mr. Lichtenstein benefits from fees and other compensation that they receive pursuant to these agreements.
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Property Managers
Our Advisor has certain affiliates which may manage the properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
We have agreed to pay our property managers a monthly management fee in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of property managers in such area. We will reimburse our property managers for certain costs and expenses. We may also pay our property managers a separate fee for the one-time initial rent-up or leasing-up of newly constructed property in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.
We may also engage our property managers to provide construction management services for some of our properties. We will pay a construction management fee in an amount of up to 5% of the cost of any improvements that our property managers undertake.
We did not incur any of these fees from our Advisor or its affiliates for these services during the years ended December 31, 2016 and 2015.
Advisor
We reimburse our Advisor for certain organization and offering expenses in connection with the Offering. We currently expect that such organization and offering expenses, will amount to approximately 2.0% of gross offering proceeds assuming we sell the maximum amount of the offering, and in no event will such expenses ultimately exceed 15.0% of gross offering proceeds.
We pay our Advisor an acquisition fee equal to 1.0% of the gross contractual purchase price (including any mortgage assumed) of each property purchased and reimburse our Advisor for expenses that it incurs in connection with the purchase of a property. We anticipate that acquisition expenses will be 0.6% of a property's purchase price, and acquisition fees and expenses are capped at 5% of the gross contract purchase price of a property. Acquisition fees of $1.1 million and $269,000 were incurred during the years ended December 31, 2016 and 2015, respectively.
Until the date on which our initial public offering ends, and subject to the approval of our board of directors, we may pay to our Advisor annually an asset management subordinated participation by issuing a number of restricted Class B Units equal to: (i) the cost of our assets multiplied by 0.1875%; divided by (ii) the value of one Common Share as of the last day of such calendar quarter, which is equal initially to $9.00 (the primary offering price minus selling commissions and dealer manager fees). The value of issued Class B Units will be determined and expensed when we deem the achievement of the performance condition (described below) to be probable. No annual subordinated performance fees were incurred during the years ended December 31, 2016 and 2015.
Beginning on the date on which our initial public offering ends, the Advisor may be paid an advisor asset management fee of one-twelfth (1/12) of 0.75% of our average invested assets and we will reimburse some expenses of the Advisor relating to asset management. No asset management fees were incurred during the years ended December 31, 2016 and 2015.
If our Advisor provides services in connection with the financing of an asset, assumption of a loan in connection with the acquisition of an asset or origination or refinancing of any loan on an asset, we will pay our Advisor a financing coordination fee equal to 0.75% of the amount available or outstanding under such financing. No financing coordination fees were charged during the years ended December 31, 2016 and 2015.
For substantial services in connection with the sale of a property, we will pay to our Advisor a commission in an amount equal to the lesser of (a) one-half of a real estate commission that is reasonable, customary and competitive in light of the size, type and location of the property and (b) 2.0% of the contract sales price of the property. The commission will not exceed the lesser of 6.0% of the contract sales price or commission that is reasonable, customary and competitive in light of the size, type and location of the property. No real estate disposition commissions were incurred during the years ended December 31, 2016 and 2015.
We will pay our Advisor an annual subordinated performance fee calculated on the basis of our annual return to holders of our Common Shares, payable annually in arrears, such that for any year in which holders of our Common Shares receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on their respective net investments, our Advisor will be entitled to 15.0% of the amount in excess of such 6.0% per annum return, provided, that the amount paid to the Advisor will not exceed 10.0% of the aggregate return for such year, and provided, further, that the annual subordinated performance fee will not be paid unless holders of our Common Shares receive a return of their respective net investments. No annual subordinated performance fees were incurred during the years ended December 31, 2016 and 2015, respectively.
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We have agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor and its affiliates to perform such services as provided in these agreements. Furthermore, the Advisor has and is expected to continue to advance certain organization and offering costs on our behalf to the extent we do not have sufficient funds to pay such costs. As of December 31, 2016 and 2015, we owed the Advisor and its affiliated entities an aggregate of $109,532 and $1.2 million, respectively, which was principally for organization and offering costs paid on its behalf, and is classified as due to related parties on the consolidated balance sheets.
Special Limited Partner
Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and has committed to make a significant equity investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum amount of the Offering. Specifically, the Special Limited Partner has committed to purchase subordinated participation interests in the Operating Partnership (the “Subordinated Participation Interests”) quarterly in an amount equal to the product of (i) $10.00 minus our then current estimated NAV per Common Share, multiplied by (ii) the number of our Common Shares outstanding. The Operating Partnership will issue one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributes. The Special Limited Partner’s obligation will continue until the earlier of: (i) the termination of the Offering; (ii) the Special Limited Partner’s purchase of an aggregate of $36.0 million of Subordinated Participation Interests and (iii) the receipt of gross offering proceeds of $300.0 million. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value.
Through December 31, 2016, the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million, including approximately 228 Subordinated Participation Interests in consideration of $11.4 million during the year ended December 31, 2016. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests will entitle the Special Limited Partner to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. Although the actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time, distributions to the Special Limited Partner, as holder of the Subordinated Participation Interests, could be substantial.
Other
From time to time, we purchase title insurance from an agent in which our Sponsor owns a 50% limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, prior to the purchase by Lightstone of any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. This process results in terms similar to those that would be negotiated at an arm’s length basis. During the years ended December 31, 2016 and 2015, we paid approximately $154,000 and $21,000, respectively, to the title insurance agent.
During the years ended December 31, 2016 and 2015, we paid $36,298 and $403,589, respectively, to an affiliate of the Sponsor for the Sponsor’s marketing expenses related to the offering that were recorded as a reduction to additional paid in capital.
During the years ended December 31, 2016 and 2015, we recorded interest expense of $606,147 (including origination fees of $276,666) and $904,302 (including origination fees of $178,334), respectively, to the operating partnership of Lightstone II in connection with the Des Moines Promissory Note, the Durham Promissory Note, the Lansing Promissory Note and the Green Bay Promissory Note.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accounting Firm Fees
The following table presents the aggregate fees billed to us for the years presented by our principal accounting firm:
| Year ended December 31, 2016 | Year ended December 31, 2015 | |||||||
| Audit Fees (a) | $ | 148,475 | $ | 129,350 | ||||
| Audit-Related Fees (b) | 120,750 | 78,750 | ||||||
| Tax Fees (c) | 35,659 | 15,188 | ||||||
| Total Fees | $ | 304,884 | $ | 223,288 | ||||
| (a) | Fees for audit services consisted of the audit of the Lightstone REIT III’s annual financial statements and interim reviews, including services normally provided in connection with statutory and regulatory filings and including registration statements and consents. |
| (b) | Fees for audit-related services related to audits of entities that the Company has acquired. |
| (c) | Fees for tax services. |
In considering the nature of the services provided by the independent auditor, the audit committee determined that such services are compatible with the provision of independent audit services. The audit committee discussed these services with the independent auditor and Lightstone REIT III management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the Securities and Exchange Commission to implement the related requirements of the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.
AUDIT COMMITTEE REPORT
To the Directors of Lightstone Value Plus Real Estate Investment Trust III, Inc.:
We have reviewed and discussed with management Lightstone Value Plus Real Estate Investment Trust III, Inc.’s audited financial statements as of and for the year ended December 31, 2016.
We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees,” (Codification of Statements of Auditing Standards, August 2, 2007 AU 380), as amended, as adopted by the Public Company Accounting Oversight Board.
We have received and reviewed the written disclosures and the letter from the independent auditors required by Public Company Accounting Oversight Board Rule 3526, Communication with Audit Committees Concerning Independence and have discussed with the auditors the auditors’ independence.
Based on the reviews and discussions referred to above, we recommend to the board of directors that the financial statements referred to above be included in Lightstone Value Plus Real Estate Investment Trust III, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016.
Audit Committee
George R. Whittemore
Edwin J. Glickman
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INDEPENDENT DIRECTORS’ REPORT
To the Stockholders of Lightstone Value Plus Real Estate Investment Trust III, Inc.:
We have reviewed the Company’s policies and determined that they are in the best interest of the Company’s stockholders. Set forth below is a discussion of the basis for that determination.
General
The Company primarily intends to acquire full-service or select-service hotels, including extended-stay hotels. Even though the Company intends primarily to acquire hotels, it may purchase other types of real estate. The Company believes that at least 75% of the net proceeds raised in its offering will be used to acquire hotels and the remaining portion of the net proceeds raised in our offering will be used to acquire properties and real estate-related assets other than hotels. However, the Company may use more or less than 75% of the net proceeds raised in its offering to acquire hotels and is not bound to that limit.
Assets other than hotels may include, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, single-tenant properties, multifamily properties, student housing properties, warehouses and distribution facilities and medical office properties. The Company expects to invest a significant portion of its funds in direct real estate investments and other equity interests, and the remainder of its funds in debt interests, which may include bridge or mezzanine loans, including in furtherance of a loan-to-own strategy. However, the Company is not prohibited from investing all its funds in debt interests.
The Company anticipates that its portfolio will provide consistent current income and may also provide capital appreciation resulting from its expectation that in certain circumstances it will be able to acquire properties at a discount to replacement cost or otherwise at less than what we perceive as the market value or to reposition or redevelop a property so as to increase its value over the amount of capital we deployed to acquire and rehabilitate the property. The Company may acquire properties that it believes would benefit from a change in management strategy, or that have incurred substantial deferred maintenance. The Company plans to diversify its portfolio by geographic region, investment size and investment risk with the goal of acquiring a portfolio of hotels and other income-producing real estate properties and real estate-related assets that provide attractive returns for its investors.
Financing Policies
The Company intends to utilize leverage to acquire its properties. The number of different properties the Company will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to the Company, the Company may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. There is no limitation on the amount the Company may invest in any single property or on the amount the Company can borrow for the purchase of any property.
The Company intends to limit its aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to the Company’s stockholders. The Company may also incur short-term indebtedness, having a maturity of two years or less. By operating on a leveraged basis, the Company will have more funds available for investment in properties. This will allow the Company to make more investments than would otherwise be possible, resulting in a more diversified portfolio. Although the Company’s liability for the repayment of indebtedness is expected to be limited to the value of the property securing the liability and the rents or profits derived therefrom, the Company’s use of leveraging increases the risk of default on the mortgage payments and a resulting foreclosure of a particular property. To the extent that the Company does not obtain mortgage loans on the Company’s properties, the Company’s ability to acquire additional properties will be restricted. The Company will endeavor to obtain financing on the most favorable terms available.
Policy on Sale or Disposition of Properties
The Company’s Board will determine whether a particular property should be sold or otherwise disposed of after considering the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving its principal investment objectives.
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The Company currently intends to hold its properties for a period of three to six years from the termination of the Company’s initial public offering. At a future date, the Company’s Board may decide to liquidate the Company, list its shares on a national stock exchange, sell its properties individually or merge or otherwise consolidate the Company with a publicly-traded REIT. Alternatively, the Company may merge with, or otherwise be acquired by, the Sponsor or its affiliates. The Company may, however, sell properties prior to such time and if so, may invest the proceeds from any sale, financing, refinancing or other disposition of its properties into additional properties. Alternatively, the Company may use these proceeds to fund maintenance or repair of existing properties or to increase reserves for such purposes. The Company may choose to reinvest the proceeds from the sale, financing and refinancing of its properties to increase its real estate assets and its net income. Notwithstanding this policy, the Board, in its discretion, may distribute all or part of the proceeds from the sale, financing, refinancing or other disposition of all or any of the Company’s properties to the Company’s stockholders. In determining whether to distribute these proceeds to stockholders, the Board will consider, among other factors, the desirability of properties available for purchase, real estate market conditions, the likelihood of the listing of the Company’s shares on a national securities exchange and compliance with the applicable requirements under federal income tax laws.
When the Company sells a property, it intends to obtain an all-cash sale price. However, the Company may take a purchase money obligation secured by a mortgage on the property as partial payment, and there are no limitations or restrictions on the Company’s ability to take such purchase money obligations. The terms of payment to the Company will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. If the Company receives notes and other property instead of cash from sales, these proceeds, other than any interest payable on these proceeds, will not be available for distributions until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed. Therefore, the distribution of the proceeds of a sale to the stockholders may be delayed until that time. In these cases, the Company will receive payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
Independent Directors
George R. Whittemore
Edwin J. Glickman
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 2016
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, as part of this Annual Report on Form 10-K (and are numbered in accordance with Item 601 of Regulation S-K):
| EXHIBIT NO. | DESCRIPTION | |
| 1.1(1) | Amended and Restated Dealer Manager Agreement by and between Lightstone Value Plus Real Estate Investment Trust III, Inc. and Orchard Securities, LLC | |
| 1.2* | Form of Soliciting Dealer Agreement | |
| 3.1(2) | Articles of Amendment and Restatement of Lightstone Value Plus Real Estate Investment Trust III, Inc. | |
| 3.2(3) | Bylaws of Lightstone Value Plus Real Estate Investment Trust III, Inc. | |
| 4.1(4) | Agreement of Limited Partnership of Lightstone Value Plus REIT III LP | |
| 4.2 | Distribution Reinvestment Program, included as Appendix C to prospectus | |
| 4.4(5) | Second Amended and Restated Contribution Agreement between Lightstone Value Plus REIT III LP and Lightstone SLP III LLC | |
| 10.1(4) | Advisory Agreement by and among Lightstone Value Plus Real Estate Investment Trust III, Inc., Lightstone Value Plus REIT III LP and Lightstone Value Plus REIT III LLC | |
| 10.2(4) | Property Management Agreement by and among Lightstone Value Plus Real Estate Investment Trust III, Inc., Lightstone Value Plus REIT III LP and Beacon Property | |
| 10.3(4) | Property Management Agreement by and among Lightstone Value Plus Real Estate Investment Trust III, Inc., Lightstone Value Plus REIT III LP and Paragon Retail Property Management LLC | |
| 10.4* | Assignment and Assumption of Purchase and Sale Agreement, dated February 4, 2015, by and among LVP HMI Des Moines LLC and Lightstone Acquisitions V LLC. | |
| 10.5* | Assignment and Assumption of Purchase and Sale Agreement, dated May 15, 2015, by and among LVP CY Durham LLC and Lightstone Acquisitions V LLC. | |
| 10.6* | Assignment and Assumption of Purchase and Sale Agreement, dated March 10, 2016, by and among LVP HMI Lansing LLC and Lightstone Acquisitions VIII LLC. | |
| 10.7* | Assignment and Assumption of Purchase and Sale Agreement, dated March 23, 2016, by and among LVP CY Warwick LLC and Lightstone Acquisitions LLC. | |
| 10.8* | Assignment and Assumption of Purchase and Sale Agreement, dated May 2, 2016, by and among LVP SHS Green Bay LLC and Lightstone Acquisitions VII LLC. | |
| 10.9* | Assignment and Assumption of Purchase and Sale Agreement, dated August 2, 2016, by and among LVP H2S Seattle LLC and Lightstone Acquisitions VI LLC. | |
| 10.10* | Assignment and Assumption of Purchase and Sale Agreement, dated August 2, 2016, by and among LVP H2S Salt Lake City LLC and Lightstone Acquisitions VI LLC. | |
| 10.11* | Assignment and Assumption of Purchase and Sale Agreement, dated September 13, 2016, by and among LVP FFI Austin LLC and Lightstone Acquisitions LLC. | |
| 10.12* | Assignment and Assumption of Purchase and Sale Agreement, dated October 7, 2016, by and among LVP SBS Austin LLC and Lightstone Acquisitions LLC. | |
| 10.13* | Assignment and Assumption Agreement, dated as of January 31, 2017, by and among REIT Cove LLC, REIT IV Cove LLC and REIT III Cove LLC. | |
| 10.14* | Revolving Credit Facility dated July 13, 2016 with Western Alliance Bank. | |
| 10.15* | Promissory Note dated October 5, 2016 with Citigroup Global Markets Realty Corp. | |
| 21.1* | Subsidiaries of the Registrant | |
| 31.1* | Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2* | Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101* | XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Value Plus Real Estate Investment Trust III, Inc. on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 28, 2017, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
| * | As filed herewith |
| (1) | Filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 12, 2017. |
| (2) | Included as an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form S-11 (Reg. No. 333-195292) filed with the Securities and Exchange Commission on September 11, 2015. |
| (3) | Included as Exhibit 3.2 to our Registration Statement on Form S-11 (Reg. No. 333-195292) submitted confidentially to the Securities and Exchange Commission on April 24, 2013. |
| (4) | Included as an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form S-11 (Reg. No. 333-195292) filed with the Securities and Exchange Commission on September 11, 2015. |
| (5) | Filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2015. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. | ||
| Date: March 28, 2017 | By: | s/ David Lichtenstein |
| David Lichtenstein | ||
| Chief Executive Officer and Chairman of the Board of Directors | ||
| (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | CAPACITY | DATE | ||
| /s/ David Lichtenstein | Chief Executive Officer and Chairman of the Board | March 28, 2017 | ||
| David Lichtenstein | of Directors (Principal Executive Officer) | |||
| /s/ Donna Brandin | Chief Financial Officer and Treasurer | March 28, 2017 | ||
| Donna Brandin | (Principal Financial Officer and Principal | |||
| Accounting Officer) | ||||
| /s/ Edwin J. Glickman | Director | March 28, 2017 | ||
| Edwin J. Glickman | ||||
| /s/ George R. Whittemore | Director | March 28, 2017 | ||
| George R. Whittemore |
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Exhibit 1.2
FIRST AMENDMENT TO
SOLICITING DEALER AGREEMENT
This First Amedment to the Soliciting Dealer Agreement (the “First Amendment”), effective as of the 12th day of January, 2017, is entered into by and among Orchard Securities, LLC, a Utah limited liability company (the “Dealer Manager”) and the Soliciting Dealer (as defined in that certain Amended and Restated Dealer Manager Agreement, dated January 12, 2017 (as may be further amended, amended and restated or otherwise modified from time to time) between the Dealer Manager and Lightstone Value Plus Real Estate Investment Trust III, Inc., a Maryland corporation (the “Company”)).
WHEREAS, the Dealer Manager and the Soliciting Dealer are parties to the Soliciting Dealer Agreement, dated [●] (the “Agreement”); and
WHEREAS, the Dealer Manager and the Soliciting Dealer desire to amend Section 6 of the Agreement, as set forth herein;
NOW, THEREFORE, pursuant to Section 17(h) of the Agreement, the Agreement is hereby amended as follows:
| 1. | Soliciting Dealer’s Compensation. Section 6(a) of the Agreement is hereby amended by deleting the second sentence and replacing it in its entirety with the following: |
“Soliciting Dealer may elect to receive a selling commission equal to 7.0% of gross proceeds from the sale of Common Shares by Soliciting Dealer, with either (a) 2.0% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale or (b) 3.0% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fourth anniversary of the closing of such sale, in which event, a portion of the dealer manager fee will be reallowed such that the combined selling commission and dealer manager fee do not exceed 10.0% of gross proceeds of the Offering of Shares.”
Please choose option:
______ 7.0% of gross proceeds from the sale of Common Shares by Soliciting Dealer.
______2.0% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary.
______3.0% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fourth anniversary.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment, effective as of the date first written above.
| ORCHARD SECURITIES, LLC | SOLICITING BROKER DEALER | |||
| By: | By: | |||
| Name: | Name: | |||
| Title: | Title | |||
Exhibit 10.4
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of February 4, 2015 (the “Effective Date”), by and between Lightstone Acquisitions V LLC, a Delaware limited liability company (“Assignor”), and LVP HMI Des Moines LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, OCI Properties III, LLC, a Minnesota limited liability company (“Seller”), Assignor and Brager Family Partnership, LLP (“Ground Lessor”) are parties to that certain Purchase and Sale Agreement dated as of October 13, 2014, as amended by the First Amendment to Purchase and Sale Agreement dated as of November 28, 2014, the Second Amendment to Purchase and Sale Agreement dated as of December 5, 2014, the Third Amendment to Purchase and Sale Agreement dated as of December 11, 2014, the Fourth Amendment to Purchase and Sale Agreement dated as of January 19, 2015 and the Fifth Amendment to Purchase and Sale Agreement dated as of January 29, 2015 (collectively, “Agreement”), pursuant to which Seller and Ground Lessor have agreed to sell and Assignor has agreed to purchase the Hampton Inn Des Moines Airport located at 5001 Fleur Drive, Des Moines, Iowa; and
WHEREAS, Assignor desires to assign to Assignee(which is an Affiliate (as defined in the Agreement) of Assignor) all of its right, title and interest in and to the Agreement and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of Agreement. Pursuant to Section 15.3 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS V | ||
| LLC, a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President, General Counsel and | ||
| Secretary | ||
| ASSIGNEE: | ||
| LVP HMI DES MOINES LLC, a | ||
| Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President, General Counsel and | ||
| Secretary | ||
Exhibit 10.5
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of May 15, 2015 (the “Effective Date”), by and between Lightstone Acquisitions V LLC, a Delaware limited liability company (“Assignor”), and LVP CY Durham LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, AWH-BP Durham Hotel, LLC, a Delaware limited liability company (“Seller”), and Assignor are parties to that certain Purchase and Sale Agreement dated as of March 12, 2015, as amended by the First Amendment to Purchase and Sale Agreement dated as of April 13, 2015, a true and correct copy of which is attached hereto as Exhibit A and is made part hereof (collectively, “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the Courtyard by Marriott located at 1815 Front Street, Durham, North Carolina 27705; and
WHEREAS, Assignor desires to assign to Assignee all of its right, title and interest in and to the Agreement and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of Agreement. Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe, on a joint and several basis with Assignor, all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation obligations that may arise due to conditions existing prior to the Effective Date; provided, however, that the foregoing assignment and assumption shall not relieve Assignor from any of its obligations under the Agreement.
2. Representations and Warranties. (i) Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment; and (ii) Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
| - 2 - |
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS V | ||
| LLC, a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
| ASSIGNEE: | ||
| LVP CY DURHAM LLC, a Delaware | ||
| limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
| - 3 - |
Exhibit 10.6
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of March 10, 2016 (the “Effective Date”), by and between Lightstone Acquisitions VIII LLC, a Delaware limited liability company (“Assignor”), and LVP HMI Lansing LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, Ontario Hospitality, Inc., an Ohio corporation (“Seller”) and Assignor are parties to that certain Purchase and Sale Agreement dated as of December 2, 2015, as amended by the First Amendment to Purchase and Sale Agreement dated as of January 12, 2016, the Second Amendment to Purchase and Sale Agreement dated as of January 26, 2016, the Third Amendment to Purchase and Sale Agreement dated as of January 27, 2016 and the Fourth Amendment to Purchase and Sale Agreement dated as of January 29, 2016 (collectively, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the Hampton Inn & Suites Lansing located at 900 North Canal Road, Lansing, MI 48917; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate (as defined in the Agreement) of Assignor) all of its right, title and interest in and to the Agreement and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 15.3 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS VIII | ||
| LLC, a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
| ASSIGNEE: | ||
| LVP HMI LANSING LLC, a Delaware | ||
| limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
Exhibit 10.7
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of March 23, 2016 (the “Effective Date”), by and between Lightstone Acquisitions LLC, a Delaware limited liability company (“Assignor”), and LVP CY Warwick LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, Warwick Lodgings LLC, a Delaware limited liability company (“Seller”) and Assignor are parties to that certain Purchase and Sale Agreement dated as of February 11, 2016 (as amended, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the Courtyard Providence Warwick located at 55 Jefferson Park Road, Warwick, Rhode Island; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate (as defined in the Agreement) of Assignor) all of its right, title and interest in and to the Agreement and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 14.6 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS LLC, a | ||
| Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
| ASSIGNEE: | ||
| LVP CY WARWICK LLC, a Delaware | ||
| limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
Exhibit 10.8
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of May 2, 2016 (the “Effective Date”), by and between Lightstone Acquisitions VII LLC, a Delaware limited liability company (“Assignor”), and LVP SHS Green Bay LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, Green Bay CS Hotel Group, LLC, a Wisconsin limited liability company (“Seller”) and Assignor are parties to that certain Purchase and Sale Agreement dated as of January 12, 2016, as amended by the First Amendment to Purchase and Sale Agreement dated as of February 11, 2016 and the Second Amendment to Purchase and Sale Agreement dated as of February 16, 2016 (collectively, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the SpringHill Suites Green Bay located at 1011 Tony Canadeo Run, Green Bay, WI 54304; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate (as defined in the Agreement) of Assignor) all of its right, title and interest in and to the Agreement and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 15.3 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS VII | ||
| LLC, a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
| ASSIGNEE: | ||
| LVP SHS GREEN BAY LLC, a Delaware | ||
| limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice | ||
| President | ||
Exhibit 10.9
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of August 2, 2016 (the “Effective Date”), by and between LIGHTSTONE ACQUISITIONS VI LLC, a Delaware limited liability company (“Assignor”), and LVP H2S SEATTLE LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, Tukwila Hotel Ownership, LLC (“Seller”) and Assignor are parties to that certain Agreement of Purchase and Sale dated as of May 9, 2016 (as amended, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the hotel known as the “Home 2 Suites by Hilton – Seattle Airport” located at 380 Upland Drive, Tukwila, WA 98188; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate of Assignor) all of its right, title and interest in and to the Agreement, and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 14.6 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date. Assignor shall continue to remain primarily liable under the Agreement until the Closing under the Agreement.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
| 2 |
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS VI LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| ASSIGNEE: | ||
| LVP H2S SEATTLE LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| 3 |
Exhibit 10.10
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of August 2, 2016 (the “Effective Date”), by and between LIGHTSTONE ACQUISITIONS VI LLC, a Delaware limited liability company (“Assignor”), and LVP H2S SALT LAKE CITY LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, South Jordan Hotel Ownership, LLC (“Seller”) and Assignor are parties to that certain Agreement of Purchase and Sale dated as of May 9, 2016 (as amended, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the hotel known as the “Home 2 Suites by Hilton – Salt Lake City/South Jordan” located at 10704 South River Front Parkway, South Jordan, UT 84095; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate of Assignor) all of its right, title and interest in and to the Agreement, and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 14.6 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date. Assignor shall continue to remain primarily liable under the Agreement until the Closing under the Agreement.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
| 2 |
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS VI LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| ASSIGNEE: | ||
| LVP H2S SALT LAKE CITY LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| 3 |
Exhibit 10.11
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of September 13, 2016 (the “Effective Date”‘), by and between LIGHTSTONE ACQUISITIONS LLC, a Delaware limited liability company (“Assignor”), and LVP FFI AUSTIN LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, Excel Austin North LLC (“Seller”) and Assignor are parties to that certain Purchase and Sale Agreement dated as of April 21, 2016, as amended (as amended, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the hotel known as the “Fairfield Inn & Suites Austin Northwest/Research Boulevard” located at 13087 Research Boulevard, Austin, Texas 78750; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate of Assignor) all of its right, title and interest in and to the Agreement, and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 15.3 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date. Assignor shall continue to remain primarily liable under the Agreement until the Closing under the Agreement.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
| 2 |
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| ASSIGNEE: | ||
| LVP FFI AUSTIN LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| 3 |
Exhibit 10.12
ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (this “Assignment”) is executed as of October 6, 2016 (the “Effective Date”), by and between LIGHTSTONE ACQUISITIONS LLC, a Delaware limited liability company (“Assignor”), and LVP SBS AUSTIN LLC, a Delaware limited liability company(“Assignee”).
WITNESSETH:
WHEREAS, Excel Austin 183 LLC (“Seller”) and Assignor are parties to that certain Purchase and Sale Agreement dated as of April 21, 2016, as amended (as amended, the “Agreement”), pursuant to which Seller has agreed to sell and Assignor has agreed to purchase the hotel known as the “Staybridge Suites Austin Northwest” located at 13087 US-183, Austin, Texas 78750; and
WHEREAS, Assignor desires to assign to Assignee (which is an Affiliate of Assignor) all of its right, title and interest in and to the Agreement, and Assignee desires to accept all of Assignor’s right, title and interest in and to the Agreement and assume Assignor’s obligations under the Agreement.
NOW THEREFORE, in consideration of the above recitals incorporated herein and the mutual promises and covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor and Assignee agree as follows:
1. Assignment and Assumption of the Agreement. Pursuant to Section 15.3 of the Agreement, Assignor hereby assigns, transfers and conveys to Assignee all of Assignor’s right, title, interest in, and delegates to Assignee all of Assignor’s duties, undertakings, agreements, obligations and covenants under, the Agreement, and Assignee hereby accepts such assignment, transfer and conveyance of the Agreement, and hereby assumes and agrees to be bound by and to perform and observe all of the duties, undertakings, agreements, obligations and covenants under the Agreement that are to be performed by Assignor thereunder in accordance with the terms of the Agreement, including without limitation, obligations that may arise due to conditions existing prior to the Effective Date. Assignor shall continue to remain primarily liable under the Agreement until the Closing under the Agreement.
2. Representations and Warranties. Assignor represents and warrants to Assignee that Assignor has full power, authority and right to execute and deliver this Assignment. Assignee represents and warrants to Assignor that Assignee has full power, authority and right to execute and deliver this Assignment.
3. Reliance. This Assignment may be relied upon as conclusive proof that the Agreement has been assigned to Assignee.
4. Further Assurances. Assignor and Assignee each covenants and agrees to hereafter execute and acknowledge any and all agreements, contracts, leases, licenses, applications, verifications and such other additional instruments and documents as may be reasonably requested by the other party hereto in furtherance of this Assignment or to carry out the intent hereof.
5. Successors and Assigns. This Assignment shall be binding upon and inure to the benefit of the successors and assigns of Assignor and Assignee.
6. Counterparts. This Assignment may be executed in one or more counterparts, and by facsimile signature, each of which shall be deemed an original and all of which, taken together, shall be construed as a single instrument.
[Signatures appear on following pages]
| 2 |
IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above set forth.
| ASSIGNOR: | ||
| LIGHTSTONE ACQUISITIONS LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| ASSIGNEE: | ||
| LVP SBS AUSTIN LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Joseph E. Teichman, Executive Vice President | ||
| 3 |
Exhibit 10.13
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this “Agreement”) is entered into as of the 31st day of January, 2017, by and among REIT COVE LLC, a Delaware limited liability company (“Assignor”), REIT III COVE LLC, a Delaware limited liability company (“REIT III”), and REIT IV COVE LLC, a Delaware limited liability company (“REIT IV”, and together with REIT III, collectively, the “Assignees”).
Unless otherwise defined herein, capitalized terms in this Agreement shall have the same meaning ascribed to them in the Purchase Agreement (as defined below).
RECITALS
A. Assignor has entered into that certain Agreement of Sale and Purchase (Membership Interests) dated as of September 29, 2016 (the “Purchase Agreement”) by and among Assignor, RP Cove, L.L.C., a Delaware limited liability company (“Rockpoint”), and Maximus Cove Investor LLC, a Delaware limited liability company, pursuant to which Assignor agreed to purchase from Rockpoint, and Rockpoint agreed to sell to Assignor, the Assigned Company Membership Interests (as defined in the Purchase Agreement).
B. Assignor desires to assign to the Assignees, and the Assignees wish to assume from Assignor, all of Assignor’s rights and obligations under and incident to the Purchase Agreement.
NOW THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, Assignor and the Assignees agree as follows, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Assignment by Assignor to the Assignees. Pursuant to and in accordance with Section 10.4 of the Purchase Agreement, Assignor hereby assigns to the Assignees all of Assignor’s rights, obligations, title and interest in, to and under the Purchase Agreement. Each Assignee is controlled, directly or indirectly, by David Lichtenstein.
2. Assumption by the Assignees. The Assignees hereby accept the foregoing assignment and assume all of Assignor’s rights, obligations, title and interest in, to and under the Purchase Agreement and shall be jointly and severally responsible for the due performance and observance of all agreements, covenants, conditions, provisions and obligations to be performed and observed by Assignor under the Purchase Agreement whether arising or accruing before, as of or after the date hereof. Upon the Closing (pursuant to and in accordance with the terms and conditions of the Purchase Agreement), (i) Rockpoint shall assign to REIT III, and REIT III shall assume from Rockpoint, fifty percent (50%) of the Assigned Company Membership Interests, and (ii) Rockpoint shall assign to REIT IV, and REIT IV shall assume from Rockpoint, the remaining fifty percent (50%) of the Assigned Company Membership Interests.
3. Binding Effect. This Assignment shall be binding upon the successors and assigns of the parties. The parties shall execute and deliver such further and additional instruments, agreements, and other documents as may be necessary to evidence or carry out the provisions of this Assignment.
4. Governing Law. This Assignment shall be governed by and construed in accordance with the substantive internal laws of the State of New York without regard to the principles of conflicts of laws.
5. Counterparts. This Agreement may be executed in multiple counterparts, each of which constitutes an original but all of which taken together constitute one and the same Agreement.
[Remainder of page intentionally left blank.]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| ASSIGNOR: | ||
| REIT COVE LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Name: Joseph E. Teichman | ||
| Title: Executive Vice President | ||
| ASSIGNEES: | ||
| REIT III COVE LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Name: Joseph E. Teichman | ||
| Title: Executive Vice President | ||
| REIT IV COVE LLC, | ||
| a Delaware limited liability company | ||
| By: | /s/ Joseph E. Teichman | |
| Name: Joseph E. Teichman | ||
| Title: Executive Vice President | ||
[Signature Page to Assignment and Assumption Agreement]
Exhibit 10.14
$60,000,000 CREDIT FACILITY
LOAN AGREEMENT
Dated as of July 13, 2016
by and among
LVP HOLD CO MEZZ III LLC,
as Borrower,
WESTERN ALLIANCE BANK
for itself, as a Lender and as Agent for all Lenders,
and
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
as Lenders
TABLE OF CONTENTS
| Page | ||
| Article 1 THE CREDITS | 1 | |
| 1.1 | Amounts and Terms of Commitments | 1 |
| 1.2 | [Intentionally Omitted] | 1 |
| 1.3 | The Revolving Facility | 1 |
| 1.4 | Extension of Maturity Date | 3 |
| 1.5 | Other Interest Provisions | 4 |
| 1.6 | Closing | 4 |
| 1.7 | Collateral | 4 |
| 1.8 | Loan Accounts | 4 |
| 1.9 | Intentionally Omitted | 5 |
| 1.10 | Intentionally Omitted | 5 |
| 1.11 | Payments by Borrower | 5 |
| 1.12 | Payments by the Lenders to Agent; Settlement | 7 |
| 1.13 | Borrowing Base Valuation | 10 |
| 1.14 | Cash Management | 10 |
| Article 2 CONDITIONS PRECEDENT | 12 | |
| 2.1 | Closing Conditions Precedent | 12 |
| 2.2 | Conditions Precedent to Funding Revolving Loans Post-Closing | 12 |
| 2.3 | Conditions Precedent to Classification as a Borrowing Base Asset | 13 |
| Article 3 REPRESENTATIONS AND WARRANTIES | 14 | |
| 3.1 | Corporate Existence and Power | 14 |
| 3.2 | Corporate Authorization; No Contravention | 14 |
| 3.3 | Governmental Authorization | 14 |
| 3.4 | Binding Effect | 14 |
| 3.5 | Litigation and Condemnation | 15 |
| 3.6 | Administrative, Criminal and Governmental Audits and Investigations | 15 |
| 3.7 | No Default | 15 |
| 3.8 | ERISA Compliance | 15 |
| 3.9 | Use of Proceeds; Margin Stock | 15 |
| 3.10 | Ownership of Property; Liens | 15 |
| 3.11 | Taxes | 16 |
| 3.12 | Financial Condition | 16 |
| 3.13 | Regulated Entities | 16 |
| 3.14 | Solvency | 17 |
| 3.15 | Labor Relations | 17 |
| 3.16 | Brokers’ Fees; Transaction Fees | 17 |
| 3.17 | Ventures, Subsidiaries and Affiliates; Outstanding Stock | 17 |
| 3.18 | Bonding | 17 |
| 3.19 | Full Disclosure | 17 |
| 3.20 | Foreign Assets Control Regulations and Anti-Money Laundering | 18 |
| 3.21 | Intentionally Omitted | 18 |
| 3.22 | Bankruptcy and Similar Matters | 18 |
| 3.23 | Site Conditions, Zoning, Access, and Utilities | 18 |
| 3.24 | License Agreement | 19 |
| 3.25 | Management Agreement | 19 |
| 3.26 | Non-Foreign Status | 19 |
| 3.27 | Commercial Purpose of Credit Facilities | 19 |
|
Article 4 AFFIRMATIVE COVENANTS |
19 | |
| 4.1 | Accounting Systems; Books and Records | 20 |
| 4.2 | Financial Reporting | 20 |
| 4.3 | Certificates; Other Information | 21 |
| 4.4 | Notices | 22 |
| 4.5 | Preservation of Corporate Existence, Etc | 23 |
| 4.6 | The Collateral | 23 |
| 4.7 | Insurance | 24 |
| 4.8 | Payment of Obligations | 24 |
| 4.9 | Compliance with Law | 24 |
| 4.10 | Anti-Money Laundering; Anti-Terrorism | 24 |
| 4.11 | Inspection of Property and Books and Records | 25 |
| 4.12 | Use of Proceeds | 25 |
| 4.13 | Further Assurances | 25 |
| 4.14 | [Intentionally Omitted] | 25 |
| 4.15 | Taxes | 25 |
| 4.16 | Casualty | 26 |
| 4.17 | Condemnation | 27 |
| 4.18 | License Agreement | 28 |
| 4.19 | Management Agreement | 29 |
| 4.20 | Requirement to Operate as Permitted Concept | 29 |
| 4.21 | Estoppel Certificates | 29 |
| 4.22 | Financial Covenants | 29 |
| 4.23 | Credit Party Obligations | 30 |
| 4.24 | Impounds | 30 |
| 4.25 | Borrowing Base Additions | 31 |
| 4.26 | Periodic Appraisals | 31 |
| 4.27 | Borrowing Base Assets | 32 |
| 4.28 | Obligations Regarding Representations and Warranties | 32 |
| 4.29 | Post-Closing Requirements | 32 |
| Article 5 NEGATIVE COVENANTS | 32 | |
| 5.1 | Limitation on Liens | 32 |
| 5.2 | Disposition of Assets | 32 |
| 5.3 | Maintenance of Existence; Consolidations and Mergers | 33 |
| 5.4 | Loans and Investments | 34 |
| 5.5 | Limitation on Indebtedness | 34 |
| 5.6 | Transactions with Affiliates | 34 |
| 5.7 | Management Fees and Compensation | 34 |
| 5.8 | No Margin Stock | 34 |
| 5.9 | Contingent Obligations | 35 |
| 5.10 | No Benefit Plans | 35 |
| 5.11 | Restricted Payments | 35 |
| 5.12 | Change in Business | 35 |
| 5.13 | Change in Structure | 35 |
| 5.14 | Changes in Accounting | 35 |
| 5.15 | No Name or Other Organizational Changes | 35 |
| 5.16 | No Negative Pledges | 36 |
| 5.17 | Sale-Leasebacks | 36 |
| 5.18 | License Agreement Modifications and Assignments | 36 |
| 5.19 | The Management Agreement | 36 |
| 5.20 | Single Purpose Entity Requirements | 36 |
| Article 6 EVENTS OF DEFAULT | 37 | |
| 6.1 | Event of Default | 37 |
| 6.2 | Remedies | 40 |
| 6.3 | Rights Not Exclusive | 40 |
| 6.4 | Late Fees | 40 |
| 6.5 | No Waiver or Cure | 41 |
| 6.6 | Full Payment Required | 41 |
| 6.7 | Credit Bidding | 41 |
| Article 7 AGENT | 41 | |
| 7.1 | Appointment and Duties | 41 |
| 7.2 | Binding Effect | 42 |
| 7.3 | Use of Discretion | 43 |
| 7.4 | Delegation of Rights and Duties | 43 |
| 7.5 | Reliance and Liability | 43 |
| 7.6 | Agent Individually | 45 |
| 7.7 | Lender Credit Decision | 45 |
| 7.8 | Expenses; Indemnities; Withholding | 46 |
| 7.9 | Resignation of Agent | 47 |
| 7.10 | Release of Collateral or Guarantors | 47 |
| 7.11 | Additional Secured Parties | 48 |
| Article 8 GENERAL PROVISIONS | 48 | |
| 8.1 | Amendments and Waivers | 48 |
| 8.2 | Notices | 50 |
| 8.3 | E-Systems and E-Transmissions | 51 |
| 8.4 | No Waiver; Cumulative Remedies | 53 |
| 8.5 | Costs and Expenses | 53 |
| 8.6 | Indemnity | 54 |
| 8.7 | Marshaling; Payments Set Aside | 55 |
| 8.8 | Binding Effect | 55 |
| 8.9 | Assignments and Participations | 55 |
| 8.10 | Non-Public Information; Confidentiality | 58 |
| 8.11 | Set-off; Sharing of Payments | 60 |
| 8.12 | Counterparts; Facsimile Signature | 61 |
| 8.13 | Severability | 61 |
| 8.14 | Captions | 61 |
| 8.15 | Independence of Provisions | 61 |
| 8.16 | Interpretation | 61 |
| 8.17 | No Third Parties Benefited | 62 |
| 8.18 | Governing Law | 62 |
| 8.19 | Jurisdiction and Service of Process | 62 |
| 8.20 | Waiver of Jury Trial | 62 |
| 8.21 | Entire Agreement; Release | 63 |
| 8.22 | Survival | 63 |
| 8.23 | Limitation of Liability for Certain Damages | 63 |
| 8.24 | Patriot Act | 63 |
| 8.25 | Replacement of Lender | 64 |
| 8.26 | Creditor-Debtor Relationship | 64 |
| 8.27 | Applicability of General Provisions to the Loan Documents | 65 |
| 8.28 | Time of the Essence; Time Periods | 65 |
| 8.29 | Corrections and Insertions | 65 |
| 8.30 | Transaction Characterization | 65 |
| Article 9 TAXES, YIELD PROTECTION AND ILLEGALITY | 65 | |
| 9.1 | Taxes | 65 |
| 9.2 | Increased Costs and Reduction of Return; Capital Adequacy Regulation Events | 67 |
| 9.3 | Funding Losses | 68 |
| 9.4 | Lender Certificates | 68 |
| Article 10 DEFINITIONS; oTHER INTERPRETIVE PROVISIONS | 68 | |
| 10.1 | Defined Terms | 68 |
| 10.2 | The Agreement | 69 |
| 10.3 | Certain Common Terms | 69 |
| 10.4 | Headings; Singular and Plural | 69 |
| 10.5 | Performance; Time | 69 |
| 10.6 | Contracts | 70 |
| 10.7 | Laws | 70 |
| 10.8 | Accounting Terms and Principles | 70 |
| 10.9 | Payments | 70 |
SCHEDULES
The following Schedules and Tables are attached to and are an integral part of this Agreement:
| Schedule 1.1 | Loan Schedule |
| Table 1.3(a) | Revolving Loan Table |
| Schedule 1.3(b) | Form of Revolving Loan Note |
| Schedule 1.3(f) | Form of Revolving Loan Borrowing Notice |
| Schedule 1.7 | Collateral Table |
| Schedule 2.1 | Closing Conditions Precedent Schedule |
| Schedule 2.3 | Borrowing Base Addition Schedule |
| Schedule 3.17 | Organizational Structure Table |
| Schedule 3.25 | Approved Management Agreements as of the Closing Date |
| Schedule 4.3(b) | Compliance Certificate |
| Schedule 4.3(c) | Borrowing Base Certificate |
| Schedule 4.7 | Insurance Requirements Schedule |
| Schedule 4.25(a) | Conditional Approval Notice Form |
| Schedule 4.25(b) | Borrowing Base Addition Notice Form |
| Schedule 4.25(c) | Proposal Package |
| Schedule 4.29 | Post-Closing Obligations |
| Schedule 8.9(c) | Assignment Form |
| Schedule 10.1(a) | Terms Defined in Loan Agreement Provisions |
| Schedule 10.1(b) | Schedule of Defined Terms |
LOAN AGREEMENT
This LOAN AGREEMENT (including all exhibits and schedules hereto, as the same may be amended, modified and/or restated from time to time, this “Agreement”) is entered into as of July 13, 2016, by and among LVP HOLD CO MEZZ III LLC, a Delaware limited liability company (“Borrower”); and WESTERN ALLIANCE BANK, an Arizona corporation (in its individual capacity, “Western Alliance Bank”), as Agent for the several financial institutions from time to time party to this Agreement (collectively, the “Lenders” and individually each a “Lender”) and for itself as a Lender and such Lenders.
Now, therefore, in consideration of the mutual agreements, provisions and covenants contained herein and other valuable consideration, the parties hereto agree as follows:
Article
1
THE CREDITS
1.1 Amounts and Terms of Commitments. This Agreement and the other Loan Documents contain the terms and conditions applicable to the loans identified in the following “Credit Facilities Table” (the “Loan”). Attached as Schedule 1.1 is a Schedule of Loans reflecting each Lender’s share of the Loan (the “Loan Schedule”).
| Credit Facilities Table | |
| Loan | Aggregate Commitment |
| Revolving Loans | $60,000,000 |
1.2 [Intentionally Omitted]
1.3 The Revolving Facility.
(a) Revolving Loans. Subject to the terms and conditions of this Agreement and in reliance on the representations and warranties of the Credit Parties contained herein and in the other Loan Documents, each Lender listed in the “Revolving Loan Table” included as Table 1.3(a) on the Loan Schedule (each, together with any Lender holding Revolving Loans, a “Revolving Loan Lender”) severally and not jointly agrees to make Loans to Borrower (each such Loan, a “Revolving Loan”), in an aggregate amount not to exceed at any time outstanding the amount set forth in the Revolving Loan Table as such Lender’s Revolving Loan Commitment (such Revolving Loan Commitment amount being referred to herein as such Lender’s “Revolving Loan Commitment”); provided, however, that, after giving effect to any borrowing of Revolving Loans, the aggregate principal amount of all outstanding Revolving Loans shall not exceed the Borrowing Base Amount.
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(b) Notes. The Revolving Loans made by each Revolving Loan Lender are evidenced by this Agreement and, if requested by such Lender, a Revolving Loan Note, substantially in the form of Schedule 1.3(b), payable to such Lender in an amount equal to such Lender’s Revolving Loan Commitment (each, a “Revolving Loan Note”).
(c) Use of Revolving Loan Proceeds. Borrower agrees to use the proceeds of the Revolving Loans exclusively to (i) repay Indebtedness of Borrower (or its Subsidiaries), (ii) acquire new properties directly or through its Subsidiaries, (iii) pay for capital expenditures incurred by Borrower or its Subsidiaries, and (iv) such other uses approved by Agent in its sole and absolute discretion, all of which are not in contravention of any Requirement of Law and not in violation of this Agreement.
(d) Repayments and Reborrowings. Subject to the other terms and conditions of this Agreement, amounts borrowed under this Section 1.3 may be repaid and reborrowed from time to time. No prepayment fee shall be due with respect to repayments of Revolving Loans.
(e) Revolving Loan Interest Rate and Payment Provisions.
(i) Interest Rate. Subject to the terms of Section 1.5, each Revolving Loan shall bear interest on the outstanding principal amount thereof from the Loan Advance Date for such Revolving Loan at the Variable Rate, such annual rate to be computed using a 360-day year and charged for actual days elapsed.
(ii) Payments. Interest on each Revolving Loan shall be paid in arrears on the first day of each calendar month with the first such payment due on the first day of the month following the date of this Agreement. The entire unpaid principal balance of each Revolving Loan, together with all accrued and unpaid interest and all other amounts payable pursuant to this Agreement and the other Loan Documents with respect to the Revolving Loans will be due and payable, in full on the “Revolving Loan Maturity Date” which is the earlier to occur of: (i) July 13, 2019; and (ii) the date on which the Revolving Loan Aggregate Commitment shall otherwise terminate in accordance with the provisions of this Agreement. The Revolving Loan Maturity Date shall not be extended unless approved by Agent and Lenders in their sole and absolute discretion (subject to Section 1.4.)
(iii) Remargin. If at any time the outstanding principal balance of Revolving Loans exceeds the Borrowing Base Amount, Borrower shall immediately prepay the outstanding Revolving Loans in an amount sufficient to eliminate such excess.
(f) Procedure for Revolving Loan Borrowings.
(i) When Available; Limitations. Revolving Loans shall be made from time to time on any Business Day during the period beginning on the Closing Date and ending twenty days prior to the Revolving Loan Maturity Date; provided, however, Revolving Loans will not be funded more frequently than once per calendar month, unless otherwise agreed by Agent and Required Lenders. Each Revolving Loan shall be in an aggregate amount of $500,000 or $100,000 increments in excess thereof.
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(ii) Notices and Fundings. Each borrowing of a Revolving Loan to be made by the Revolving Loan Lenders on the same day shall be made upon the Borrower’s irrevocable written notice to Agent (each, a “Revolving Loan Borrowing Notice”) substantially in the form of Schedule 1.3(f), which Revolving Loan Borrowing Notice must be received by Agent prior to 1:00 p.m. (Phoenix time) on the date that is not less than three Business Days prior to the requested borrowing date. Upon receipt of a Revolving Loan Borrowing Notice for a particular Revolving Loan, Agent will promptly notify each Revolving Loan Lender of such Revolving Loan Borrowing Notice and of the amount of such Lender’s Commitment Percentage of such Revolving Loan. Unless Agent is otherwise directed in writing by the Borrower, the proceeds of each requested Revolving Loan after the Closing Date will be made available to Borrower by Agent by wire transfer of such amount to Borrower pursuant to the wire transfer instructions specified on the applicable Revolving Loan Borrowing Notice.
(g) Unused Revolving Loan Commitment Fee. Borrower shall pay to Agent a fee (the “Unused Revolving Loan Commitment Fee”) for the account of each Revolving Loan Lender in an amount equal to: (i) the average daily balance of the Revolving Loan Commitment of such Revolving Loan Lender during the preceding Fiscal Quarter; less (ii) the average daily balance of all Revolving Loans held by such Revolving Loan Lender during the preceding Fiscal Quarter; (iii) with the result being multiplied by 0.50% per annum. The total Unused Revolving Loan Commitment Fee to be paid by Borrower will be equal to the sum of all of the Unused Revolving Loan Commitment Fees due to the Lenders, subject to Section 1.12(e)(v). The Unused Revolving Loan Commitment Fee shall accrue at all times from and after the execution and delivery of this Agreement and shall be due and payable (i) quarterly in arrears on the fifteenth day after the end of each Fiscal Quarter; (ii) on the Revolving Loan Maturity Date; and (iii) upon the termination of the Revolving Loan Aggregate Commitment.
1.4 Extension of Maturity Date. At the Lenders’ sole discretion, the Lenders (acting unanimously) may offer Borrower the option to extend the Revolving Loan Maturity Date for one (1) year (to July 13, 2020). If the Revolving Loan Maturity Date is so extended, the Lenders (acting unanimously), at their sole discretion, may offer an additional option to extend the Revolving Loan Maturity Date for one (1) more year (to July 13, 2021). Notwithstanding the foregoing, the Revolving Loan Maturity Date may not be extended beyond July 13, 2021. In order to exercise such options to extend, Borrower, at a minimum, must (i) notify Agent of its desire to extend the Revolving Loan Maturity Date at least ninety (90) days prior to the then Revolving Loan Maturity Date, and (ii) satisfy the following conditions by or on the Revolving Loan Maturity Date: (a) Borrower has paid to Agent for the ratable benefit of Revolving Loan Lenders an extension fee in the amount of one quarter percent (25 basis points) of the aggregate Revolving Loan Commitments; (b) Agent shall have received a certificate signed by a duly-authorized officer of Borrower stating that (1) no Default or Event of Default has occurred and is continuing or would result from such extension, (2) Borrower is in compliance with the financial covenants in Section 4.22 both immediately before and after giving effect to such extension, and (3) the representations and warranties contained in the Loan Documents are true and correct in all material respects on and as of the extension date and (c) Borrower shall have executed all other documents reasonably requested by Agent with respect to any extension.
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1.5 Other Interest Provisions.
(a) Default Interest. At the election of Agent or the Required Lenders while any Event of Default exists (or automatically while any Event of Default under Section 6.1(a) or 6.1(f) exists), Borrower shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on each Loan from and after the date of occurrence of such Event of Default, at a rate per annum which is determined by adding two percent per annum to the Variable Rate in effect from time to time with respect to such Loan. All such interest shall be payable on demand of Agent or the Required Lenders.
(b) Maximum Rate of Interest. Anything herein or in any of the other Loan Documents to the contrary notwithstanding, the obligations of Borrower hereunder shall be subject to the limitation that payments of interest shall not be required, for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by the respective Lender would be contrary to any Requirement of Law applicable to such Lender limiting the highest rate of interest which may be lawfully contracted for, charged or received by such Lender, and in such event Borrower shall pay such Lender interest at the highest rate permitted by applicable law (“Maximum Lawful Rate”); provided, however, that if at any time thereafter the rate of interest payable hereunder is less than the Maximum Lawful Rate, Borrower shall continue to pay interest hereunder at the Maximum Lawful Rate until such time as the total interest received by Agent, on behalf of the Lenders, is equal to the total interest that would have been received had the interest payable hereunder been (but for the operation of this subsection) been computed since the Closing Date as otherwise provided in this Agreement.
1.6 Closing. The closing (the “Closing”) with respect to the Loan will occur within three Business Days following satisfaction (or waiver) of each of the closing conditions precedent listed in Section 2.1 and on Schedule 2.1. The date on which the Closing occurs and the Revolving Loan to be made at Closing is funded is the “Closing Date.” Borrower hereby authorizes Agent to insert the Closing Date on the first page hereof, as the date of this Agreement, and in the various Loan Documents executed in connection with the Closing, as the date thereof. The Closing must occur on or before 1:00 p.m. local time in Phoenix, Arizona on July 14, 2016 (the “Closing Deadline”). If the Closing has not occurred on or before the Closing Deadline, Lenders shall have absolutely no obligation whatsoever to extend the Loan to Borrower. Agent may extend the Closing Deadline in Agent’s sole discretion. Any Closing Deadline extension must be in writing to be valid.
1.7 Collateral. All of the Obligations, including with respect to the Loan, will be secured by the Collateral. At Closing, the Collateral will include the Collateral described in the Collateral Table attached as Schedule 1.7 (the “Collateral Table”) as well as all other Collateral described in the Loan Documents.
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1.8 Loan Accounts.
(a) Maintenance of Loan Records. Agent, on behalf of the Lenders, shall record on its books and records the amount of each Loan made, the interest rate applicable, all payments of principal and interest thereon and the principal balance thereof from time to time outstanding. On a monthly basis, Agent shall deliver to Borrower a loan statement setting forth such record for the immediately preceding calendar month. Such record shall, absent manifest error, be conclusive evidence of the amount of the Loans made by the Lenders to Borrower and the interest and payments thereon. Any failure to so record or any error in doing so, or any failure to deliver such loan statement shall not, however, limit or otherwise affect the obligation of Borrower hereunder (and under any Note) to pay any amount owing with respect to the Loans or provide the basis for any claim against Agent.
(b) Ownership Register. Agent, acting as a non-fiduciary agent of Borrower solely for tax purposes and solely with respect to the actions described in this subsection, shall establish and maintain at its address referred to in Section 8.2 (or at such other address as Agent may notify Borrower): (i) a record of ownership (the “Register”) in which Agent agrees to register by book entry the interests (including any rights to receive payment hereunder) of Agent and each Lender in the Revolving Loans, each of their obligations under this Agreement to participate in each Loan, and any assignment of any such interest, obligation or right; and (ii) accounts in the Register in accordance with its usual practice in which it shall record: (A) the names and addresses of the Lenders (and each change thereto pursuant to Sections 8.9 and 8.25); (B) the Commitments of each Lender; (C) the amount of each Loan and each funding of any participation described in clause (i) of this subsection; (D) the amount of any principal or interest due and payable or paid; and (E) any other payment received by Agent from Borrower and its application to the Obligations.
(c) Registered Obligations. Notwithstanding anything to the contrary contained in this Agreement, the Loans (including any Notes evidencing such Loans) are registered obligations, the right, title and interest of the Lenders and their assignees in and to such Loans shall be transferable only upon notation of such transfer in the Register and no assignment thereof shall be effective until recorded therein. This Section 1.8 and Section 8.9 shall be construed so that the Loans are at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the Code.
(d) Access to Register. The Credit Parties, Agent, and the Lenders shall treat each Person whose name is recorded in the Register as a Lender for all purposes of this Agreement. Information contained in the Register with respect to any Lender shall be available for access by Borrower, Agent, or such Lender during normal business hours and from time to time upon at least one Business Day’s prior notice. No Lender shall, in such capacity, have access to or be otherwise permitted to review any information in the Register other than information with respect to such Lender, unless otherwise agreed by Agent.
1.9 Intentionally Omitted.
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1.10 Intentionally Omitted.
1.11 Payments by Borrower.
(a) Time, Manner and Place of Payment. All payments (including prepayments) to be made by each Credit Party on account of principal, interest, fees and other amounts required hereunder shall be made without set off, recoupment, counterclaim or deduction of any kind, shall, except as otherwise expressly provided herein, be made to Agent (for the ratable account of the Persons entitled thereto) at the address for payment specified in the signature page hereof in relation to Agent (or such other address as Agent may from time to time specify in accordance with Section 8.2), including payments utilizing the ACH system, and shall be made in Dollars and by wire transfer or ACH transfer in immediately available funds (which shall be the exclusive means of payment hereunder), no later than noon (Phoenix time) on the date due. Any payment which is received by Agent later than noon (Phoenix time) may in Agent’s discretion be deemed to have been received on the immediately succeeding Business Day and any applicable interest or fee shall continue to accrue. Borrower and each other Credit Party hereby irrevocably waives the right to direct the application during the continuance of an Event of Default of any and all payments in respect of any Obligation and any proceeds of Collateral. If any payment hereunder shall be stated to be due on a day and such day is not 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 interest or fees, as the case may be. All payments with respect to the Obligations, including payments made by ACH debit, shall be in U.S. dollars and shall be made from a business deposit account in Borrower’s name at a U.S. bank.
(b) Revolving Loans to Fund Interest, Fees, and Other Amounts. Borrower hereby authorizes Agent and each Lender to make a Revolving Loan to pay (i) interest, principal, agent fees, and Unused Commitment Fees, in each instance, on the date due; or (ii) after five days’ prior notice to Borrower, other fees, costs or expenses payable by Borrower or any other Credit Party hereunder or under the other Loan Documents.
(c) Application of Payments After Event of Default. During the continuance of an Event of Default, Agent may, and, upon the direction of Required Lenders, shall apply any and all payments received by Agent in respect of any Obligation in accordance with priorities specified in this subsection (c). Notwithstanding any provision herein to the contrary, all payments made by Credit Parties to Agent after any or all of the Obligations have been accelerated (so long as such acceleration has not been rescinded), including proceeds of Collateral, shall be applied as follows:
(i) First, to payment of costs and expenses, including reasonable attorneys’ fees and expenses, of Agent payable or reimbursable by the Credit Parties under the Loan Documents;
(ii) Second, to payment of reasonable attorneys’ fees and expenses of the Lenders payable or reimbursable by Borrower under this Agreement;
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(iii) Third, to payment of all accrued unpaid interest on the Obligations and fees owed to Agent and the Lenders;
(iv) Fourth, to payment of principal of the Obligations, including Obligations under any Secured Rate Contract;
(v) Fifth, to payment of any other amounts owing constituting Obligations; and
(vi) Sixth, any remainder shall be for the account of and paid to whoever may be lawfully entitled thereto.
In carrying out the foregoing, amounts received shall be applied in the numerical order provided until exhausted prior to the application to the next succeeding category; and each of the Lenders or other Persons entitled to payment shall receive an amount equal to its pro rata share of amounts available to be applied pursuant to clauses (iii), (iv), and (v) above.
1.12 Payments by the Lenders to Agent; Settlement.
(a) Funding Requirements. Agent may, on behalf of the Lenders, disburse funds to Borrower for Loans requested. Each Lender shall reimburse Agent on demand for all funds disbursed on its behalf by Agent, or if Agent so requests, each Lender will remit to Agent its Commitment Percentage of any Loan before Agent disburses same to Borrower. If Agent elects to require that each Lender make funds available to Agent prior to disbursement by Agent to Borrower, Agent shall advise each Lender by telephone or fax of the amount of such Lender’s Commitment Percentage of the Loan requested by Borrower no later than the Business Day prior to the scheduled borrowing date applicable thereto, and each such Lender shall pay Agent such Lender’s Commitment Percentage of such requested Loan, in same day funds, by wire transfer to Agent’s account, as set forth on Agent’s signature page hereto, no later than noon (Phoenix time) on such scheduled borrowing date. Nothing in this subsection (a) or elsewhere in this Agreement or the other Loan Documents, including the other provisions of this Section 1.12, shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Agent any Lender or Borrower may have against any Lender as a result of any default by such Lender hereunder.
(b) Agent Payments to Lenders; Settlement. At least once each calendar month or more frequently at Agent’s election (each, a “Settlement Date”), Agent shall advise each Lender by telephone or fax of the amount of such Lender’s Commitment Percentage of principal, interest and fees paid for the benefit of the Lenders with respect to each applicable Loan. Except as otherwise provided in Section 1.12(e)(iii) and Section 1.12(e)(v), Agent shall pay to each Lender such Lender’s Commitment Percentage of principal, interest and fees paid by Borrower since the previous Settlement Date for the benefit of such Lender on the Loans held by it. Such payments shall be made by wire transfer to such Lender not later than 1:00 p.m. (Phoenix time) on the next Business Day following each Settlement Date.
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(c) Availability of Lender’s Commitment Percentage. Agent may assume that each Revolving Loan Lender will make its Commitment Percentage of each Revolving Loan available to Agent on each borrowing date. If such Commitment Percentage is not, in fact, paid to Agent by such Revolving Loan Lender when due, Agent will be entitled to recover such amount on demand from such Revolving Loan Lender without setoff, counterclaim or deduction of any kind. If any Revolving Loan Lender fails to pay the amount of its Commitment Percentage forthwith upon Agent’s demand, Agent shall promptly notify the Borrower, and Borrower shall immediately repay such amount to Agent. Nothing in this subsection or elsewhere in this Agreement or the other Loan Documents shall be deemed to require Agent to advance funds on behalf of any Revolving Lender or to relieve any Revolving Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Borrower may have against any Revolving Lender as a result of any default by such Revolving Lender hereunder. Without limiting the provisions of subsection (b) above, to the extent that Agent advances funds to Borrower on behalf of any Revolving Loan Lender and is not reimbursed therefor on the same Business Day as such advance is made, Agent shall be entitled to retain for its account all interest accrued on such advance from the date such advance was made until reimbursed by the applicable Revolving Loan Lender.
(d) Return of Payments.
(i) Recovery from the Lenders. If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender on demand without setoff, counterclaim or deduction of any kind.
(ii) Returned Payments. If Agent determines at any time that any amount received by Agent under this Agreement or any other Loan Document must be returned to any Credit Party or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Loan Document, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without setoff, counterclaim or deduction of any kind, and Agent will be entitled to set-off against future distributions to such Lender any such amounts (with interest) that are not repaid on demand.
(e) Non-Funding Lenders.
(i) Responsibility. The failure of any Non-Funding Lender to make any Revolving Loan, or to fund any purchase of any participation to be made or funded by it, or to make any payment required by it under any Loan Document on the date specified therefor shall not relieve any other Lender of its obligations to make such loan, fund the purchase of any such participation, or make any other such required payment on such date, and neither Agent nor, other than as expressly set forth herein, any other Lender shall be responsible for the failure of any Non-Funding Lender to make a loan, fund the purchase of a participation or make any other required payment under any Loan Document.
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(ii) Voting Rights. Notwithstanding anything set forth herein to the contrary, including Section 8.1, a Non-Funding Lender shall not have any voting or consent rights under or with respect to any Loan Document or constitute a “Lender” or a “Revolving Loan Lender” (or be, or have its Loans and Commitments, included in the determination of “Required Lenders”, or “Lenders directly affected” pursuant to Section 8.1) for any voting or consent rights under or with respect to any Loan Document, provided that: (A) the Commitment of a Non-Funding Lender may not be increased, extended or reinstated; (B) the principal of a Non-Funding Lender’s Loans may not be reduced or forgiven; and (C) the interest rate applicable to Obligations owing to a Non-Funding Lender may not be reduced, in each case, without the consent of such Non-Funding Lender. Moreover, for the purposes of determining Required Lenders, the Loans and Commitments held by Non-Funding Lenders shall be excluded from the total Loans and Commitments outstanding.
(iii) Borrower Payments to a Non-Funding Lender. Agent shall be authorized to use all payments received by Agent for the benefit of any Non-Funding Lender pursuant to this Agreement to pay in full the Aggregate Excess Funding Amount to the appropriate Secured Parties. With respect to such Non-Funding Lender’s failure to fund Revolving Loans, any amounts applied by Agent to satisfy such funding shortfalls shall be deemed to constitute a Revolving Loan or amount of the participation required to be funded and, if necessary to effectuate the foregoing, the other Revolving Lenders shall be deemed to have sold, and such Non-Funding Lender shall be deemed to have purchased, Revolving Loans from the other Revolving Loan Lenders until such time as the aggregate amount of the Revolving Loans are held by the Revolving Loan Lenders in accordance with their Commitment Percentages of the Revolving Loan Aggregate Commitment. Any amounts owing by a Non-Funding Lender to Agent which are not paid when due shall accrue interest at the interest rate applicable during such period to Revolving Loans. If Agent is holding cash collateral of a Non-Funding Lender that cures pursuant to clause (iv) below or that ceases to be a Non-Funding Lender pursuant to the definition of Non-Funding Lender, Agent shall return the unused portion of such cash collateral to such Lender. The “Aggregate Excess Funding Amount” of a Non-Funding Lender shall be the aggregate amount of all unpaid obligations owing by such Lender to Agent and other Lenders under the Loan Documents, including such Lender’s pro rata share of all Revolving Loans.
(iv) Cure. A Lender may cure its status as a Non-Funding Lender under clause (a) of the definition of Non-Funding Lender if such Lender fully pays to Agent, on behalf of the applicable Secured Parties, the Aggregate Excess Funding Amount, plus all interest due thereon. Any such cure shall not relieve any Lender from liability for breaching its contractual obligations hereunder.
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(v) Fees. A Lender that is a Non-Funding Lender pursuant to clause (a) of the definition of Non-Funding Lender shall not earn and shall not be entitled to receive, and Borrower shall not be required to pay, such Lender’s portion of the Unused Revolving Loan Commitment Fee during the time such Lender is a Non-Funding Lender pursuant to clause (a) of such definition.
(f) Procedures. Agent is hereby authorized by each Credit Party and each other Secured Party to establish procedures (and to amend such procedures from time to time) to facilitate administration and servicing of the Loans and other matters incidental thereto. Without limiting the generality of the foregoing, Agent is hereby authorized to establish procedures to make available or deliver, or to accept, notices, documents and similar items on, by posting to or submitting and/or completion, on E-Systems.
1.13 Borrowing Base Valuation. Agent will determine the Borrowing Base Amount from time to time (each such date, a “Borrowing Base Valuation Date”), including, without limitation, (i) as of the Closing Date, (ii) as of the end of each Fiscal Quarter based upon the Financial Statements and Borrowing Base Certificate provided pursuant to Sections 4.2 and 4.3, and (iii) upon receipt of any new or updated Acceptable Appraisal ordered by Agent. If Borrower fails to provide Agent with the required Financial Statements or a Borrowing Base Certificate for any quarter pursuant to Sections 4.2 and 4.3 (and fails to cure such breach within the cure period set forth in Section 6.1(d), if applicable), Agent and Required Lenders may, in their sole discretion, elect to deem the Total Borrowing Base Value to be zero dollars until such Financial Statements and Borrowing Base Certificate are provided to Agent.
1.14 Cash Management.
(a) Borrower shall deposit, and shall cause Manager to deposit, all Operating Revenues into a Depository Account in which Borrower has granted to Agent a perfected security interest pursuant to a Blocked Account Agreement. On or before Closing (and thereafter as needed), Borrower and Manager shall give irrevocable notices to all current Credit Card Issuers or any other account debtors doing business with Borrower or any of the Borrowing Base Assets to make or wire all payments to a Depository Account in which Borrower has granted to Agent a perfected security interest. Within thirty (30) days after (i) the Closing with respect to the initial Borrowing Base Assets or (ii) the date of submission as a Borrowing Base Asset with respect to all subsequently added Borrowing Base Assets, Borrower shall deliver to Agent such notices signed by Borrower and will endeavor to have them countersigned by each Credit Card Issuer. Borrower and Manager shall give the same irrevocable notice to all future Credit Card Issuers and other account debtors concurrently with entering into agreements with such parties and, in the case of future Credit Card Issuers, shall deliver to Agent all such notices signed by Borrower and will endeavor to have them countersigned by each future Credit Card Issuer within thirty (30) days thereafter. Each reference to Borrower in this Section 1.14 shall also include the TRS Lessee for each Hotel Asset, and Borrower shall cause each TRS Lessee to comply with this Section 1.14.
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(b) During any Sweep Period, commencing upon the written request of Agent:
(i) Upon notice from Agent, the financial institution who is a party to the Blocked Account Agreement shall transfer all funds then on deposit, and thereafter deposited, in its Depository Account to an account maintained by Agent in Agent’s name (or such other account name as Agent may elect) at Western Alliance Bank or another bank selected by Agent in its sole discretion (the “Agent Account”). Such transfers to the Agent Account shall continue until a Sweep Period no longer exists.
(ii) Upon Agent’s determination that a Sweep Period no longer exists, Agent shall transfer all funds then on deposit in the Agent Account to the Depository Account and shall notify the applicable financial institution to cease transferring funds to the Agent Account.
(iii) Borrower acknowledges that more than one Sweep Period may occur during the term of the Loan.
(c) The Agent Account, and all funds at any time on deposit therein, shall be subject to the following:
(i) At any time on or after the first day of each month, Agent shall withdraw from the Agent Account an amount equal in the aggregate to all debt service, reserve amounts (including Tax & Assessment Impositions in accordance with Section 4.24), fees, costs, expenses and other amounts then owing to Secured Parties under the Loan Documents.
(ii) Borrower shall submit to Agent a monthly a disbursement request containing detailed description of Operating Expenses then owing, together with invoices, bills of sale and such other evidence as Agent may request to confirm the amount and nature of each such Operating Expense. Each such disbursement request shall reflect Operating Expenses shown on the then-current operating budget for such Borrowing Base Asset or be accompanied by a detailed explanation for the variance.
(iii) After payment of all amounts described under Section 1.14(c)(i) and upon Agent’s approval of each disbursement request, Agent shall disburse funds from the Agent Account to pay Operating Expenses described in the approved disbursement request, which disbursements shall be made by Agent to Borrower or the Manager who shall then pay such expenses and provide Agent with reasonable evidence of such payment within ten (10) Business Days of receipt of such disbursement. Such disbursement request may also include sales taxes, which Agent shall release from the Agent Account as the item with first priority to be paid as Operating Expenses.
(iv) Agent, in its sole discretion, may apply all of the funds then on deposit in the Agent Account (after payment of debt service, reserve amounts and Operating Expenses then owing) to pay down the principal balance of the Revolving Loans, provided that unless the Revolving Loans have been accelerated or have otherwise become due and payable in full, Agent shall not by such application of such excess funds reduce the balance in any Agent Account to less than $50,000. Thereafter, Agent, in its sole discretion, may continue to apply all of the funds remaining in the Agent Account after payment of debt service, reserve amounts and Operating Expenses each month to pay down the principal balance of the Revolving Loans until the Sweep Period terminates. In no way shall Agent's review, approval or payment of any disbursement request be deemed to impose any obligation on Agent to manage or operate any Hotel Asset or to pay any Operating Expense (except out of available funds on deposit in the Agent Account as set forth herein) or be deemed or construed as an approval of the amount of any Operating Expense (except to the extent that Agent determines a particular amount does not constitute an Operating Expense) or the performance of any vendor supplying materials or services to a Hotel Asset.
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(v) Nothing in this Section 1.14 shall obligate Agent to make any advances or loans to or for the benefit of Borrower other than disbursements of available funds in the Agent Account from time to time as described in this Section 1.14.
(vi) To secure the Obligations, Borrower grants to Agent a security interest in all funds held in the Agent Account. While an Event of Default exists, Agent shall be entitled, without notice to Borrower, to apply any funds in the Agent Account to satisfy Borrower's obligations under the Loan Documents.
Article
2
CONDITIONS PRECEDENT
2.1 Closing Conditions Precedent. The obligation of each Lender to make its initial Loans to be funded at Closing and to close the transactions contemplated by this Agreement is subject to Agent’s satisfaction with or waiver of, in Agent’s sole discretion and in each case on or prior to the Closing Deadline, the closing conditions precedent set forth in this Section and on the Closing Conditions Precedent Schedule attached as Schedule 2.1, including all required deliverables, each at the expense of the Credit Parties:
(a) Borrowing Base Certificate. Borrower shall have provided to Agent a Borrowing Base Certificate setting forth the Total Borrowing Base Value as of the Closing Date.
2.2 Conditions Precedent to Funding Revolving Loans Post-Closing. Except as otherwise expressly provided herein, no Revolving Loan Lender shall be obligated to fund any Revolving Loan after the Closing, if, as of the date of funding, the conditions in this Section 2.2 are not satisfied. The request by Borrower and acceptance by Borrower of the proceeds of such Revolving Loan shall be deemed to constitute, as of the date thereof, both a representation and warranty by Borrower that the conditions in this Section 2.2 have been satisfied and a reaffirmation by each Credit Party of the granting and continuance of Agent’s Liens, on behalf of itself and the Secured Parties, pursuant to the Collateral Documents.
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(a) Representations and Warranties True and Correct. All representations and warranties by any Credit Party contained herein or in any other Loan Document are true and correct in all material respects (without duplication of any materiality qualifier contained therein), unless Agent or Required Lenders have determined to make such Revolving Loan notwithstanding the fact that such warranty or representation is untrue or incorrect.
(b) No Default or Event of Default. No Default or Event of Default has occurred and is continuing or would reasonably be expected to result after giving effect to such Revolving Loan, unless Agent or Required Lenders shall have determined to make such Revolving Loan notwithstanding the existence of such Default or Event of Default.
(c) Payment of Costs, Expenses and Fees. All costs, expenses and fees to be paid by Borrower on or before the date of funding of such Revolving Loan shall have been paid in full.
(d) No Material Adverse Effect. No Material Adverse Effect shall have occurred since Closing, and there shall be no facts or circumstances existing and not previously disclosed in writing to Agent or the Lenders with respect to any Credit Party, the Collateral, the seller, if any, of the Collateral, any other Person representing or otherwise acting on behalf of a Credit Party, or the transactions contemplated by the Loan Documents, in Agent’s reasonable judgment, are inconsistent in a material and adverse manner with any such information disclosed to Agent prior to Closing.
(e) Loan Documents. Agent shall have received and has filed or recorded, as applicable, such documents as Agent may require to (i) continue the full benefits of the Loan Documents; and (ii) protect, preserve, maintain, continue, and enforce Agent’s rights in (and the priority of Agents Liens on) the Collateral, including consents, intercreditor agreements, and subordination agreements, in each case duly executed and, where appropriate, acknowledged by the appropriate parties (with each such document or instrument to be deemed to be a Loan Document).
(f) Borrowing Base Amount. After giving effect to any Loan, the aggregate outstanding amount of the Revolving Loans would not exceed the Borrowing Base Amount.
(g) Borrowing Base Certificate. Not less than five (5) Business Days before the Revolving Loan is to be made, Agent shall have received a current Borrowing Base Certificate dated as of the latest Borrowing Base Valuation Date and computed as if the requested Revolving Loan had been made on such date.
(h) Capital Expenditure Information. If the Revolving Loan is to be made to pay for capital expenditures, Borrower shall have provided Agent with any cost information with respect to such capital expenditures, as required by Agent in its reasonable discretion.
(i) Purchase of Borrowing Base Assets. If the Revolving Loan is to be made to pay costs associated with the purchase of a Borrowing Base Asset, Agent shall have received all information required by Agent in connection with such purchase, and the applicable Hotel Asset must qualify as a Borrowing Base Asset upon the disbursement of the proceeds of such Revolving Loan.
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(j) Incurrence Tests. Not less than five (5) Business Days before the Revolving Loan is to be made, Agent shall have received a certificate of Borrower demonstrating to Agent’s satisfaction Borrower’s compliance with the financial covenants set forth in Section 4.22 on a pro forma basis after giving effect to the proposed borrowing, together with supporting information in detail satisfactory to Agent.
2.3 Conditions Precedent to Classification as a Borrowing Base Asset. Prior to any Hotel Asset being classified as a Borrowing Base Asset, the conditions set forth in Schedule 2.3 must be satisfied with respect to such Hotel Asset. In addition, if a Hotel Asset is to be added as a Borrowing Base Asset after the Closing Date, Borrower must comply with Section 4.25.
Article
3
REPRESENTATIONS AND WARRANTIES
Borrower acknowledges and agrees that the representations and warranties in this Article are a material consideration to Agent and the Lenders; that Agent and the Lenders are relying on their correctness and completeness in entering into this Agreement and making the Loans available to Borrower; and that these representations and warranties are true and accurate as of the date hereof, will be true and accurate as of the Closing, as if made at Closing, and will survive the Closing, regardless of any investigation or inspection by Agent or any Lender. Accordingly, Borrower represents, warrants, and certifies to and covenants with Agent and the Lenders that:
3.1 Corporate Existence and Power. Each Credit Party (a) is a corporation, limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, organization or formation, as applicable; (b) has the power and authority and all governmental licenses, authorizations, Permits, consents and approvals to own its assets, carry on its business and execute, deliver, and perform its obligations under, the Loan Documents to which it is a party; (c) is duly qualified as a foreign corporation, limited liability company or limited partnership, as applicable, and licensed and in good standing, under the laws of each jurisdiction where its ownership, lease or operation of Property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in clause (c) or clause (d), to the extent that the failure to do so would not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.
3.2 Corporate Authorization; No Contravention. The execution, delivery and performance by each of the Credit Parties of this Agreement and any other Loan Document to which such Person is party, have been duly authorized by all necessary action, and do not and will not (a) contravene the terms of any of that Person’s Organization Documents; (b) conflict with or result in any material breach or contravention of, or result in the creation of any Lien under, any document evidencing any material Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its Property is subject; or (c) violate any material Requirement of Law in any material respect.
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3.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Credit Party of this Agreement or any other Loan Document except (a) for recordings and filings in connection with the Liens granted to Agent under the Collateral Documents; and (b) those obtained or made on or prior to the Closing Date.
3.4 Binding Effect. This Agreement and each other Loan Document to which any Credit Party is a party constitute the legal, valid and binding obligations of each such Person, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.
3.5 Litigation and Condemnation. There are no actions, suits, proceedings, claims or disputes pending, or to the knowledge of Borrower, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, including condemnation proceedings or proceedings in lieu of condemnation, against Borrower, any of its Subsidiaries or any of their respective Properties which (a) purport to affect or pertain to this Agreement, any other Loan Document, or any of the transactions contemplated hereby or thereby; (b) would reasonably be expected to result in monetary judgment(s) or relief, individually or in the aggregate, in excess of $500,000 for any Site; or (c) seek an injunction or other equitable relief which would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document or directing that the transactions provided for herein or therein not be consummated as herein or therein provided.
3.6 Administrative, Criminal and Governmental Audits and Investigations. There are no administrative or criminal matters or investigations or government investigations, or other similar matters currently pending or, to the knowledge of each Credit Party, threatened that involve any Credit Party nor has any Credit Party been involved in any such matters within the past seven years.
3.7 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by any Credit Party or the grant or perfection of Agent’s Liens on the Collateral. No Credit Party is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, would reasonably be expected to have a Material Adverse Effect.
3.8 ERISA Compliance. None of the Credit Parties maintains, or has any Liabilities with respect to, any Title IV Plan, Multiemployer Plan, and other material Benefit Plan.
3.9 Use of Proceeds; Margin Stock. The proceeds of the Loans are intended to be and shall be used solely for the purposes set forth in and permitted by Section 1.3(c) and are intended to be and shall be used in compliance with Section 5.8. Neither the Borrower nor any of its Subsidiaries is engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. Proceeds of the Loans shall not be used for the purpose of purchasing or carrying Margin Stock. As of the Closing Date, neither the Borrower nor any of its Subsidiaries owns any Margin Stock.
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3.10 Ownership of Property; Liens. Each of the Credit Parties which owns a Borrowing Base Asset has good record and marketable title in fee simple to each Site that is a Borrowing Base Asset, and good and valid title to all owned personal property and valid leasehold interests in all leased personal property, in each instance, necessary or used in the ordinary conduct of their respective businesses. None of the Property of any Credit Party is subject to any Liens other than Permitted Liens. All material Permits required to have been issued or appropriate to enable each such Site to be lawfully occupied and used for all of the purposes for which it is currently occupied and used have been lawfully issued and are in full force and effect. All Real Estate and all personal property of each Subsidiary Guarantor are subject to Liens in favor of Agent for the benefit of the Secured Parties.
3.11 Taxes. All federal, state, local and foreign income and franchise and other material tax returns, reports and statements (collectively, the “Tax Returns”) required to be filed by any Tax Affiliate have been filed with the appropriate Governmental Authorities, all such Tax Returns are true and correct in all material respects, and all Taxes reflected therein or otherwise due and payable have been paid prior to the date on which any Liability may be added thereto for non-payment thereof except for those contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves are maintained on the books of the appropriate Tax Affiliate in accordance with GAAP. To Borrower’s knowledge, no Tax Return is under audit or examination by any Governmental Authority and no notice of any audit or examination or any assertion of any claim for Taxes has been given or made by any Governmental Authority. Proper and accurate amounts have been withheld by each Tax Affiliate from their respective employees for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable Requirements of Law and such withholdings have been timely paid to the respective Governmental Authorities. No Tax Affiliate has participated in a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b) or has been a member of an affiliated, combined or unitary group other than the group of which a Tax Affiliate is the common parent.
3.12 Financial Condition.
(a) Pre-Closing Financial Statements. To Borrower’s knowledge, the financial statements delivered to Agent for each of the Borrowing Base Assets for the trailing twelve months ending April 30, 2016, present fairly in all material respects the results of operations for each Borrowing Base Asset for the periods covered thereby.
(b) Absence of Material Adverse Effects. Since December 31, 2015, there has been no Material Adverse Effect.
(c) Indebtedness and Contingent Obligations. The Borrower and its Subsidiaries have no Indebtedness other than Indebtedness permitted pursuant to Section 5.5 and have no Contingent Obligations other than Contingent Obligations permitted pursuant to Section 5.9.
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(d) Closing Projections. All financial performance projections delivered to Agent, including the financial performance projections delivered on or prior to the Closing Date, represent Borrower’s best good faith estimate of future financial performance and are based on assumptions believed by Borrower to be fair and reasonable in light of current market conditions, it being acknowledged and agreed by Agent and the Lenders that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by such projections may differ from the projected results.
3.13 Regulated Entities. None of any Credit Party, any Person controlling any Credit Party, or any Affiliate of any Credit Party, is (a) an “investment company” within the meaning of the Investment Company Act of 1940; or (b) subject to regulation under the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other federal or state statute, rule or regulation limiting its ability to incur Indebtedness, pledge its assets or perform its obligations under the Loan Documents.
3.14 Solvency. Both before and after giving effect to (a) the Loans made on or prior to the date this representation and warranty is made or remade; (b) the disbursement of the proceeds of such Loans to Borrower or as directed by the Borrower; and (c) payment and accrual of all transaction costs in connection with the foregoing, both the Credit Parties taken as a whole and each Credit Party individually are Solvent. This Agreement and the other Loan Documents were executed and delivered to the Agent by each Credit Party in good faith, and the Obligations incurred thereunder and the Liens granted thereunder were incurred and granted in a substantially contemporaneous exchange for fair equivalent value.
3.15 Labor Relations. There are no strikes, work stoppages, slowdowns or lockouts existing, pending (or, to the knowledge of Borrower, threatened) against or involving any Credit Party, except for those that would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. There is no collective bargaining or similar agreement with any union, labor organization, works council or similar representative covering any employee of any Credit Party. To Borrower’s knowledge, (a) no petition for certification or election of any such representative is existing or pending with respect to any employee of any Credit Party; and (b) no such representative has sought certification or recognition with respect to any employee of any Credit Party.
3.16 Brokers’ Fees; Transaction Fees. Except for fees payable to Agent and the Lenders, none of the Credit Parties has any obligation to any Person in respect of any finder’s, broker’s or investment banker’s fee in connection with the transactions contemplated hereby.
3.17 Ventures, Subsidiaries and Affiliates; Outstanding Stock. Borrower (a) has no Subsidiaries, except as may be disclosed on Schedule 3.17 (the “Organizational Structure Table”) and (b) is not engaged in any joint venture or partnership with any other Person. All issued and outstanding Stock and Stock Equivalents of Borrower are duly authorized and validly issued, fully paid, non-assessable, and free and clear of all Liens. All such securities were issued in compliance with all applicable state and federal laws concerning the issuance of securities. All of the issued and outstanding Stock of Borrower and each Subsidiary of Borrower, if any, is owned by each of the Persons and in the amounts set forth on the Organizational Structure Table. Except as set forth on the Organizational Structure Table, there are no pre-emptive or other outstanding rights to purchase, options, warrants or similar rights or agreements pursuant to which Borrower may be required to issue, sell, repurchase or redeem any of its Stock or Stock Equivalents or any Stock or Stock Equivalents of its Subsidiaries. Set forth on the Organizational Structure Table is a true and complete organizational chart for Borrower and its Subsidiaries, which the Credit Parties shall update upon notice to Agent promptly following the incorporation, organization or formation of any Subsidiary.
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3.18 Bonding. No Credit Party is a party to or bound by any surety bond agreement, indemnification agreement therefor or bonding requirement with respect to products or services sold by it.
3.19 Full Disclosure. None of the representations or warranties made by any Credit Party as of the date such representations and warranties are made or deemed made, and none of the statements contained in each exhibit, report, statement or certificate furnished by or on behalf of any Credit Party in connection with the Loan Documents (including the offering and disclosure materials, if any, delivered by or on behalf of any Credit Party to Agent or the Lenders prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered.
3.20 Foreign Assets Control Regulations and Anti-Money Laundering. Each Credit Party and its Affiliates (each, an “AML Party”) is and will remain in compliance with the following (collectively, the “AML Requirements”): all U.S. economic sanctions laws and executive orders; all regulations promulgated by the U.S. Office of Foreign Assets Control (“OFAC”); and all applicable anti-money laundering and counter-terrorism provisions of the Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, P.L. 107-56 (the “Patriot Act”), and all rules and regulations issued pursuant to such laws, including those relating to “know your customer”, anti-money laundering, and anti-terrorism. No AML Party is or will become a Person (a) included by OFAC on the list of Specially Designated Nationals and Blocked Persons (the “SDN List”) or who is otherwise the target of U.S. economic sanctions laws, such that, in either case, a U.S. Person cannot engage in business transactions with such Person; or (b) that is Controlled by, or acting, directly or indirectly, for or on behalf of, any Person on the SDN List or a foreign government that is the target of U.S. economic sanctions prohibitions, such that entry into or performance under any Loan Document would violate any Requirement of Law. For purposes of this Section 3.20, “Affiliate” does not include the shareholders of any entity that is publicly traded on a recognized national United States stock exchange.
3.21 Intentionally Omitted.
3.22 Bankruptcy and Similar Matters. There are no bankruptcy, insolvency, or similar proceeding currently pending or, to the knowledge of Borrower, threatened against any Credit Party. During the past seven years: (a) no assets of any Credit Party have been the subject of any foreclosure or similar proceeding or been transferred by deed in lieu; (b) no Credit Party has filed (or had filed against such Credit Party) a petition under the U.S. Bankruptcy Reform Act of 1978, 11 U.S.C. §101, et seq. (the “Bankruptcy Code”) or obtained a discharge of its debts under the Bankruptcy Code; and (c) no Person that is a principal officer, executive, member, manager or shareholder of a Credit Party held a similar position in an entity that, during the time such Person held such position or within one year after leaving such position, filed (or had filed against it) a petition under the Bankruptcy Code or that obtained a discharge of its debts under the Bankruptcy Code.
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3.23 Site Conditions, Zoning, Access, and Utilities. Each Site, including all buildings and other improvements associated with such Site, is in good condition and repair, ordinary wear and tear excepted; free (to the knowledge of Borrower) from structural defects. Permanent, legal access is available to each Site from a physically open and dedicated public right-of-way. Each Site is unconditionally zoned by the appropriate Governmental Authority for the use of such Site for the Permitted Concept. Adequate public or private utilities are available at each Site to permit operation of such Site as a Permitted Concept, and all utility connection fees and use charges have been paid in full.
3.24 License Agreement. Borrower has delivered to Agent a fully executed, complete copy of each License Agreement affecting a Site. Each License Agreement is in full force and effect, the entire interest of the franchisee thereunder is owned by one or more Credit Parties, and such interest has not been assigned, transferred, mortgaged, or otherwise encumbered other than pursuant to Lender’s Liens. The term of each License Agreement exceeds the Revolving Loan Maturity Date. No notice of default from the Licensor has been received by Borrower or any other Credit Party with respect to any License Agreement that has not been cured, and no notice of default to the Licensor has been given that has not been cured. To the knowledge of Borrower, no event has occurred and no condition exists, including with respect to any required remodeling or re-imaging, that, with the giving of notice or the lapse of time or both, would constitute a default under any License Agreement. No Credit Party is subject to any property or performance improvement plan or similar requirement under any License Agreement (each, a “PIP”) or, if a Credit Party is subject to a PIP, the requirements thereof have been fully disclosed to Agent, including expenses, required reserves, and other requirements. Each Borrowing Base Asset is subject to an Approved License Agreement with an Approved Licensor.
3.25 Management Agreement. Borrower has delivered to Agent a fully executed, complete copy of each Management Agreement affecting a Site. Each Management Agreement is in full force and effect, the entire interest of the owner thereunder is owned by the Credit Party that owns or leases such Site, and such interest has not been assigned, transferred, mortgaged, or otherwise encumbered other than pursuant to Liens in favor of Agent. No notice of default from Manager has been received by Borrower or any other Credit Party that has not been cured, and no notice of default to such Manager has been given that has not been cured. To Borrower’s knowledge, no event has occurred and no condition exists that, with the giving of notice or the lapse of time or both, would constitute a default under the Management Agreement. Each Management Agreement (a) is fully subordinate to the Loan and Loan Documents, including to all Liens in Agent’s favor; and (b) does not contain any rights of first refusal or other options in favor of Manager to acquire any Collateral or other property of a Credit Party. Each Borrowing Base Asset is operated and managed by an Approved Manager pursuant to an Approved Management Agreement. Each Approved Management Agreement as of the Closing Date is set forth on Schedule 3.25.
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3.26 Non-Foreign Status. Borrower is not a “foreign corporation”, “foreign partnership”, “foreign trust”, “foreign estate” or “foreign person,” as those terms are defined by the Code.
3.27 Commercial Purpose of Credit Facilities. The purpose of the Obligations is a commercial business purpose and not a personal, family, or household purpose. No portion of the Collateral is being used by the Credit Parties for any personal, family or household purposes.
Article
4
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation (other than contingent indemnification Obligations to the extent no claim giving rise thereto has been asserted) shall remain unpaid or unsatisfied, Borrower shall comply with the following and, to the extent a covenant is expressed as a covenant of a Credit Party or a Subsidiary of Borrower, shall cause each such Credit Party or Subsidiary of Borrower to comply with the following:
4.1 Accounting Systems; Books and Records. Borrower shall maintain (a) a system of accounting established and administered in accordance with sound business practices to permit the preparation of financial statements in conformity with GAAP (provided that monthly financial statements shall not be required to have footnote disclosures and are subject to normal year-end adjustments); and (b) proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of financial transactions and matters involving the assets and business of such Person.
4.2 Financial Reporting.
(a) Financial Reports. Borrower shall deliver to Agent and each Lender as an E-Transmission and in detail reasonably satisfactory to Agent and the Required Lenders:
(i) Annual and Quarterly Financial Statements. Within 120 days after the end of each Fiscal Year of Borrower and within 45 days after the end of each Fiscal Quarter of Borrower (including the last Fiscal Quarter in each Fiscal Year): (A) complete Financial Statements for Borrower and each other Credit Party for the period then ended (including, without limitation, for Limited Guarantor, the audited annual Financial Statements of Lightstone Value Plus Real Estate Investment Trust III, Inc.) and (B) such other information (financial or otherwise) as Agent may reasonably request.
(ii) Other Financial Information. Within 45 days following the end of each Fiscal Quarter: (A) standard hotel data of rooms sold and rooms available for the Fiscal Quarter, as well as gross revenue breakdown of room revenue from other revenue for such period, so that occupancy ADR and RevPar Statistics for such Fiscal Quarter can be calculated; and (B) the Smith Travel Research Reports for such Fiscal Quarter.
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(iii) Quality Assurance Reports. Within 45 days following the end of each Fiscal Year, copies of all Quality Assurance reports for each Site issued by a Licensor during such Fiscal Year.
(iv) Royalty Billings. Within 30 days after the end of each Fiscal Quarter, all Licensor royalty billing statements for each Site for such Fiscal Quarter.
(v) Other. Borrower will also deliver to Agent such Financial Statements of Borrower and each other Credit Party as Agent may request from time to time to verify compliance with the terms and conditions of this Agreement and the other Loan Documents, including with any financial covenants and at any time following the occurrence and during the continuance of a Default. “Financial Statements” means, for Borrower, each Credit Party and Lightstone Value Plus Real Estate Investment Trust III, Inc., a consolidated and consolidating balance sheet, including retained earnings, as of the relevant fiscal period, and related profit and loss statements, cash flows (if any), and all related schedules for the fiscal period then ended; provided, however, quarterly Financial Statements will not require statements of retained earnings or cash flows unless requested by Agent in its reasonable discretion. In those cases where a Credit Party is an individual, such Financial Statements shall include statements of assets and liabilities, tax returns, salary information, and such other information as Agent may reasonably request.
(b) Financial Statement Requirements. All Financial Statements of Borrower and Subsidiary Guarantors shall show results (including operating statements in detail reasonably acceptable to Agent) separately for each Borrowing Base Asset and shall be prepared in accordance with GAAP from period to period. All Financial Statements of Borrower must be certified by a Responsible Officer to be true, correct and complete in all material respects as of the date covered thereby.
(c) Tax Returns. Within the earlier of (a) 30 days of filing such Tax Returns with the appropriate Government Authorities; or (b) November 15 of each Fiscal Year, Borrower shall, and shall cause each of its Subsidiaries, to deliver to Agent true and complete copies of all such Tax Returns filed by Borrower and its Subsidiaries, in each case only if such entity is required to file a Tax Return.
(d) Budgets and Projections. Annually, no later than the last day of each Fiscal Year of the Borrower, Borrower will deliver to Agent budgets and projections for the operation of each Site for the upcoming Fiscal Year, in form and content reasonably satisfactory to Agent.
4.3 Certificates; Other Information. Borrower shall furnish to Agent and each Lender as an E-Transmission:
(a) Reports. Together with each delivery of the Annual Financial Statements, (i) an operational report, in reasonable detail, signed by a Responsible Officer, describing the operations and financial condition of Borrower for the Fiscal Year then ended, and (ii) a report setting forth in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the most recent projections for the current Fiscal Year delivered pursuant to Section 4.3(d) and discussing the reasons for any significant variations;
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(b) Compliance Certificate. Together with each delivery of any Financial Statement, Borrower will deliver to Agent a compliance certificate (the “Compliance Certificate”) using the attached Compliance Certificate Form on Schedule 4.3(b) (or such other form as Agent may then require), duly executed by a Responsible Officer, that, among other things: (a) certifies that the Financial Statements are accurate and complete and fairly present, in all material respects, in accordance with GAAP, the financial position and the results of operations of Borrower, in the case of Borrower’s Financial Statements, or such other Credit Party, in the case of such other Credit Party’s Financial Statements; (b) demonstrates compliance with each of the financial covenants contained in this Agreement; and (c) states that no Default is continuing as of the date of delivery of such compliance certificate or, if a Default is continuing, states the nature thereof and the action that Borrower proposes to take with respect thereto;
(c) Borrowing Base Certificates. Together with each delivery of any Financial Statements of Borrower or any appraisals pursuant to this Agreement, Borrower will deliver to Agent a Borrowing Base Certificate setting forth the Total Borrowing Base Value as of the last day of the most recently ended Fiscal Quarter or date of appraisal, if later;
(d) Projections. As soon as available and in any event no later than the last day of each Fiscal Year of Borrower, projections of the Credit Parties’ consolidated and consolidating financial performance for the forthcoming Fiscal Year on a month by month basis;
(e) Accountant Audits and Reports. Promptly upon receipt thereof, copies of any reports submitted by Borrower’s certified public accountants in connection with each annual, interim or special audit or review of any type of the Financial Statements or internal control systems of any Credit Party made by such accountants, including any comment letters submitted by such accountants to management of any Credit Party in connection with their services; and
(f) Other Items. Promptly, such additional business, financial, corporate affairs, perfection certificates and other information as Agent may from time to time reasonably request.
4.4 Notices. In addition to any other requirement in this Agreement or the other Loan Documents to provide Agent and the Lenders with certain notices, Borrower shall notify promptly Agent and each Lender of each of the following (and in no event later than three Business Days after a Responsible Officer becomes aware thereof); provided, however, that a requirement in this Agreement or any other Loan Document to provide Agent and/or the Lenders with notice of the occurrence or existence of certain events or matters shall not be construed as an approval or waiver of, or consent to, any such event or matter, where consent or approval of Agent or the Lenders is otherwise required:
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(a) Default or Event of Default. The occurrence or existence of any Default or Event of Default;
(b) Breach of Contractual Obligations. Any breach or non-performance of, or any default under, any Contractual Obligation of any Credit Party, or any violation of, or non-compliance with, any Requirement of Law, which would reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect, including a description of such breach, non-performance, default, violation or non-compliance and the steps, if any, such Person has taken, is taking or proposes to take in respect thereof;
(c) Governmental Authority Disputes, Investigations, Etc. Any dispute, litigation, investigation, proceeding or suspension which may exist at any time between any Credit Party and any Governmental Authority which would reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect;
(d) Commencement of Litigation; Material Developments. The commencement of, or any material development in, any litigation or proceeding affecting Borrower, any of Borrower’s Subsidiaries or their respective properties (i) in which the amount of damages claimed is $500,000 or more (unless covered by insurance), (ii) which would reasonably be expected to have a Material Adverse Effect, or (iii) in which the relief sought is an injunction or other stay of the performance of this Agreement or any other Loan Document;
(e) Existence of a Material Adverse Effect. Any Material Adverse Effect subsequent to the date of the most recent financial statements delivered to Agent and the Lenders pursuant to this Agreement;
(f) Changes in Accounting and Financial Reporting Practices. Any material change in accounting policies or financial reporting practices by any Credit Party;
(g) Labor Controversies. Any labor controversy resulting in or threatening to result in any strike, work stoppage, boycott, shutdown or other labor disruption against or involving any Credit Party if the same would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect; and
(h) New Subsidiaries; Stock Issuances. The creation, establishment or acquisition of any Subsidiary of Borrower or the issuance by or to any Credit Party (other than the Limited Guarantor) of any Stock or Stock Equivalent.
Each notice pursuant to this Section shall be delivered as an E-Transmission, accompanied by a statement by a Responsible Officer of Borrower, setting forth details of the occurrence referred to therein, and stating what action Borrower or other Person proposes to take with respect thereto and at what time. Each notice under Section 4.4(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been breached or violated.
4.5 Preservation of Corporate Existence, Etc.. Each Credit Party shall: (a) preserve and maintain in full force and effect its organizational existence and good standing under the laws of its jurisdiction of incorporation, organization or formation, as applicable, except as permitted by Section 5.3; (b) preserve and maintain in full force and effect all rights, privileges, qualifications, Permits, licenses and franchises necessary in the normal conduct of its business except as permitted by Sections 5.2 and 5.3 and except as would not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect; and (c) use its commercially reasonable efforts, in the Ordinary Course of Business, to preserve its business organization and preserve the goodwill and business of the customers, suppliers and others having material business relations with it.
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4.6 The Collateral. The Credit Parties will (a) keep the Collateral free and clear of any and all Liens, other than the Permitted Liens and Permitted Encumbrances; (b) use the Collateral only in its trade or business; (c) keep the tangible Collateral at each Site and maintain such tangible Collateral in good operating condition and repair, normal wear and tear excepted; and (d) own and keep at each Site all equipment, including all machinery, furniture, appliances, trade fixtures, tools, office and record keeping equipment, and inventory required to be maintained by Borrower at such Site pursuant to the License Agreement and Management Agreement for such Site and that are reasonably necessary for the proper and prudent operation of such Site as the Permitted Concept.
4.7 Insurance. Borrower shall obtain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to Borrower’s, as well as such other insurance and coverages as may be necessary to comply with any Requirement of Law or as Agent may otherwise reasonably require from time to time, including the insurance policies and coverages set forth on Schedule 4.7 (the “Insurance Requirements Schedule”). All insurance policies and coverages shall satisfy the Insurance Requirements (as defined on said Schedule). Borrower’s compliance or non-compliance with the Insurance Requirements shall not limit the liability of any Credit Party for the acts or omissions of Borrower, any other Credit Party, or any of their respective related Persons, as provided in this Agreement or in any of the other Loan Documents. If Agent exercises its remedies and there is a sale of the Collateral or any other transfer of title or assignment of the Collateral in extinguishment, in whole or in part, of the Obligations, all right, title and interest of Borrower in and to all required policies of insurance relating to the Collateral so transferred shall inure to the benefit of and pass to the successor in interest to Borrower or the purchaser or grantee of the Collateral, to the extent such policies are assignable pursuant to the terms thereof.
4.8 Payment of Obligations. Each Credit Party shall pay, discharge and perform as the same shall become due and payable or required to be performed: (a) all Tax liabilities, assessments and governmental charges or levies upon it or its Property and all lawful claims which, if unpaid, would by law become a Lien upon its Property, unless the same are being contested in good faith by appropriate proceedings diligently prosecuted which stay the enforcement of any Lien and for which adequate reserves in accordance with GAAP are being maintained by such Person; (b) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained herein, in any other Loan Documents and/or in any instrument or agreement evidencing such Indebtedness; (c) the performance of all obligations under any Contractual Obligation to such Credit Party or any of its Subsidiaries is bound, or to which it or any of its Property is subject, except where the failure to perform would not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect; and (d) payments to the extent necessary to avoid the imposition of a Lien with respect to, or the involuntary termination of any underfunded Benefit Plan.
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4.9 Compliance with Law. Each Credit Party will comply with all Requirements of Law, except where non-compliance would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
4.10 Anti-Money Laundering; Anti-Terrorism. Each Credit Party shall, at all times, comply, and cause its Affiliates to comply, with all AML Requirements. Neither Borrower nor any other Credit Party will use any proceeds of the Loans directly or indirectly for any payments to any government official or employee, political party, political party official, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the U.S. Foreign Corrupt Practices Act of 1977. Within five days of written request, Borrower shall provide Lender with such documentation as Lender may request from time to time, to verify compliance with the terms and conditions of this Section, including with respect to sources of funds for payments made or to be made by any Credit Party.
4.11 Inspection of Property and Books and Records. Each Credit Party shall, during normal business hours and upon reasonable advance notice (unless an Event of Default shall have occurred and be continuing, in which event no notice shall be required and Agent shall have access at any and all times during the continuance thereof): (a) provide access to each Site to Agent and any of its Related Persons, as frequently as Agent determines to be appropriate; (b) permit Agent and any of its Related Persons to conduct field examinations, audit, inspect, and make extracts and copies (or take originals if reasonably necessary) from all of such Credit Party’s books and records; and (c) inspect, evaluate and make physical inspections, verifications and appraisals of the Collateral in any manner and through any medium that Agent considers advisable, in each instance, at the Credit Parties’ expense; provided, however, that the Credit Parties shall only be obligated to reimburse Agent for the expenses of one such field examination, audit and inspection per Site per calendar year or more frequently if an Event of Default has occurred and is continuing. Any Lender may accompany Agent or its Related Persons in connection with any inspection at such Lender’s expense.
4.12 Use of Proceeds. Borrower shall use the proceeds of the Loans solely for the purposes specified in Section 1.3.
4.13 Further Assurances.
(a) Disclosures. Each Credit Party shall ensure that all written information, exhibits and reports furnished to Agent or the Lenders do not and will not contain any untrue statement of a material fact and do not and will not omit to state any material fact or any fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and will promptly disclose to Agent and the Lenders and correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement or recordation thereof.
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(b) Taking Certain Actions. Promptly upon request by Agent, the Credit Parties shall take such additional actions and execute such documents as Agent may reasonably require from time to time in order to: (i) carry out more effectively the purposes of this Agreement or any other Loan Document; (ii) subject the Collateral to the Liens created by any of the Collateral Documents; (iii) perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the Liens intended to be created thereby; and (iv) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Secured Parties the rights granted or now or hereafter intended to be granted to the Secured Parties under any Loan Document.
4.14 [Intentionally Omitted].
4.15 Taxes. Borrower shall pay or cause to be paid, prior to delinquency, all Taxes which may at any time be assessed, levied or imposed upon Borrower, any Site, the Collateral, the Loan Documents, the Obligations, or the rents, issues, profits, damages, income and other benefits now or hereafter derived from any of the Sites, or which may arise in respect of the occupancy, use, possession or operation thereof, subject, however, to any contest rights provided for in the Loan Documents.
4.16 Casualty.
(a) Casualty; Continuation of Obligations. Borrower shall at all times bear the entire risk of any loss, theft, damage to, or destruction of, any Collateral from any cause whatsoever, including as a result of a taking by eminent domain (a “Casualty”). If a Casualty occurs, whether or not covered by insurance, Borrower will promptly give Agent and the Lenders written notice thereof, describing the nature and extent thereof. No Casualty shall relieve Borrower of any of its Obligations, including the obligations to make regularly scheduled payments with respect to each Revolving Loan.
(b) Restoration Obligation. Promptly following the occurrence of a Casualty, Borrower shall, at its expense, commence and diligently complete the repair, restoration, replacement, and rebuilding of the Collateral as nearly as possible to its value, condition and character immediately prior to the Casualty (a ”Restoration”). Borrower shall not be excused from Borrower’s Restoration obligation, regardless of whether there are Insurance Proceeds available to Borrower or whether any such Insurance Proceeds are sufficient in amount, and the application or release by Agent of any Insurance Proceeds shall not cure or waive any Default or Event of Default under this Agreement or the other Loan Documents or invalidate any act done pursuant thereto.
(c) Application of Insurance Proceeds. Upon the occurrence of any Casualty with respect to any Site (or portion thereof) (an “Affected Site”), Borrower will promptly and diligently pursue collection of all insurance proceeds with respect to such Casualty (the “Insurance Proceeds”). All Insurance Proceeds shall be payable to Agent, for the benefit of the Secured Parties, and Borrower authorizes and directs any affected insurance company to pay the Insurance Proceeds directly to Agent. If Borrower receives any Insurance Proceeds relating to such Casualty, Borrower shall promptly pay such proceeds to Agent. All Insurance Proceeds will be applied by Agent to payment of the Obligations in such order as Agent, in its sole discretion, shall determine; provided, however, that if no Default or Event of Default has occurred and is continuing, and the Casualty is not a Material Casualty and Restoration can be completed by the earlier of (1) the date that is six months prior to the Revolving Loan Maturity Date, or (2) the date that is four months after the date the Insurance Proceeds are paid to Agent (as determined by Agent in its sole discretion), the Insurance Proceeds, less costs, fees and expenses incurred by Agent, the Lenders, and Borrower in the collection thereof, including adjuster’s fees and expenses and reasonable attorneys’ fees and expenses (the “Net Insurance Proceeds”), shall be made available to Borrower as follows: (i) if the Net Insurance Proceeds are less than $350,000, the Net Insurance Proceeds shall be paid to Borrower by Agent and applied by Borrower to the cost of the Restoration; and (ii) if the Net Insurance Proceeds are $350,000 or greater, the Net Insurance Proceeds shall be held and disbursed by Agent, or as Agent may from time to time direct, as the Restoration progresses, to pay or reimburse Borrower for Restoration costs, upon Borrower’s written request accompanied by evidence, reasonably satisfactory to Agent, that: (A) the Restoration is in compliance in all material respects with all Requirements of Law and all private restrictions and requirements; (B) the amount requested has been paid or is then due and payable and is properly a part of such cost; (C) there are no Liens for labor or materials previously supplied in connection with the Restoration; (D) if the estimated cost of the Restoration exceeds the Net Insurance Proceeds (exclusive of proceeds received from Borrower’s business income insurance), Borrower has deposited into an escrow satisfactory to Agent such excess amount, which sum will be disbursed pursuant to escrow instructions satisfactory to Agent; and (E) the balance of such Net Insurance Proceeds, together with the funds deposited into escrow, if any, will, after making the payment requested, be sufficient to pay the balance of the Restoration costs. Upon receipt by Agent of evidence reasonably satisfactory to Agent that the Restoration has been completed, the cost thereof has been paid in full, and that there are no Liens for labor or materials supplied in connection therewith, the balance, if any, of such Net Insurance Proceeds shall be paid to Borrower.
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(d) Adjustments to Borrowing Base and Financial Covenants. If a Material Casualty occurs, the Affected Site will no longer constitute a Borrowing Base Asset from the date of the Casualty and, to the extent that such reclassification of such Affected Site would require Borrower to make a payment under Section 1.3(e)(iii), Agent and Lenders will not require such payment to be made until the earlier of the following (the “Required Remargin Date”): (i) the date Insurance Proceeds for such Casualty are paid to Agent, or (ii) 180 days after the occurrence of such Casualty; provided, no further advances of the Loan will be made without Lenders’ consent until such required payment is made. Further, if a Material Casualty occurs, from and after the date of such Casualty, in calculating the financial covenants in Section 4.22, (1) Agent will exclude all Net Operating Income applicable to the Affected Site (whether or not such income was earned before or after the date of Casualty); (2) the Pro Rata Debt Amount associated with the Affected Site will be excluded from the Consolidated Debt Yield; and (3) the debt service payments (including any interest payments) with respect to the Pro Rata Debt Amount will be excluded from the Consolidated Pre-Compensation FCCR and the Consolidated Post-Compensation FCCR. The exclusions with respect to the Consolidated Debt Yield, Consolidated Pre-Compensation FCCR and the Consolidated Post-Compensation FCCR in clauses (2) and (3) will cease upon the Required Remargin Date. “Pro Rata Debt Amount” means the total outstanding principal amount of the Revolving Loans as of the applicable date of determination, multiplied by a fraction the numerator of which is the portion of the Total Borrowing Base Value attributable to the Affected Site, and the denominator of which is the Total Borrowing Base Value of all Sites (including the Affected Site).
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4.17 Condemnation.
(a) Takings; Continuation of Obligations. If there is a taking of all or any portion of a Site or the commencement of any proceedings or negotiations which might result in a taking, for any public or quasi-public purpose by any lawful authority by exercise of the right of condemnation or by agreement between Agent, Borrower and those authorized to exercise such right in lieu of condemnation (a “Taking”), Borrower will promptly give Agent written notice of the Taking, generally describing the nature and extent. No Taking shall relieve Borrower of any of its Obligations, including its obligations to make regularly scheduled payments of principal and interest under the Note and the other Loan Documents.
(b) Agent’s Right to Participate. Borrower shall not, without Agent’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, settle, adjust, or compromise any claim for loss or damage in connection with any Taking or proposed Taking and, without regard to the adequacy of its security, to commence, appear in and prosecute in its own name or on behalf of Borrower any such action or proceeding arising out of or relating to a Taking or proposed Taking.
(c) Restoration Obligations. Promptly following the occurrence of a Taking, other than a Total Taking, Borrower shall, at Borrower’s expense, commence and diligently complete the repair, restoration, replacement, and rebuilding of the Site as nearly as possible to its value, condition and character immediately prior to the Taking (a “Condemnation Restoration”). Borrower shall not be excused from repairing or maintaining any Site or from Borrower’s Condemnation Restoration obligation, regardless of whether , regardless of whether or not there are Condemnation Proceeds available to Borrower or whether any such Condemnation Proceeds are sufficient in amount, and the application or release by Agent of any Condemnation Proceeds shall not cure or waive any Default or Event of Default under this Agreement or the other Loan Documents or invalidate any act done pursuant thereto.
(d) Application of Condemnation Proceeds. All compensation, awards, damages, rights of action and proceeds awarded to Borrower by reason of any such Taking or received by Borrower as the result of a transfer in lieu of a Taking (the “Condemnation Proceeds”) are assigned to Agent and shall be paid directly to Agent. Borrower agrees to execute such further assignments of the Condemnation Proceeds as Agent may require. If Borrower receives any Condemnation Proceeds, Borrower shall promptly pay over such proceeds to Agent. All Condemnation Proceeds will be applied by Agent to payment of the Obligations in such order as Agent, in its sole discretion, shall determine; provided, however, that if no Default or Event of Default has occurred and is continuing and if the Taking is not a Total Taking (as determined by Agent in its sole discretion), and Condemnation Restoration can be completed by the earlier of (1) the date that is six months prior to the Revolving Loan Maturity Date, or (2) the date that is four months after the date the Condemnation Proceeds are paid to Agent (as determined by Agent in its reasonable discretion), the Condemnation Proceeds, less costs, fees and expenses incurred by Agent and Borrower in the collection thereof, including reasonable attorneys’ fees and expenses (the “Net Condemnation Proceeds”), shall be made available to Borrower, to be used by Borrower to satisfy its Condemnation Restoration obligations, substantially in the manner and according to the procedures, limitations, and requirements provided in Section 4.16 for the distribution of Net Insurance Proceeds, as if the Net Condemnation Proceeds were Net Insurance Proceeds.
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(e) Adjustments to Borrowing Base and Financial Covenants. If a Total Taking shall occur, the Site subject to the Taking will no longer be a Borrowing Base Asset and Agent shall adjust the Borrowing Base Amount and financial covenants in Section 4.22 as if a Material Casualty occurred to the Site affected by the Taking as provided in Section 4.16(d) but substituting (i) “Condemnation Proceeds” for “Insurance Proceeds”, (ii) “Taking” for “Casualty”, and (iii) “Total Taking” for “Material Casualty” as used therein, and “Affected Site” shall mean the Site affected by the Taking.
4.18 License Agreement. The Credit Parties will (a) timely comply with and perform all of the franchisee’s or licensee’s obligations under each License Agreement, including all remodeling and re-imaging obligations, and will give Agent prompt written notice of the occurrence of any default by Borrower, any other Credit Party or the Licensor under such License Agreement and of any notice of default given to Borrower or any other Credit Party by the Licensor; and (b) at all times cause each Borrowing Base Asset to be subject to an Approved License Agreement or similar arrangement with an Approved Licensor who has executed and delivered a Licensor comfort letter in form and substance satisfactory to the Agent in its sole discretion. Borrower will give Agent prompt written notice of any bankruptcy filing by or against the Licensor of which Borrower or any other Credit Party has knowledge. Borrower will send Agent copies of all notices given by Borrower or any other Credit Party to the Licensor concurrently with the giving of such notices to the Licensor. The Credit Parties will keep each License Agreement in full force and effect and will exercise all available options, such that the term of each License Agreement, as so extended, will not expire prior to the Revolving Loan Maturity Date. Borrower will notify Agent immediately if any Site becomes subject to any PIP, and Borrower shall provide such information with respect to such PIP as Agent may require, including the expected expenses, required reserves and compliance requirements. Borrower will complete (or cause to be completed), in lien free condition, all improvements required pursuant to each PIP by the date required thereunder.
4.19 Management Agreement. The Credit Parties will (a) timely comply with and perform all of the property owner’s obligations under the Management Agreement and will give Agent prompt written notice of the occurrence of any default by Borrower, any other Credit Party, or Manager under the Management Agreement and of any notice of default given to Borrower or any other Credit Party by Manager; and (b) at all times cause each Borrowing Base Asset to be managed and operated by an Approved Manager. Borrower will also give Agent prompt written notice of any bankruptcy filing by or against Manager of which Borrower has knowledge. Borrower will send Agent copies of all notices given by Borrower or any other Credit Party to Manager concurrently with the giving of such notices to Manager. The Credit Parties will keep the Management Agreement in full force and effect and will exercise all available options, such that the term of the Management Agreement, as so extended, will not expire prior to the Revolving Loan Maturity Date. Borrower will set aside and maintain adequate reserves for repair, replacement and maintenance of each Site.
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4.20 Requirement to Operate as Permitted Concept. Borrower shall at all times occupy each Site and diligently operate its business at each Site as the applicable Permitted Concept. Borrower shall not, and shall not permit any tenant to, by itself or through any sale, lease or other type of transfer, convert such Site or other Collateral to an alternative use while this Agreement is in effect, without Agent’s consent, in Agent’s sole discretion.
4.21 Estoppel Certificates. From time to time and within 15 days after a request from Agent, Borrower will execute, acknowledge and deliver to Agent a certificate in the form supplied by Agent, certifying: (a) whether, to Borrower’s knowledge, there are then any existing Defaults or Events of Default by Borrower in the performance of its Obligations under any of the Loan Documents, and, if there are any such Defaults, specifying the nature and extent thereof; and (b) as to such other facts and circumstances as Agent may reasonably request.
4.22 Financial Covenants. Borrower covenants and agrees that, so long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation (other than contingent indemnification Obligations to the extent no claim giving rise thereto has been asserted) shall remain unpaid or unsatisfied, Borrower shall comply with the following financial covenants:
(a) Consolidated Debt Yield Test. As of the last day of each Fiscal Quarter occurring after the Closing Date, Borrower must maintain a Consolidated Debt Yield equal to or greater than 12%
(b) Consolidated Pre-Compensation FCCR Test. Borrower must maintain a Consolidated Pre-Compensation FCCR of at least 1.50:1, computed for the trailing 12-month period ending on the last day of each Fiscal Quarter occurring after the Closing Date.
If Borrower shall not be in compliance with such financial covenants (or any of them) as of the last day of any Fiscal Quarter, Borrower shall make a principal payment within ten (10) days after Borrower’s Compliance Certificate for such Fiscal Quarter was due (i.e. no later than fifty-five (55) days after the last day of such Fiscal Quarter) so as to reduce the outstanding principal amount of the Loan to the maximum principal amount at which all of said financial covenants would have been satisfied. If Borrower timely makes such principal payment, then (i) no Event of Default shall be deemed to have occurred and (ii) a Sweep Period shall not be deemed to have commenced.
4.23 Credit Party Obligations. Borrower shall cause each Credit Party to comply with the terms of the Loan Documents applicable to such Credit Party.
4.24 Impounds.
(a) Right to Impound. Commencing upon written request made by Agent at any time an Event of Default exists (the “Impound Commencement Date”), Borrower shall deposit with Agent the amounts described below, on a continuing basis until all Liens securing the Obligations have been released or until Agent otherwise notifies Borrower.
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(b) Impound Deposits. Monthly, on each Payment Day occurring after the Impound Commencement Date, Borrower shall deposit with Agent an amount equal to 1/12th of the aggregate annual charges, as reasonably estimated by Agent, for all real property taxes on each Site and, to the extent included with real property taxes, the amount of any levies and assessments (including special district and improvement lien taxes, levies, and assessments) on the Sites (collectively, the “Tax & Assessment Impositions”). On the Impound Commencement Date, Borrower shall deposit with Agent a sum of money that, together with the monthly installments described above following the Impound Commencement Date, will be sufficient to pay the next installment of Tax & Assessment Impositions 30 days prior to the date any delinquency or penalty becomes due with respect to such payment. Amounts deposited with Agent pursuant to this subsection are referred to collectively as the “Tax & Assessment Imposition Deposits”. Under no circumstances will Tax & Assessment Impositions be deemed to include income taxes, sales tax, or payroll taxes.
(c) Use of Impound Deposits; Borrower’s Continuing Obligations. If Borrower is required to make Tax & Assessment Imposition Deposits, Borrower will cause all bills, statements, or other documents relating to the Tax & Assessment Impositions to be sent directly to Agent at least 30 days prior to the date on which such charges first become due and payable. Upon receipt of such bills, statements, or other documents evidencing that an installment of Tax & Assessment Impositions is then payable, and provided there are sufficient Tax & Assessment Imposition Deposits, Agent shall pay such amounts as may be due out of the Tax & Assessment Imposition Deposits. If at any time and for any reason the Tax & Assessment Imposition Deposits are or will be insufficient to pay such amounts, Agent shall notify Borrower and Borrower shall immediately deposit an amount equal to such deficiency with Agent. In no event will Agent be deemed a trustee of Tax & Assessment Imposition Deposits or be obligated to pay any amounts in excess of the amount of the Tax & Assessment Imposition Deposits. Agent may commingle Tax & Assessment Imposition Deposits with its own funds, and Borrower shall not be entitled to interest thereon. Notwithstanding any impounding for Tax & Assessment Impositions, Borrower has the primary and continuing obligation to pay all Tax & Assessment Impositions, and Agent’s exercise of the right to impound shall not constitute a waiver of any Default or a release of Borrower from any of such obligations.
4.25 Borrowing Base Additions. Any approval of any new Borrowing Base Assets after the Closing Date will be in the sole discretion of Agent and Required Lenders. Borrower may provide a written request to the Agent that a Hotel Asset (a “Proposed Borrowing Base Asset”) be added as a Borrowing Base Asset and, in connection therewith, Borrower will deliver to the Agent, at the Borrower’s expense, a Proposal Package with respect to such Proposed Borrowing Base Asset. Within 25 Business Days after receipt of a complete Proposal Package, the Agent shall give written notice to the Borrower of whether the Agent and the Required Lenders have conditionally approved such Proposed Borrowing Base Asset as a Borrowing Base Asset (any such notice comprising a conditional approval, a “Conditional Approval Notice”). The delivery of a Conditional Approval Notice, and any such approval or disapproval will be in the sole discretion of Agent and Required Lenders. After the issuance of a Conditional Approval Notice, Borrower will be required to satisfy the conditions set forth in Schedule 2.3 and the Borrowing Base Conditions before the applicable Proposed Borrowing Base Asset is considered a Borrowing Base Asset. Failure by Agent to provide a Conditional Approval Notice within such 25 Business Days will be deemed to constitute disapproval of the Proposed Borrowing Base Asset. Within 45 days after receipt by the Borrower of a Conditional Approval Notice (which period may be extended in the sole discretion of the Agent, at the Borrower’s request, for an additional 30 days), the conditions set forth in Schedule 2.3 and the Borrowing Base Conditions must be satisfied in order for the Proposed Borrowing Base Asset (as determined by Agent in its sole discretion) to be classified as a Borrowing Base Asset and, upon which, Agent will provide a Borrowing Base Addition Notice to Borrower with respect to the applicable Hotel Asset.
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4.26 Periodic Appraisals. Agent or Required Lenders may require an Acceptable Appraisal of the Sites, or any of them, or an update to a previously provided Acceptable Appraisal, indicating the present appraised value thereof as required by Agent: (a) if Agent or Required Lenders determines in good faith that an appraisal is required as a result of (i) any law, regulation or guideline or any change or interpretation thereof; or (ii) any central bank or other fiscal, monetary or other Government Authority having jurisdiction over Agent or Lenders or their activities requesting, directing or imposing a condition upon Agent or Lenders (whether or not such request, direction or condition shall have the force of law); (b) at any time after the occurrence and during the continuance of a Default; (c) at any time after the occurrence of a Material Casualty or Total Taking; or (d) at any other time or times required by Agent or Required Lenders. Appraisals and updates pursuant to this Section 4.26 shall be at Borrower’s sole cost and expense, provided, however, with respect to Appraisals ordered pursuant to clause (d), Agent will only charge Borrower for the cost of one such Appraisal for each Borrowing Base Asset per twelve (12) month period. All appraisals and updates shall comply with Requirements of Law, as well as Agent’s internal requirements, and shall be conducted by appraisers selected and retained by or on behalf of Agent. This Section shall not limit Borrower’s obligation to pay expenses associated with appraisals obtained prior to the Closing Date, or in connection with a Borrowing Base Addition.
4.27 Borrowing Base Assets. Borrower will cause all Borrowing Base Assets to satisfy the Borrowing Base Conditions at all times.
4.28 Obligations Regarding Representations and Warranties. Borrower will do all things necessary or appropriate such that the representations and warranties of Borrower and the other Credit Parties contained in any of the Loan Documents remain true, complete, and correct in all material respects.
4.29 Post-Closing Requirements. Borrower agrees to satisfy the requirements set forth on Schedule 4.29 (“Post-Closing Requirements”) by the applicable dates for such requirements as set forth in such schedule. It shall be an Event of Default, for which there is no additional notice or cure period, if Borrower fails to satisfy the Post-Closing Requirements by the applicable deadline and such failure continues without being fully cured for more than 10 days following written notice to Borrower of such failure, whereupon Agent shall be entitled to exercise all of its rights and remedies under the Loan Agreement and the other Loan Documents.
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Article
5
NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation (other than contingent indemnification Obligations to the extent no claim giving rise thereto has been asserted) shall remain unpaid or unsatisfied, Borrower shall comply with the following and, to the extent a covenant is expressed as a covenant of a Credit Party or a Subsidiary of Borrower, shall cause each such Credit Party or Subsidiary of Borrower to comply with the following:
5.1 Limitation on Liens. Borrower shall not (and shall not permit any of its Subsidiaries to): (a) directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any of its Property, whether now owned or hereafter acquired, other than the Permitted Liens and Permitted Encumbrances or (b) directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any of the Collateral, whether now owned or hereafter acquired, other than the Permitted Liens and Permitted Encumbrances.
5.2 Disposition of Assets.
(a) Transfers; Change of Control. Neither Borrower nor any of its Subsidiaries shall do or permit to be done, voluntarily or involuntarily, or by operation of law or otherwise, any of the following without the prior written consent of Agent, in its sole discretion: (i) sell, lease, mortgage, pledge, license, assign, transfer, or otherwise encumber or dispose of any Collateral to any Person, except for (1) sales of inventory in the ordinary course of business; (2) so long as no Default has occurred and is continuing, sales or other dispositions of obsolete equipment consistent with past practices, so long as such items are replaced by items of equal or greater value and utility; and (3) so long as no Default has occurred and is continuing, a Permitted Transfer; (ii) sell, mortgage, pledge, assign, transfer, or otherwise encumber or dispose of its interest in this Agreement or the other Loan Documents; (iii) engage in or allow a change of Control of Borrower or any of its Subsidiaries to occur, including a change resulting from (1) direct or indirect transfers of beneficial ownership of, or the right and power to vote, any Stock or Stock Equivalent, whether in one or a series of transactions; or (2) creation or issuance of new or additional equity interests; (iv) pledge, assign, or otherwise encumber or dispose of any interest in Borrower or any of its Subsidiaries as collateral for any obligation of a Credit Party or any other Person; or (v) enter into any agreement to do, or which would or could result in, any of the foregoing.
(b) Permitted Transfers. Following a transfer of a Borrowing Base Asset pursuant to a Permitted Transfer, such Site shall cease to be a Borrowing Base Asset and the Agent will, upon the request of the Borrower and at the Borrower’s expense, release any Mortgages and UCC financing statements in favor of Agent from such transferred Borrowing Base Assets. Lenders hereby authorize Agent to make such releases. As used herein, “Permitted Transfer” means the sale and transfer of any Borrowing Base Asset to any Person that is not an Affiliate of Borrower, with the intention that such Borrowing Base Asset, upon consummation of such transfer, shall no longer constitute a Borrowing Base Asset, provided that:
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(i) immediately after giving effect to such transfer and the removal of the Site as a Borrowing Base Asset, (1) the remaining Borrowing Base Assets shall continue to satisfy the requirements set forth in the definition of Borrowing Base Conditions, (2) the outstanding principal balance of the Revolving Loans will not exceed the Borrowing Base Amount and (3) there will be three (3) or more Borrowing Base Assets;
(ii) No Default shall have occurred and be continuing;
(iii) the Borrower shall be in compliance with the covenants contained in Section 4.22 on a pro forma basis immediately after giving effect to such transfer and such Site no longer being a Borrowing Base Asset; and
(iv) on or prior to the date of such transfer, Borrower shall have delivered to the Agent (A) a Borrowing Base Certificate demonstrating that the Total Borrowing Base Value (calculated on a pro forma basis after giving effect to such transfer) will be greater than or equal to the aggregate outstanding principal balance of the Revolving Loans, and (B) a certificate of the Borrower demonstrating compliance with the foregoing clauses (i) through (iii) and confirming that no Default shall exist on the date of such transfer or will result therefrom, together with supporting information in detail satisfactory to the Agent.
5.3 Maintenance of Existence; Consolidations and Mergers. Borrower shall not, and shall not permit any Credit Party to, dissolve, liquidate, or otherwise cease to exist or merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person; provided, however, that the foregoing shall not operate to prevent a transaction that results in the Obligations being paid and performed in full or a Permitted Transfer.
5.4 Loans and Investments. Other than in connection with the acquisition of a Property constituting a Hotel Asset which, upon such acquisition, will become a Borrowing Base Asset, Borrower shall not (and shall not permit any of its Subsidiaries to) (a) purchase or acquire, or make any commitment to purchase or acquire any Stock or Stock Equivalents, or any obligations or other securities of, or any interest in, any Person, including the establishment or creation of any Subsidiary; provided, however, Borrower (or any of its Subsidiaries) may establish or create new Subsidiaries in connection with acquiring a Property constituting a Hotel Asset which, upon such acquisition, will become a Borrowing Base Asset; (b) make or commit to make any acquisition of all or substantially all of the assets of another Person, or of any business or division of any Person, including by way of merger, consolidation or other combination; or (c) make or purchase or commit to make or purchase, any advance, loan, extension of credit or capital contribution to or any other investment in, any Person including Borrower, any Affiliate of Borrower or any Subsidiary of Borrower (the foregoing items being referred to as “Investments”).
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5.5 Limitation on Indebtedness. Borrower shall not, and shall not permit any of its Subsidiaries to, create, incur, assume, permit to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except (a) the Obligations; (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 5.9; (c) Indebtedness consisting of Capital Lease Obligations with respect to any Borrowing Base Asset not to exceed five percent (5%) of the amount of the Total Borrowing Base Value attributable to such Borrowing Base Asset in the aggregate at any time; and (d) other unsecured Indebtedness consisting of trade payables incurred in the Ordinary Course of Business and not exceeding $500,000 in the aggregate at any time with respect to any Borrowing Base Asset.
5.6 Transactions with Affiliates. Borrower shall not enter into any transaction with any Affiliate, except (a) as expressly permitted by this Agreement; or (b) in the Ordinary Course of Business and pursuant to the reasonable requirements of the business of such Borrower upon fair and reasonable terms no less favorable to such Borrower than would be obtained in a comparable arm’s length transaction with a Person not an Affiliate and which are disclosed in writing to Agent; provided, however, that in no event shall a Credit Party perform or provide any management, consulting, administrative or similar services to or for any Person other than another Credit Party.
5.7 Management Fees and Compensation. No Credit Party shall pay any management, consulting or similar fees to any Affiliate of any Credit Party or to any officer, director or employee of any Credit Party or any Affiliate of any Credit Party except payment of reasonable compensation to officers and employees for actual services rendered in the Ordinary Course of Business;
5.8 No Margin Stock. No Credit Party shall use any portion of the Loan proceeds, directly or indirectly, to purchase or carry Margin Stock or repay or otherwise refinance Indebtedness of any Credit Party or others incurred to purchase or carry Margin Stock, or otherwise in any manner which is in contravention of any Requirement of Law or in violation of this Agreement. Borrower shall not use any proceeds of any Loan or the Collateral for personal, family, or household purposes.
5.9 Contingent Obligations. Borrower shall not (and shall not permit any of its Subsidiaries to) create, incur, assume or suffer to exist any Contingent Obligations except in respect of the Obligations and except (a) endorsements for collection or deposit in the Ordinary Course of Business; (b) Rate Contracts entered into in the Ordinary Course of Business for bona fide hedging purposes and not for speculation, with Agent’s prior written consent; and (c) Contingent Obligations arising under indemnity agreements to title insurers to cause such title insurers to issue to Agent title insurance policies.
5.10 No Benefit Plans. Neither Borrower nor any of the Credit Parties shall establish, maintain or incur any Liabilities with respect to, any Title IV Plan, Multiemployer Plan or other material Benefit Plan.
5.11 Restricted Payments. Borrower shall not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any Stock or Stock Equivalent, or purchase, redeem or otherwise acquire for value any Stock or Stock Equivalent now or hereafter outstanding if, either before or after giving effect to such transaction, a Default or Event of Default would occur or has occurred and is continuing.
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5.12 Change in Business. Borrower shall not (a) make any changes in any of Borrower’s business objectives, purposes, or operations that could reasonably be expected to adversely affect repayment of the Obligations or that could reasonably be expected to have a Material Adverse Effect; or (b) carry on any business, operations or activities substantially different from those carried on at the date hereof, including business, operations and activities reasonably related thereto.
5.13 Change in Structure. Except as expressly permitted under Section 5.3, Borrower shall not (and shall not permit any of its Subsidiaries to) amend any of its Organization Documents in any material respect or in any respect adverse to Agent or the Lenders.
5.14 Changes in Accounting. Borrower shall not make any significant change in accounting treatment or reporting practices, except as required by GAAP or Requirement of Law, and then only after giving effect to the provisions of Section 10.8, or change the Fiscal Year or method for determining Fiscal Quarters of Borrower.
5.15 No Name or Other Organizational Changes. Borrower shall not (and shall not permit any of its Subsidiaries to) (a) amend, restate, supplement, or terminate its Organization Documents in a manner that could reasonably be expected to have a Material Adverse Effect; or (b) change any of the following from what it is as of the Closing: (i) its name; (ii) its place of business or, if there is more than one principal place of business, its chief executive office; (iii) its mailing address; (iv) the location of its books and records; (v) the type of legal entity that it is; (vi) the organization identification number issued by its state of incorporation or organization, if it has one; however if Borrower does not have such a number and later obtains one, such Borrower will immediately notify Agent of such number; or (vii) its state of incorporation or organization, without, in each instance, giving Agent at least 45 days’ prior written notice thereof and taking all actions deemed necessary or appropriate by Agent to continuously protect and perfect Agent’s Liens in the Collateral.
5.16 No Negative Pledges. Borrower shall not, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual restriction or encumbrance of any kind on the ability of any Borrower to pay dividends or make any other distribution on any of such Borrower’s Stock or Stock Equivalents or to pay fees, including management fees, or make other payments and distributions to Borrower or any other Credit Party. Borrower shall not, directly or indirectly, enter into, assume or become subject to any Contractual Obligation prohibiting or otherwise restricting the existence of any Agent Lien upon its Property, whether now owned or hereafter acquired.
5.17 Sale-Leasebacks. Borrower shall not engage in a sale leaseback, synthetic lease or similar transaction involving any of its assets.
5.18 License Agreement Modifications and Assignments. No Credit Party shall: (a) agree to any License Agreement amendment that could reasonably be expected to materially and adversely affect (i) the rights and privileges of franchisee thereunder; or (ii) the rights, privileges, and remedies of Agent and the Lenders under the Loan Documents, with respect to the Collateral or the License Agreement; or (b) assign, transfer, mortgage, pledge or otherwise encumber any License Agreement or any interest therein to any Person other than Agent. Borrower shall send Agent a copy of all License Agreement amendments promptly following execution thereof by Licensor and Borrower.
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5.19 The Management Agreement. Borrower shall not (and shall not permit any of its Subsidiaries to) (a) agree to any Management Agreement amendment that could reasonably be expected to materially and adversely affect (i) the rights and privileges of the owner thereunder; or (ii) the rights, privileges, and remedies of Agent under the Loan Documents with respect to the Collateral or the Management Agreement; (b) assign, transfer, mortgage, pledge or otherwise encumber the Management Agreement or any interest therein to any Person other than Agent; (c) make any change in Manager without Agent’s prior written consent, such consent not to be unreasonably withheld, conditioned or delayed; or (d) become obligated with respect to any other Contractual Obligation for the maintenance or operation of the Site or for providing services in connection with the Site, other than the Management Agreement and other agreements entered into in the Ordinary Course of Business and on normal and customary terms. Borrower will send Agent a copy of all Management Agreement amendments promptly following execution thereof by all parties thereto.
5.20 Single Purpose Entity Requirements. Borrower shall not take any of the following actions: (a) engage in any business or activity other than the acquisition and ownership of Subsidiaries directly or indirectly owning the Collateral and activities incidental thereto; (b) acquire or own any material asset other than equity interest in such Subsidiaries; (c) commingle its assets with the assets of any of its Affiliates or of any other Person or transfer any assets to any such Person other than transfers and distributions on account of equity interests in the Borrower permitted pursuant to the Loan Documents; (d) allow any Person to pay its debts and liabilities or fail to pay its debts and liabilities solely from its own assets; (e) fail to maintain its records, books of account and bank accounts separate and apart from those of its Affiliates and any other Person; (f) fail to correct any known misunderstandings regarding the separate identity of Borrower; (g) hold itself out to be responsible or pledge its assets or credit worthiness for the debts of another Person or allow any Person to hold itself out to be responsible or pledge its assets or credit worthiness for the debts of the Borrower (except for a Subsidiary Guarantor or Limited Guarantor); (h) make any loans or advances to any Person, including any Affiliate of Borrower; (i) fail either to hold itself out to the public as a legal entity separate and distinct from any other Person or to conduct its business solely in its own name in order not to mislead others as to the Person with which such other party is transacting business, or to suggest that Borrower is responsible for the debts of any third party (including any Affiliate of Borrower); or (j) conceal assets from any creditor, or enter into any transaction with the intent to hinder, delay or defraud creditors of the Borrower or the creditors of any other Person.
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Article
6
EVENTS OF DEFAULT
6.1 Event of Default. Any of the following shall constitute an “Event of Default”:
(a) Non-Payment. (1) The Revolving Loans are not repaid in full on or before the Revolving Loan Maturity Date or (2) any other Obligation for the payment of money is not paid within 10 days of the due date therefor, or if no specific due date is specified, then within 10 days of written demand from Agent.
(b) Representation or Warranty. Any representation, warranty or certification by or on behalf of any Credit Party made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document, Financial Statement or other statement by any such Person or their respective Responsible Officers, furnished at any time under this Agreement, or in or under any other Loan Document, shall prove to have been incorrect in any material respect (without duplication of other materiality qualifiers contained therein) on or as of the date made or deemed made.
(c) Specific Defaults. Any Credit Party fails to perform or observe any term, covenant or agreement contained in any of Sections 4.7, 4.12, 4.22 or Article 5. A breach of a financial covenant contained in Section 4.22 shall be deemed to have occurred as of the date ten (10) days after Borrower’s Compliance Certificate for such Fiscal Quarter was due, regardless of when the Financial Statements reflecting such breach are delivered to Agent, unless Borrower has made the principal paydown required by Section 4.22 within said ten (10) day period. An Event of Default under either Section 4.22 or Article 5 shall conclusively be deemed to be a continuing Event of Default until Agent, in its sole discretion, waives such Event of Default in writing.
(d) Financial Information. Any Credit Party fails to perform or observe any term, covenant or agreement contained in Section 4.2 or Section 4.3(b), and, with respect to the first such failure in any twelve (12) month period only, such Credit Party has not cured such failure within ten (10) Business Days after written notice from Agent.
(e) Material Adverse Effect. Any event or circumstance occurs that has had or could reasonably be expected to have a Material Adverse Effect.
(f) Bankruptcy, Insolvency, and Certain Other Proceedings.
(i) Insolvency; Business Cessation. Any Credit Party (A) ceases to be Solvent; (B) generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (C) voluntarily ceases to conduct its business in the ordinary course for not less than 20 consecutive Business Days; or (D) takes any action to effectuate or authorize any of the foregoing;
(ii) Insolvency Proceedings. Any Credit Party shall institute or have instituted against it any proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship, receivership, or relief of debtors, (A) seeking to adjudicate it bankrupt or insolvent; (B) seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, composition of it or its debts or any similar order; or (C) seeking entry of an order for relief or appointment of a custodian, receiver, trustee, conservator, liquidating agent, liquidator, or other official with similar powers, for it or for any substantial part of its property; and in the case of any such proceeding or other action instituted against (but not by or with the consent of) such Credit Party, either (i) such proceeding or action shall remain undismissed or unstayed for a period of 60 days or more; or (ii) any action sought in such proceedings shall occur;
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(iii) Failure of Enforceability or Lien. If (A) any material provision of any Loan Document shall, at any time after the delivery of such Loan Document, fail to be valid and binding on, or enforceable against, a Credit Party; (B) any Loan Document purporting to grant a Lien to secure any Obligation shall, at any time after the delivery thereof, fail to create a valid and enforceable Lien on any Collateral purported to be covered thereby; (C) any such Lien shall fail or cease to be a perfected Lien with the priority required in the relevant Loan Document; or (D) a Credit Party shall state in writing that any of the events described in the preceding clauses of this subsection has occurred; or
(iv) Actions in Furtherance. Any Credit Party shall take any action to authorize or effectuate, or otherwise further, any action or circumstance described in the preceding clauses of this subsection (f).
(g) Monetary Judgments. One or more judgments, non-interlocutory orders, decrees or arbitration awards shall be entered against any one or more of the Credit Parties involving in the aggregate a liability of $500,000 or more (provided that the applicable threshold for Limited Guarantor shall be $10,000,000), excluding amounts covered by insurance to the extent the relevant independent third-party insurer has not denied coverage therefor, and the same shall remain unsatisfied, unvacated, unbonded and unstayed by reason of a pending appeal for a period of 30 days after the entry thereof.
(h) Non-Monetary Judgments. One or more non-monetary judgments, orders or decrees shall be rendered against any one or more of the Credit Parties which has or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect.
(i) Cross Default. Any Credit Party (i) fails to make any payment in respect of any Indebtedness (other than the Obligations) or Contingent Obligation (other than the Obligations) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $500,000 (except that the applicable threshold for Limited Guarantor shall be $10,000,000) when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the document relating thereto on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation (other than Contingent Obligations owing by one Credit Party with respect to the obligations of another Credit Party permitted hereunder or earnouts permitted hereunder), if the effect of such failure, event or condition is to cause, or to permit, the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to declare the same to be due and payable prior to its stated maturity (without regard to any subordination terms with respect thereto), or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded.
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(j) Dissolution. Any entity Credit Party is dissolved or its existence is terminated or there is commenced against any such Credit Party any action or proceeding which seeks as one of its remedies the dissolution of such Credit Party or termination of its existence and the same shall remain undismissed or unstayed for a period of 60 days or more.
(k) License Agreement; Management Agreement. The License Agreement or the Management Agreement terminates or expires (without same having been replaced in accordance with this Agreement) prior to the performance and payment in full of the Obligations.
(l) Crimes and Forfeitures. Any executive officer of a Credit Party shall be indicted for a crime, a punishment for which could include (i) the forfeiture of any assets of such Credit Party or of any equity interest in such Credit Party; (ii) the loss of eligibility for any permit; (iii) imprisonment; or (iv) a material fine or other material monetary penalty.
(m) Other Defaults. Any Credit Party fails to observe or perform any of the covenants, conditions, or obligations of this Agreement or any of the other Loan Documents, other than those referred to in the other subsections of this Section 6.1, and such failure continues unremedied for a period of 30 days after the earlier to occur of (i) the date upon which a Responsible Officer of any Credit Party becomes aware of such failure; and (ii) the date upon which written notice thereof is given to the Borrower by Agent or Required Lenders. However, if such failure is not willful or intentional, does not place any rights or interest in any Collateral in immediate jeopardy, and is within the reasonable power of such Credit Party to cure after receipt of notice thereof, all as determined by Agent in its reasonable discretion, then such failure shall not constitute an Event of Default (unless otherwise expressly provided) if during such 30-day period, such Credit Party begins to cure the failure and then diligently pursues the cure to completion, except that in no event will the cure period under this subsection exceed 60 days from the date such Credit Party receives the notice from Lender. If such Credit Party fails to cure such failure within the time periods provided in this subsection, an Event of Default shall be deemed to have occurred without further notice or demand of any kind being required.
(n) Other Events of Default. Any other event or circumstance designated elsewhere in this Agreement or the other Loan Documents as an Event of Default.
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6.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, Agent may, and shall at the request of the Required Lenders:
(a) Suspension and Termination of Commitments. Suspend or terminate all or any portion of any one or more of the Commitments of each Lender to make Loans, whereupon all or such portion of such Commitments shall forthwith be suspended or terminated;
(b) Acceleration. Upon five days advance written notice from Agent to Borrower, declare all or any portion of the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, all without presentment, demand, protest or other further notice of any kind, all of which are hereby expressly waived by each Credit Party; and/or
(c) Exercise Rights and Remedies. Exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents or applicable law;
provided, however, that upon the occurrence of an Event of Default under Section 6.1(f), the obligation of each Lender to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of Agent or any Lender.
6.3 Rights Not Exclusive. The rights provided for herein and in the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. Neither the acceptance of this Agreement nor its enforcement shall prejudice or in any manner affect Agent’s rights to realize upon or enforce its rights with respect to any security now or in the future held by Agent, and Agent and the Lenders are entitled to enforce this Agreement and its rights and remedies with respect to any such security in such order and manner as they may in their sole discretion determine.
6.4 Late Fees. If Borrower fails to make any payment (excluding payment in full at maturity, whether by acceleration or otherwise) on or before the 10th day after the due date for such Payment, then Borrower shall pay Agent a late fee equal to 5% of such past-due payment, which Agent shall be entitled to retain. Such late fee will be immediately due and payable and is in addition to any other charges, costs, fees, and expenses that Borrower may owe as a result of the late Payment, including the imposition of a default rate of interest pursuant to this Agreement or, where applicable, pursuant to any other Loan Document.
6.5 No Waiver or Cure. Neither the application of a default rate of interest in the circumstances described herein or in any of the other Loan Documents nor the imposition of any late fee shall be interpreted to extend any cure period set forth herein or in any other Loan Document, to cure any Default or Event of Default, or to otherwise limit or waive any of the rights or remedies of Agent and the Lenders under this Agreement or any other Loan Document.
6.6 Full Payment Required. The acceptance by Agent of any sum after the same is due shall not constitute a waiver of the right either to require prompt payment, when due, of all other sums hereby secured or to declare a subsequent Event of Default. The acceptance by Agent of any sum in an amount less than the sum then due shall be deemed to be an acceptance on account only and upon condition that it shall not constitute a waiver of Borrower’s obligation to pay the entire sum then due, and Borrower’s failure to pay such entire sum then due shall, at Agent or the Required Lenders’ election, constitute an immediate Event of Default without the necessity for any further notice, notwithstanding such acceptance of such amount on account.
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6.7 Credit Bidding. Agent or any Lender may purchase, in any public or private sale conducted under the provisions of the UCC (including pursuant to Sections 9-610 and 9-620 of the UCC), the provisions of the Bankruptcy Code (including pursuant to Section 363 of the Bankruptcy Code) or at any sale or foreclosure conducted by Agent (whether by judicial action or otherwise) in accordance with applicable laws, rules and regulations, all or any portion of the Collateral. The Lenders hereby irrevocably authorize Agent, upon the written consent of the Agent and Required Lenders, to Credit Bid (in an amount and on such terms as may be directed by Required Lenders and purchase at any such sale (either directly or through one or more acquisition vehicles) all or any portion of the Collateral on behalf of and for the benefit of the Lenders (but not as agent for any individual Lender or Lenders, unless the Required Lenders shall otherwise agree in writing). Each Lender hereby agrees that, except as otherwise provided in the Loan Documents or with the written consent of Agent and the Required Lenders, it will not exercise any right that it might otherwise have to Credit Bid at any sales of all or any portion of the Collateral conducted under the provisions of the UCC or the Bankruptcy Code, foreclosure sales or other similar dispositions of Collateral.
Article
7
AGENT
7.1 Appointment and Duties.
(a) Appointment of Agent. Each Lender hereby appoints Western Alliance Bank (together with any successor Agent pursuant to Section 7.9) as Agent hereunder and authorizes Agent to (i) execute and deliver the Loan Documents and accept delivery thereof on its behalf from any Credit Party; (ii) take such action on its behalf and to exercise all rights, powers and remedies and perform the duties as are expressly delegated to Agent under such Loan Documents; and (iii) exercise such powers as are reasonably incidental thereto.
(b) Duties as Collateral and Disbursing Agent. Without limiting the generality of Section 7.1(a), Agent shall have the sole and exclusive right and authority (to the exclusion of the Lenders), and is hereby authorized, to (i) act as the disbursing and collecting agent for the Lenders with respect to all payments and collections arising in connection with the Loan Documents, including in any proceeding described in Section 6.1(f)(ii) or any other bankruptcy, insolvency or similar proceeding, and each Person making any payment in connection with any Loan Document to any Secured Party is hereby authorized to make such payment to Agent; (ii) file and prove claims and file other documents necessary or desirable to allow the claims of the Secured Parties with respect to any Obligation in any proceeding described in Section 6.1(f) or any other bankruptcy, insolvency or similar proceeding (but not to vote, consent or otherwise act on behalf of such Person); (iii) act as collateral agent for each Secured Party for purposes of the perfection of all Liens created by such agreements and all other purposes stated therein; (iv) manage, supervise and otherwise deal with the Collateral; (v) take such other action as is necessary or desirable to maintain the perfection and priority of the Liens created or purported to be created by the Loan Documents; (vi) except as may be otherwise specified in any Loan Document, exercise all remedies given to Agent and the other Secured Parties with respect to the Credit Parties and/or the Collateral, whether under the Loan Documents, applicable Requirements of Law or otherwise; and (vii) execute any amendment, consent or waiver under the Loan Documents on behalf of any Lender that has consented in writing to such amendment, consent or waiver; provided, however, that Agent hereby appoints, authorizes and directs each Lender to act as collateral sub-agent for Agent and the Lenders for purposes of the perfection of all Liens with respect to the Collateral, including any deposit account maintained by a Credit Party with, and cash and Cash Equivalents held by, such Lender, and may further authorize and direct the Lenders to take further actions as collateral sub-agents for purposes of enforcing such Liens or otherwise to transfer the Collateral subject thereto to Agent, and each Lender hereby agrees to take such further actions to the extent, and only to the extent, so authorized and directed.
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(c) Limited Duties. Under the Loan Documents, Agent (i) is acting solely on behalf of the Secured Parties (except to the limited extent provided in Section 1.8(b) with respect to the Register), with duties that are entirely administrative in nature, notwithstanding the use of the defined term “Agent”, the terms “agent”, “Agent” and “collateral agent” and similar terms in any Loan Document to refer to Agent, which terms are used for title purposes only; (ii) is not assuming any obligation under any Loan Document other than as expressly set forth therein or any role as agent, fiduciary or trustee of or for any Lender or any other Person; and (iii) shall have no implied functions, responsibilities, duties, obligations or other liabilities under any Loan Document. Each Secured Party, by accepting the benefits of the Loan Documents, hereby waives and agrees not to assert any claim against Agent based on the roles, duties and legal relationships expressly disclaimed in this subsection.
7.2 Binding Effect. Each Secured Party, by accepting the benefits of the Loan Documents, agrees that (i) any action taken by Agent or the Required Lenders (or, if expressly required hereby, a greater proportion of the Lenders) in accordance with the provisions of the Loan Documents; (ii) any action taken by Agent in reliance upon the instructions of Required Lenders (or, where so required, such greater proportion); and (iii) the exercise by Agent or the Required Lenders (or, where so required, such greater proportion) of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Secured Parties.
7.3 Use of Discretion.
(a) No Action without Instructions. Agent shall not be required to exercise any discretion or take, or to omit to take, any action, including with respect to enforcement or collection, except any action it is required to take or omit to take (i) under any Loan Document; or (ii) pursuant to instructions from the Required Lenders (or, where expressly required by the terms of this Agreement, a greater proportion of the Lenders).
(b) Right Not to Follow Certain Instructions. Notwithstanding the provisions of Section 7.3(a), Agent shall not be required to take, or to omit to take, any action (i) unless, upon demand, Agent receives an indemnification satisfactory to it from the Lenders (or, to the extent applicable and acceptable to Agent, any other Person) against all Liabilities that, by reason of such action or omission, may be imposed on, incurred by or asserted against Agent or any Related Person thereof or (ii) that is, in the opinion of Agent or its counsel, contrary to any Loan Document or applicable Requirement of Law.
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(c) Exclusive Right to Enforce Rights and Remedies. Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Credit Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, Agent in accordance with the Loan Documents for the benefit of all Lenders; provided, however, that the foregoing shall not prohibit (i) Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Agent) hereunder and under the other Loan Documents; (ii) any Lender from exercising setoff rights in accordance with and subject to the provisions of Section 8.11; or (iii) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Credit Party under any bankruptcy or other debtor relief law; and provided further, however, that, if at any time there is no Person acting as Agent hereunder and under the other Loan Documents, then (A) the Required Lenders shall have the rights otherwise ascribed to Agent pursuant to Article 7; and (B) in addition to the matters set forth in clause (ii) and clause (iii) of the preceding proviso and subject to Section 8.11, any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.
7.4 Delegation of Rights and Duties. Agent may, upon any term or condition it specifies, delegate or exercise any of its rights, powers and remedies under, and delegate or perform any of its duties or any other action with respect to, any Loan Document by or through any trustee, co-agent, employee, attorney-in-fact and any other Person (including any Secured Party). Any such Person shall benefit from this Article to the extent provided by Agent.
7.5 Reliance and Liability.
(a) Right to Rely and Take Certain Actions. Agent may, without incurring any liability hereunder: (i) treat the payee of any Revolving Loan Note as its holder until such Revolving Loan Note has been assigned in accordance with Section 8.9; (ii) rely on the Register to the extent set forth in Section 1.8; (iii) consult with any of its Related Persons and, whether or not selected by it, any other advisors, accountants and other experts (including advisors to, and accountants and experts engaged by, any Credit Party); and (iv) rely and act upon any document and information (including those that are transmitted as an E-Transmission) and any telephone message or conversation, in each case believed by it to be genuine and transmitted, signed or otherwise authenticated by the appropriate parties.
(b) No Liability. None of Agent or its Related Persons shall be liable for any action taken or omitted to be taken by any of them under or in connection with any Loan Document, and each Secured Party and Credit Party hereby waive and shall not assert any right, claim or cause of action based thereon, except to the extent of liabilities resulting primarily from the gross negligence or willful misconduct of Agent or, as the case may be, such Related Person (each as determined in a final, non-appealable judgment by a court of competent jurisdiction) in connection with the duties expressly set forth herein. Without limiting the foregoing, Agent:
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(i) Shall not be responsible or otherwise incur liability for any action or omission taken in reliance upon the instructions of the Required Lenders or for the actions or omissions of any of its Related Persons selected with reasonable care (other than employees, officers and directors of Agent, when acting on behalf of Agent);
(ii) Shall not be responsible to any Lender or other Person for the due execution, legality, validity, enforceability, effectiveness, genuineness, sufficiency or value of, or the attachment, perfection or priority of any Lien created or purported to be created under or in connection with, any Loan Document;
(iii) Makes no warranty or representation, and shall not be responsible, to any Lender or other Person for any statement, document, information, representation or warranty made or furnished by or on behalf of any Credit Party or any Related Person of any Credit Party in connection with any Loan Document or any transaction contemplated therein or any other document or information with respect to any Credit Party, whether or not transmitted or (except for documents expressly required under any Loan Document to be transmitted to the Lenders) omitted to be transmitted by Agent, including as to completeness, accuracy, scope or adequacy thereof, or for the scope, nature or results of any due diligence performed by Agent in connection with the Loan Documents; and
(iv) Shall not have any duty to ascertain or to inquire as to the performance or observance of any provision of any Loan Document, whether any condition set forth in any Loan Document is satisfied or waived, as to the financial condition of any Credit Party or as to the existence or continuation or possible occurrence or continuation of any Default or Event of Default and shall not be deemed to have notice or knowledge of such occurrence or continuation unless it has received a notice from Borrower or a Lender describing such Default or Event of Default that is clearly labeled “notice of default” (in which case Agent shall promptly give notice of such receipt to all Lenders);
(c) and, for each of the items set forth in clauses (i) through (iv) above, each Lender and Credit Party hereby waive and agree not to assert any right, claim or cause of action it might have against Agent based thereon.
7.6 Agent Individually. Agent and its Affiliates may make loans and other extensions of credit to, acquire Stock and Stock Equivalents of, engage in any kind of business with, any Credit Party or Affiliate thereof as though it were not acting as Agent and may receive separate fees and other payments therefor. To the extent Agent or any of its Affiliates makes any Loan or otherwise becomes a Lender hereunder, it shall have and may exercise the same rights and powers hereunder and shall be subject to the same obligations and liabilities as any other Lender and the terms “Lender”, “Revolving Loan Lender”, “Required Lender”, and any similar terms shall, except where otherwise expressly provided in any Loan Document, include Agent or such Affiliate, as the case may be, in its individual capacity as Lender, Revolving Loan Lender or as one of the Required Lenders, respectively.
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7.7 Lender Credit Decision.
(a) Lenders to Make Independent Credit Decisions. Each Lender acknowledges that it shall, independently and without reliance upon Agent, any Lender, or any of their Related Persons, or upon any document (including any offering and disclosure materials in connection with the syndication of the Loans) solely or in part because such document was transmitted by Agent or any of its Related Persons, conduct its own independent investigation of the financial condition and affairs of each Credit Party and make and continue to make its own credit decisions in connection with entering into, and taking or not taking any action under, any Loan Document or with respect to any transaction contemplated in any Loan Document, in each case based on such documents and information as it shall deem appropriate. Except for documents expressly required by any Loan Document to be transmitted by Agent to the Lenders, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, Property, financial and other condition or creditworthiness of any Credit Party or any Affiliate of any Credit Party that may come in to the possession of Agent or any of its Related Persons.
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(b) MNPI. If any Lender has elected to abstain from receiving MNPI concerning the Credit Parties or their Affiliates, such Lender acknowledges that, notwithstanding such election, Agent and/or the Credit Parties will, from time to time, make available syndicate-information (which may contain MNPI) as required by the terms of, or in the course of administering, the Loans to the credit contact(s) identified for receipt of such information on the Lender’s administrative questionnaire who are able to receive and use all syndicate-level information (which may contain MNPI) in accordance with such Lender’s compliance policies and contractual obligations and applicable law, including federal and state securities laws; provided, however, that if such contact is not so identified in such questionnaire, the relevant Lender hereby agrees to promptly (and in any event within one Business Day) provide such a contact to Agent and the Credit Parties upon request therefor by Agent or the Credit Parties. Notwithstanding such Lender’s election to abstain from receiving MNPI, such Lender acknowledges that if such Lender chooses to communicate with Agent, it assumes the risk of receiving MNPI concerning the Credit Parties or their Affiliates.
7.8 Expenses; Indemnities; Withholding.
(a) Reimbursement for Certain Costs and Expenses. Each Lender agrees to reimburse Agent and each of its Related Persons (to the extent not reimbursed by any Credit Party) promptly upon demand, severally and ratably, for any costs and expenses (including fees, charges and disbursements of financial, legal and other advisors and Taxes paid in the name of, or on behalf of, any Credit Party) that may be incurred by Agent or any of its Related Persons in connection with the preparation, syndication, execution, delivery, administration, modification, consent, waiver or enforcement of, or the taking of any other action (whether through negotiations, through any work-out, bankruptcy, restructuring or other legal or other proceeding, including preparation for and/or response to any subpoena or request for document production relating thereto, or otherwise) in respect of, or legal advice with respect to its rights or responsibilities under, any Loan Document.
(b) Indemnification of Agent. Each Lender further agrees to indemnify Agent and each of its Related Persons (to the extent not reimbursed by any Credit Party), severally and ratably, from and against Liabilities (including, to the extent not indemnified pursuant to Section 7.8(c), Taxes, interests and penalties imposed for not properly withholding or backup withholding on payments made to or for the account of any Lender) that may be imposed on, incurred by or asserted against Agent or any of its Related Persons in any matter relating to or arising out of, in connection with or as a result of any Loan Document or any other act, event or transaction related, contemplated in or attendant to any such Loan Document, or, in each case, any action taken or omitted to be taken by Agent or any of its Related Persons under or with respect to any of the foregoing; provided, however, that no Lender shall be liable to Agent or any of its Related Persons to the extent such liability has resulted primarily from the gross negligence or willful misconduct of Agent or, as the case may be, such Related Person, as determined by a court of competent jurisdiction in a final non-appealable judgment or order.
(c) Tax Withholding. To the extent required by any applicable law, Agent may withhold from any payment to any Lender under a Loan Document an amount equal to any applicable withholding tax. If (i) the IRS or any other Governmental Authority asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate certification form was not delivered, was not properly executed, or fails to establish an exemption from, or reduction of, withholding tax with respect to a particular type of payment, or because such Lender failed to notify Agent or any other Person of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason); or (ii) Agent reasonably determines that it was required to withhold Taxes from a prior payment but failed to do so, such Lender shall promptly indemnify Agent fully for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and together with all expenses incurred by Agent, including legal expenses, allocated internal costs and out-of-pocket expenses. Agent may offset against any payment to any Lender under a Loan Document, any applicable withholding tax that was required to be withheld from any prior payment to such Lender but which was not so withheld, as well as any other amounts for which Agent is entitled to indemnification from such Lender under this Section 7.8(c).
7.9 Resignation of Agent.
(a) Resignation and Successor Agent. Agent may resign at any time by delivering notice of such resignation to Lenders and Borrower, effective on the date set forth in such notice or, if no such date is set forth therein, upon the date such notice shall be effective, in accordance with the terms of this Section 7.9. If Agent delivers any such notice, the Required Lenders shall have the right to appoint a successor Agent. If, after 30 days following the date of the retiring Agent’s notice of resignation, no successor Agent has been appointed by the Required Lenders that has accepted such appointment, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent from among the Lenders. Each appointment under this subsection (a) shall be subject to the prior consent of Borrower, which may not be unreasonably withheld but shall not be required during the continuance of an Event of Default.
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(b) Discharge; Rights of Successor. Effective immediately upon its resignation, (i) the retiring Agent shall be discharged from its duties and obligations under the Loan Documents; (ii) the Lenders shall assume and perform all of the duties of Agent until a successor Agent shall have accepted a valid appointment hereunder; (iii) the retiring Agent and its Related Persons shall no longer have the benefit of any provision of any Loan Document other than with respect to any actions taken or omitted to be taken while such retiring Agent was, or because such Agent had been, validly acting as Agent under the Loan Documents; and (iv) subject to its rights under Section 7.3, the retiring Agent shall take such action as may be reasonably necessary to assign to the successor Agent its rights as Agent under the Loan Documents. Effective immediately upon its acceptance of a valid appointment as Agent, a successor Agent shall succeed to, and become vested with, all the rights, powers, privileges and duties of the retiring Agent under the Loan Documents.
7.10 Release of Collateral or Guarantors. Each Lender hereby consents to the release and hereby directs Agent to release any Lien held by Agent for the benefit of the Secured Parties against (a) any Collateral that is sold, transferred, conveyed or otherwise disposed of by a Credit Party in a transaction permitted by the Loan Documents (including pursuant to a valid waiver or consent); and (b) all of the Collateral and all Credit Parties, upon (i) termination of the Revolving Loan Commitments; (ii) payment and satisfaction in full of all Loans and all other Obligations under the Loan Documents and all Obligations arising under Secured Rate Contracts, that Agent has theretofore been notified in writing by the holder of such Obligation are then due and payable; (iii) deposit of cash collateral with respect to all Contingent Obligations in amounts and on terms and conditions and with parties satisfactory to Agent and each Indemnitee that is, or may be, owed such Obligations (excluding Contingent Obligations as to which no claim has been asserted); and (iv) to the extent requested by Agent, receipt by Agent and the Secured Parties of liability releases from the Credit Parties each in form and substance reasonably acceptable to Agent. Each Lender hereby directs Agent, and Agent hereby agrees, upon receipt of reasonable advance notice from Borrower, to execute and deliver or file such documents and to perform other actions reasonably necessary to release the guaranties and Liens when and as directed in this Section.
7.11 Additional Secured Parties. The benefit of the provisions of the Loan Documents directly relating to the Collateral or any Lien granted thereunder shall extend to and be available to any Secured Party that is not a Lender as long as, by accepting such benefits, such Secured Party agrees, as among Agent and all other Secured Parties, that such Secured Party is bound by (and, if requested by Agent, shall confirm such agreement in a writing in form and substance acceptable to Agent) this Article 7, Sections 8.3, 8.9, 8.10, 8.11, 8.17, 8.26, and 9.1, and the decisions and actions of Agent and the Required Lenders (or, where expressly required by the terms of this Agreement, a greater proportion of the Lenders or other parties hereto as required herein) to the same extent a Lender is bound; provided, however, that, notwithstanding the foregoing: (a) such Secured Party shall be bound by Section 7.8 only to the extent of Liabilities, costs and expenses with respect to or otherwise relating to the Collateral held for the benefit of such Secured Party, in which case the obligations of such Secured Party thereunder shall not be limited by any concept of pro rata share or similar concept; (b) each of Agent and the Lenders shall be entitled to act at their sole discretion, without regard to the interest of such Secured Party, regardless of whether any Obligation to such Secured Party thereafter remains outstanding, is deprived of the benefit of the Collateral, becomes unsecured or is otherwise affected or put in jeopardy thereby, and without any duty or liability to such Secured Party or any such Obligation; and (c) except as otherwise set forth herein, such Secured Party shall not have any right to be notified of, consent to, direct, require or be heard with respect to, any action taken or omitted in respect of the Collateral or under any Loan Document.
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Article
8
GENERAL PROVISIONS
8.1 Amendments and Waivers.
(a) Amendments and Waivers Generally. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by any Credit Party therefrom, shall be effective unless the same shall be in writing and signed by Agent, the Required Lenders (or by Agent with the consent of the Required Lenders), and Borrower and then such waiver shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all Lenders directly affected thereby (or by Agent with the consent of all Lenders directly affected thereby), in addition to Agent, the Required Lenders (or by Agent with the consent of the Required Lenders) and Borrower, do any of the following (it being agreed that all Lenders shall be deemed to be directly affected by an amendment or waiver of the type described in clauses(v), (vi), and (vii) below):
(i) Increase or extend the Commitment of any Lender or reinstate any Commitment suspended or terminated pursuant to Section 6.2(a);
(ii) Postpone or delay any date fixed for, or reduce or waive, any scheduled installment of principal or any payment of interest, fees or other amounts (other than principal) due to the Lenders (or any of them) hereunder or under any other Loan Document;
(iii) Reduce the principal of, or the rate of interest specified herein (it being agreed, however, that waiver of the default interest margin shall only require the consent of Required Lenders) or the amount of interest payable in cash specified herein on any Loan, or of any fees or other amounts payable hereunder or under any other Loan Document;
(iv) Amend or modify Section 1.11(c);
(v) Change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which shall be required for the Lenders or any of them to take any action hereunder;
(vi) Amend this Section 8.1, other than Section 8.1(d), or, subject to the terms of this Agreement, the definition of Required Lenders or any provision providing for consent or other action by all Lenders; or
(vii) Discharge any Credit Party from its respective payment Obligations under the Loan Documents, or release all or substantially all of the Collateral, except as otherwise may be provided in this Agreement or the other Loan Documents;
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(b) Amendments Affecting Rights of Agent. No amendment, waiver or consent shall, unless in writing and signed by Agent, in addition to the Required Lenders or all Lenders directly affected thereby, as the case may be (or by Agent with the consent of the Required Lenders or all Lenders directly affected thereby, as the case may be), affect the rights or duties of Agent under this Agreement or any other Loan Document.
(c) Secured Rate Contracts. No amendment, modification or waiver of this Agreement or any Loan Document altering the ratable treatment of Obligations arising under Secured Rate Contracts resulting in such Obligations being junior in right of payment to principal on the Loans or resulting in Obligations owing to any Secured Swap Provider becoming unsecured (other than releases of Liens permitted in accordance with the terms hereof), in each case in a manner adverse to any Secured Swap Provider, shall be effective without the written consent of such Secured Swap Provider or, in the case of a Secured Rate Contract provided or arranged by Western Alliance Bank or an Affiliate of Western Alliance Bank.
(d) Other Restrictions. No amendment or waiver shall, unless signed by Agent and Required Lenders (or by Agent with the consent of Required Lenders), amend or waive compliance with the conditions precedent to the obligations of the Lenders to make any Revolving Loan in Section 2.2 or waive any Default or Event of Default for the purpose of satisfying the conditions precedent to the obligations of the Lenders to make any Revolving Loan in Section 2.2. No amendment shall: (i) amend or waive this Section 8.1(d) or the definitions of the terms used in this Section 8.1(d) insofar as the definitions affect the substance of this Section 8.1(d); (ii) change the definition of the term Required Lenders; or (iii) change the percentage of the Lenders which shall be required for Revolving Loan Lenders to take any action hereunder, in each case, without the consent of all Revolving Loan Lenders.
(e) Additional Credit Facilities. This Agreement may be amended with the written consent of Agent, the Borrower, and the Required Lenders to (i) add one or more additional credit facilities to this Agreement and to permit the extensions of credit from time to time outstanding thereunder and the outstanding principal and accrued interest and fees in respect thereof to share ratably in the benefits of this Agreement and the other Loan Documents with the Revolving Loans and the accrued interest and fees in respect thereof; and (ii) include, as appropriate, the Lenders holding such credit facilities in any determination of the Required Lenders.
(f) Other. Notwithstanding anything to the contrary contained in this Section 8.1, (i) Borrower may amend Schedule 3.17 upon notice to Agent; (ii) Agent may amend the Revolving Loan Table to reflect Sales entered into pursuant to Section 8.9; and (iii) Agent and Borrower may amend or modify this Agreement and any other Loan Document to (A) cure any ambiguity, omission, defect or inconsistency therein; and (2) grant a new Lien for the benefit of the Secured Parties, extend an existing Lien over additional Property for the benefit of the Secured Parties or join additional Persons as Credit Parties.
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8.2 Notices.
(a) Addresses. All notices and other communications required or expressly authorized to be made by this Agreement or any other Loan Document shall be given in writing, unless otherwise expressly specified herein, and (i) sent by personal delivery, overnight courier service, or U.S. mail, in each case addressed to the address set forth on the applicable signature page hereto (or such other address as shall be notified in writing (A) in the case of Borrower and Agent, to the other parties hereto and (B) in the case of all other parties, to the Borrower and Agent; (ii) posted to Syndtrak® (to the extent such system is available and set up by or at the direction of Agent prior to posting) in an appropriate location by uploading such notice, demand, request, direction or other communication to www.syndtrak.com, faxing it to 866-545-6600 with an appropriate bar-code fax coversheet or using such other means of posting to Syndtrak® as may be available and reasonably acceptable to Agent prior to such posting; (iii) posted to any other E-System approved by or set up by or at the direction of Agent; or (iv) sent as an E-Transmission, other than by posting to an E-system; provided, however, that E-Transmissions to Agent, other than by way of posting to an E-system, shall be effective only for notices where such E-Transmission is specifically authorized by this Agreement or such other Loan Document and such E-Transmission is delivered in compliance with procedures of Agent applicable at the time and previously communicated to the Borrower with respect to such E-Transmissions and receipt of such E-Transmission is acknowledged by Agent.
(b) Effectiveness. All communications described in Section 8.2(a) and all other notices, demands, requests and other communications made in connection with this Agreement or any other Loan Document shall be effective and be deemed to have been received (i) if delivered by hand, upon personal delivery; (ii) if delivered by overnight courier service, one Business Day after delivery to such courier service; (iii) if delivered by mail, three Business Days after deposit in the mail; (iv) if delivered as an E-Transmission by E-Fax, upon sender’s receipt of confirmation of proper transmission; (v) if delivered by posting to Intralinks® or any other E-System, on the later of the Business Day of such posting and the Business Day access to such posting is given to the recipient thereof in accordance with the standard procedures applicable to such E-System; and (vi) if delivered as an E-Transmission using email, one Business Day after such email is sent, so long as the sender does not receive any response email indicating that the email sent was undeliverable, any such “undeliverable” email being wholly ineffective. The posting, completion and/or submission by any Credit Party of any communication pursuant to Intralinks® or any other E-System shall constitute a representation and warranty by the Credit Parties that any representation, warranty, certification or other similar statement required by the Loan Documents to be provided, given or made by a Credit Party in connection with any such communication is true, correct and complete (as and to the extent provided in the Loan Documents) except as expressly noted in such communication or E-System.
(c) Lender Notifications to Agent. Each Lender shall notify Agent in writing of any changes in the address to which notices to such Lender should be directed, of addresses of its Lending Office, of payment instructions in respect of all payments to be made to it hereunder, and of such other administrative information as Agent shall reasonably request.
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8.3 E-Systems and E-Transmissions. Subject, in each case, to the provisions of Section 8.2:
(a) Use of E-Systems.
(i) Authorization. Each of Agent, the Lenders, each Credit Party and each of their Related Persons is authorized (but not required) to transmit, post or otherwise make or communicate, in its sole discretion, E-Transmissions using an E-System approved by or set up by or at the direction of Agent in connection with any Loan Document and the transactions contemplated therein; provided, however, that the foregoing shall not apply to any Loan Document that is to be filed or recorded with any Governmental Authority that does not accept electronic filings or recordations. Each Credit Party and each Secured Party hereto acknowledges and agrees that the use of E-Systems is not necessarily secure and that there are risks associated with such use, including risks of interception, disclosure and abuse and each indicates it assumes and accepts such risks by hereby authorizing the transmission of E-Transmissions using an E-System.
(ii) Signatures. Each of the parties agrees that (A) no posting to any E-System shall be denied legal effect merely because it is made electronically; (B) each E-Signature on any such posting shall be deemed sufficient to satisfy any requirement for a “signature”; (C) each such posting shall be deemed sufficient to satisfy any requirement for a “writing”, in each case including pursuant to any Loan Document, any applicable provision of any UCC, the federal Uniform Electronic Transactions Act, the Electronic Signatures in Global and National Commerce Act and any substantive or procedural Requirement of Law governing such subject matter; (D) each such posting that is not readily capable of bearing either a signature or a reproduction of a signature may be signed, and shall be deemed signed, by attaching to, or logically associating with such posting, an E-Signature, upon which Agent, each other Secured Party and each Credit Party may rely and assume the authenticity thereof; and (E) each such posting containing a signature, a reproduction of a signature or an E-Signature shall, for all intents and purposes, have the same effect and weight as a signed paper original.
(iii) Separate Agreements. All uses of an E-System shall be governed by and subject to, in addition to Section 8.2 and this Section 8.3, the separate terms, conditions and privacy policy posted or referenced in such E-System (or such terms, conditions and privacy policy as may be updated from time to time, including on such E-System) and related Contractual Obligations executed by Agent and Credit Parties in connection with the use of such E-System.
(iv) LIMITATION OF LIABILITY. ALL E-SYSTEMS AND ALL E-TRANSMISSIONS MADE USING E-SYSTEMS SHALL BE PROVIDED “AS IS” AND “AS AVAILABLE”. NONE OF AGENT, ANY LENDER OR ANY OF THEIR RELATED PERSONS WARRANTS THE ACCURACY, ADEQUACY OR COMPLETENESS OF ANY E-SYSTEM OR E-TRANSMISSION MADE USING AN E-SYSTEM AND DISCLAIMS ALL LIABILITY FOR ERRORS OR OMISSIONS THEREIN. NO WARRANTY OF ANY KIND IS MADE BY AGENT, ANY LENDER OR ANY OF THEIR RELATED PERSONS IN CONNECTION WITH ANY E-SYSTEM OR E-TRANSMISSION MADE USING AN E-SYSTEM, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD-PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS. Borrower and each Secured Party agrees that Agent has no responsibility for maintaining or providing any equipment, software, services or any testing required in connection with any E-Transmission made using an E-System or otherwise required for any E-System.
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(b) Other E-Transmissions. Each of Agent, the Lenders, each Credit Party and each of their Related Persons is authorized (but not required) to transmit, post or otherwise make or communicate, in its sole discretion, E-Transmissions other than by E-System; provided, however, and except as otherwise permitted by Section 8.3(a), the Credit Parties shall deliver, as a further condition to Closing, live pen and ink signatures for those Loan Documents to be delivered on or before Closing, that Agent, in its sole discretion, designates as requiring such live signatures. From time to time after Closing and except as otherwise permitted by Section 8.3(a), each Credit Party agrees to deliver to Agent, upon Agent’s request, a live pen and ink signature page for any Loan Document. Where this Agreement or any other Loan Document, including any executed signature pages, is communicated by E-Transmission, other than by E-System: (i) this Agreement, such other Loan Document and such signature pages shall conclusively be deemed sufficient to satisfy any requirement for a “writing,” “authentication,” “signature,” or “original” pursuant to any Loan Document or Requirement of Law and shall be admissible as an original in any legal proceeding arising out of or relating to this Agreement or any of the other Loan Documents; and (ii) each such E-Transmission shall have the same legal effect as a live pen and ink signed paper original.
(c) Contesting Validity. Neither Agent, the Lenders, the Credit Parties, nor their respective Related Persons shall contest the validity or enforceability of this Agreement or such other Loan Document on the basis that this Agreement, such other Loan Document, or one or more signatures hereto or thereto were the subject of an E-Transmission or executed by an E-Signature; provided, however, that nothing herein shall limit a party’s right to contest whether this Agreement or such other Loan Document has been altered after E-Transmission or whether the E-Transmission was delivered to an appropriate representative of Lender.
8.4 No Waiver; Cumulative Remedies. Waiver of any matter shall not be deemed a waiver of the same or any other matter on any future occasion. No failure to exercise and no delay in exercising, on the part of Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. No course of dealing between any Credit Party, any Affiliate of any Credit Party, Agent or any Lender shall be effective to amend, modify or discharge any provision of this Agreement or any of the other Loan Documents.
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8.5 Costs and Expenses.
(a) Generally. Any action taken by any Credit Party under or with respect to any Loan Document, even if required under any Loan Document or at the request of Agent or Required Lenders, shall be at the expense of such Credit Party, and neither Agent nor any other Secured Party shall be required under any Loan Document to reimburse any Credit Party therefor except as expressly provided therein. In addition, Borrower agrees to pay or reimburse upon demand: (i) Agent for all reasonable out-of-pocket costs and expenses incurred by it or any of its Related Persons in connection with (A) the investigation, development, preparation, negotiation, syndication, execution, interpretation, or administration of (1) the Loans or any Loan Document, including Agent’s review and evaluation of, and determinations with respect to, any conditions precedent that must, at any time, be satisfied by any of the Credit Parties; and (2) any amendment, extension, renewal, termination, supplement, or waiver of any provision of any Loan Document, including any commitment or proposal letter therefor and any other document prepared in connection therewith; (B) environmental audits, internal audit reviews, field examinations, Site inspections, Collateral audits and appraisals, background checks and similar expenses, to the extent permitted hereunder, which shall be reimbursed, in addition to the out-of-pocket costs and expenses of such examiners, at the per diem rate per individual then charged by Agent for its examiners; and (ii) each of Agent and its Related Persons for all costs and expenses incurred in connection with (A) any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a “work-out”; (B) the enforcement or preservation of any right or remedy under any Loan Document, any Obligation, with respect to the Collateral or any other related right or remedy; or (C) the commencement, defense, conduct of, intervention in, or the taking of any other action (including preparation for and/or response to any subpoena or request for document production relating thereto) with respect to, any proceeding (including any bankruptcy or insolvency proceeding) related to any Credit Party, Loan Document, or Obligation, including reasonable attorneys’ fees and expenses of one law firm on behalf of all Lenders (other than Agent) incurred in connection with any of the matters referred to in this clause (ii).
(b) Processing Fees; Additional Lender Consideration. Borrower agrees to pay to Agent, for Agent’s benefit, a reasonable processing and review fee in connection with the matters described in Section 8.5(a) or any other matter requiring Agent or Required Lender approval or consent pursuant to this Agreement or any other Loan Document. Agent may also charge, on behalf of the Lenders, an additional fee as consideration to the Lenders in connection with, and as a condition precedent to, any such matter.
(c) Service Fees. Agent may, from time to time, impose fees or charges for returned checks, multiple payoff quotes within a certain period of time, additional copies of documents, processing non-ACH payments, and such other services it may provide to Borrower while the Obligations are outstanding. Agent may make available to Borrower a schedule of fees or charges for such services upon demand or from time to time; provided, however, such fees and charges are subject to change at any time in Agent’s sole discretion, without notice to Borrower.
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8.6 Indemnity. Each Credit Party agrees to indemnify, hold harmless and defend Agent, each Lender, and each of their respective Related Persons (each such Person being an “Indemnitee“) for, from, and against all Liabilities (including brokerage commissions, fees and other compensation) that may be imposed on, incurred by or asserted against any such Indemnitee in any matter relating to or arising out of, in connection with or as a result of any of the following (collectively, the “Indemnified Matters“): (a) any Loan Document, any Obligation (or the repayment thereof), the use or intended use of the proceeds of any Loan or any securities filing of, or with respect to, any Credit Party; (b) Borrower’s operations at or relating to the Sites; (c) the Collateral, including its design, construction, operation, alteration, maintenance, or use by Borrower or any other Person; (d) any permitted disclosure of Credit Party Information; (e) any misrepresentation or inaccuracy in any representation or warranty in any Loan Document; (f) any breach or failure by any Credit Party to perform its Obligations; (g) any commitment letter, proposal letter or term sheet with any Person and any Contractual Obligation, arrangement or understanding with any broker, finder or consultant, in each case relating or connected in any way to the transactions contemplated by this Agreement; (h) any actual or prospective investigation, litigation or other proceeding, whether or not brought by any such Indemnitee or any of its Related Persons, any holders of securities or creditors (and including reasonable attorneys’ fees in any case), whether or not any such Indemnitee, Related Person, holder or creditor is a party thereto, and whether or not based on any securities or commercial law or regulation or any other Requirement of Law or theory thereof, including common law, equity, contract, tort or otherwise; (i) any other matter with respect to which any Credit Party has an indemnity obligation to any Indemnitee pursuant to any other provision of this Agreement or the other Loan Documents (excluding, however, the Environmental Indemnity Agreement, it being the intent and agreement of the parties that the indemnification obligations therein be and are separate and independent and not included within the coverage of this Section; and (j) any other act, event or transaction related, contemplated in or attendant to any of the foregoing; provided, however, that no Credit Party shall have any liability under this Section to any Indemnitee with respect to any Indemnified Matter, to the extent such liability has resulted primarily from the gross negligence or willful misconduct of such Indemnitee, as determined by a court of competent jurisdiction in a final non-appealable judgment or order. Furthermore, each Credit Party waives and agrees not to assert against any Indemnitee any right of contribution with respect to any Liabilities that may be imposed on, incurred by or asserted against any Related Person.
8.7 Marshaling; Payments Set Aside. No Secured Party shall be under any obligation to marshal any Collateral in favor of any Credit Party or any other Person or against or in payment of any Obligation. To the extent that any Secured Party receives a payment from Borrower, from any other Credit Party, from the proceeds of the Collateral, from the exercise of its rights of setoff (to the extent allowed pursuant to Section 8.11), any enforcement action or otherwise, and such payment is subsequently, in whole or in part, invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not occurred.
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8.8 Binding Effect. This Agreement shall become effective when it shall have been executed by Borrower, the other Credit Parties signatory hereto and Agent and when Agent shall have been notified by each Lender that such Lender has executed it. Thereafter, it shall be binding upon and inure to the benefit of, but only to the benefit of Borrower, the other Credit Parties hereto (in each case except for Article 7), Agent, each Lender, and, to the extent provided in Section 7.11, each other Secured Party and, in each case, their respective successors and permitted assigns. Except as expressly provided in any Loan Document (including in Section 7.9), none of Borrower, any other Credit Party, or Agent shall have the right to assign any rights or obligations hereunder or any interest herein.
8.9 Assignments and Participations.
(a) Right to Assign. Subject to the provisions of Section 8.9(b), each Lender may sell, transfer, negotiate or assign (a “Sale“) all or a portion of its rights and obligations hereunder (including all or a portion of its Commitments and its rights and obligations with respect to Loans) to any of the following (each an “Eligible Assignee“): (i) any existing Lender (other than a Non-Funding Lender or Impacted Lender); (ii) any Affiliate or Approved Fund of any existing Lender (other than a Non-Funding Lender or Impacted Lender); or (iii) any other Person approved by Agent and, so long as no Default or Event of Default exists, Borrower (which approvals shall not be unreasonably withheld or delayed).
(b) Sale Parameters. Sales must be ratable among the obligations owing to and owed by each Lender with respect to the Revolving Loans. For each Loan, the aggregate outstanding principal amount (determined as of the effective date of the applicable Assignment) of the Loans and Commitments subject to any such Sale shall be in a minimum amount of $1,000,000, unless such Sale is (i) made to an existing Lender or an Affiliate or Approved Fund of any existing Lender; (ii) of the assignor’s (together with its Affiliates and Approved Funds) entire interest in such facility; or (iii) made with the prior consent of Agent. Interest accrued prior to and through the date of any such Sale may not be assigned. Sales by the Lenders who are Non-Funding Lenders due to clause (a) of the definition of Non-Funding Lender shall be subject to Agent’s prior written consent in all instances, unless in connection with such sale, such Non-Funding Lender cures, or causes the cure of, its Non-Funding Lender status as contemplated in Section 1.12(e)(iv). Agent’s refusal to accept a Sale to a Credit Party, an Affiliate of a Credit Party, or to a Person that would be a Non-Funding Lender or an Impacted Lender, or the imposition of conditions or limitations (including limitations on voting) upon Sales to such Persons, shall not be deemed to be unreasonable.
(c) Procedure. The parties to each Sale made in reliance on Section 8.9(a), other than those described in Sections 8.9(e) or 8.9(f), shall execute and deliver to Agent an Assignment, substantially in the form of Schedule 8.9(c), via an electronic settlement system designated by Agent (or, if previously agreed with Agent, via a manual execution and delivery of the Assignment) evidencing such Sale, together with any existing Note subject to such Sale (or any affidavit of loss therefor acceptable to Agent), any tax forms required to be delivered pursuant to Section 9.1 and payment of an assignment fee in the amount of $3,500 to Agent, unless waived or reduced by Agent; provided, however, that (i) if a Sale by a Lender is made to an Affiliate or an Approved Fund of such assigning Lender, then no assignment fee shall be due in connection with such Sale; and (ii) if a Sale by a Lender is made to an assignee that is not an Affiliate or Approved Fund of such assignor Lender, and concurrently to one or more Affiliates or Approved Funds of such Assignee, then only one assignment fee of $3,500 shall be due in connection with such Sale (unless waived or reduced by Agent). Upon receipt of all the foregoing, and conditioned upon such receipt and, if such Assignment is made in accordance with clause (iii) of Section 8.9(b), upon Agent consenting to such Assignment, from and after the effective date specified in such Assignment, Agent shall record or cause to be recorded in the Register the information contained in such Assignment.
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(d) Effectiveness. Subject to the recording of an Assignment by Agent in the Register: (i) the assignee thereunder shall become a party hereto and, to the extent that rights and obligations under the Loan Documents have been assigned to such assignee pursuant to such Assignment, shall have the rights and obligations of a Lender; (ii) any applicable Note shall be transferred to such assignee through such entry; and (iii) the assignor thereunder shall, to the extent that rights and obligations under this Agreement have been assigned by it pursuant to such Assignment, relinquish its rights (except for those surviving the termination of the Commitments and the payment in full of the Obligations) and be released from its obligations under the Loan Documents, other than those relating to events or circumstances occurring prior to such assignment (and, in the case of an Assignment covering all or the remaining portion of an assigning Lender’s rights and obligations under the Loan Documents, such Lender shall cease to be a party hereto).
(e) Grant of Security Interests. In addition to the other rights provided in this Section 8.9, each Lender may grant a security interest in, or otherwise assign as collateral, any of its rights under this Agreement, whether now owned or hereafter acquired (including rights to payments of principal or interest on the Loans), to (i) any federal reserve bank (pursuant to Regulation A of the Federal Reserve Board), without notice to Agent or (ii) any holder of, or trustee for the benefit of the holders of, such Lender’s Indebtedness or equity securities, by notice to Agent; provided, however, that no such holder or trustee, whether because of such grant or assignment or any foreclosure thereon (unless such foreclosure is made through an assignment in accordance with Section 8.9(b) above), shall be entitled to any rights of such Lender hereunder and no such Lender shall be relieved of any of its obligations hereunder.
(f) Participants and SPVs. In addition to the other rights provided in this Section 8.9, each Lender may, (x) with notice to Agent, grant to an SPV the option to make all or any part of any Loan that such Lender would otherwise be required to make hereunder (and the exercise of such option by such SPV and the making of Loans pursuant thereto shall satisfy the obligation of such Lender to make such Loans hereunder) and such SPV may assign to such Lender the right to receive payment with respect to any Obligation; and (y) without notice to or consent from Agent or Borrower, sell participations to one or more Persons in or to all or a portion of its rights and obligations under the Loan Documents (including all its rights and obligations with respect to the Revolving Loans); provided, however, that, whether as a result of any term of any Loan Document or of such grant or participation:
(i) No such SPV or participant shall have a commitment, or be deemed to have made an offer to commit, to make Loans hereunder, and, except as provided in the applicable option agreement, none shall be liable for any obligation of such Lender hereunder;
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(ii) Such Lender’s rights and obligations, and the rights and obligations of the Credit Parties and the Secured Parties towards such Lender, under any Loan Document shall remain unchanged and each other party hereto shall continue to deal solely with such Lender, which shall remain the holder of the Obligations in the Register, except that (A) each such participant and SPV shall be entitled to the benefit of Article 9, but, with respect to Section 9.1, only to the extent such participant or SPV delivers the tax forms such Lender is required to collect pursuant to Section 9.1(f) and then only to the extent of any amount to which such Lender would be entitled in the absence of any such grant or participation; and (B) each such SPV may receive other payments that would otherwise be made to such Lender with respect to Loans funded by such SPV to the extent provided in the applicable option agreement and set forth in a notice provided to Agent by such SPV and such Lender, provided, however, that in no case (including pursuant to clause (A) or (B) above) shall an SPV or participant have the right to enforce any of the terms of any Loan Document;
(iii) The consent of such SPV or participant shall not be required (either directly, as a restraint on such Lender’s ability to consent hereunder or otherwise) for any amendments, waivers or consents with respect to any Loan Document or to exercise or refrain from exercising any powers or rights such Lender may have under or in respect of the Loan Documents (including the right to enforce or direct enforcement of the Obligations), except for those described in clauses (ii) and (iii) of Section 8.1(a) with respect to amounts, or dates fixed for payment of amounts, to which such participant or SPV would otherwise be entitled and, in the case of participants, except for those described in clause (vi) of Section 8.1(a); and
(iv) No party hereto shall institute against any SPV grantee of an option pursuant to this Section 8.9(f) any bankruptcy, reorganization, insolvency, liquidation or similar proceeding, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper of such SPV; provided, however, that each Lender having designated an SPV as such agrees to indemnify each Indemnitee against any Liability that may be incurred by, or asserted against, such Indemnitee as a result of failing to institute such proceeding (including a failure to be reimbursed by such SPV for any such Liability). The agreement in the preceding sentence shall survive the termination of the Commitments and the payment in full of the Obligations.
8.10 Non-Public Information; Confidentiality.
(a) Non-Public Information. Each of Agent and each Lender acknowledges and agrees that it may receive material non-public information (“MNPI”) hereunder concerning the Credit Parties and their Affiliates and agrees to use such information in compliance with all relevant policies, procedures and applicable Requirements of Laws (including United States federal and state securities laws and regulations).
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(b) Confidential Information. Each of Agent and each Lender agrees to use all reasonable efforts to maintain, in accordance with its customary practices, the confidentiality of information obtained by it pursuant to any Loan Document, except that such information may be disclosed (i) with the consent of Borrower; (ii) to Related Persons of such Lender or Agent, as the case may be, that are advised of the confidential nature of such information and are instructed to keep such information confidential in accordance with the terms hereof; (iii) to the extent such information presently is or hereafter becomes (A) publicly available other than as a result of a breach of this Section 8.10; or (B) available to such Lender, Agent. or any of their Related Persons, as the case may be, from a source (other than any Credit Party) not known by them to be subject to disclosure restrictions; (iv) to the extent disclosure is required by any applicable Requirement of Law or other legal process or requested or demanded by any Governmental Authority; (v) to the extent necessary or customary for inclusion in league table measurements; (vi) to the National Association of Insurance Commissioners or any similar organization, any examiner or any nationally recognized rating agency, or otherwise to the extent consisting of general portfolio information that does not identify Credit Parties; (vii) to current or prospective assignees, SPVs (including the investors or prospective investors therein), participants, or direct or contractual counterparties to any Secured Rate Contracts and to their respective Related Persons, and to the extent such assignees, investors, participants, counterparties, or Related Persons agree to be bound by provisions substantially similar to the provisions of this Section 8.10 (and such Person may disclose information to their respective Related Persons in accordance with clause (ii) above); (viii) to any other party hereto; (ix) to Licensor and Manager upon the occurrence and during the continuation of a Default; (x) to any proposed transferee, purchaser, assignee, servicer, participant, lender, investor, ratings agency, or other Person with respect to any proposed Sale, participation of the Loan, or sale of any of the Collateral; (xi) to any insurance or title company in connection with the transactions contemplated by the Loan Documents, including any action, suit, or proceeding arising out of, in connection with, or relating to, this Agreement or the other Loan Documents, the Loan, or any other transaction contemplated hereby; and (xii) in connection with the exercise or enforcement of any right or remedy under any Loan Document, in connection with any litigation or other proceeding to which such Lender, Agent or any of their Related Persons is a party or bound, or to the extent necessary to respond to public statements or disclosures by Credit Parties or their Related Persons referring to a Lender, Agent or any of their Related Persons. The Credit Parties further consent to the use by Agent, the Lenders, and their respective Affiliates of data relating to Borrower’s operations, including unit-level and corporate level operating results, and authorize such Persons to produce and distribute various industry statistical analyses and data compilations, provided that all such analyses and data compilations will be aggregated and will not be specifically attributable to the Sites, Borrower, any other Credit Party, or any operator or lessee of the Sites. In the event of any conflict between the terms of this Section 8.10 and those of any other Contractual Obligation entered into with any Credit Party (whether or not a Loan Document), the terms of this Section 8.10 shall govern.
(c) Tombstones. Each Credit Party consents to the publication by Agent or any Lender of any press releases, tombstones, advertising or other promotional materials (including as an E-Transmission) relating to the financing transactions contemplated by this Agreement using such Credit Party’s name, product photographs, logo or trademark.
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(d) Press Release and Related Matters. No Credit Party shall, and no Credit Party shall permit any of its Affiliates to, issue any press release or other public disclosure (other than any document filed with any Governmental Authority relating to a public offering of securities of any Credit Party) using the name, logo or otherwise referring to Western Alliance Bank or of any of its Affiliates, the Loan Documents or any transaction contemplated herein or therein to which Western Alliance Bank or any of its Affiliates is party without the prior written consent of Western Alliance Bank or such Affiliate, each in its sole discretion, except to the extent required to do so under applicable Requirements of Law and then, only after consulting with Western Alliance Bank.
(e) Authorization to Share Certain Information. Borrower and each other Credit Party authorize each Licensor and Manager to disclose and release to Agent, the Lenders and their respective Affiliates any and all information they may request from time to time regarding (i) the status of each License Agreement and Management Agreement; (ii) the affairs and financial condition of Borrower, such other Credit Party, or any operator of the Sites; and (iii) the business operations at the Sites, including Site level and entity level operating results. Borrower and each such Credit Party also expressly authorize Agent and its Affiliates, from time to time while any of the Obligations are outstanding to perform background, credit, judgment, lien and other checks, searches, inspections and investigations and to obtain personal and business credit reports and asset reports with respect to Borrower and the other Credit Parties and to answer questions about its credit experience with Borrower and the other Credit Parties. All of the information which Agent or its Affiliates obtain from time to time in accordance with this Section, together with all other information which Lender or its Affiliates now possess or in the future may acquire with respect to Borrower, any of the other Credit Parties, the Collateral, the Credit Facilities, or the business operations at the Sites, whether pursuant to the Loan Documents or otherwise, is referred to as “Credit Party Information.”
(f) Distribution of Materials to the Lenders. The Credit Parties acknowledge and agree that Credit Party Information may be disseminated by, or on behalf of, Agent, and made available, to the Lenders by posting such Credit Party Information on an E-System. The Credit Parties authorize Agent to download copies of their logos from its website and post copies thereof on an E-System.
(g) Material Non-Public Information. The Credit Parties agree that if either they, any parent company, or Affiliate has publicly traded equity or debt securities in the United States, they shall (and shall cause such parent company or Affiliate, as the case may be, identify in writing and, to the extent reasonably practicable, clearly and conspicuously mark such Credit Party Information that contain only information that is publicly available or that is not material for purposes of United States federal and state securities laws as “PUBLIC”. The Credit Parties agree that by identifying such Credit Party Information as “PUBLIC” or publicly filing such Credit Party Information with the Securities and Exchange Commission, then Agent and the Lenders shall be entitled to treat such Credit Party Information as not containing any MNPI for purposes of United States federal and state securities laws. The Credit Parties further represent, warrant, acknowledge and agree that the following documents and materials shall be deemed to be PUBLIC, whether or not so marked, and do not contain any MNPI: (i) the Loan Documents, including the schedules and exhibits attached thereto; and (ii) administrative materials of a customary nature prepared by the Credit Parties or Agent (including, Borrowing Notices and any similar requests or notices posted on or through an E-System). Before distribution of Credit Party Information, the Credit Parties agree to execute and deliver to Agent a letter authorizing distribution of the evaluation materials to prospective Lenders and their employees willing to receive MNPI, and a separate letter authorizing distribution of evaluation materials that do not contain MNPI and represent that no MNPI is contained therein.
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8.11 Set-off; Sharing of Payments.
(a) Right of Setoff. Each of Agent, each Lender, and each Affiliate (including each branch office thereof) of any of them is hereby authorized, without notice or demand (each of which is hereby waived by each Credit Party), at any time and from time to time during the continuance of any Event of Default and to the fullest extent permitted by applicable Requirements of Law, to set off and apply any and all deposits (whether general or special, time or demand, provisional or final) at any time held and other Indebtedness, claims or other obligations at any time owing by Agent, such Lender, or any of their respective Affiliates to or for the credit or the account of Borrower or any other Credit Party against any Obligation of any Credit Party now or hereafter existing, whether or not any demand was made under any Loan Document with respect to such Obligation and even though such Obligation may be unmatured; provided, however, that no Lender shall exercise any such right of setoff without the prior written consent of Agent and the Required Lenders or if, in the opinion of Agent or its counsel, the exercise of setoff rights could materially prejudice the rights and remedies of Agent pursuant to Agent’s Liens on the Collateral. Each of Agent and each Lender agrees promptly to notify Borrower and Agent after any such setoff and application made by such Lender or its Affiliates; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights under this Section 8.11 are in addition to any other rights and remedies (including other rights of setoff) that Agent, the Lenders, their Affiliates and the other Secured Parties, may have.
(b) Sharing of Payments, Etc. If any Lender, directly or through an Affiliate or branch office thereof, obtains any payment of any Obligation of any Credit Party (whether voluntary, involuntary or through the exercise of any right of setoff or the receipt of any Collateral or “proceeds” (as defined under the applicable UCC) of Collateral) other than pursuant to Section 8.9 or Article 9 and such payment exceeds the amount such Lender would have been entitled to receive if all payments had gone to, and been distributed by, Agent in accordance with the provisions of the Loan Documents, such Lender shall purchase for cash from other Lenders such participations in their Obligations as necessary for such Lender to share such excess payment with such Lenders to ensure such payment is applied as though it had been received by Agent and applied in accordance with this Agreement (or, if such application would then be at the discretion of Borrower, applied to repay the Obligations in accordance herewith); provided, however, that (i) if such payment is rescinded or otherwise recovered from such Lender in whole or in part, such purchase shall be rescinded and the purchase price therefor shall be returned to such Lender without interest; and (ii) such Lender shall, to the fullest extent permitted by applicable Requirements of Law, be able to exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of the applicable Credit Party in the amount of such participation. If a Non-Funding Lender receives any such payment as described in the previous sentence, such Lender shall turn over such payments to Agent in an amount that would satisfy the cash collateral requirements set forth in Section 1.11(e).
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s
8.12 Counterparts; Facsimile Signature. This Agreement and the other Loan Documents may be executed in any number of counterparts and by different parties 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. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart. Delivery of an executed signature page of this Agreement as an E-Transmission shall be as effective as delivery of a manually executed counterpart hereof.
8.13 Severability. The illegality or unenforceability of any provision of this Agreement, any other Loan Document, or any instrument or agreement required hereunder or thereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement, such other Loan Document, or any instrument or agreement required hereunder or thereunder.
8.14 Captions. The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement.
8.15 Independence of Provisions. The parties hereto acknowledge that this Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters, and that such limitations, tests and measurements are cumulative and must each be performed, except as expressly stated to the contrary in this Agreement.
8.16 Interpretation. This Agreement is the result of negotiations among, and has been reviewed by counsel to Credit Parties, Agent, each Lender and other parties hereto, and is the product of all such parties. Accordingly, this Agreement and the other Loan Documents shall not be construed against the Lenders or Agent merely because of Agent’s or Lenders’ involvement in the preparation of such documents and agreements. Without limiting the generality of the foregoing, each of the parties hereto has had the advice of counsel with respect to Sections 8.18, 8.19, and 8.20.
8.17 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of Borrower, the Lenders, Agent, each Indemnitee, and, subject to the provisions of Section 7.11, each other Secured Party, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Neither Agent nor any Lender shall have any obligation to any Person not a party to this Agreement or the other Loan Documents.
8.18 Governing Law. The laws of the State of ARIZONA (without giving effect to its conflicts of laws principles) shall govern all matters arising out of, in connection with or relating to this Agreement and the other Loan Documents (EXCEPT AS OTHERWISE PROVIDED THEREIN), including its validity, interpretation, construction, performance and enforcement (including any claims sounding in contract or tort law arising out of the subject matter hereof and any determinations with respect to post-judgment interest).
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8.19 Jurisdiction and Service of Process. Any legal action or proceeding with respect to any Loan Document shall be brought exclusively in the courts of the State of Arizona located in Maricopa County, or of the United States of America for the District of Arizona, sitting in Phoenix, Arizona, and Borrower and each other Credit Party unconditionally accepts, for itself and in respect of its Property, generally and unconditionally, the jurisdiction of the aforesaid courts; provided, however, that nothing in this Agreement shall limit or restrict Agent’s right to commence any proceeding in the federal or state courts located in the state in which a particular Site is located to the extent Agent deems such proceeding necessary or advisable to exercise remedies available under any Loan Document. The parties hereto irrevocably waive any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, that any of them may now or hereafter have to the bringing of any such action or proceeding in such jurisdictions. Each of Borrower and the other Credit Parties (a) irrevocably waives personal service of any and all legal process, summons, notices and other documents of any kind; (b) consents to such service in any suit, action or proceeding brought in the United States by any means permitted by any applicable Requirement of Law, including by the mailing thereof to Borrower’s address specified on the signature page hereto; and (c) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by any applicable Requirement of Law. Nothing contained in this Section 8.19 shall affect the right of Agent or any Lender to serve process in any other manner permitted by applicable Requirements of Law or commence legal proceedings or otherwise proceed against any Credit Party in any other jurisdiction.
8.20 Waiver of Jury Trial. THE PARTIES HERETO, TO THE EXTENT PERMITTED BY LAW, WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING ARISING OUT OF, IN CONNECTION WITH OR RELATING TO, THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ANY OTHER TRANSACTION CONTEMPLATED HEREBY AND THEREBY. THIS WAIVER APPLIES TO ANY ACTION, SUIT OR PROCEEDING WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE.
8.21 Entire Agreement; Release. THE LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT OF THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS RELATING TO THE SUBJECT MATTER THEREOF AND ANY PRIOR LETTER OF INTEREST, COMMITMENT LETTER, CONFIDENTIALITY AND SIMILAR AGREEMENTS INVOLVING ANY CREDIT PARTY, AGENT, ANY LENDER, OR ANY AFFILIATE OF AGENT OR ANY LENDER RELATING TO A FINANCING OF SUBSTANTIALLY SIMILAR FORM, PURPOSE OR EFFECT and the Loan Documents may not be contradicted by evidence of any alleged oral agreement. IN THE EVENT OF ANY CONFLICT BETWEEN THE TERMS OF THIS AGREEMENT AND ANY OTHER LOAN DOCUMENT, THE TERMS OF THIS AGREEMENT SHALL GOVERN (UNLESS OTHERWISE EXPRESSLY STATED IN SUCH OTHER LOAN DOCUMENTS OR SUCH TERMS OF SUCH OTHER LOAN DOCUMENTS ARE NECESSARY TO COMPLY WITH APPLICABLE REQUIREMENTS OF LAW, IN WHICH CASE SUCH TERMS SHALL GOVERN TO THE EXTENT NECESSARY TO COMPLY THEREWITH). Execution of this Agreement by the Credit Parties constitutes a full, complete and irrevocable release of any and all claims which each Credit Party may have at law or in equity in respect of all prior discussions and understandings, oral or written, relating to the subject matter of this Agreement and the other Loan Documents. Each Credit Party acknowledges and affirms that such Credit Party did not rely on any statement, oral or written, not contained in the Loan Documents in making its decisions to enter into the agreements expressed in the Loan Documents.
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8.22 Survival. Any indemnification or other protection provided to Agent, the Lenders, or any other Indemnitee pursuant to any Loan Document, all representations and warranties made in any Loan Document, the provisions of this Article 8 and of Article 10, and all other provisions of the Loan Documents that are stated to survive, shall survive the repayment in full in cash and performance of the Obligations and inure to the benefit of any Person that at any time held a right thereunder and, thereafter, its successors and permitted assigns.
8.23 Limitation of Liability for Certain Damages. In no event shall Agent, any Lender or any of their respective Related Persons be liable to Borrower or any other Credit Party on any theory of liability for any special, indirect, consequential or punitive damages (including any loss of profits, business or anticipated savings). BORROWER AND EACH OTHER CREDIT PARTY HEREBY WAIVE, RELEASE AND AGREE NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR.
8.24 Patriot Act. Each Lender that is subject to the Patriot Act hereby notifies the Credit Parties that pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies each Credit Party, which information includes the name and address of each Credit Party and other information that will allow such Lender to identify each Credit Party in accordance with the Patriot Act.
8.25 Replacement of Lender. Within 45 days after (i) receipt by the Borrower of written notice and demand from any Lender (an “Affected Lender”) for payment of additional costs as provided in Sections 9.1 and 9.3; or (ii) any failure by any Lender (other than Agent or an Affiliate of Agent) to consent to a requested amendment, waiver or modification to any Loan Document to which Required Lenders have already consented but the consent of each Lender (or each Lender directly affected thereby, as applicable) is required with respect thereto, Borrower may, at its option, notify Agent and such Affected Lender (or such non-consenting Lender) of Borrower’s intention to obtain, at Borrower’s expense, a replacement Lender (“Replacement Lender”) for such Affected Lender (or such non-consenting Lender), which Replacement Lender shall be reasonably satisfactory to Agent. If Borrower obtains a Replacement Lender within 45 days following notice of its intention to do so, the Affected Lender (or such non-consenting Lender) shall sell and assign its Loans and Commitments to such Replacement Lender, at par, provided that Borrower has reimbursed such Affected Lender for its increased costs for which it is entitled to reimbursement under this Agreement through the date of such sale and assignment. If a replaced Lender does not execute an Assignment pursuant to Section 8.9 within five Business Days after receipt by such replaced Lender of notice of replacement pursuant to this Section and presentation to such replaced Lender of an Assignment evidencing an assignment pursuant to this Section, Borrower shall be entitled (but not obligated) to execute such an Assignment on behalf of such replaced Lender, and any such Assignment so executed by Borrower, the Replacement Lender and Agent, shall be effective for purposes of this Section and Section 8.9. Notwithstanding the foregoing, with respect to a Lender that is a Non-Funding Lender or an Impacted Lender, Agent may, but shall not be obligated to, obtain a Replacement Lender and execute an Assignment on behalf of such Non-Funding Lender or Impacted Lender at any time with three Business’ Days prior notice to such Lender (unless notice is not practicable under the circumstances) and cause such Lender’s Loans and Commitments to be sold and assigned, in whole or in part, at par. Upon any such assignment and payment and compliance with the other provisions of Section 8.9, such replaced Lender shall no longer constitute a “Lender” for purposes hereof; provided, any rights of such replaced Lender to indemnification hereunder shall survive.
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8.26 Creditor-Debtor Relationship. The relationship between Agent and each Lender, on the one hand, and the Credit Parties, on the other hand, is solely that of creditor and debtor. No Secured Party has any fiduciary relationship or duty to any Credit Party arising out of or in connection with, and there is no agency, tenancy or joint venture relationship between the Secured Parties and the Credit Parties by virtue of, any Loan Document or any transaction contemplated therein. No Loan Document provision is intended, nor shall be deemed or construed, to make Agent or any Lender in any way responsible for the debts, obligations or losses of any Credit Party. EACH CREDIT PARTY REPRESENTS, ACKNOWLEDGES, AND AGREES THAT (a) SUCH CREDIT PARTY IS ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS VOLUNTARILY AND HAS HAD THE OPPORTUNITY TO OBTAIN AND CONSULT WITH SUCH LEGAL, FINANCIAL AND OTHER ADVISERS AS EACH HAS DEEMED APPROPRIATE; AND (b) NEITHER AGENT, LENDERS, NOR ANY OF THEIR RESPECTIVE AFFILIATES, NOR ANY OF THEIR RESPECTIVE RELATED PERSONS HAS ACTED AS AN INVESTMENT, TAX OR FINANCIAL ADVISER TO SUCH CREDIT PARTY IN ANY RESPECT AND HAS NOT OTHERWISE PROVIDED SUCH CREDIT PARTY WITH ANY INVESTMENT, TAX, OR FINANCIAL ADVICE OF ANY NATURE WHATSOEVER.
8.27 Applicability of General Provisions to the Loan Documents. The provisions of this Article and the Schedule of Defined Terms attached as Schedule 10.1(b) apply equally to this Agreement and to each other Loan Document, and to all Credit Parties, the same as if such provisions were set forth in full in each other Loan Document.
8.28 Time of the Essence; Time Periods. Time is of the essence for performance of the Obligations under this Agreement and each of the other Loan Documents. Unless otherwise expressly stated herein or in such other Loan Document, the time for performance of any obligation or taking any action hereunder or under such other Loan Document shall be deemed to expire at 4:00 o’clock p.m. (Phoenix time) on the last day of the applicable time period provided for in such Loan Document. If the time for performance of any obligation or taking any action under such Loan Document expires on a day other than a Business Day, the time for performance or taking such action shall be extended to the next succeeding Business Day. Unless otherwise expressly stated, references in any of the Loan Documents to a particular time of day shall be to the local time in Phoenix, Arizona, and references to “month” shall be a reference to calendar months.
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8.29 Corrections and Insertions. Agent may correct patent errors in the Loan Documents and fill in all blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties.
8.30 Transaction Characterization. The Loan Documents are a contract to extend a Financial Accommodation (as such term is used in the Bankruptcy Code) for Borrower’s benefit.
Article
9
TAXES, YIELD PROTECTION AND ILLEGALITY
9.1 Taxes.
(a) Payments to be Free and Clear of Taxes. Except as otherwise provided in this Section 9.1, each payment by any Credit Party under any Loan Document shall be made free and clear of all Taxes.
(b) Gross-Up. If any Taxes shall be required by any Requirement of Law to be deducted from or in respect of any amount payable under any Loan Document to any Secured Party (i) such amount shall be increased as necessary to ensure that, after all required deductions for Taxes are made (including deductions applicable to any increases to any amount under this Section 9.1), such Secured Party receives the amount it would have received had no such deductions been made; (ii) the relevant Credit Party shall make such deductions; (iii) the relevant Credit Party shall timely pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable Requirements of Law; and (iv) within 30 days after such payment is made, the relevant Credit Party shall deliver to Agent an original or certified copy of a receipt evidencing such payment or other evidence of payment reasonably satisfactory to Agent.
(c) Other Taxes. Borrower further agrees to pay, and authorizes Agent to pay in Borrower’s name, any and all Taxes arising from the execution, delivery or registration of, or otherwise with respect to, any Loan Document or any transaction contemplated therein (collectively, “Other Taxes”). Within 30 days after the date of any payment of Other Taxes by any Credit Party, Borrower shall furnish to Agent, at its address referred to in Section 8.2, the original or a certified copy of a receipt evidencing payment thereof or other evidence of payment reasonably satisfactory to Agent.
(d) Reimbursement and Indemnification. Borrower shall reimburse and indemnify, within 30 days after receipt of demand therefor (with copy to Agent), each Secured Party for all Taxes and Other Taxes (including any Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 9.1) required to be paid by such Secured Party by any Governmental Authority and any Liabilities arising therefrom or with respect thereto, whether or not, absent manifest error, such Taxes or Other Taxes were correctly or legally asserted by such Governmental Authority. A certificate of the Secured Party (or of Agent on behalf of such Secured Party) claiming any compensation under this Section 9.1(d) setting forth the amounts to be paid thereunder and delivered to Borrower with a copy to Agent, shall be conclusive, binding and final for all purposes, absent manifest error. In determining such amount, Agent and such Secured Party may use any reasonable averaging and attribution methods.
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(e) Mitigation. Any Lender claiming any additional amounts payable pursuant to this Section 9.1 shall use its reasonable efforts (consistent with its internal policies and Requirements of Law) to change the jurisdiction of its Lending Office if such a change would reduce any such additional amounts (or any similar amount that may thereafter accrue) and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender.
(f) Tax Forms.
(i) Non-U.S. Lender Parties. Each Non-U.S. Lender Party that, at any of the following times, is entitled to an exemption from United States withholding tax or, after a change in any Requirement of Law, is subject to such withholding tax at a reduced rate under an applicable tax treaty, shall (A) on or prior to the date such Non-U.S. Lender Party becomes a Non-U.S. Lender Party hereunder; (B) on or prior to the date on which any such form or certification expires or becomes obsolete; (C) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it pursuant to this subsection (f); and (D) from time to time if requested by Borrower or Agent (or, in the case of a participant or SPV, the relevant Lender), provide Agent and Borrower (or, in the case of a participant or SPV, the relevant Lender) with two completed originals of each of the following, as applicable: (1) Form W-8ECI (claiming exemption from U.S. withholding tax because the income is effectively connected with a U.S. trade or business), Form W-8BEN (claiming exemption from, or a reduction of, U.S. withholding tax under an income tax treaty) and/or Form W-8IMY (together with appropriate forms, certifications and supporting statements) or any successor forms; (2) in the case of a Non-U.S. Lender Party claiming exemption under Sections 871(h) or 881(c) of the Code, Form W-8BEN (claiming exemption from U.S. withholding tax under the portfolio interest exemption) or any successor form and a certificate in form and substance acceptable to Agent that such Non-U.S. Lender Party is not (x) a “bank” within the meaning of Section 881(c)(3)(A) of the Code; (y) a “10 percent shareholder” of Borrower within the meaning of Section 881(c)(3)(B) of the Code; or (z) a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code; or (3) any other applicable document prescribed by the IRS certifying as to the entitlement of such Non-U.S. Lender Party to such exemption from United States withholding tax or reduced rate with respect to all payments to be made to such Non-U.S. Lender Party under the Loan Documents. Unless Borrower and Agent have received forms or other documents satisfactory to them indicating that payments under any Loan Document to or for a Non-U.S. Lender Party are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Credit Parties and Agent shall withhold amounts required to be withheld by applicable Requirements of Law from such payments at the applicable statutory rate.
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(ii) U.S. Lender Parties. Each U.S. Lender Party shall (A) on or prior to the date such U.S. Lender Party becomes a U.S. Lender Party hereunder; (B) on or prior to the date on which any such form or certification expires or becomes obsolete; (C) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it pursuant to this subsection (f); and (D) from time to time if requested by Borrower or Agent (or, in the case of a participant or SPV, the relevant Lender), provide Agent and Borrower (or, in the case of a participant or SPV, the relevant Lender) with two completed originals of Form W-9 (certifying that such U.S. Lender Party is entitled to an exemption from U.S. backup withholding tax) or any successor form.
(iii) Participants and SPVs. Each Lender having sold a participation in any of its Obligations or identified an SPV as such to Agent shall collect from such participant or SPV the documents described in this subsection (f) and provide them to Agent.
(iv) FATCA. If a payment made to a Non-U.S. Lender Party would be subject to United States federal withholding tax imposed by FATCA if such Non-U.S. Lender Party fails to comply with the applicable reporting requirements of FATCA, such Non-U.S. Lender Party shall deliver to Agent and Borrower any documentation under any Requirement of Law or reasonably requested by Agent or Borrower sufficient for Agent or Borrower to comply with their obligations under FATCA and to determine that such Non-U.S. Lender has complied with such applicable reporting requirements.
9.2 Increased Costs and Reduction of Return; Capital Adequacy Regulation Events. If any Lender (a) determines that a Capital Adequacy Regulation Event affects the amount of capital required or expected to be maintained by such Lender or any entity controlling such Lender; and (b) taking into consideration such Lender’s or such entities’ policies with respect to capital adequacy and such Lender’s desired return on capital, determines that the amount of such capital is increased as a consequence of its Commitment(s), Loans, credits or obligations under this Agreement, then, within 30 days of demand of such Lender (with a copy to Agent), Borrower shall pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender (or the entity controlling the Lender) for such increase; provided, however, that Borrower shall not be required to compensate any Lender pursuant to this Section for any amounts incurred more than 180 days prior to the date that such Lender notifies Borrower, in writing, of the amounts and of such Lender’s intention to claim compensation thereof; provided, further, that if the event giving rise to such increase is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof. “Capital Adequacy Regulation Event” means: (i) the introduction of any Capital Adequacy Regulation; (ii) any change in any Capital Adequacy Regulation; (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof; (iv) compliance by such Lender (or its Lending Office) or any entity controlling the Lender with any Capital Adequacy Regulation; and (v) notwithstanding anything herein to the contrary and regardless of the date enacted, adopted or issued: (A) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith; and (B) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States of America or foreign regulatory authorities, in each case in respect of this clause (B) pursuant to Basel III.
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9.3 Funding Losses. Borrower agrees to reimburse each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of the failure of Borrower to borrow a Loan after Borrower has given a Borrowing Notice.
9.4 Lender Certificates. Any Lender claiming reimbursement or compensation pursuant to this Article shall deliver to Borrower (with a copy to Agent) a certificate setting forth in reasonable detail the amount payable to such Lender, and such certificate shall be conclusive and binding on Borrower in the absence of manifest error.
Article
10
DEFINITIONS; oTHER INTERPRETIVE PROVISIONS
10.1 Defined Terms. Unless otherwise specified, all terms defined herein or any other Loan Document shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto or thereto. Terms (including uncapitalized terms) not otherwise defined herein and that are defined in the UCC shall have the meanings therein provided.
(a) Terms Defined in Body of Agreement. Capitalized terms that are defined in the body of this Agreement are listed on Schedule 10.1(a) with references to where such defined terms appear in the Agreement set forth opposite such terms.
(b) Schedule of Defined Terms. Capitalized terms used herein and in the other Loan Documents and not otherwise defined herein or therein have the meanings set forth on the Schedule of Defined Terms attached as Schedule 10.1(b).
10.2 The Agreement. Unless otherwise expressly provided or the context may otherwise require: (a) the words “hereof”, “herein”, “hereunder” and words of similar import when used in this Agreement or any other Loan Document shall refer to this Agreement or such other Loan Document as a whole and not to any particular provision of this Agreement or such other Loan Document; (b) article, section, subsection, clause, appendix, exhibit, schedule, and table references in a Loan Document are to the Loan Document in which any such item is referenced; (c) references to any document includes all appendices, exhibits, schedules, and tables thereto (all of which are incorporated into and constitute an integral part of the document to which they are attached).
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10.3 Certain Common Terms. The term “document” includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. The term “including” is not limiting and means “including without limitation.” The term “incur” means incur, create, make, issue, assume or otherwise become directly or indirectly liable in respect of or responsible for, in each case whether directly or indirectly, and the terms “incurrence” and “incurred” and similar derivatives shall have correlative meanings. The term “sole” means “sole and absolute”. References to any statute, law, ordinance, regulation or rule are to such statute, law, ordinance, regulation or rule, as modified from time to time and to any successor to any such statute, law, ordinance, regulation or rule, in each case as in effect at the time any such reference is operative.
10.4 Headings; Singular and Plural. Article, section, subsection, appendix, exhibit, schedule and table titles and other divisions contained in any Loan Document are without substantive meaning or content of any kind and are not a part of the agreement between the parties. Unless otherwise expressly indicated, the meaning of any term defined (including by reference) in any Loan Document shall be equally applicable to both the singular and plural forms of such term.
10.5 Performance; Time. Whenever any performance obligation hereunder or under any other Loan Document (other than a payment obligation) shall be stated to be due or required to be satisfied on a day other than a Business Day, such performance shall be made or satisfied on the next succeeding Business Day. For the avoidance of doubt, the initial payments of interest and fees relating to the Obligations (other than amounts due on the Closing Date) shall be due and paid on the first day of the first month following the entry of the Obligations onto the operations systems of Agent, but in no event later than the first day of the second month following the Closing Date. In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including.” If any provision of this Agreement or any other Loan Document refers to any action taken or to be taken by any Person, or which such Person is prohibited from taking, such provision shall be interpreted to encompass any and all means, direct or indirect, of taking, or not taking, such action.
10.6 Contracts. Unless otherwise expressly provided herein or in any other Loan Document, references to agreements and other contractual instruments, including this Agreement and the other Loan Documents, shall be deemed to include all subsequent amendments, thereto, restatements and substitutions thereof and other modifications and supplements thereto which are in effect from time to time, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document.
10.7 Laws. References to any statute, law, ordinance, regulation or rule may be made by using either the common or public name thereof or a specific cite reference and such references are to such statute, law, ordinance, regulation or rule, as modified from time to time and to any successor to any such statute, law, ordinance, regulation or rule, in each case as in effect at the time any such reference is operative.
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10.8 Accounting Terms and Principles. All accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in accordance with GAAP. No change in GAAP used in the preparation of any Financial Statement or Compliance Certificate or used in measuring compliance with any financial covenant or financial performance test in this Agreement or the other Loan Documents and hereafter adopted by Borrower or any other Credit Party shall be given effect for purposes of measuring compliance with any such covenants and tests, including those in Section 2.1, Section 4.22, and Article 5, unless Borrower, Agent and the Required Lenders agree to modify such provisions to reflect such changes in GAAP and, unless such provisions are modified, all Financial Statements, Compliance Certificates and similar documents provided hereunder shall be provided together with a reconciliation between the calculations and amounts set forth therein before and after giving effect to such change in GAAP. Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to in Section 2.1, Section 4.22, and Article 5, shall be made, without giving effect to any election under Accounting Standards Codification 825-10 (or any other Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other Liabilities of any Credit Party at “fair value.”
10.9 Payments. Agent may set up standards and procedures to determine or redetermine the equivalent in Dollars of any amount expressed in any currency other than Dollars and otherwise may, but shall not be obligated to, rely on any determination made by any Credit Party. Any such determination or redetermination by Agent shall be conclusive and binding for all purposes, absent manifest error. No determination or redetermination by any Secured Party or any Credit Party and no other currency conversion shall change or release any obligation of any Credit Party or of any Secured Party (other than Agent and its Related Persons) under any Loan Document, each of which agrees to pay separately for any shortfall remaining after any conversion and payment of the amount as converted. Agent may round up or down, and may set up appropriate mechanisms to round up or down, any amount hereunder to nearest higher or lower amounts and may determine reasonable de minimis payment thresholds.
[Signature Pages Follow]
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EXECUTED effective as of the date first set forth above.
| BORROWER: | |
| LVP HOLD CO MEZZ III LLC, a Delaware limited liability company | |
| By: ______________________________ Name: Joseph E. Teichman Title: Executive Vice President | |
| Principal place of business and address for notices: | |
|
c/o The Lightstone Group 1985 Cedar Bridge Ave, Ste. 1 Lakewood, NJ 08701 Attn: Joseph E. Teichman, Esq. Facsimile No.: (732) 612-1444 Email address: jteichman@lightstonegroup.com
With a copy to:
Eckert Seamans Cherin & Mellott, LLC U.S. Steel Tower, 44th Floor 600 Grant Street Pittsburgh, Pennsylvania 15219 Attn: Timothy Q. Hudak, Esq. Facsimile No.: (412) 566-6099 Email address: thudak@eckertseamans.com |
EXECUTED effective as of the date first set forth above.
| WESTERN ALLIANCE BANK, as Agent | |
| By:_______________________________ | |
| Name: _____________________________ | |
| Title: _____________________________ | |
| Address for Notices: | |
| Western Alliance Bank | |
| One East Washington Street, 14th Floor | |
| Phoenix, Arizona 85004 | |
|
Attention: Justin Schwab
With a copy to:
One Arizona Center 400 East Van Buren Phoenix, Arizona 85004-22025 Attention: Marc Currie Facsimile: (602) 382-6070
| |
| Address for payments: | |
| Western Alliance Bank | |
| One East Washington Street, 14th Floor | |
| Phoenix, Arizona 85004 |
EXECUTED effective as of the date first set forth above.
| WESTERN ALLIANCE BANK, an Arizona corporation, as a Lender | |
| Name: ________________________________________ | |
| Title: _________________________________________ | |
|
Address for notices: Western Alliance Bank One East Washington Street, 14th Floor Phoenix, Arizona 85004 |
Exhibit 10.15
LOAN AGREEMENT
Dated as of October 5, 2016
by and among
LVP H2S SEATTLE LLC,
LVP H2S SEATTLE HOLDING CORP.,
LVP H2S SALT LAKE CITY LLC AND
LVP H2S SALT LAKE CITY HOLDING CORP.,
individually and/or collectively (as the context requires), as Borrower
and
CITIGROUP GLOBAL MARKETS REALTY CORP.,
as Lender
Table of Contents
| ARTICLE 1 DEFINITIONS; PRINCIPLES OF CONSTRUCTION | ||
| Section 1.1. | Definitions | 1 |
| Section 1.2. | Principles of Construction | 27 |
| ARTICLE 2 GENERAL TERMS | ||
| Section 2.1. | Loan Commitment; Disbursement to Borrower | 27 |
| Section 2.2. | The Loan | 27 |
| Section 2.3. | Disbursement to Borrower | 27 |
| Section 2.4. | The Note and the other Loan Documents | 27 |
| Section 2.5. | Interest Rate | 27 |
| Section 2.6. | Loan Payments | 28 |
| Section 2.7. | Prepayments | 30 |
| Section 2.8. | Defeasance | 31 |
| Section 2.9. | Intentionally Omitted | 33 |
| ARTICLE 3 REPRESENTATIONS AND WARRANTIES | ||
| Section 3.1. | Legal Status and Authority | 34 |
| Section 3.2. | Validity of Documents | 34 |
| Section 3.3. | Litigation | 35 |
| Section 3.4. | Agreements | 35 |
| Section 3.5. | Financial Condition | 35 |
| Section 3.6. | Disclosure | 35 |
| Section 3.7. | No Plan Assets | 36 |
| Section 3.8. | Not a Foreign Person | 36 |
| Section 3.9. | Intentionally Omitted | 36 |
| Section 3.10. | Business Purposes | 36 |
| Section 3.11. | Borrower’s Principal Place of Business | 36 |
| Section 3.12. | Status of Property | 36 |
| Section 3.13. | Financial Information | 38 |
| Section 3.14. | Condemnation | 38 |
| Section 3.15. | Separate Lots | 38 |
| Section 3.16. | Insurance | 39 |
| Section 3.17. | Use of Property | 39 |
| Section 3.18. | Leases and Rent Roll | 39 |
| Section 3.19. | Filing and Recording Taxes | 39 |
| Section 3.20. | Management Agreement | 39 |
| Section 3.21. | Illegal Activity/Forfeiture | 39 |
| Section 3.22. | Taxes | 39 |
| Section 3.23. | Permitted Encumbrances | 40 |
| Section 3.24. | Third Party Representations | 40 |
| Section 3.25. | Non-Consolidation Opinion Assumptions | 40 |
| Section 3.26. | Federal Reserve Regulations | 40 |
| Section 3.27. | Investment Company Act | 40 |
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| Section 3.28. | Fraudulent Conveyance | 40 |
| Section 3.29. | Embargoed Person | 41 |
| Section 3.30. | Anti-Money Laundering and Economic Sanctions | 41 |
| Section 3.31. | Organizational Chart | 42 |
| Section 3.32. | Bank Holding Company | 42 |
| Section 3.33. | Hotel Matters | 42 |
| Section 3.34. | Property Document Representations | 43 |
| Section 3.35. | Master Lease Representations | 43 |
| Section 3.36. | No Change in Facts or Circumstances; Disclosure | 44 |
| ARTICLE 4 BORROWER COVENANTS | ||
| Section 4.1. | Existence | 44 |
| Section 4.2. | Legal Requirements | 44 |
| Section 4.3. | Maintenance and Use of Property | 46 |
| Section 4.4. | Waste | 46 |
| Section 4.5. | Taxes and Other Charges | 46 |
| Section 4.6. | Litigation | 47 |
| Section 4.7. | Access to Property | 47 |
| Section 4.8. | Notice of Default | 47 |
| Section 4.9. | Cooperate in Legal Proceedings | 47 |
| Section 4.10. | Intentionally Omitted | 48 |
| Section 4.11. | Intentionally Omitted | 48 |
| Section 4.12. | Books and Records | 48 |
| Section 4.13. | Estoppel Certificates | 51 |
| Section 4.14. | Leases and Rents | 52 |
| Section 4.15. | Management Agreement | 53 |
| Section 4.16. | Payment for Labor and Materials | 55 |
| Section 4.17. | Performance of Other Agreements | 56 |
| Section 4.18. | Debt Cancellation | 56 |
| Section 4.19. | ERISA | 56 |
| Section 4.20. | No Joint Assessment | 57 |
| Section 4.21. | Alterations | 57 |
| Section 4.22. | Property Document Covenants | 58 |
| Section 4.23. | Master Lease Covenants | 58 |
| ARTICLE 5 ENTITY COVENANTS | ||
| Section 5.1. | Single Purpose Entity/Separateness | 65 |
| Section 5.2. | Independent Director | 70 |
| Section 5.3. | Change of Name, Identity or Structure | 71 |
| Section 5.4. | Business and Operations | 72 |
| ARTICLE 6 NO SALE OR ENCUMBRANCE | ||
| Section 6.1. | Transfer Definitions | 72 |
| Section 6.2. | No Sale/Encumbrance | 73 |
| Section 6.3. | Permitted Equity Transfers | 74 |
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| Section 6.4. | Permitted Property Transfer (Assumption) | 75 |
| Section 6.5. | Lender’s Rights | 78 |
| Section 6.6. | Economic Sanctions, Anti-Money Laundering and Transfers | 78 |
| ARTICLE 7 INSURANCE; CASUALTY; CONDEMNATION; RESTORATION | ||
| Section 7.1. | Insurance | 78 |
| Section 7.2. | Casualty | 84 |
| Section 7.3. | Condemnation | 84 |
| Section 7.4. | Restoration | 85 |
| ARTICLE 8 RESERVE FUNDS | ||
| Section 8.1. | Immediate Repair Funds | 89 |
| Section 8.2. | Intentionally Omitted | 90 |
| Section 8.3. | Intentionally Omitted | 90 |
| Section 8.4. | Operating Expense Funds | 90 |
| Section 8.5. | Excess Cash Flow Funds | 91 |
| Section 8.6. | Tax and Insurance Funds | 91 |
| Section 8.7. | The Accounts Generally | 92 |
| Section 8.8. | Intentionally Omitted | 94 |
| Section 8.9. | Other Reserve Funds | 94 |
| ARTICLE 9 CASH MANAGEMENT | ||
| Section 9.1. | Establishment of Certain Accounts | 98 |
| Section 9.2. | Deposits into the Restricted Account | 99 |
| Section 9.3. | Disbursements from the Cash Management Account | 101 |
| Section 9.4. | Withdrawals from the Debt Service Account | 101 |
| Section 9.5. | Payments Received Under this Agreement | 101 |
| ARTICLE 10 EVENTS OF DEFAULT; REMEDIES | ||
| Section 10.1. | Event of Default | 102 |
| Section 10.2. | Remedies | 106 |
| ARTICLE 11 SECONDARY MARKET | ||
| Section 11.1. | Securitization | 108 |
| Section 11.2. | Disclosure | 110 |
| Section 11.3. | Reserves/Escrows | 112 |
| Section 11.4. | Servicer | 112 |
| Section 11.5. | Rating Agency Costs | 112 |
| Section 11.6. | Mezzanine Option | 113 |
| Section 11.7. | Conversion to Registered Form | 113 |
| Section 11.8. | Uncross of Properties | 114 |
| ARTICLE 12 INDEMNIFICATIONS | ||
| Section 12.1. | General Indemnification | 115 |
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| Section 12.2. | Mortgage and Intangible Tax Indemnification | 115 |
| Section 12.3. | ERISA Indemnification | 115 |
| Section 12.4. | Duty to Defend, Legal Fees and Other Fees and Expenses | 116 |
| Section 12.5. | Survival | 116 |
| Section 12.6. | Environmental Indemnity | 116 |
| ARTICLE 13 EXCULPATION | ||
| Section 13.1. | Exculpation | 116 |
| ARTICLE 14 NOTICES | ||
| Section 14.1. | Notices | 120 |
| ARTICLE 15 FURTHER ASSURANCES | ||
| Section 15.1. | Replacement Documents | 121 |
| Section 15.2. | Recording of Security Instrument | 121 |
| Section 15.3. | Further Acts | 122 |
| Section 15.4. | Changes in Tax, Debt, Credit and Documentary Stamp Laws | 123 |
| ARTICLE 16 WAIVERS | ||
| Section 16.1. | Remedies Cumulative; Waivers | 123 |
| Section 16.2. | Modification, Waiver in Writing | 124 |
| Section 16.3. | Delay Not a Waiver | 124 |
| Section 16.4. | Waiver of Trial by Jury | 124 |
| Section 16.5. | Waiver of Notice | 124 |
| Section 16.6. | Remedies of Borrower | 124 |
| Section 16.7. | Marshalling and Other Matters | 125 |
| Section 16.8. | Waiver of Statute of Limitations | 125 |
| Section 16.9. | Waiver of Counterclaim | 125 |
| Section 16.10. | Sole Discretion of Lender | 125 |
| ARTICLE 17 MISCELLANEOUS | ||
| Section 17.1. | Survival | 125 |
| Section 17.2. | Governing Law | 126 |
| Section 17.3. | Headings | 127 |
| Section 17.4. | Severability | 127 |
| Section 17.5. | Preferences | 127 |
| Section 17.6. | Expenses | 128 |
| Section 17.7. | Cost of Enforcement | 129 |
| Section 17.8. | Schedules Incorporated | 129 |
| Section 17.9. | Offsets, Counterclaims and Defenses | 129 |
| Section 17.10. | No Joint Venture or Partnership; No Third Party Beneficiaries | 129 |
| Section 17.11. | Publicity | 130 |
| Section 17.12. | Limitation of Liability | 130 |
| Section 17.13. | Conflict; Construction of Documents; Reliance | 131 |
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| Section 17.14. | Entire Agreement | 131 |
| Section 17.15. | Liability | 131 |
| Section 17.16. | Duplicate Originals; Counterparts | 131 |
| Section 17.17. | Brokers | 132 |
| Section 17.18. | Set-Off | 132 |
| Section 17.19. | Contributions and Waivers | 132 |
| Section 17.20. | Cross Default; Cross-Collateralization | 136 |
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LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of October 5, 2016 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this “Agreement”), by and among CITIGROUP GLOBAL MARKETS REALTY CORP., having an address at 390 Greenwich Street, 7th Floor, New York, New York 10013 (together with its successors and/or assigns, “Lender”), LVP H2S SEATTLE LLC, a Delaware limited liability company (together with its successors and/or assigns, “Seattle Fee Owner”), LVP H2S SEATTLE HOLDING CORP., a Delaware corporation (together with its successors and/or assigns, “Seattle Lessee”; Seattle Fee Owner and Seattle Lessee are, individually and/or collectively (as the context requires) referred to herein as “Seattle Borrower”), LVP H2S SALT LAKE CITY LLC, a Delaware limited liability company (together with its successors and/or assigns, “SLC Fee Owner”) and LVP H2S SALT LAKE CITY HOLDING CORP., a Delaware corporation (together with its successors and/or assigns, “SLC Lessee”; SLC Fee Owner and SLC Lessee are, individually and/or collectively (as the context requires) referred to herein as “SLC Borrower”; Seattle Borrower and SLC Borrower are, individually and/or collectively (as the context requires) referred to herein as “Borrower”), each having their respective principal place of business at 1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701.
RECITALS:
Borrower desires to obtain the Loan (defined below) from Lender.
Lender is willing to make the Loan to Borrower, subject to and in accordance with the terms of this Agreement and the other Loan Documents (defined below).
In consideration of the making of the Loan by Lender and the covenants, agreements, representations and warranties set forth in this Agreement, the parties hereto hereby covenant, agree, represent and warrant as follows:
ARTICLE 1
DEFINITIONS; PRINCIPLES OF CONSTRUCTION
Section 1.1. Definitions.
For all purposes of this Agreement, except as otherwise expressly required or unless the context clearly indicates a contrary intent:
“Acceptable LLC” shall mean a limited liability company formed under Delaware law which (i) has at least one springing member, which, upon the dissolution of all of the members or the withdrawal or the disassociation of all of the members from such limited liability company, shall immediately become the sole member of such limited liability company, and (ii) otherwise meets the Rating Agency criteria then applicable to such entities.
“Account Collateral” shall mean (i) the Accounts, and all cash, checks, drafts, certificates and instruments, if any, from time to time deposited or held in the Accounts from time to time; (ii) any and all amounts invested in Permitted Investments; (iii) all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise payable in respect of, or in exchange for, any or all of the foregoing; and (iv) to the extent not covered by clauses (i) - (iii) above, all “proceeds” (as defined under the UCC as in effect in the State in which the Accounts are located) of any or all of the foregoing.
“Accounts” shall mean the Cash Management Account, the Debt Service Account, the Restricted Account, the Tax Account, the Insurance Account, the FF&E Reserve Account, the PIP Reserve Account, the Immediate Repair Account, the Excess Cash Flow Account, the Operating Expense Account and any other account established by this Agreement or the other Loan Documents.
“Act” is defined in Section 5.1 hereof.
“Affected Property” shall have the meaning set forth in Section 11.8 hereof.
“Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, is in Control of, is Controlled by or is under common Control with such Person or, with respect to any natural Person, is a member of the Family Group of such Person.
“Affiliated Franchisor” shall mean any franchisor of the Property in which Borrower, Guarantor, Sponsor, any SPE Component Entity (if any) or any Affiliate of such entities has, directly or indirectly, any legal, beneficial or economic interest.
“Affiliated Manager” shall mean any managing agent of any Individual Property in which Borrower, Guarantor, Sponsor, any SPE Component Entity (if any) or any Affiliate of such entities has, directly or indirectly, any legal, beneficial or economic interest.
“Allocated Loan Amount” shall mean the portion of the principal amount of the Loan allocated to any applicable Individual Property as set forth on Schedule V hereof, as such amounts may be adjusted from time to time as hereinafter set forth. Notwithstanding the foregoing, with respect to a Condemnation or Casualty affecting one hundred percent (100%) of an Individual Property, the Allocated Loan Amount for such Individual Property shall, at Lender’s sole discretion, be reduced to zero (such Allocated Loan Amount prior to reduction being referred to as the “Withdrawn Allocated Amount”) and each other Allocated Loan Amount shall, if the Withdrawn Allocated Amount exceeds the Applied Net Proceeds realized with respect to such Individual Property (such excess being referred to as the “Proceeds Deficiency”), be increased by an amount equal to the product of (1) the Proceeds Deficiency and (2) a fraction, the numerator of which is the applicable Allocated Loan Amount (prior to the adjustment in question) and the denominator of which is the aggregate of all of the Allocated Loan Amounts (prior to the adjustment in question) other than the Withdrawn Allocated Amount.
“ALTA” shall mean American Land Title Association, or any successor thereto.
“Alteration Threshold” shall mean, with respect to each Individual Property, an amount equal to 5% of the outstanding principal amount of the Allocated Loan Amount attributable to such Individual Property.
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“Applicable Contribution” shall have the meaning set forth in Section 17.19 hereof.
“Applicable Termination Fees” shall mean, with respect to any Franchise Agreement, all termination fees, exit fees, other similar fees, costs, penalties, judgments, damages and other amounts due, in each case, in connection with the termination, rejection or other cessation of such Franchise Agreement.
“Approved Accounting Method” shall mean the Uniform System of Accounts, (consistently applied) or such other method of accounting, consistently applied, as may be reasonably acceptable to Lender.
“Approved Annual Budget” shall have the meaning set forth in Section 4.12 hereof.
“Approved FF&E” shall mean, for any period, FF&E which is reasonably approved by Lender (it being acknowledged that if no Trigger Period is then ongoing, Lender’s approval shall be deemed given if, at the applicable time of disbursement, the applicable FF&E is set forth in the then current Approved Annual Budget).
“Approved Extraordinary Expense” shall mean an operating expense of the applicable Individual Property not set forth on the Approved Annual Budget but approved by Lender in writing (which such approval shall not be unreasonably withheld or delayed).
“Approved ID Provider” shall mean each of CT Corporation, Corporation Service Company, National Registered Agents, Inc., Vcorp, Wilmington Trust Company, Stewart Management Company and Lord Securities Corporation; provided, that, (A) the foregoing shall be deemed Approved ID Providers unless and until disapproved by any Rating Agency and (B) additional national providers of Independent Directors may be deemed added to the foregoing hereunder to the extent approved in writing by Lender and the Rating Agencies.
“Approved Operating Expense” shall mean an operating expense of the applicable Individual Property set forth on the Approved Annual Budget.
“Assignment of Management Agreement” shall mean, individually and/or collectively (as the context requires) each Conditional Assignment of Management Agreement dated as of the date hereof among Lender, Borrower and Manager, as the same may be amended, restated, replaced, extended, renewed, supplemented or otherwise modified from time to time.
“Award” shall mean any compensation paid by any Governmental Authority in connection with a Condemnation in respect of all or any part of the Property.
“Bank” shall be deemed to refer to the bank or other institution maintaining the Restricted Account pursuant to the Restricted Account Agreement.
“Bankruptcy Code” shall mean Title 11 of the United States Code entitled “Bankruptcy”, as amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder, and any comparable foreign laws relating to bankruptcy, insolvency or creditors’ rights.
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“Bankruptcy Event” shall mean the occurrence of any one or more the of the following: (i) Borrower, any Affiliated Manager, any Affiliated Franchisor or any SPE Component Entity shall commence any case, proceeding or other action (A) under the Bankruptcy Code and/or any Creditors Rights Laws seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, liquidation or dissolution or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets (other than with the express written consent of Lender or Servicer); (ii) Borrower, any Affiliated Manager, any Affiliated Franchisor or any SPE Component Entity shall make a general assignment for the benefit of its creditors (other than with the express written consent of Lender or Servicer); (iii) any Restricted Party (or Affiliate thereof) files, or joins or colludes in the filing of, (A) an involuntary petition against Borrower, any Affiliated Manager, any Affiliated Franchisor or any SPE Component Entity under the Bankruptcy Code or any other Creditors Rights Laws, or solicits or causes to be solicited or colludes with petitioning creditors for any involuntary petition under the Bankruptcy Code or any other Creditors Rights Laws against Borrower, any Affiliated Manager, any Affiliated Franchisor or any SPE Component Entity or (B) any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of Borrower’s, any Affiliated Manager’s, any Affiliated Franchisor’s or any SPE Component Entity’s assets; (iv) Borrower, any Affiliated Manager, any Affiliated Franchisor or any SPE Component Entity files an answer consenting to or otherwise affirmatively acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other Creditors Rights Laws, or solicits or causes to be solicited or colludes with petitioning creditors for any involuntary petition against it from any Person; (v) any Restricted Party (or Affiliate thereof) consents to or affirmatively acquiesces in or joins in an application for the appointment of a custodian, receiver, trustee, or examiner for Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor or any portion of the Property; (vi) Borrower, any Affiliated Manager, any Affiliated Franchisor or any SPE Component Entity makes an assignment for the benefit of creditors, or, other than to Lender or Servicer, admits, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due; (vii) any Restricted Party (or Affiliate thereof) contesting or opposing any motion made by Lender to obtain relief from the automatic stay or seeking to reinstate the automatic stay in the event of any proceeding under the Bankruptcy Code or any other Creditors Rights Laws involving Sponsor or its subsidiaries; (viii) any Restricted Party (or Affiliate thereof) taking any action in furtherance of, in collusion with respect to or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in items (i) through (vii) above; and (ix) in the event Lender receives less than the full value of its claim in any proceeding under the Bankruptcy Code or any other Creditors Rights Laws, Sponsor or any of its Affiliates receiving an equity interest or other financial benefit of any kind as a result of a “new value” plan or equity contribution.
“Benefit Amount” shall have the meaning set forth in Section 17.19 hereof.
“Borrower Group” shall mean each Borrower Party, any of their respective Affiliates and any other Person acting or failing to act at the direction of any Borrower Party or any of their respective Affiliates.
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“Borrower Party” and “Borrower Parties” shall mean each of Borrower, any SPE Component Entity, Sponsor, any Affiliated Manager, any Affiliated Franchisor and Guarantor.
“Business Day” shall mean a day on which commercial banks are not authorized or required by applicable law to close in New York, New York.
“Cash Flow Adjustments” shall mean adjustments made by Lender in its calculation of Underwritable Cash Flow and the components thereof, which such adjustments shall only include adjustments (A) for (i) items of a non-recurring nature and (ii) imminent liabilities and/or other expense increases (including, without limitation, imminent increases to Taxes and Insurance Premiums); and (B) to exclude rental income attributable to any Tenant (to the extent there are any Tenant’s in place at the Property (it being acknowledged that a standard and customary transient hotel guest shall not be deemed a Tenant for purposes hereof)) (1) in bankruptcy that has not affirmed its Lease in the applicable bankruptcy proceeding pursuant to a final, non-appealable order of a court of competent jurisdiction, (2) not paying rent under its Lease or otherwise in default under its Lease beyond any applicable notice and cure periods, (3) that has expressed its intention (directly, constructively or otherwise) to not renew, terminate, cancel and/or reject its applicable Lease, (4) whose tenancy at the Property is month-to-month and/or (5) under a Lease which expires within 6 months or less of the applicable date of calculation hereunder.
“Cash Management Account” shall have the meaning set forth in Section 9.1 hereof.
“Cash Management Provisions” shall mean the representations, covenants and other terms and conditions of this Agreement and the other Loan Documents (including, without limitation, the Restricted Account Agreement) related to, in each case, cash management and/or other related matters (including, without limitation, Article 9 hereof).
“Casualty” shall have the meaning set forth in Section 7.2 hereof.
“Casualty Consultant” shall have the meaning set forth in Section 7.4 hereof.
“Closing Date” shall mean the date of the funding of the Loan.
“Condemnation” shall mean a temporary or permanent taking by any Governmental Authority as the result, in lieu or in anticipation, of the exercise of the right of condemnation or eminent domain, of all or any part of the Property, or any interest therein or right accruing thereto, including any right of access thereto or any change of grade affecting the Property or any part thereof.
“Contribution” shall have the meaning set forth in Section 17.19 hereof.
“Control” shall mean the power to direct the management and policies of an entity, directly or indirectly, whether through the ownership of voting securities or other beneficial interests, by contract or otherwise. The terms “Controlled” and “Controlling” shall have correlative meanings.
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“Covered Rating Agency Information” shall mean any Provided Information furnished to the Rating Agencies in connection with issuing, monitoring and/or maintaining the Securities.
“Credit Card Agreement” shall have the meaning set forth in Section 9.2 hereof.
“Creditors Rights Laws” shall mean any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to its debts or debtors.
“Debt” shall mean the outstanding principal amount set forth in, and evidenced by, this Agreement and the Note together with all interest accrued and unpaid thereon and all other sums due to Lender in respect of the Loan under the Note, this Agreement or the other Loan Documents (including, without limitation, all costs and expenses payable to Lender thereunder).
“Debt Service” shall mean, with respect to any particular period of time, scheduled principal (if applicable) and interest payments hereunder.
“Debt Service Account” shall have the meaning set forth in Section 9.1 hereof.
“Debt Service Coverage Ratio” shall mean the ratio calculated by Lender on a monthly basis of (i) the Underwritable Cash Flow to (ii) the aggregate amount of debt service which would be due for the twelve (12) month period immediately preceding the date of calculation; provided, that, the foregoing shall be calculated by Lender (A) based upon the actual amount of debt service which would be due for such period and (B) assuming that the Loan had been in place for the entirety of said period.
“Default” shall mean the occurrence of any event hereunder or under the Note or the other Loan Documents which, but for the giving of notice or passage of time, or both, would be an Event of Default.
“Default Rate” shall mean, with respect to the Loan, a rate per annum equal to the lesser of (i) the Maximum Legal Rate, or (ii) four percent (4%) above the Interest Rate.
“Default Yield Maintenance Premium” shall mean an amount equal to the greater of (i) 4% of the amount of the Debt prepaid or (ii) the Yield Maintenance Premium.
“Defeasance Approval Item” shall have the meaning set forth in Section 2.8 hereof.
“Defeasance Collateral Account” shall have the meaning set forth in Section 2.8 hereof.
“Direction Notice” shall have the meaning set forth in Section 9.2 hereof.
“Disclosure Documents” shall mean, collectively and as applicable, any offering circular, prospectus, prospectus supplement, private placement memorandum or other offering document, in each case, in connection with a Securitization.
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“Eligible Account” shall mean a separate and identifiable account from all other funds held by the holding institution that is an account or accounts maintained with a federal or state- chartered depository institution or trust company which (a) complies with the definition of Eligible Institution, (b) has a combined capital and surplus of at least $50,000,000 and (c) has corporate trust powers and is acting in its fiduciary capacity. An Eligible Account will not be evidenced by a certificate of deposit, passbook or other instrument.
“Eligible Institution” shall mean (a) a depository institution or trust company insured by the Federal Deposit Insurance Corporation (i) the short term unsecured debt obligations or commercial paper of which are rated at least “A-1+” (or its equivalent) from each of the Rating Agencies (in the case of accounts in which funds are held for thirty (30) days or less) and (ii) the long term unsecured debt obligations of which are rated at least “A+” (or its equivalent) from each of the Rating Agencies (in the case of accounts in which funds are held for more than thirty (30) days) or (b) such other depository institution otherwise approved by the Rating Agencies from time-to-time.
“Embargoed Person” shall have the meaning set forth in Section 3.29 hereof.
“Environmental Indemnity” shall mean that certain Environmental Indemnity Agreement, dated as of the date hereof, executed by Borrower and Guarantor in connection with the Loan for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.
“Environmental Laws” shall have the meaning set forth in the Environmental Indemnity.
“Equity Collateral” shall have the meaning set forth in Section 11.6 hereof.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as the same may heretofore have been or shall be amended, restated, replaced or otherwise modified.
“Event of Default” shall have the meaning set forth in Section 10.1 hereof.
“Excess Cash Flow” shall have the meaning set forth in Section 9.3 hereof.
“Excess Cash Flow Account” shall have the meaning set forth in Section 8.5 hereof.
“Excess Cash Flow Funds” shall have the meaning set forth in Section 8.5 hereof.
“Exchange Act” shall mean the Securities and Exchange Act of 1934, as amended.
“Excluded Items” shall mean (i) the fees and expenses of any attorneys of any Borrower Party (whether in house or retained) and (ii) any costs incurred by any Borrower Party in connection with the cooperation obligations under Section 11.1(b) hereof to the extent that Lender reasonably determines that it needs to invoke Borrower’s cooperation obligations pursuant to Section 11.1(b) hereof as the direct result of any Borrower Party (or Affiliate thereof) committing willful misconduct, negligence, fraud, misrepresentation and/or failure to state a material fact or circumstance
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“Exculpated Parties” and “Exculpated Parties” shall mean, collectively, Borrower’s direct or indirect members, managers, shareholders, partners, officers, directors, employees, advisors or agents; provided, that, in no event shall Guarantor be deemed to be an Exculpated Party, provided, further, that, for the avoidance of doubt, Guarantor’s liability shall be governed by the Guaranty and the Environmental Indemnity.
“Family Group” shall mean, as to any natural Person, the spouse, children and grandchildren (in each case, by birth or adoption) and other lineal descendants, in each case, of such natural Person and, in each case, family trusts and/or conservatorships for the benefit of any of the foregoing Persons.
“FF&E” shall mean the replacement of furniture, fixtures and equipment from time to time in connection with the operation of the Property.
“FF&E Payment” shall have the meaning set forth in Section 8.9 hereof.
“FF&E Reserve Account” shall have the meaning set forth in Section 8.9 hereof.
“FF&E Reserve Funds” shall have the meaning set forth in Section 8.9 hereof.
“FF&E Reserve Monthly Deposit” shall have the meaning set forth in Section 8.9 hereof.
“First Monthly Payment Date” shall mean November 6, 2016.
“Fitch” shall mean Fitch, Inc.
“Flood Insurance Acts” shall have the meaning set forth in Section 7.1 hereof.
“Franchise Agreement” shall mean, individually and/or collectively (as the context requires) (a) as to the Seattle Property, (i) that certain Franchise Agreement dated as of August 2, 2016 between Hilton Franchise Holding LLC and Seattle Lessee or (ii) any Qualified Franchise Agreement entered into subsequent to the Closing Date in accordance with the terms and provisions of this Agreement and the other Loan Documents and (b) as to the SLC Property, (i) that certain Franchise Agreement dated as of August 2, 2016 between Hilton Franchise Holding LLC and SLC Lessee or (ii) any Qualified Franchise Agreement entered into subsequent to the Closing Date in accordance with the terms and provisions of this Agreement and the other Loan Documents.
“Franchise Agreement Cure Conditions” shall mean each of the following (i) Borrower has cured all defaults (if any) under the Franchise Agreement to the satisfaction of the applicable Franchisor, (ii) Borrower and the applicable Franchisor have re-affirmed the Franchise Agreement as being in full force and effect, (iii) with respect to any applicable bankruptcy or insolvency proceedings involving the applicable Franchisor and/or Franchise Agreement (if any), such Franchisor is no longer insolvent or subject to any bankruptcy or insolvency proceedings and has affirmed such Franchise Agreement pursuant to a final, non- appealable order of a court of competent jurisdiction, (iv) the Property continues to be operated, “flagged” and branded pursuant to the Franchise Agreement and (v) all Permits applicable to the related Franchise Agreement are in full force and effect. For purposes of clarification, the Franchise Agreement Cure Conditions shall only be deemed to be satisfied hereunder to the extent that each of the items listed in subsections (i) through (v) above (other than any of said items deemed inapplicable by Lender in its reasonable discretion due to the nature of the events related to the applicable Franchise Agreement Trigger Period) are fully satisfied to Lender’s reasonably satisfaction.
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“Franchise Agreement Trigger Period” shall mean a period (A) commencing upon the first to occur of (i) Borrower being in default under the Franchise Agreement beyond any applicable notice and cure periods, (ii) Borrower or Franchisor giving notice that it is terminating the Franchise Agreement, (iii) any termination or cancellation of the Franchise Agreement (including, without limitation, rejection in any bankruptcy or similar insolvency proceeding of Franchisor) and/or the Franchise Agreement expiring or otherwise failing to otherwise be in full force and effect, (iv) any bankruptcy or similar insolvency of Franchisor, (v) the Property failing to be operated, “flagged” and/or branded pursuant to the Franchise Agreement and (vi) any Permit applicable to the Franchise Agreement ceasing to be in full force in effect; and (B) expiring upon Lender’s receipt of evidence reasonably acceptable to Lender (which such evidence shall, if required by Lender, include, without limitation, a duly executed estoppel certificate and comfort letter from the applicable Franchisor, in each case, in form and substance reasonably acceptable to Lender) of (1) (a) the satisfaction of the Franchise Agreement Cure Conditions or (b) the branding, “flagging” and operation of the Property pursuant to a replacement Qualified Franchise Agreement entered into in accordance with the terms of this Agreement and the other Loan Documents (which Qualified Franchise Agreement shall be in full force and effect with no defaults thereunder) and (2) to the extent a PIP is required in connection with the foregoing, the deposit of the corresponding PIP Deposit into the PIP Reserve Account in accordance with Section 8.9 hereof.
“Franchise Renewal Event” shall mean, in connection with any Franchise Renewal Trigger Event, an event which shall occur upon Lender’s receipt of evidence reasonably acceptable to Lender (which such evidence shall include, without limitation, a duly executed estoppel certificate and comfort letter from the applicable Franchisor (in each case, in form and substance reasonably acceptable to Lender)) that (i) the related Franchise Agreement has been extended or a replacement Qualified Franchise Agreement has been entered into, in each case, for a term expiring no earlier than three (3) years after the Stated Maturity Date and otherwise in accordance with the applicable terms and conditions of this Agreement and the other Loan Documents, (ii) such Franchise Agreement (as so extended) or such replacement Qualified Franchise Agreement, as applicable, is in full force and effect with no defaults thereunder and (iii) to the extent a PIP is required in connection with the foregoing, the corresponding PIP Deposit has been deposited in the PIP Reserve Account in accordance with Section 8.9 hereof. For the purposes of the foregoing, the applicable Franchise Agreement will not fail to be deemed “entered into” and “in full force and effect” to the extent the same has been duly executed and delivered but provides that it is only effective after the expiration of the then current Franchise Agreement.
“Franchise Renewal Trigger Event” shall mean an event which shall be deemed to have occurred if a Franchise Renewal Event does not occur on or before the date which is twelve (12) months prior to the expiration of the then applicable term of the Franchise Agreement.
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“Franchise Triggers” shall have the meaning set forth in Section 4.24 hereof.
“Franchisor” shall mean, with respect to any Franchise Agreement, each applicable franchisor or other counterparty thereunder; provided, that, to the extent that any applicable Hotel Operating Agreement is owned, controlled, provided by or otherwise has no counterparty other than Borrower, Borrower shall be deemed the “Franchisor” thereunder for purposes hereof and of the other Loan Documents.
“Funding Borrower” shall have the meaning set forth in Section 17.19 hereof.
“GAAP” shall mean generally accepted accounting principles in the United States of
America as of the date of the applicable financial report.
“Government Securities” shall mean “government securities” as defined in Section 2(a)(16) of the Investment Company Act of 1940 and within the meaning of Treasury Regulation Section 1.860G-2(a)(8); provided, that, (i) such “government securities” are not subject to prepayment, call or early redemption, (ii) to the extent that any REMIC Requirements require a revised and/or alternate definition of “government securities” in connection with any defeasance hereunder, the foregoing shall be deemed amended in a manner commensurate therewith and (iii) the aforesaid laws and regulations shall be deemed to refer to the same as may be and/or may hereafter be amended, restated, replaced or otherwise modified.
“Governmental Authority” shall mean any court, board, agency, commission, office or other authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence.
“Gross Rents” shall mean an amount equal to annual rental income reflected in a current rent roll for all Tenants (other than Master Tenant) paying rent, open for business and in actual physical occupancy of their respective space demised pursuant to Leases (other than the Master Lease) which are in full force and effect (Borrower hereby represents that as of the Closing Date, the Gross Rents at the Property equal $0.00).
“Guarantor” shall mean Lightstone Value Plus REIT III LP, a Delaware limited partnership and any successor to and/or replacement of the foregoing Person, in each case, pursuant to and in accordance with the applicable terms and conditions of the Loan Documents.
“Guarantor Control Condition” shall mean a condition which shall be deemed satisfied to the extent that each Person that Controls (directly or indirectly) Borrower and, if applicable, each SPE Component Entity is, in each case, itself a current Guarantor (as distinguished from any prior Guarantor that has been replaced in accordance with the applicable terms and conditions of the Loan Documents) or Controlled (directly or indirectly) by one or more current Guarantors (as distinguished from any prior Guarantor that has been replaced in accordance with the applicable terms and conditions of the Loan Documents).
“Guaranty” shall mean that certain Limited Recourse Guaranty executed by Guarantor and dated as of the date hereof.
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“Hotel Operating Agreement” shall mean any brand, trademark, tradename, license, franchise, reservation system, logotype, mark, listing system, hotel operating system (including, without limitation, any of the foregoing owned or otherwise controlled by Borrower, Sponsor or Guarantor or any of their respective Affiliates) and any agreements and/or rights to use the foregoing (by law, contract or otherwise), in each case, as would be commonly subsumed into a hotel franchise agreement.
“Hotel Provisions” shall mean the representations, covenants and other terms and conditions of this Agreement and the other Loan Documents related to, in each case, the operation of the Properties as hotels (including, without limitation, provisions relating to each Franchise Agreement).
“Immediate Repair Account” shall have the meaning set forth in Section 8.1 hereof.
“Immediate Repair Funds” shall have the meaning set forth in Section 8.1 hereof.
“Immediate Repairs” shall have the meaning set forth in Section 8.1 hereof.
“Improvements” shall mean, individually and/or collectively (as the context requires), the “Improvements” as defined in each applicable Security Instrument.
“Indebtedness” shall mean, for any Person, any indebtedness or other similar obligation for which such Person is obligated (directly or indirectly, by contract, operation of law or otherwise), including, without limitation, (i) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit, or for the deferred purchase price of property for which such Person or its assets is liable, (ii) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable if such amounts were advanced thereunder, (iii) all amounts required to be paid by such Person by contract and/or as a guaranteed payment (including, without limitation, any such amounts required to be paid to partners and/or as a preferred or special dividend, including any mandatory redemption of shares or interests), (iv) all indebtedness incurred and/or guaranteed by such Person, directly or indirectly (including, without limitation, contractual obligations of such Person), (v) all obligations under leases that constitute capital leases for which such Person is liable, (vi) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss and (vii) any property-assessed clean energy loans or similar indebtedness, including, without limitation, if such loans or indebtedness are made or otherwise provided by any Governmental Authority and/or secured or repaid (directly or indirectly) by any taxes or similar assessments.
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“Indemnified Parties” shall mean (a) Lender, (b) any successor owner or holder of the Loan or participations in the Loan, (c) any Servicer or prior Servicer of the Loan, (d) any Investor or any prior Investor in any Securities, (e) any trustees, custodians or other fiduciaries who hold or who have held a full or partial interest in the Loan for the benefit of any Investor or other third party, (f) any receiver or other fiduciary appointed in a foreclosure or other Creditors Rights Laws proceeding, (g) any officers, directors, shareholders, partners, members, employees, agents, servants, representatives, contractors, subcontractors, Affiliates or subsidiaries of any and all of the foregoing, and (h) the heirs, legal representatives, successors and assigns of any and all of the foregoing (including, without limitation, any successors by merger, consolidation or acquisition of all or a substantial portion of the Indemnified Parties’ assets and business), in all cases whether during the term of the Loan or as part of or following a foreclosure of the Loan.
“Independent Director” shall have the meaning set forth in Section 5.2 hereof.
“Individual Property” shall mean each parcel of real property, the Improvements thereon and all personal property owned by the applicable Borrower and encumbered by the applicable Security Instrument, together with all rights pertaining to such property and Improvements, as more particularly described in the granting clauses of the applicable Security Instrument and referred to therein as the “Property.”
“Insurance Account” shall have the meaning set forth in Section 8.6 hereof.
“Insurance Payment Date” shall mean, with respect to any applicable Policies, the date occurring 30 days prior to the date the applicable Insurance Premiums associated therewith are due and payable.
“Insurance Premiums” shall have the meaning set forth in Section 7.1 hereof.
“Intellectual Property” shall have the meaning set forth in Section 3.33 hereof.
“Interest Accrual Period” shall mean the period beginning on (and including) the sixth (6th) day of each calendar month during the term of the Loan and ending on (and including) the fifth (5th) day of the next succeeding calendar month.
“Interest Rate” shall mean a rate per annum equal to 4.73%.
“Interest Shortfall” shall have the meaning set forth in Section 2.7 hereof.
“Investor” shall mean any investor or potential investor in the Loan (or any portion thereof or interest therein) in connection with any Secondary Market Transaction.
“IRS Code” shall mean the Internal Revenue Code of 1986, as amended from time to time or any successor statute.
“Land” shall mean, individually and/or collectively (as the context requires), the “Land”
as defined in each applicable Security Instrument.
“Lease” shall have the meaning set forth in the Security Instrument; provided, however, notwithstanding anything in the Security Instrument to the contrary, for purposes of this Agreement, the term “Lease" shall exclude the rental of hotel rooms to transient guests and the temporary, transient rental of conference room and meeting space for special events, in each case, in the ordinary course of business at the Property.
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“Legal Requirements” shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting Borrower or the 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, including, without limitation, the Americans with Disabilities Act of 1990, and all Permits, 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 Borrower or the Property or any part thereof, including, without limitation, any which may (i) require repairs, modifications or alterations in or to the Property or any part thereof, or (ii) in any way limit the use and enjoyment thereof.
“Lender Control Date” shall mean, following an exercise of remedies under the Loan Documents, the earlier to occur of (i) the date that Lender takes title to the Property in connection with an exercise of remedies under the Loan Documents and controls the Property to the exclusion of any Borrower Party or any Affiliate thereof and (ii) the date that any receiver appointed in connection with Lender’s remedies under the Loan Documents takes physical possession of and controls the Property, in each case, to the exclusion of any Borrower Party or any Affiliate thereof.
“Liabilities” shall have the meaning set forth in Section 11.2 hereof.
“Loan” shall mean the loan made by Lender to Borrower pursuant to this Agreement.
“Loan Bifurcation” shall have the meaning set forth in Section 11.1 hereof.
“Loan Documents” shall mean, collectively, this Agreement, the Note, the Security Instrument, the Environmental Indemnity, the Assignment of Management Agreement, the Guaranty and all other documents executed and/or delivered in connection with the Loan, as each of the same may be amended, restated, replaced, extended, renewed, supplemented or otherwise modified from time to time.
“Losses” shall mean (except to the extent that any such items arise solely from the illegal acts, gross negligence or willful misconduct of Lender or, to the extent applicable, the Indemnified Party seeking indemnification for the applicable Loss) any and all losses, damages, costs, fees, expenses, claims, suits, judgments, awards, liabilities (including but not limited to strict liabilities), obligations, debts, diminutions in value, fines, penalties, charges, amounts paid in settlement, foreseeable and unforeseeable consequential damages (it being acknowledged that consequential and/or punitive damages shall be covered by this definition solely to the extent such consequential damages and/or punitive damages are actually paid or payable to third parties by any party seeking indemnification for Losses), litigation costs and attorneys’ fees, in the case of each of the foregoing, of whatever kind or nature and whether or not incurred in connection with any judicial or administrative proceedings, actions, claims, suits, judgments or awards.
“Management Agreement” shall mean individually and/or collectively (as the context may require), each management agreement entered into by and between Borrower and Manager, pursuant to which Manager is to provide management and other services with respect to the Property or any portion thereof, as the same may be amended, restated, replaced, extended, renewed, supplemented or otherwise modified from time to time.
| - 13 - |
“Manager” shall mean (i) with respect to each Individual Property, Island Hospitality Management II, LLC or (ii) such other Person selected as the manager of any applicable Individual Property in accordance with the terms of this Agreement or the other Loan Documents.
“Master Lease” shall mean, individually and/or collectively (as the context may require), (i) that certain Lease Agreement dated as of August 2, 2016 by and between Seattle Fee Owner and Seattle Lessee and (ii) that certain Lease Agreement dated as of August 2, 2016 by and between SLC Fee Owner and SLC Lessee, as each of the same may be modified by the applicable Master Lease Estoppel and may be further amended, restated, replaced, supplemented or otherwise modified from time to time in accordance with the terms and conditions hereof.
“Master Lease Estoppel” shall mean, individually and/or collectively (as the context may require), (i) that certain Master Lease Estoppel and Agreement dated as of the date hereof by and among Lender, Seattle Fee Owner and Seattle Lessee and (ii) that certain Master Lease Estoppel and Agreement dated as of the date hereof by and among Lender, SLC Fee Owner and SLC Lessee, as each of the same may be amended, restated, replaced, supplemented or otherwise modified from time to time in accordance with the terms and conditions hereof.
“Master Lease Provisions” shall mean the representations, covenants and other terms and conditions of this Agreement and the other Loan Documents related to, in each case, the Master Lease.
“Master Tenant” shall mean, individually and/or collectively (as the context may require), then then current tenant under each Master Lease.
“Material Action” shall mean with respect to any Person, any action to consolidate or merge such Person with or into any Person, or sell all or substantially all of the assets of such Person, or to institute proceedings to have such Person be adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency proceedings against such Person or file a petition seeking, or consent to, reorganization or relief with respect to such Person under any applicable federal or state law relating to bankruptcy, or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of such Person or a substantial part of its property, or make any assignment for the benefit of creditors of such Person, or admit in writing such Person’s inability to pay its debts generally as they become due, or take action in furtherance of any such action, or, to the fullest extent permitted by law, dissolve or liquidate such Person.
“Material Adverse Effect” shall mean a material adverse effect on (i) the Property or any material portion thereof, (ii) the business, profits, operations or condition (financial or otherwise) of Borrower, Guarantor, Sponsor or the Property or any material portion thereof, (iii) the enforceability, validity, perfection or priority of the lien of the Security Instrument or the other Loan Documents, or (iv) the ability of Borrower and/or Guarantor to perform its obligations under the Security Instrument or the other Loan Documents.
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“Maturity Date” shall mean the Stated Maturity Date or such other date on which the final payment of the principal amount of the Loan becomes due and payable as herein provided, whether at the Stated Maturity Date, by declaration of acceleration, or otherwise.
“Maximum Legal Rate” shall mean the maximum non-usurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness evidenced by the Note and as provided for herein or the other Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the Loan.
“Member” is defined in Section 5.1 hereof.
“Mezzanine Borrower” shall have the meaning set forth in Section 11.6 hereof.
“Mezzanine Option” shall have the meaning set forth in Section 11.6 hereof.
“Minimum Disbursement Amount” shall mean Fifteen Thousand and No/100 Dollars ($15,000).
“Monthly Debt Service Payment Amount” shall mean, for the First Monthly Payment Date and for each Monthly Payment Date occurring thereafter, a constant monthly payment of $147,805.67.
“Monthly Insurance Deposit” shall have the meaning set forth in Section 8.6 hereof.
“Monthly Payment Date” shall mean the First Monthly Payment Date and the sixth (6th) day of every calendar month occurring thereafter during the term of the Loan.
“Monthly Tax Deposit” shall have the meaning set forth in Section 8.6 hereof. “Moody’s” shall mean Moody’s Investor Service, Inc.
“Net Proceeds” shall mean: (i) the net amount of all insurance proceeds payable as a result of a Casualty to any Individual Property, after deduction of reasonable costs and expenses (including, but not limited to, reasonable attorneys’ fees), if any, in collecting such insurance proceeds, or (ii) the net amount of the Award, after deduction of reasonable costs and expenses (including, but not limited to, reasonable attorneys’ fees), if any, in collecting such Award.
“Net Proceeds Deficiency” shall have the meaning set forth in Section 7.4 hereof.
“New Franchisor” shall mean, individually and/or collectively (as the context requires), each Person engaged as a Franchisor subsequent to the Closing Date (including, without limitation, any Person replacing or becoming the assignee of any then current Franchisor) in accordance with the applicable terms and conditions hereof.
“New Manager” shall mean any Person replacing or becoming the assignee of the then current Manager, in each case, in accordance with the applicable terms and conditions hereof.
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“New Non-Consolidation Opinion” shall mean a substantive non-consolidation opinion provided by outside counsel reasonably acceptable to Lender and the Rating Agencies and otherwise in form and substance reasonably acceptable to Lender and the Rating Agencies.
“Non-Conforming Policy” shall have the meaning set forth in Section 7.1 hereof.
“Non-Consolidation Opinion” shall mean that certain substantive non-consolidation opinion delivered to Lender by Eckert Seamans Cherin & Mellott, LLC in connection with the closing of the Loan.
“Note” shall mean that certain Promissory Note of even date herewith in the principal amount of $28,400,000, made by Borrower in favor of Lender, as the same may be amended, restated, replaced, extended, renewed, supplemented, severed, split, or otherwise modified from time to time.
“Obligations” shall have the meaning set forth in Section 17.19 hereof.
“OFAC” shall have the meaning set forth in Section 3.30 hereof.
“Officer’s Certificate” shall mean a certificate delivered to Lender by Borrower which is signed by Responsible Officer of Borrower.
“Op Ex Monthly Deposit” shall have the meaning set forth in Section 8.4 hereof.
“Operating Expense Account” shall have the meaning set forth in Section 8.4 hereof.
“Operating Expense Funds” shall have the meaning set forth in Section 8.4 hereof.
“Operating Expenses” shall mean the total of all expenditures, computed in accordance with the Approved Accounting Method, of whatever kind relating to the operation, occupancy, maintenance and management of the Property that are incurred on a regular monthly or other periodic basis, including without limitation, (and without duplication) (a) utilities, ordinary repairs and maintenance, insurance, license fees, property taxes and assessments, advertising expenses, payroll and related taxes, computer processing charges, management fees (equal to the greater of (x) three percent (3%) of the sum of (A) Operating Income for the trailing twelve (12) month period plus (B) Gross Rents or (y) actual management fees payable under the Management Agreement), franchise fees (i.e. as of the Closing Date, the program fee and the royalty fee under each Franchise Agreement) (equal to: (I) with respect to the Seattle Property, the greater of (x) 6% of the sum of (A) Operating Income for the trailing twelve (12) month period relating to the Seattle Property plus (B) Gross Rents relating the Seattle Property or (y) actual franchise fees payable under the Franchise Agreement relating to the Seattle Property and (II) with respect to the SLC Property, the greater of 8% of the sum of (A) Operating Income for the trailing twelve (12) month period relating to the SLC Property plus (B) Gross Rents relating the SLC Property or (y) actual franchise fees payable under the Franchise Agreement relating to the SLC Property), operational equipment or other lease payments as approved by Lender (including, without limitation, under the Master Lease), but specifically excluding (i) depreciation, (ii) Debt Service, (iii) non-recurring or extraordinary expenses, and (iv) deposits into the Reserve Funds; (b) normalized FF&E equal to (I) with respect to the Seattle Property, the greater of: (x) 4% of annual gross revenue generated by the hotel related operations at the Seattle Property and (y) the amount required by any Franchise Agreement or similar agreement in place at the Seattle Property and (II) with respect to the SLC Property, the greater of: (x) 6.5% of annual gross revenue generated by the hotel related operations at the SLC Property and (y) the amount required by any Franchise Agreement or similar agreement in place at the SLC Property.
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“Operating Income” shall mean all income, computed in accordance with the Approved Accounting Method, derived from the ownership and operation of the Property from whatever source, including, without limitation (but without duplication) (a) all income and proceeds received from rental of rooms, commercial space, meeting, conference and/or banquet space within the Property; (b) all income and proceeds received from food and beverage operations and from catering services conducted from the Property; (c) all income and proceeds from business interruption, rental interruption and use and occupancy insurance with respect to the operation of the Property (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); (d) all Awards for temporary use (after deducting therefrom all costs incurred in the adjustment or collection thereof and in Restoration of the Property); (e) all refunds of any items included in “Operating Expenses”; (f) all income and proceeds from judgments, settlements and other resolutions of disputes with respect to matters which would be includable in this definition of “Operating Income” if received in the ordinary course of the Property operation (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); and (g) all other incidental income in connection with the operation of the Property; but excluding (1) rental income derived from Leases (other than percentage rents (if applicable) and rents paid under the Master Lease) and gross receipts received by lessees, managers, licensees or concessionaires of the Property (including, without limitation, any Manager); (2) consideration received at the Property for hotel accommodations, goods and services to be provided at other hotels, although arranged by, for or on behalf of Borrower or Manager; (3) sales, occupancy, use or other taxes on receipts required to be paid to any Governmental Authority; (4) interest income from any source other than the Reserve Accounts; (5) non-recurring or extraordinary income (including, without limitation, lease termination payments) and proceeds from the sale or other disposition of goods, capital assets and other items not in the ordinary course of the Property operation (such as the sales of furniture, fixtures and equipment); (6) federal, state and municipal excise, sales and use taxes collected directly from patrons or guests of the Property as a part of or based on the sales price of any goods, services or other items, such as gross receipts, room, admission, cabaret or equivalent taxes; (7) Awards (except to the extent provided in clause (d) above) or insurance proceeds (except to the extent provided in clause (c) above); (8) refunds of amounts not included in Operating Expenses at any time and uncollectible accounts; (9) gratuities collected by the Property employees; (10) the proceeds of any financing; (11) other income or proceeds resulting other than from the use or occupancy of the Property, or any part thereof, or other than from the sale of goods, services or other items sold on or provided from the Property in the ordinary course of business; (12) uncollectable accounts and any credits or refunds made to customers, guests or patrons in the form of allowances or adjustments to previously recorded revenues; (13) unforfeited security deposits, utility and other similar deposits; and (14) any disbursements to Borrower from the Reserve Funds.. Operating Income shall not be diminished as a result of the Security Instrument or the creation of any intervening estate or interest in the Property or any part thereof. Notwithstanding the foregoing or anything to the contrary contained herein or in any other Loan Document, “Gross Rents” and “Operating Income” shall be calculated hereunder without duplication of one another or of any individual item contained within the definitions thereof.
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“Other Charges” shall mean all maintenance charges, impositions other than Taxes, and any other charges, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Property, now or hereafter levied or assessed or imposed against the Property or any part thereof.
“Patriot Act” shall have the meaning set forth in Section 3.30 hereof.
“Permits” shall mean all certificates, licenses, permits, franchises, trade names, certificates of occupancy, consents, Intellectual Property, and other approvals (governmental and otherwise) necessary for the operation of each Individual Property (including, without limitation, the operation of all “amenities” in place as of the Closing Date and any additional future “amenities” that are then in place) and the conduct of Borrower’s business (including, without limitation, all required zoning, building code, land use, environmental, public assembly and other similar permits or approvals).
“Permitted Encumbrances” shall mean, with respect to each Individual Property, collectively, (a) the lien and security interests created by this Agreement and the other Loan Documents, (b) all liens, encumbrances and other matters disclosed in the applicable Title Insurance Policy, (c) liens, if any, for Taxes imposed by any Governmental Authority not yet due or delinquent and (d) such other title and survey exceptions as Lender has approved or may approve in writing in Lender’s sole discretion.
“Permitted Equipment Leases” shall mean equipment leases or other similar instruments entered into with respect to the Personal Property; provided, that, in each case, such equipment leases or similar instruments (i) are entered into on commercially reasonable terms and conditions in the ordinary course of Borrower’s business and (ii) relate to Personal Property which is (A) used in connection with the operation and maintenance of the applicable Individual Property in the ordinary course of Borrower’s business and (B) readily replaceable without material interference or interruption to the operation of the applicable Individual Property.
“Permitted Investments” shall mean “permitted investments” as then defined and required by the Rating Agencies.
“Person” shall mean any individual, corporation, partnership, joint venture, limited liability company, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any other entity and, in each case, any fiduciary acting in such capacity on behalf of any of the foregoing.
“Personal Property” shall mean, individually and/or collectively (as the context requires), the “Personal Property” as defined in each applicable Security Instrument.
“PIP” shall mean any property improvement plan or similar requirement under the Franchise Agreement.
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“PIP Completion Evidence” shall mean, with respect to any PIP, evidence reasonably acceptable to Lender that the related PIP Work has been (x) completed in a good, workmanlike and lien free manner in accordance with this Agreement, the Franchise Agreement and applicable Legal Requirements and (y) paid for in full, which such evidence shall include, without limitation, (a) written certification from Borrower and the Franchisor confirming the foregoing, (b) at Lender’s discretion, an inspection of the Property by Lender and/or its agents confirming the foregoing, (c) lien waivers and releases from all parties furnishing materials and/or services in connection therewith and (d) a title search for the Property confirming that only Permitted Encumbrances exist and no liens, lis pendens or similar matters have been filed in connection with the related PIP Work.
“PIP Deposit” shall have the meaning set forth in Section 8.9 hereof.
“PIP Reserve Account” shall have the meaning set forth in Section 8.9 hereof. “PIP Reserve Funds” shall have the meaning set forth in Section 8.9 hereof.
“PIP Reserve Minimum Balance” shall mean, with respect to any PIP, an amount equal to 10% of the corresponding PIP Deposit.
“PIP Work” shall mean, with respect to any PIP for which Borrower makes a PIP Deposit in accordance with the terms hereof, the work that is the subject thereof.
“Policies” shall have the meaning specified in Section 7.1 hereof.
“Prohibited Transfer” shall have the meaning set forth in Section 6.2 hereof.
“Property” and “Properties” shall mean, individually and/or collectively (as the context requires), each Individual Property which is subject to the terms hereof and of the other Loan Documents.
“Property Document” shall mean, individually or collectively (as the context may require), the following: (i) the Franchise Agreement and (ii) the Master Lease.
“Property Document Event” shall mean any event which would, directly or indirectly, cause a termination right, right of first refusal, first offer or any other similar right, cause any termination fees to be due or would cause a Material Adverse Effect to occur under any Property Document (in each case, beyond any applicable notice and cure periods under the applicable Property Document); provided, however, any of the foregoing shall not be deemed a Property Document Event to the extent Lender’s prior written consent is obtained with respect to the same.
“Property Document Provisions” shall mean the representations, covenants and other terms and conditions of this Agreement and the other Loan Documents related to, in each case, any Property Document.
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“Provided Information” shall mean any information provided by or on behalf of any Borrower Party in connection with the Loan, the Property, such Borrower Party and/or any related matter or Person.
“Prudent Lender Standard” shall, with respect to any matter, be deemed to have been met if the matter in question (i) prior to a Securitization, is reasonably acceptable to Lender and (ii) after a Securitization, (A) if permitted by REMIC Requirements applicable to such matter, would be reasonably acceptable to Lender or (B) if the Lender discretion in the foregoing subsection (A) is not permitted under such applicable REMIC Requirements, would be acceptable to a prudent lender of securitized commercial mortgage loans.
“Qualified Franchise Agreement” shall mean a franchise, trademark and license agreement with respect to the Property with a Qualified Franchisor containing all applicable Hotel Operating Agreements which is approved by Lender in writing (which such approval may be conditioned upon Lender’s receipt of a Rating Agency Confirmation with respect to such agreement).
“Qualified Franchisor” shall mean a reputable and experienced franchisor possessing experience in flagging hotel properties similar in size, scope, use and value as the Property and approved by Lender in writing (which such approval may be granted or withheld in Lender’s reasonable discretion and may be conditioned upon Lender’s receipt of a Rating Agency Confirmation with respect to such Person).
“Qualified Insurer” shall have the meaning set forth in Section 7.1 hereof.
“Qualified Management Agreement” shall mean a management agreement with a Qualified Manager with respect to the applicable Individual Property which is approved by Lender in writing (which such approval may be conditioned upon Lender's receipt of a Rating Agency Confirmation with respect to such management agreement).
“Qualified Manager” shall mean a Person approved by Lender in writing (which such approval may be conditioned upon Lender's receipt of a Rating Agency Confirmation with respect to such Person).
“Rating Agencies” shall mean each of S&P, Moody’s, Fitch and any other nationally- recognized statistical rating agency designated by Lender (and any successor to any of the foregoing) in connection with and/or in anticipation of any Secondary Market Transaction.
“Rating Agency Condition” shall be deemed to exist if (i) any Rating Agency fails to respond to any request for a Rating Agency Confirmation with respect to any applicable matter or otherwise elects (orally or in writing) not to consider any applicable matter or (ii) Lender (or its Servicer) is not required to and/or elects not to obtain (or cause to be obtained) a Rating Agency Confirmation with respect to any applicable matter, in each case, pursuant to and in compliance with any pooling and servicing agreement(s) or similar agreement(s), in each case, relating to the servicing and/or administration of the Loan.
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“Rating Agency Confirmation” shall mean (i) prior to a Securitization or if the Rating Agency Condition exists, that Lender has (in consultation with the Rating Agencies (if required by Lender)) approved the matter in question in writing based upon Lender’s good faith determination of applicable Rating Agency standards and criteria and (ii) from and after a Securitization (to the extent the Rating Agency Condition does not exist), a written affirmation from each of the Rating Agencies (obtained at Borrower’s sole cost and expense) that the credit rating of the Securities by such Rating Agency immediately prior to the occurrence of the event with respect to which such Rating Agency Confirmation is sought will not be qualified, downgraded or withdrawn as a result of the occurrence of such event, which affirmation may be granted or withheld in such Rating Agency’s sole and absolute discretion.
“Registrar” shall have the meaning set forth in Section 11.7 hereof.
“Regulation AB” shall mean Regulation AB under the Securities Act and the Exchange Act, as such Regulation may be amended from time to time.
“Reimbursement Contribution” shall have the meaning set forth in Section 17.19 hereof.
“Release Date” shall mean the earlier to occur of (i) the fourth anniversary of the Closing Date and (ii) the date that is two (2) years from the “startup day” (within the meaning of Section 860G(a)(9) of the IRS Code) of the REMIC Trust established in connection with the last Securitization involving any portion of or interest in the Loan.
“Remaining Loan” shall have the meaning set forth in Section 11.8 hereof.
“Remaining Loan Documents” shall have the meaning set forth in Section 11.8 hereof.
“REMIC Opinion” shall mean, as to any matter, an opinion as to the compliance of such matter with applicable REMIC Requirements (which such opinion shall be, in form and substance and from a provider, in each case, reasonably acceptable to Lender and acceptable to the Rating Agencies).
“REMIC Payment” shall have the meaning set forth in Section 7.3 hereof.
“REMIC Requirements” shall mean any applicable legal requirements relating to any REMIC Trust (including, without limitation, those relating to the continued treatment of the Loan (or the applicable portion thereof and/or interest therein) as a “qualified mortgage” held by such REMIC Trust, the continued qualification of such REMIC Trust as such under the IRS Code, the non-imposition of any tax on such REMIC Trust under the IRS Code (including, without limitation, taxes on “prohibited transactions and “contributions”) and any other constraints, rules and/or other regulations and/or requirements relating to the servicing, modification and/or other similar matters with respect to the Loan (or any portion thereof and/or interest therein) that may now or hereafter exist under applicable legal requirements (including, without limitation under the IRS Code)).
“REMIC Trust” shall mean any “real estate mortgage investment conduit” within the meaning of Section 860D of the IRS Code that holds any interest in all or any portion of the Loan.
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“Rent Loss Proceeds” shall have the meaning set forth in Section 7.1 hereof.
“Rents” shall have the meaning set forth in the Security Instrument.
“Reporting Failure” shall have the meaning set forth in Section 4.12 hereof.
“Required Financial Item” shall have the meaning set forth in Section 4.12 hereof.
“Reserve Accounts” shall mean the Tax Account, the Insurance Account, the FF&E Reserve Account, the PIP Reserve Account, the Immediate Repair Account, the Excess Cash Flow Account, the Operating Expense Account and any other escrow account established by this Agreement or the other Loan Documents (but specifically excluding the Cash Management Account, the Restricted Account and the Debt Service Account).
“Reserve Funds” shall mean the Tax and Insurance Funds, the FF&E Reserve Funds, the PIP Reserve Funds, the Immediate Repair Funds, the Excess Cash Flow Funds, the Operating Expense Funds and any other escrow funds established by this Agreement or the other Loan Documents.
“Responsible Officer” means with respect to a Person, the chairman of the board, president, chief operating officer, chief financial officer, treasurer or vice president of such Person or such other similar officer of such Person reasonably acceptable to Lender.
“Restoration” shall mean, following the occurrence of a Casualty or a Condemnation which is of a type necessitating the repair of the Property (or any portion thereof), the completion of the repair and restoration of the Property (or applicable portion thereof) as nearly as possible to the condition the Property (or applicable portion thereof) was in immediately prior to such Casualty or Condemnation, with such alterations as may be reasonably approved by Lender.
“Restoration Retainage” shall have the meaning set forth in Section 7.4 hereof.
“Restoration Threshold” shall mean, with respect to each Individual Property, an amount equal to 5% of the outstanding principal amount of the Allocated Loan Amount attributable to such Individual Property.
“Restricted Account” shall have the meaning set forth in Section 9.1 hereof.
“Restricted Account Agreement” shall mean, individually and/or collectively, as the context shall require, those two (2) certain Deposit Account Control Agreements (one (1) for each Individual Property) by and among the applicable Borrowers, Lender and Wells Fargo Bank, National Association, dated as of the date hereof, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time in accordance with the terms hereof.
“Restricted Party” shall have the meaning set forth in Section 6.1 hereof.
“Sale or Pledge” shall have the meaning set forth in Section 6.1 hereof.
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“Sanctions” shall have the meaning set forth in Section 3.30 hereof.
“Scheduled Defeasance Payments” shall mean scheduled payments of interest and principal hereunder for all Monthly Payment Dates occurring after the Total Defeasance Date and up to and including the Stated Maturity Date (including the outstanding principal balance and accrued interest on the Loan as of the Stated Maturity Date) and all payments required after the Total Defeasance Date, if any, under the Loan Documents for servicing fees, rating surveillance charges (to the extent applicable) and other similar charges.
“Scheduled PIP” shall mean the work described on each PIP attached hereto as Schedule II.
“Seattle Property” shall mean the Individual Property owned as of the date hereof by Seattle Fee Owner.
“Secondary Market Transaction” shall have the meaning set forth in Section 11.1 hereof.
“Securities” shall have the meaning set forth in Section 11.1 hereof.
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Securitization” shall have the meaning set forth in Section 11.1 hereof.
“Security Agreement” shall mean a pledge and security agreement in form and substance satisfying the Prudent Lender Standard pursuant to which Borrower grants Lender a perfected, first priority security interest in the Defeasance Collateral Account and the Total Defeasance Collateral.
“Security Deposits” shall mean any advance deposits or any other deposits collected with respect to the Property, whether in the form of cash, letter(s) of credit or other cash equivalents (including, without limitation, such deposits made in connection with any Lease).
“Security Instrument” and “Security Instruments” shall mean individually and/or collectively (as the context requires), each Fee and Leasehold Deed of Trust and Security Agreement dated the date hereof, executed and delivered by each applicable Borrower as security for the Loan and encumbering the Property (or any portion thereof), as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.
“Security Instrument Taxes” shall have the meaning set forth in Section 15.2 hereof.
“Servicer” shall have the meaning set forth in Section 11.4 hereof.
“Severed Loan Documents” shall have the meaning set forth in Article 10.
“Single Purpose Entity” shall mean an entity whose structure and organizational and governing documents are otherwise in form and substance acceptable to the Rating Agencies and satisfying the Prudent Lender Standard.
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“SLC Property” shall mean the Individual Property owned as of the date hereof by SLC Fee Owner.
“Special Member” is defined in Section 5.1 hereof.
“SPE Component Entity” shall have the meaning set forth in Section 5.1 hereof.
“Sponsor” shall mean Lightstone Value Plus REIT III LP, a Delaware limited partnership.
“S&P” shall mean Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
“State” shall mean the applicable state in which the applicable Individual Property is located.
“Stated Maturity Date” shall mean October 6, 2021.
“Sufficient Revenue” shall mean, with respect to any applicable item, revenue generated by the Property in the twelve (12) month period immediately preceding the applicable date of determination in an amount sufficient to pay for the same.
“Successor Borrower” shall have the meaning set forth in Section 2.8 hereof.
“Survey” shall mean, individually or collectively (as the context requires), each survey of each Individual Property certified and delivered to Lender in connection with the closing of the Loan.
“Tax Account” shall have the meaning set forth in Section 8.6 hereof.
“Tax and Insurance Funds” shall have the meaning set forth in Section 8.6 hereof.
“Taxes” shall mean all taxes, assessments, water rates, sewer rents, and other governmental impositions, including, without limitation, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Land, now or hereafter levied or assessed or imposed against the Property or any part thereof.
“Tax Payment Date” shall mean, with respect to any applicable Taxes, the date occurring 30 days prior to the date the same are due and payable.
“Tenant” shall mean any Person leasing, subleasing or otherwise occupying any portion of the Property under a Lease or other occupancy agreement.
“Third Party Reports” shall mean those certain third party reports relating to the physical condition of the Property delivered and certified to Lender, in each case, in connection with the closing of the Loan.
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“Title Insurance Policy” shall mean those certain ALTA mortgagee title insurance policies issued with respect to each Individual Property and insuring the lien of the Security Instruments.
“To Borrower’s knowledge”, “to the best of Borrower’s knowledge” or words of similar import shall mean the actual knowledge of those natural Persons directly or indirectly Controlling Borrower, controlling the day of day operation of the Property (including, without limitation, any Affiliated Manager) or principally employed by Borrower or Affiliated Manager to manage or operate Borrower or the Property.
“Total Defeasance Collateral” shall mean Government Securities, which provide payments (i) on or prior to, but as close as possible to, the Business Day immediately preceding all Monthly Payment Dates and other scheduled payment dates, if any, hereunder after the Total Defeasance Date and up to and including the Stated Maturity Date, and (ii) in amounts equal to or greater than the Scheduled Defeasance Payments relating to such Monthly Payment Dates and other scheduled payment dates.
“Total Defeasance Date” shall have the meaning set forth in Section 2.8 hereof.
“Total Defeasance Event” shall have the meaning set forth in Section 2.8 hereof.
“Trigger Period” shall mean a period (A) commencing upon the earliest of (i) the occurrence and continuance of an Event of Default, (ii) the Debt Service Coverage Ratio being less than 1.25 to 1.00, (iii) the occurrence of a Franchise Agreement Trigger Period, (iv) the occurrence of a Franchise Renewal Trigger Event and (v) if Manager shall be involved in any bankruptcy or insolvency proceeding which would violate Section 10.1(f) hereof (assuming for the purposes of this clause (v) only that the provisions of Section 10.1(f) applied to Manager in the same manner that they apply to Borrower); and (B) expiring upon (v) with regard to any Trigger Period commenced in connection with clause (i) above, the cure (if applicable) of such Event of Default, (w) with regard to any Trigger Period commenced in connection with clause (ii) above, the date that the Debt Service Coverage Ratio is equal to or greater than 1.30 to 1.00 for two (2) consecutive calendar quarters, (x) with regard to any Trigger Period commenced in connection with clause (iii) above, a Franchise Agreement Trigger Period ceasing to exist in accordance with the terms hereof, (y) with regard to any Trigger Period commenced in connection with clause (iv) above, the occurrence of a Franchise Renewal Event and (z) with regard to any Trigger Period commenced in connection with clause (v) above, Borrower’s replacement of the applicable Manager in accordance with the terms hereof with a New Manager. Notwithstanding the foregoing, a Trigger Period shall not be deemed to expire in the event that a Trigger Period then exists for any other reason.
“True Up Payment” shall mean a payment into the applicable Reserve Account of a sum which, together with any applicable monthly deposits into the applicable Reserve Account, will be sufficient to discharge the obligations and liabilities for which such Reserve Account was established as and when reasonably appropriate. The amount of the True Up Payment shall be determined by Lender in its reasonable discretion and shall be final and binding absent manifest error.
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“UCC” or “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in the State.
“Unaffected Property” shall have the meaning set forth in Section 11.8 hereof.
“Uncrossed Loan” shall have the meaning set forth in Section 11.8 hereof.
“Uncrossed Loan Documents” shall have the meaning set forth in Section 11.8 hereof.
“Uncrossing Event” shall have the meaning set forth in Section 11.8 hereof.
“Underwritable Cash Flow” shall mean an amount calculated by Lender on a monthly basis equal to the sum of Gross Rents plus the trailing twelve (12) months Operating Income, less the trailing twelve (12) months Operating Expenses, each of which shall be subject to Lender’s application of the Cash Flow Adjustments. Lender’s calculation of Underwritable Cash Flow (including determination of items that do not qualify as Operating Income or Operating Expenses) shall be reasonably calculated by Lender in good faith based upon Lender’s reasonable determination of Rating Agency criteria.
“Underwriter Group” shall have the meaning set forth in Section 11.2 hereof.
“Updated Information” shall have the meaning set forth in Section 11.1 hereof.
“U.S. Obligations” shall mean direct full faith and credit obligations of the United States of America that are not subject to prepayment, call or early redemption.
“Uniform System of Accounts” shall mean the most recent edition of the Uniform System of Accounts for Hotels, as adopted by the American Hotel and Motel Association.
“Vcorp” shall mean Vcorp Entity Services, LLC.
“Work Charge” shall have the meaning set forth in Section 4.16 hereof.
“Yield Maintenance Premium” shall mean an amount equal to the greater of (a) an amount equal to 1% of the amount prepaid; or (b) an amount equal to the present value as of the date on which the prepayment is made of the Calculated Payments (as defined below) from the date on which the prepayment is made through the Stated Maturity Date determined by discounting such payments at the Discount Rate (as defined below). As used in this definition, the term “Calculated Payments” shall mean the monthly payments of interest only which would be due based on the principal amount of the Loan being prepaid on the date on which prepayment is made and assuming an interest rate per annum equal to the difference (if such difference is greater than zero) between (y) the Interest Rate and (z) the Yield Maintenance Treasury Rate (as defined below). As used in this definition, the term “Discount Rate” shall mean the rate which, when compounded monthly, is equivalent to the Yield Maintenance Treasury Rate (as defined below), when compounded semi-annually. As used in this definition, the term “Yield Maintenance Treasury Rate” shall mean the yield calculated by Lender by the linear interpolation of the yields, as reported in the Federal Reserve Statistical Release H.15- Selected Interest Rates under the heading “U.S. Government Securities/Treasury Constant Maturities” for the week ending prior to the date on which prepayment is made, of U.S. Treasury Constant Maturities with maturity dates (one longer or one shorter) most nearly approximating the Stated Maturity Date. In the event Release H.15 is no longer published, Lender shall select a comparable publication to determine the Yield Maintenance Treasury Rate. In no event, however, shall Lender be required to reinvest any prepayment proceeds in U.S. Treasury obligations or otherwise. Lender shall notify Borrower of the amount and the basis of determination of the required prepayment consideration. Lender’s calculation of the Yield Maintenance Premium shall be conclusive absent manifest error.
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Section 1.2. Principles of Construction. All references to sections and schedules are to sections and schedules in or to this Agreement unless otherwise specified. All uses of the word “including” shall mean “including, without limitation” unless the context shall indicate otherwise. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined. References herein to “the Property or any portion thereof” and words of similar import shall be deemed to refer, as applicable, to any portion of the Property taken as a whole (including any Individual Property) and any portion of any Individual Property.
ARTICLE 2
GENERAL TERMS
Section 2.1. Loan Commitment; Disbursement to Borrower. Except as expressly and specifically set forth herein, Lender has no obligation or other commitment to loan any funds to Borrower or otherwise make disbursements to Borrower. Borrower hereby waives any right Borrower may have to make any claim to the contrary.
Section 2.2. The Loan. Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make and Borrower hereby agrees to accept the Loan on the Closing Date.
Section 2.3. Disbursement to Borrower. Borrower may request and receive only one borrowing hereunder in respect of the Loan and any amount borrowed and repaid hereunder in respect of the Loan may not be re-borrowed.
Section 2.4. The Note and the other Loan Documents. The Loan shall be evidenced by the Note and this Agreement and secured by this Agreement and the other Loan Documents.
Section 2.5. Interest Rate.
(a) Interest on the outstanding principal balance of the Loan shall accrue from the Closing Date at the Interest Rate until repaid in accordance with the applicable terms and conditions hereof.
(b) Intentionally Omitted.
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(c) In the event that, and for so long as, any Event of Default shall have occurred and be continuing, (i) the then outstanding principal balance of the Loan shall accrue interest at the Default Rate, calculated from the date the applicable Event of Default occurred, (ii) without limitation of any rights or remedies contained herein and/or in any other Loan Document, any interest accrued at the Default Rate in excess of the interest component of the Monthly Debt Service Payment Amount shall, to the extent not already paid and/or due and payable hereunder, be due and payable on each Monthly Payment Date and (iii) all references herein and/or in any other Loan Document to the “Interest Rate” shall be deemed to refer to the Default Rate.
(d) Interest on the outstanding principal balance of the Loan shall be calculated by multiplying (a) the actual number of days elapsed in the period for which the calculation is being made by (b) a daily rate based on a three hundred sixty (360) day year (that is, the Interest Rate or the Default Rate, as then applicable, expressed as an annual rate divided by 360) by (c) the outstanding principal balance. The accrual period for calculating interest due on each Monthly Payment Date shall be the Interest Accrual Period immediately prior to such Monthly Payment Date. Borrower understands and acknowledges that such interest accrual requirement results in more interest accruing on the Loan than if either a thirty (30) day month and a three hundred sixty (360) day year or the actual number of days and a three hundred sixty-five (365) day year were used to compute the accrual of interest on the Loan.
(e) This Agreement and the other Loan Documents are subject to the express condition that at no time shall Borrower be required to pay interest on the principal balance of the Loan (including, to the extent applicable, any prepayment premium and/or penalty) at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the Maximum Legal Rate. If by the terms of this Agreement or the other Loan Documents, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder (including, to the extent applicable, any prepayment premium and/or penalty) at a rate in excess of the Maximum Legal Rate, the Interest Rate or the Default Rate, as the case may be, and/or, to the extent applicable, any prepayment premium and/or penalty shall, in each case, be deemed to be immediately reduced to the Maximum Legal Rate and all previous payments in excess of the Maximum Legal Rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. All sums paid or agreed to be paid to Lender for the use, forbearance, or detention of the sums due under the Loan, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Loan (including, to the extent applicable, any prepayment premium and/or penalty) does not exceed the Maximum Legal Rate from time to time in effect and applicable to the Loan for so long as the Loan is outstanding.
Section 2.6. Loan Payments.
(a) Borrower shall make a payment to Lender of interest only on the Closing Date for the period from (and including) the Closing Date through (but excluding) the sixth (6th) day of either (i) the month in which the Closing Date occurs (if such Closing Date is after the first day of such month, but prior to the sixth (6th) day of such month) or (ii) if the Closing Date is after the sixth (6th) day of the then current calendar month, the month following the month in which the Closing Date occurs; provided, however, if the Closing Date is the sixth (6th) day of a calendar month, no such separate payment of interest shall be due. Borrower shall make a payment to Lender of interest and, to the extent applicable, principal in the amount of the Monthly Debt Service Payment Amount on the First Monthly Payment Date and on each Monthly Payment Date occurring thereafter to and including the Maturity Date. Each payment shall be applied first to accrued and unpaid interest and the balance to principal. The non- interest only portion of Monthly Debt Service Payment Amount required hereunder is based upon a thirty (30) year amortization schedule.
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(b) Intentionally Omitted.
(c) Borrower shall pay to Lender on the Maturity Date the outstanding principal balance of the Loan, all accrued and unpaid interest and all other amounts due hereunder and under the Note, the Security Instrument and the other Loan Documents.
(d) If any principal, interest or any other sum due under the Loan Documents, other than the payment of principal due on the Maturity Date, is not paid by Borrower within two (2) days of the date on which it is due, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the maximum amount permitted by applicable law in order to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment. Any such amount shall be secured by the Security Instrument and the other Loan Documents.
(e)
(i) Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 1:00 P.M., New York City time, on the date when due and shall be made in lawful money of the United States of America in immediately available funds at Lender’s office, and any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day.
(ii) Whenever any payment to be made hereunder or under any other Loan Document shall be stated to be due on a day which is not a Business Day, the due date thereof shall be deemed to be the immediately succeeding Business Day.
(iii) All payments required to be made by Borrower hereunder or under the Note or the other Loan Documents shall be made irrespective of, and without deduction for, any setoff, claim or counterclaim and shall be made irrespective of any defense thereto.
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Section 2.7. Prepayments.
(a) Except as otherwise provided herein, Borrower shall not have the right to prepay the Loan in whole or in part. On or after the Monthly Payment Date occurring two (2) months prior to the Stated Maturity Date (such period, the “Open Prepayment Period”), Borrower may, provided no Event of Default has occurred and is continuing, at its option and upon thirty (30) days prior notice to Lender (or such shorter period of time as may be permitted by Lender in its sole discretion), prepay the Debt on any date without payment of any prepayment premium or penalty (including, without limitation, any Default Yield Maintenance Premium). Such prepayment of the Debt shall be made in whole (and not in part). Any prepayment received by Lender on a date other than a Monthly Payment Date shall include interest which would have accrued thereon to the next Monthly Payment Date (such amounts, the “Interest Shortfall”) and such amounts (i.e., principal and interest prepaid by Borrower) shall be held by Lender as collateral security for the Loan in an interest bearing Eligible Account at an Eligible Institution, with interest accruing on such amounts to the benefit of Borrower; such amounts prepaid shall be applied to the Loan on the next Monthly Payment Date, with any interest on such funds paid to Borrower on such date provided no Event of Default then exists.
(b) On each date on which Lender actually receives a distribution of Net Proceeds, and if Lender does not make such Net Proceeds available for Restoration or for disbursement as Rent Loss Proceeds (as applicable), in each case, in accordance with the applicable terms and conditions hereof, Borrower shall, at Lender’s option, prepay the Debt in an amount equal to one hundred percent (100%) of such Net Proceeds together with any applicable Interest Shortfall. Borrower shall make the REMIC Payment as and to the extent required hereunder. No prepayment premium or penalty (including, without limitation, any Default Yield Maintenance Premium) shall be due in connection with any prepayment made pursuant to this Section 2.7(b) (including, without limitation, in connection with any REMIC Payment). Any prepayment received by Lender pursuant to this Section 2.7(b) on a date other than a Monthly Payment Date shall be held by Lender as collateral security for the Loan in an interest bearing, Eligible Account at an Eligible Institution, with such interest accruing to the benefit of Borrower, and shall be applied by Lender on the next Monthly Payment Date, with any interest on such funds paid to Borrower on such date provided no Event of Default then exists.
(c) After the occurrence and during the continuance of an Event of Default and notwithstanding any acceleration of the Debt in accordance with the applicable terms and conditions hereof, the Default Yield Maintenance Premium shall, in all cases, be deemed a portion of the Debt due and owing hereunder and under the other Loan Documents. Without limitation of the foregoing, if, after the occurrence and during the continuance of an Event of Default, (i) payment of all or any part of the Debt is tendered by Borrower (voluntarily or involuntarily), a purchaser at foreclosure or any other Person, (ii) Lender obtains a recovery of all or a portion of the Debt (through an exercise of remedies hereunder or under the other Loan Documents or otherwise) or (iii) the Debt is deemed satisfied (in whole or in part) through an exercise of remedies hereunder or under the other Loan Documents or at law, the Default Yield Maintenance Premium, in addition to the outstanding principal balance, all accrued and unpaid interest and other amounts payable under the Loan Documents, shall be deemed due and payable hereunder. Notwithstanding anything to the contrary contained herein or in any other Loan Document, (i) any prepayment of the Debt shall be applied to the Debt in such order and priority as may be determined by Lender in its sole discretion and (ii) the word “prepayment” when used herein and in the other Loan Documents shall also be deemed to mean repayment and payment.
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Section 2.8. Defeasance.
(a) Total Defeasance.
(i) Provided no Event of Default shall have occurred and be continuing, Borrower shall have the right at any time after the Release Date and prior to the Maturity Date to voluntarily defease the entire Loan and obtain a release of the lien of the Security Instrument by providing Lender with the Total Defeasance Collateral (hereinafter, a “Total Defeasance Event”), subject to the satisfaction of the following conditions precedent:
| (A) | Borrower shall provide Lender not less than thirty (30) days notice (or such shorter period of time if permitted by Lender in its sole discretion) but not more than one hundred twenty (120) days notice specifying a date (the “Total Defeasance Date”) on which the Total Defeasance Event is to occur; |
| (B) | Unless otherwise agreed to in writing by Lender, Borrower shall pay to Lender (1) all payments of principal and interest due and payable on the Loan to and including the Total Defeasance Date (provided, that, if such Total Defeasance Date is not a Monthly Payment Date, Borrower shall also pay to Lender all payments of principal and interest due on the Loan to and including the next occurring Monthly Payment Date); (2) all other sums, if any, due and payable under the Note, this Agreement, the Security Instrument and the other Loan Documents through and including the Total Defeasance Date (or, if the Total Defeasance Date is not a Monthly Payment Date, the next occurring Monthly Payment Date); (3) all escrow, closing, recording, legal, Rating Agency and other fees, costs and expenses paid or incurred by Lender or its agents in connection with the Total Defeasance Event, the release of the lien of Security Instrument on the Property, the review of the proposed Defeasance Collateral and the preparation of the Security Agreement, the Defeasance Collateral Account Agreement and related documentation; and (4) any revenue, documentary stamp, intangible or other taxes, charges or fees due in connection with the transfer or assumption of the Note or the Total Defeasance Event; |
| (C) | Borrower shall deposit the Total Defeasance Collateral into the Defeasance Collateral Account and otherwise comply with the provisions of Section 2.8(c)hereof; |
| (D) | Borrower shall execute and deliver to Lender a Security Agreement in respect of the Defeasance Collateral Account and the Total Defeasance Collateral; |
| (E) | Borrower shall deliver to Lender (1) an opinion of counsel for Borrower that is standard in commercial lending transactions and subject only to customary qualifications, assumptions and exceptions opining, among other things, that (I) Lender has a legal and valid perfected first priority security interest in the Defeasance Collateral Account and the Total Defeasance Collateral; (II) the Total Defeasance Event will not result in a deemed exchange for purposes of the IRS Code and will not adversely affect the status of the Note as indebtedness for federal income tax purposes; and (III) delivery of the Total Defeasance Collateral and the grant of a security interest therein to Lender shall not constitute an avoidable preference under Section 547 of the Bankruptcy Code or applicable state law; (2) a REMIC Opinion with respect to the Total Defeasance Event; and (3) if requested by Lender, a New Non- Consolidation Opinion with respect to Successor Borrower; |
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| (F) | Borrower shall deliver to Lender a Rating Agency Confirmation as to the Total Defeasance Event; |
| (G) | Borrower shall deliver an Officer’s Certificate certifying that the requirements set forth in this Section 2.8 have been satisfied; |
| (H) | Borrower shall deliver a certificate of a nationally recognized public accounting firm acceptable to Lender certifying that the Total Defeasance Collateral will generate monthly amounts equal to or greater than the Scheduled Defeasance Payments; and |
| (I) | Borrower shall deliver such other certificates, opinions, documents and instruments as Lender may reasonably request. |
(ii) If Borrower has elected to defease the entire Loan and the requirements of this Section 2.8 have been satisfied or waived by Lender in writing, the Property shall be released from the lien of the Security Instrument and the Total Defeasance Collateral pledged pursuant to the Security Agreement shall be the sole source of collateral securing the Loan. In connection with the release of the lien, Borrower shall submit to Lender, not less than ten (10) days prior to the Total Defeasance Date (or such shorter time as is acceptable to Lender in its sole discretion), a release of lien (and related Loan Documents) for execution by Lender. Such release shall be in a form appropriate in each jurisdiction in which each Individual Property is located and that contains standard provisions protecting the rights of the releasing lender. In addition, Borrower shall provide all other documentation Lender reasonably requires to be delivered by Borrower in connection with such release, together with an Officer’s Certificate certifying that such documentation (1) is in compliance with all Legal Requirements, and (2) will effect such release in accordance with the terms of this Agreement. Except as set forth in this Article 2, no repayment, prepayment or defeasance of all or any portion of the Loan shall cause, give rise to a right to require, or otherwise result in, the release of the lien of the Security Instrument.
(b) Notwithstanding anything contained herein or in any other Loan Document to the contrary, no partial defeasance of the Loan shall be permitted.
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(c) On or before the date on which Borrower delivers the Total Defeasance Collateral, Borrower shall open at any Eligible Institution an Eligible Account (the “Defeasance Collateral Account”). The Defeasance Collateral Account shall contain only (i) Total Defeasance Collateral and (ii) cash from interest and principal paid on the Total Defeasance Collateral. All cash from interest and principal payments paid on the Total Defeasance Collateral shall be paid over to Lender on each Monthly Payment Date and applied first to accrued and unpaid interest and then to principal. Any cash from interest and principal paid on the Total Defeasance Collateral not needed to pay the Scheduled Defeasance Payments shall be (i) paid to Borrower or Successor Borrower (as applicable) and/or (ii) to the extent permitted by applicable REMIC Requirements, retained in the Defeasance Collateral Account. Borrower shall cause the Eligible Institution at which the Total Defeasance Collateral is deposited to enter an agreement with Borrower and Lender, satisfactory to Lender in its reasonable discretion, pursuant to which such Eligible Institution shall agree to hold and distribute the Total Defeasance Collateral in accordance with this Agreement (such agreement, the “Defeasance Collateral Account Agreement”). Borrower or Successor Borrower (as applicable) shall be the owner of the Defeasance Collateral Account and shall report all income accrued on Total Defeasance Collateral for federal, state and local income tax purposes in its income tax return (to the extent required by applicable law). Borrower shall prepay all cost and expenses associated with opening and maintaining the Defeasance Collateral Account. Lender shall not in any way be liable by reason of any insufficiency in the Defeasance Collateral Account.
(d) In connection with a Total Defeasance Event under this Section 2.8, a successor entity (the “Successor Borrower”) shall be established, which such Successor Borrower shall be (i) a Single Purpose Entity and (ii) established and/or designated by Borrower. The right of Lender hereunder to designate and/or establish Successor Borrower may, at the option and in the sole discretion of the initial named Lender hereunder, be retained by the initial named Lender hereunder notwithstanding any Secondary Market Transaction. Borrower shall transfer and assign all obligations, rights and duties under and to the Note, Security Agreement and Defeasance Collateral Account Agreement, together with the Total Defeasance Collateral to such Successor Borrower. Such Successor Borrower shall assume the obligations under the Note, the Defeasance Collateral Account Agreement and the Security Agreement in a manner acceptable to Lender and the Rating Agencies and Borrower shall be relieved of its obligations under the Loan Documents relating to the Note (other than those obligations which by their terms survive a repayment, defeasance or other satisfaction of the Loan and/or a transfer of the Property in connection with Lender’s exercise of its remedies under the Loan Documents). Borrower shall pay all costs and expenses reasonably incurred by Lender and Successor Borrower, including attorney’s fees and expenses, incurred in connection with the foregoing.
(e) Notwithstanding anything to the contrary contained in this Section 2.8, the parties hereto hereby acknowledge and agree that after the Securitization of the Loan (or any portion thereof or interest therein), with respect to any Lender approval or similar discretionary rights over any matters contained in this Section 2.8 (any such matter, an “Defeasance Approval Item”), such rights shall be construed such that Lender shall only be permitted to withhold its consent or approval with respect to any Defeasance Approval Item if the same fails to meet the Prudent Lender Standard.
Section 2.9. Intentionally Omitted.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as of the Closing Date that:
Section 3.1. Legal Status and Authority. Each Borrower (a) is duly organized, validly existing and in good standing under the laws of its state of formation; (b) is duly qualified to transact business and is in good standing in the State; and (c) has all necessary approvals, governmental and otherwise, and full power and authority to own, operate and lease the applicable Individual Property. Each Borrower has full power, authority and legal right to mortgage, grant, bargain, sell, pledge, assign, warrant, transfer and convey the applicable Individual Property pursuant to the terms hereof and to keep and observe all of the terms of this Agreement, the Note, the Security Instrument and the other Loan Documents on Borrower’s part to be performed.
Section 3.2. Validity of Documents. (a) The execution, delivery and performance of this Agreement, the Note, the Security Instrument and the other Loan Documents by Borrower and Guarantor and the borrowing evidenced by the Note and this Agreement (i) are within the power and authority of such parties; (ii) have been authorized by all requisite organizational action of such parties; (iii) have received all necessary approvals and consents, corporate, governmental or otherwise; (iv) will not violate, conflict with, result in a breach of or constitute (with notice or lapse of time, or both) a material default under any provision of law, any order or judgment of any court or Governmental Authority, any license, certificate or other approval required to operate the Property or any portion thereof, any applicable organizational documents, or any applicable indenture, agreement or other instrument, including, without limitation, the Management Agreement; (v) will not result in the creation or imposition of any lien, charge or encumbrance whatsoever upon any of its assets, except the lien and security interest created hereby and by the other Loan Documents; and (vi) will not require any authorization or license from, or any filing with, any Governmental Authority (except for the recordation of each Security Instrument in appropriate land records in each applicable State and except for Uniform Commercial Code filings relating to the security interest created hereby), (b) this Agreement, the Note, the Security Instrument and the other Loan Documents have been duly executed and delivered by Borrower and Guarantor (to the extent a party thereto) and (c) this Agreement, the Note, the Security Instrument and the other Loan Documents constitute the legal, valid and binding obligations of Borrower and Guarantor (to the extent a party thereto). The Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower or Guarantor, including the defense of usury, nor would the operation of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Creditors Rights Laws, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law)). Neither Borrower nor Guarantor has asserted any right of rescission, set-off, counterclaim or defense with respect to the Loan Documents.
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Section 3.3. Litigation. Except as expressly and specifically noted in the Third Party Reports, there is no action, suit, proceeding or governmental investigation, in each case, judicial, administrative or otherwise (including any condemnation or similar proceeding), pending or, to Borrower’s knowledge, threatened or contemplated against Borrower, Sponsor or Guarantor or against or affecting the Property other than those that either (i) have been disclosed to Lender by Borrower in writing in connection with the closing of the Loan or (ii) are fully covered by insurance and would not otherwise have a Material Adverse Effect.
Section 3.4. Agreements. Borrower is not a party to any agreement or instrument or subject to any restriction which is reasonably likely to have a Material Adverse Effect. Borrower is not in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party or by which Borrower or the Property (or any portion thereof) is bound. Borrower has no material financial obligation under any agreement or instrument to which Borrower is a party or by which Borrower or the Property (or any portion thereof) is otherwise bound, other than (a) obligations incurred in the ordinary course of the operation of the Property and (b) obligations under this Agreement, the Security Instrument, the Note and the other Loan Documents. There is no agreement or instrument to which Borrower is a party or by which Borrower is bound that would require the subordination in right of payment of any of Borrower’s obligations hereunder or under the Note to an obligation owed to another party.
Section 3.5. Financial Condition.
(a) Borrower is solvent and Borrower has received reasonably equivalent value for the granting of the Security Instrument. No voluntary or, to Borrower’s knowledge, involuntary proceeding under Creditors Rights Laws with respect to any Borrower Party has been initiated
(b) In the last ten (10) years, no (i) petition in bankruptcy has been filed by or against any Borrower Party and (ii) Borrower Party has ever made any assignment for the benefit of creditors or taken advantage of any Creditors Rights Laws.
(c) No Borrower Party is contemplating either the filing of a petition by it under any Creditors Rights Laws or the liquidation of its assets or property and Borrower has no knowledge of any Person contemplating the filing of any such petition against any Borrower Party.
(d) With respect to any loan or financing in which any Borrower Party or any Affiliate thereof has been directly or directly obligated for or has, in connection therewith, otherwise provided any guaranty, indemnity or similar surety, except as expressly disclosed to Lender in connection with the origination of the Loan, none of such loans or financings has ever been (i) more than 30 days in default or (ii) transferred to special servicing.
Section 3.6. Disclosure. Borrower has disclosed to Lender all material facts and has not failed to disclose any material fact that could cause any representation or warranty made herein to be materially misleading.
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Section 3.7. No Plan Assets. As of the date hereof and until the Debt is repaid in accordance with the applicable terms and conditions hereof, (a) Borrower is not and will not be an “employee benefit plan,” as defined in Section 3(3) of ERISA, subject to Title I of ERISA, (b) Borrower is not and will not be a “governmental plan” within the meaning of Section 3(32) of ERISA, (c) transactions by or with Borrower are not and will not be subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans and (d) none of the assets of Borrower constitutes or will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA. As of the date hereof, neither Borrower, nor any member of a “controlled group of corporations” (within the meaning of Section 414 of the IRS Code), maintains, sponsors or contributes to a “defined benefit plan” (within the meaning of Section 3(35) of ERISA) or a “multiemployer pension plan” (within the meaning of Section 3(37)(A) of ERISA).
Section 3.8. Not a Foreign Person. Borrower is not a “foreign person” within the meaning of § 1445(f)(3) of the IRS Code.
Section 3.9. Intentionally Omitted.
Section 3.10. Business Purposes. The Loan is solely for the business purpose of Borrower, and is not for personal, family, household, or agricultural purposes.
Section 3.11. Borrower’s Principal Place of Business. Borrower’s principal place of business and its chief executive office as of the date hereof is 1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701. Borrower’s mailing address, as set forth in the opening paragraph hereof or as changed in accordance with the provisions hereof, is true and correct. Borrower’s organizational identification number, if any, assigned by the state of its incorporation or organization is (i) for Seattle Fee Owner, 60404383, (ii) for Seattle Lessee, 6040486, (iii) for SLC Fee Owner, 6040494 and (iv) for SLC Lessee, 6040498. Borrower’s federal tax identification number is (i) for Seattle Fee Owner, 81-2682090, (ii) for Seattle Lessee, 81- 2692567, (iii) for SLC Fee Owner, 81-2692462 and (iv) for SLC Lessee, 81-2707380. Borrower is not subject to back-up withholding taxes.
Section 3.12. Status of Property.
(a) To Borrower’s knowledge, Borrower has obtained all Permits, all of which are in full force and effect as of the date hereof and not subject to revocation, suspension, forfeiture or modification.
(b) Except as expressly and specifically noted in the Third Party Reports, to Borrower’s knowledge, each Individual Property and the present and contemplated use and occupancy thereof are in full compliance with all applicable zoning ordinances, building codes, land use laws, Environmental Laws and other similar Legal Requirements.
(c) Each Individual Property is served by all utilities required for the current or contemplated use thereof. All utility service is provided by public utilities and each Individual Property has accepted or is equipped to accept such utility service.
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(d) All public roads and streets necessary for service of and access to each Individual Property for the current or contemplated use thereof have been completed, are serviceable and all-weather and are physically and legally open for use by the public. Each Individual Property has either direct access to such public roads or streets or access to such public roads or streets by virtue of a perpetual easement or similar agreement inuring in favor of Borrower and any subsequent owners of the applicable Individual Property.
(e) Each Individual Property is served by public water and sewer systems.
(f) The Property is free from damage caused by fire or other casualty. Except as expressly and specifically noted in the Third Party Reports, to Borrower’s knowledge, the Property, including, without limitation, all buildings, improvements, parking facilities, sidewalks, storm drainage systems, roofs, plumbing systems, HVAC systems, fire protection systems, electrical systems, equipment, elevators, exterior sidings and doors, landscaping, irrigation systems and all structural components, are in good condition, order and repair in all material respects; there exists no structural or other material defects or damages in the Property, whether latent or otherwise, and Borrower has not received notice from any insurance company or bonding company of any defects or inadequacies in the Property, or any part thereof, which would adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond.
(g) All costs and expenses of any and all labor, materials, supplies and equipment used in the construction of the Improvements have been paid in full. There are no mechanics’ or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under applicable Legal Requirements could give rise to any such liens) affecting the Property which are or may be prior to or equal to the lien of the Security Instrument.
(h) Borrower has paid in full for, and is the owner of, all furnishings, fixtures and equipment (other than Tenants’ property) used in connection with the operation of the Property, free and clear of any and all security interests, liens or encumbrances, except the lien and security interest created by this Agreement, the Note, the Security Instrument and the other Loan Documents.
(i) Except as expressly and specifically noted in the Third Party Reports, to Borrower’s knowledge, all liquid and solid waste disposal, septic and sewer systems located on the Property are in a good and safe condition and repair and in compliance with all Legal Requirements.
(j) Except as expressly disclosed on the Survey, no portion of the Improvements is located in an area identified by the Federal Emergency Management Agency or any successor thereto as an area having special flood hazards pursuant to the Flood Insurance Acts. No part of the Property consists of or is classified as wetlands, tidelands or swamp and overflow lands.
(k) Except as expressly disclosed on the Survey, all the Improvements lie within the boundaries of the Land and any building restriction lines applicable to the Land.
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(l) To Borrower’s knowledge, there are no pending or proposed special or other assessments for public improvements or otherwise affecting the Property, nor are there any contemplated improvements to the Property that may result in such special or other assessments.
(m) Borrower has not (i) made, ordered or contracted for any construction, repairs, alterations or improvements to be made on or to the Property which have not been completed and paid for in full, other than the Scheduled PIP, (ii) ordered materials for any such construction, repairs, alterations or improvements which have not been paid for in full or (iii) attached any fixtures to the Property which have not been paid for in full. There is no such construction, repairs, alterations or improvements ongoing at the Property as of the Closing Date, other than the Scheduled PIP. There are no outstanding or disputed claims for any Work Charges and there are no outstanding liens or security interests in connection with any Work Charges.
(n) Borrower has no direct employees. All other personnel employed at or in connection with the Property are the direct employees of Manager.
Section 3.13. Financial Information. All financial data, including, without limitation, the balance sheets, statements of cash flow and statements of income and operating expense that have been delivered to Lender in respect of Borrower, Sponsor, Guarantor and/or the Property (the “Financial Data”) (a) are true, complete and correct in all material respects, (b) accurately represent the financial condition of Borrower, Sponsor, Guarantor or the Property, as applicable, as of the date of such reports in all material respects, and (c) to the extent prepared or audited by an independent certified public accounting firm, have been, to Borrower’s knowledge, prepared in accordance with the Approved Accounting Method throughout the periods covered, except as disclosed therein. Borrower does not have any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are known to Borrower and reasonably likely to have a Material Adverse Effect, except as referred to or reflected in said financial statements. Since the date of such financial statements, there has been no materially adverse change in the financial condition, operations or business of Borrower, Sponsor or Guarantor from that set forth in said financial statements. With respect to any Financial Data that relates solely to the operations, expenses and income of the Property prior to August 2, 2016, the representations and warranties contained in this Section 3.13 shall be deemed to be made to the best of Borrower’s knowledge with due inquiry.
Section 3.14. Condemnation. No Condemnation or other proceeding has been commenced or, to Borrower’s best knowledge, is threatened or contemplated with respect to all or any portion of the Property or for the relocation of the access to any Individual Property.
Section 3.15. Separate Lots. Each Individual Property is assessed for real estate tax purposes as one or more wholly independent tax lot or lots, separate from any adjoining land or improvements not constituting a part of such lot or lots, and no other land or improvements is assessed and taxed together with any Individual Property or any portion thereof.
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Section 3.16. Insurance. Borrower has obtained and has delivered to Lender certified copies of all Policies (or such other evidence acceptable to Lender) reflecting the insurance coverages, amounts and other requirements set forth in this Agreement. There are no present claims under any of the Policies that are not either fully covered by such Policies or which would result in a Material Adverse Effect, and to Borrower’s knowledge, no Person, including Borrower, has done, by act or omission, anything which would impair the coverage of any of the Policies.
Section 3.17. Use of Property. Each Individual Property is used exclusively as a hotel and other appurtenant and related uses.
Section 3.18. Leases and Rent Roll. There exist no Leases (other than the Master Lease).
Section 3.19. Filing and Recording Taxes. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid by any Person under applicable Legal Requirements currently in effect in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of this Agreement, the Security Instrument, the Note and the other Loan Documents, including, without limitation, the Security Instrument, have been paid or will be paid, and, under current Legal Requirements, the Security Instrument and the other Loan Documents are enforceable in accordance with their terms by Lender (or any subsequent holder thereof), except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Creditors Rights Laws, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 3.20. Management Agreement. The Management Agreement is in full force and effect and there is no default thereunder by any party thereto and, to Borrower’s knowledge, no event has occurred that, with the passage of time and/or the giving of notice would constitute a default thereunder. As of the date hereof, no management fees under the Management Agreement are accrued but unpaid, other than management fees accrued from the last payment thereof to the Closing Date which are not yet delinquent.
Section 3.21. Illegal Activity/Forfeiture.
(a) No portion of the Property has been or will be purchased, improved, equipped or furnished by any Borrower Party (or Affiliate thereof) with proceeds of any illegal activity and to Borrower’s knowledge, there are no illegal activities or activities relating to controlled substances at the Property.
(b) There has not been and shall never be committed by Borrower or, to Borrower’s knowledge, any other Person in occupancy of or involved with the operation or use of the Property any act or omission affording the federal government or any state or local government the right of forfeiture as against the Property or any part thereof or any monies paid in performance of Borrower’s obligations under this Agreement, the Note, the Security Instrument or the other Loan Documents. Borrower hereby covenants and agrees not to commit, permit or suffer to exist any act or omission affording such right of forfeiture.
Section 3.22. Taxes. Borrower has filed all federal, state, county, municipal, and city income, personal property and other tax returns required to have been filed by it and has paid all taxes and related liabilities which have become due pursuant to such returns or pursuant to any assessments received by it. Borrower knows of no basis for any additional assessment in respect of any such taxes and related liabilities for prior years.
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Section 3.23. Permitted Encumbrances. None of the Permitted Encumbrances, individually or in the aggregate, materially and adversely interferes with the benefits of the security intended to be provided by this Agreement, the Security Instrument, the Note and the other Loan Documents, materially and adversely affects the value or marketability of the Property (or any portion thereof), materially and adversely impairs the use or the operation of the Property or impairs Borrower’s ability to pay its obligations in a timely manner.
Section 3.24. Third Party Representations. To Borrower’s knowledge, each of the representations and the warranties made by Sponsor and Guarantor in the other Loan Documents (if any) are true, complete and correct in all material respects.
Section 3.25. Non-Consolidation Opinion Assumptions. All of the assumptions made in the Non-Consolidation Opinion, including, but not limited to, any exhibits attached thereto and/or certificates delivered in connection therewith, are true, complete and correct.
Section 3.26. Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of 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, the Security Instrument, the Note or the other Loan Documents.
Section 3.27. Investment Company Act. Borrower is not (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (c) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.
Section 3.28. Fraudulent Conveyance. Borrower (a) has not entered into the Loan or any Loan Document with the actual intent to hinder, delay, or defraud any creditor and (b) received reasonably equivalent value in exchange for its obligations under the Loan Documents. On the Closing Date, giving effect to the Loan, the fair saleable value of Borrower’s assets exceeds and will, immediately following the execution and delivery of the Loan Documents, exceed Borrower’s total liabilities, including, without limitation, subordinated, unliquidated, disputed or contingent liabilities. The fair saleable value of Borrower’s assets is and will, immediately following the execution and delivery of the Loan Documents, be greater than Borrower’s probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and matured. Borrower’s assets do not and, immediately following the execution and delivery of the Loan Documents will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower).
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Section 3.29. Embargoed Person. As of the date hereof and at all times throughout the term of the Loan, including after giving effect to any transfers of interests permitted pursuant to the Loan Documents, (a) none of the funds or other assets of any Borrower Party constitute (or will constitute) property of, or are (or will be) beneficially owned, directly or indirectly, by any Person or government that is the subject of economic sanctions under U.S. law, including but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., the Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder with the result that transactions involving or the investment in any such Borrower Party (whether directly or indirectly) is prohibited by applicable law or the Loan made by Lender is in violation of applicable law (“Embargoed Person”); (b) no Embargoed Person has (or will have) any interest of any nature whatsoever in any Borrower Party, with the result that transactions involving or the investment in any such Borrower Party (whether directly or indirectly), is prohibited by applicable law or the Loan is in violation of applicable law; and (c) none of the funds of any Borrower Party have been (or will be) derived from any unlawful activity with the result that transactions involving or the investment in any such Borrower Party (whether directly or indirectly), is prohibited by applicable law or the Loan is in violation of applicable law. Any violation of the foregoing shall, at Lender’s option, constitute an Event of Default hereunder. The foregoing representations shall be deemed not to apply to any indirect interests in Borrower held by Persons as shares of stock on a nationally recognized stock exchange.
Section 3.30. Anti-Money Laundering and Economic Sanctions. Each Borrower Party, each and every Person Affiliated with any Borrower Party and, to Borrower’s knowledge, their directors, officers, employees or agents and any Person that has an economic interest in any Borrower Party, in each case, has not, and at all times throughout the term of the Loan, including after giving effect to any transfers of interests permitted pursuant to the Loan Documents, shall not: (i) itself be (or have been), be (or have been) owned or controlled by, or act for or on behalf of a Person or government that is the subject of, in each case, economic sanctions administered or enforced by the Office of Foreign Assets Control (“OFAC”) of the Department of the Treasury, the Department of State, or other relevant sanctions authority (“Sanctions”); (ii) fail to be (or have been) in full compliance with the requirements of the USA PATRIOT Act or other applicable anti-money laundering laws and regulations and all Sanctions; (iii) fail to operate (or have operated) under policies, procedures and practices, if any, that are (A) in compliance with applicable anti-money laundering laws and regulations and Sanctions and (B) available to Lender for Lender’s review and inspection during normal business hours and upon reasonable prior notice; (iv) be (or have been) in receipt of any notice from OFAC, the Secretary of State or the Attorney General of the United States or any other department, agency or office of the United States, in each case, claiming a violation or possible violation of applicable anti-money laundering laws and regulations and/or Sanctions; (v) be (or have been) the subject of Sanctions, including those listed as a Specially Designated National or as a “blocked” Person on any lists issued by OFAC and those owned or controlled by or acting for or on behalf of such Specially Designated National or “blocked” Person; (vi) be (or have been) a Person who has been determined by competent authority to be subject to any of the prohibitions contained in the USA PATRIOT Act; or (vii) be (or have been) owned or controlled by or be (or have been) acting for or on behalf of, in each case, any Person who has been determined to be subject to the prohibitions contained in the USA PATRIOT Act. Borrower covenants and agrees that in the event Borrower receives any notice that any Borrower Party (or any of their respective beneficial owners or Affiliates) became the subject of Sanctions or is indicted, arraigned, or custodially detained on charges involving Sanctions, money laundering or predicate crimes to money laundering, Borrower shall immediately notify Lender. It shall be an Event of Default hereunder if any Borrower Party or any other party to any Loan Document becomes the subject of Sanctions or is indicted, arraigned or custodially detained on charges involving Sanctions, money laundering or predicate crimes to money laundering. All capitalized words and phrases and all defined terms used in the USA PATRIOT Act of 2001, 107 Public Law 56 (October 26, 2001) and in other statutes and all orders, rules and regulations of the United States government and its various executive departments, agencies and offices related to applicable anti-money laundering laws and regulations (collectively referred as the “Patriot Act”) are incorporated into this Section.
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Section 3.31. Organizational Chart. The organizational charts attached as Schedule III hereto (collectively, the “Organizational Chart”), including, without limitation, the statements made thereon, are true, complete and correct on and as of the date hereof.
Section 3.32. Bank Holding Company. Borrower is not a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System.
Section 3.33. Hotel Matters.
(a) Except with respect to the Franchise Agreement, the Property is not subject to any Hotel Operating Agreements. The Franchise Agreement has not been amended, restated, supplemented or otherwise modified, is in full force and effect and there is no default thereunder by any party thereto and, to Borrower’s knowledge, no event has occurred that, with the passage of time and/or giving of notice, would constitute a default thereunder.
(b) Except for the Scheduled PIP, there is currently no PIP or other similar requirement imposed under the Franchise Agreement.
(c) The Property is not subject to equipment leases or any other similar leases or agreements, other than Permitted Equipment Leases.
(d) Borrower owns or has the right to use, pursuant to the Franchise Agreement, all patents, licenses, franchises, trademarks, trademark rights, trade names, trade name rights, trade secrets and copyrights (collectively, the “Intellectual Property”) necessary to the conduct of its businesses as currently conducted, without known conflict with any patent, license, franchise, trademark, trade secret, trade name, copyright, or other proprietary right of any other Person. To Borrower’s knowledge, all such Intellectual Property is fully protected and/or duly and properly registered, filed or issued in the appropriate office and jurisdictions for such registrations, filing or issuances. No material claim has been asserted by any Person against Borrower with respect to the use of any such Intellectual Property, or challenging or questioning the validity or effectiveness of any such Intellectual Property. Other than pursuant to the Franchise Agreements, Borrower (i) does not have or hold any Intellectual Property or (ii) is not the registered holder of any website.
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(e) There are no: (i) collective bargaining agreements and/or other labor agreements to which Borrower or the Property, or any portion thereof, is a party or by which either is or may be bound; (ii) employment, profit sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, health, welfare, or incentive plans and/or contracts to which Borrower is a party or by which Borrower is or may be bound; or (iii) plans and/or agreements under which “fringe benefits” (including, but not limited to, vacation plans or programs, and related or similar dental or medical plans or programs, and related or similar benefits) are afforded to employees of Borrower. Borrower has not violated any applicable laws, rules and regulations relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by appropriate Governmental Authorities.
(f) Except for the Master Lease, Borrower has not entered into any contract or agreement (written, oral or otherwise) with any other Borrower Party or any Affiliate of and Borrower Party.
Section 3.34. Property Document Representations. With respect to each Property Document, Borrower hereby represents that (a) each Property Document is in full force and effect and has not been amended, restated, replaced or otherwise modified (except, in each case, as expressly set forth herein), (b) there are no defaults under any Property Document by Borrower or, to Borrower’s knowledge, any other party thereto and, to Borrower’s knowledge, no event has occurred which, but for the passage of time, the giving of notice, or both, would constitute a default under any Property Document, (c) all rents, additional rents and other sums due and payable under the Property Documents have been paid in full in accordance with the applicable terms and conditions of the Property Documents, (d) no party to any Property Document has commenced any action or given or received any notice for the purpose of terminating any Property Document and (e) the representations made in any estoppel or similar document delivered with respect to any Property Document in connection with the Loan are, to Borrower’s knowledge, true, complete and correct and are hereby incorporated by reference as if fully set forth herein.
Section 3.35. Master Lease Representations. (a) The Master Lease is in full force and effect and has not been modified or amended in any manner whatsoever, (b) there are no material defaults under the Master Lease by any party thereto, and no event has occurred which but for the passage of time, or notice, or both would constitute a material default under the Master Lease, (c) all rents, additional rents and other sums due and payable under the Master Lease have been paid in full, (d) no party to the Master Lease has commenced any action or given or received any notice for the purpose of terminating the Master Lease, (e) the representations made in the Master Lease Estoppel are true, complete and correct and are hereby incorporated by reference as if fully set forth herein and (f) there are no subleases currently executed for the premises demised under the Master Lease.
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Section 3.36. No Change in Facts or Circumstances; Disclosure.
All information submitted by (or on behalf of) Borrower, Guarantor or Sponsor to Lender and in all financial statements, reports, certificates and other documents submitted in connection with the Loan or in satisfaction of the terms thereof and all statements of fact made by Borrower, Sponsor and/or Guarantor in this Agreement or in the other Loan Documents, are accurate, complete and correct in all material respects. There has been no material adverse change in any condition, fact, circumstance or event that would make any such information inaccurate, incomplete or otherwise misleading in any material respect or that otherwise have a Material Adverse Effect. Borrower has disclosed to Lender all material facts and has not failed to disclose any material fact that could cause any representation or warranty made herein to be materially misleading.
Borrower agrees that, unless expressly provided otherwise, all of the representations and warranties of Borrower set forth in this Article 3 and elsewhere in this Agreement and the other Loan Documents shall survive for so long as any portion of the Debt remains owing to Lender. All representations, warranties, covenants and agreements made in this Agreement and in the other Loan Documents shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf.
ARTICLE 4
BORROWER COVENANTS
From the date hereof and until payment and performance in full of all obligations of Borrower under this Agreement, the Security Instrument, the Note and the other Loan Documents or the earlier release of the lien of the Security Instrument (and all related obligations) in accordance with the terms of this Agreement, the Security Instrument, the Note and the other Loan Documents, Borrower hereby covenants and agrees with Lender that:
Section 4.1. Existence. Each Borrower will continuously maintain (a) its existence and shall not dissolve or permit its dissolution, (b) its rights to do business in the State and (c) its franchises and trade names, if any.
Section 4.2. Legal Requirements.
(a) Borrower shall comply in all material respects and shall cause the Property to comply in all material respects with all Legal Requirements affecting the Property or the use thereof (which such covenant shall be deemed to (i) include Environmental Laws and (ii) require Borrower to keep all Permits in full force and effect).
(b) Borrower shall from time to time, upon Lender’s reasonable request and Lender’s reasonable belief that there is a change in circumstances with regard to the Property (such request not to be made more than one time during any twelve (12) month period (unless such request is made during the continuance of Event of Default or in connection with a Secondary Market Transaction)), provide Lender with evidence reasonably satisfactory to Lender that the Property complies with all Legal Requirements or is exempt from compliance with Legal Requirements, which such satisfactory evidence may be a certificate from a Responsible Officer of Borrower certifying to the same to Borrower’s actual knowledge.
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(c) Borrower shall give prompt notice to Lender of the receipt by Borrower of any written notice related to a material violation of any Legal Requirements and of the commencement of any proceedings or investigations which relate to compliance with Legal Requirements.
(d) After prior written notice to Lender (which notice shall not be required with respect to immaterial matters provided: (i) no Material Adverse Effect has occurred or is reasonably likely to occur in connection with the applicable contest and alleged violation (including, without limitation, the Property shall not at any time be in danger of being sold, forfeited, terminated, canceled or lost and at no time shall there shall be any danger of the lien of the Security Instrument being primed by any related lien), (ii) to the extent any costs, fees or expenses are at issue, have accrued or are reasonably likely to be assessed or incurred they shall be less than (or, as applicable, shall not be likely to exceed) $10,000 in the aggregate and (iii) Borrower diligently pursues its contest rights in full accordance with this Section 4.2(d)), Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the validity of any Legal Requirement, the applicability of any Legal Requirement to Borrower or any Individual Property or any alleged violation of any Legal Requirement, provided that (i) no Event of Default has occurred and is continuing (unless the applicable Event of Default has been affirmatively and expressly waived in writing by Lender in Lender’s sole discretion); (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any instrument to which Borrower is subject and shall not constitute a default thereunder and such proceeding shall be permitted by and conducted in accordance with all applicable Legal Requirements; (iii) neither the applicable Individual Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost; (iv) Borrower shall promptly upon final determination thereof comply with any such Legal Requirement determined to be valid or applicable or cure any violation of any Legal Requirement; (v) such proceeding shall suspend the enforcement of the contested Legal Requirement against Borrower or the applicable Individual Property; and (vi) Borrower shall furnish such security as may be required in the proceeding, or as may be reasonably requested by Lender, to insure compliance with such Legal Requirement, together with all interest and penalties payable in connection therewith. Lender may apply any such security or part thereof, as necessary to cause compliance with such Legal Requirement at any time when, in the reasonable judgment of Lender, the validity, applicability or violation of such Legal Requirement is finally established or the applicable Individual Property (or any part thereof or interest therein) shall be in danger of being sold, forfeited, terminated, cancelled or lost.
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Section 4.3. Maintenance and Use of Property. Borrower shall cause the Property to be maintained in a good and safe condition and repair, reasonable wear and tear excepted. The Improvements and the Personal Property shall not be removed, demolished or materially altered (except for normal replacement of the Personal Property) without the consent of Lender (which such consent shall not be unreasonably withheld, conditioned or delayed (subject, in each case, to REMIC Requirements)) or as otherwise permitted pursuant to Section 4.21 hereof. Borrower shall perform (or shall cause to be performed) the prompt repair, replacement and/or rebuilding of any part of the Property which may be destroyed by any casualty, or become damaged, worn or dilapidated or which may be affected by any proceeding of the character referred to in Section 3.14 hereof and shall complete and pay for (or cause the completion and payment for) any structure at any time in the process of construction or repair on the Land. Borrower shall operate the Property for the same uses as the Property is currently operated and Borrower shall not, without the prior written consent of Lender (which such consent shall not be unreasonably withheld, conditioned or delayed (subject, in each case, to REMIC Requirements)), (i) change the use of the Property or (ii) initiate, join in, acquiesce in, or consent to any change in any private restrictive covenant, zoning law or other public or private restriction, limiting or defining the uses which may be made of the Property or any part thereof. If under applicable zoning provisions the use of all or any portion of the Property is or shall become a nonconforming use, Borrower will not cause or permit the nonconforming use to be discontinued or the nonconforming Improvement to be abandoned without the express written consent of Lender (which such consent shall not be unreasonably withheld, conditioned or delayed (subject, in each case, to REMIC Requirements)).
Section 4.4. Waste. Borrower shall not commit or suffer any physical waste of the Property or make any change in the use of the Property which will in any way materially increase the risk of fire or other hazard arising out of the operation of the Property, or take any action that might invalidate or give cause for cancellation of any Policy, or do or knowingly permit to be done thereon anything that would result in a Material Adverse Effect. Borrower will not, without the prior written consent of Lender, permit any drilling or exploration for or extraction, removal, or production of any minerals from the surface or the subsurface of the Property, regardless of the depth thereof or the method of mining or extraction thereof.
Section 4.5. Taxes and Other Charges.
(a) Subject to the contest rights provided in Section 4.5(b), Borrower shall pay (or cause to be paid) all Taxes and Other Charges now or hereafter levied or assessed or imposed against the Property or any part thereof as the same become due and payable; provided, however, prior to the occurrence and continuance of an Event of Default, Borrower’s obligation to directly pay Taxes shall be suspended for so long as Borrower complies with the terms and provisions of Section 8.6 hereof. Borrower shall furnish to Lender receipts for the payment of the Taxes and the Other Charges prior to the date the same shall become delinquent (provided, however, that Borrower is not required to furnish such receipts for payment of Taxes in the event that such Taxes have been paid by Lender pursuant to Section 8.6 hereof). Borrower shall not suffer and shall, subject to the contest rights provided in Section 4.5(b), promptly cause to be paid and discharged any lien or charge whatsoever which may be or become a lien or charge against the Property (or any portion thereof), and shall promptly pay for all utility services provided to the Property (or any portion thereof).
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(b) After prior written notice to Lender (which notice shall not be required with respect to immaterial matters provided: (i) no Material Adverse Effect has occurred or is reasonably likely to occur in connection with the applicable contest and alleged violation (including, without limitation, the Property shall not at any time be in danger of being sold, forfeited, terminated, canceled or lost and at no time shall there shall be any danger of the lien of the Security Instrument being primed by any related lien), (ii) the contested payment shall be less than $10,000 in the aggregate and (iii) Borrower diligently pursues its contest rights in full accordance with this Section 4.5(b)), Borrower, at its own expense, may contest (or permit to be contested) by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any Taxes or Other Charges, provided that (i) no Event of Default has occurred and remains uncured; (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder and such proceeding shall be permitted by and conducted in accordance with all applicable Legal Requirements; (iii) neither the applicable Individual Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost; (iv) Borrower shall promptly upon final determination thereof pay the amount of any such Taxes or Other Charges, together with all costs, interest and penalties which may be payable in connection therewith; (v) such proceeding shall suspend the collection of such contested Taxes or Other Charges from the applicable Individual Property or such Taxes and Other Charges shall have been paid in full (together with all interest, penalties or other similar sums due) pending resolution of the applicable contest; and (vi) Borrower shall furnish such security as may be required in the proceeding, or deliver to Lender such reserve deposits as may be reasonably requested by Lender, to insure the payment of any such Taxes or Other Charges, together with all interest and penalties thereon (provided, that, Lender shall not require such reserve if Lender reasonably determines that all applicable Taxes and Other Charges have been paid in full (together with all interest, penalties or other similar sums due) pending resolution of the applicable contest). Lender may pay over any such cash deposit or part thereof held by Lender to the claimant entitled thereto at any time when, in the reasonable judgment of Lender, the entitlement of such claimant is established or the applicable Individual Property (or part thereof or interest therein) shall be in danger of being sold, forfeited, terminated, canceled or lost or there shall be any danger of the lien of the Security Instrument being primed by any related lien.
Section 4.6. Litigation. Borrower shall give prompt written notice to Lender of any litigation or governmental proceedings pending or threatened in writing against Borrower which might have a Material Adverse Effect.
Section 4.7. Access to Property. Borrower shall permit agents, representatives and employees of Lender to inspect the Property or any part thereof at reasonable hours upon reasonable advance notice.
Section 4.8. Notice of Default. Borrower shall promptly advise Lender of any material adverse change in Borrower’s, Sponsor’s and/or Guarantor’s condition (financial or otherwise) or of the occurrence of any Default or Event of Default of which Borrower has knowledge.
Section 4.9. Cooperate in Legal Proceedings. Except with respect to a bona fide good faith claim made by Borrower against Lender, Borrower shall cooperate fully with Lender with respect to any proceedings before any court, board or other Governmental Authority which may in any way affect the rights of Lender hereunder or any rights obtained by Lender under any of the Note, the Security Instrument or the other Loan Documents and, in connection therewith, permit Lender, at its election, to participate in any such proceedings.
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Section 4.10. Intentionally Omitted.
Section 4.11. Intentionally Omitted.
Section 4.12. Books and Records.
(a) Borrower shall furnish to Lender:
(i) monthly Smith Travel Research Reports, including occupancy statistics, average daily room rates, market penetration and relevant competing hotel properties, with respect to each Individual Property during the subject month within thirty (30) days after the end of each calendar month (provided, however, at the end of each calendar quarter, Borrower shall have forty five (45) days);
(ii) to the extent there are any Leases in place at the Property, monthly certified rent rolls for each Individual Property within thirty (30) days after the end of each calendar month (provided, however, at the end of each calendar quarter, Borrower shall have forty five (45) days);
(iii) to the extent any Franchise Agreement or other agreement containing Hotel Operating Agreements is in place, in any month that Borrower receives the same from any Franchisor or any similar Person, Borrower shall deliver to Lender a quality control report (including, without limitation, franchise scores and similar evaluations) in form reasonable acceptable to Lender from the applicable Franchisor (or similar entity, as applicable) together with the operating statements required by clause (iv) below covering the related month in which Borrower receives the applicable quality control report (Borrower acknowledges that it shall deliver said quality control reports for each Individual Property no less often that one (1) time during each calendar year);
(iv) monthly operating statements of each Individual Property detailing the revenues received, the expenses incurred and the components of Underwritable Cash Flow before and after Debt Service and major capital improvements for the period of calculation (including, without limitation, FF&E and PIP expenditures and containing appropriate year-to-date information, within thirty (30) days after the end of each calendar month (provided, however, at the end of each calendar quarter, Borrower shall have forty five (45) days);
(v) within one hundred twenty (120) days after the close of each fiscal year of Borrower (or such earlier time as Lender shall determine in its reasonable discretion is necessary to comply with any Legal Requirements, including, without limitation, Regulation AB provided that: (a) Lender shall notify Borrower in writing that a shorter time period is required and (b) unless there is a change in Regulation AB or any other applicable Legal Requirement after the Closing Date, in no event shall said time period be shortened to sooner than eighty five (85) days after the close of each fiscal year of Borrower), (A) with respect to Borrower, an annual balance sheet, statement of cash flow, profit and loss statement and statement of change in financial position and (B) an annual operating statement, in each case, detailing occupancy statistics (including an average daily room rate), the revenues received, the expenses incurred and the components of Underwritable Cash Flow before and after Debt Service and major capital improvements for the period of calculation (including, without limitation, FF&E and PIP expenditures and information as to compliance with the Franchise Agreement (if any) and the terms hereof with respect to the same (including, without limitation, any franchise scores, franchise inspection reports, source contribution reports (showing, among things, sale segmentations) or other similar evaluations (if any) with respect to each Individual Property)) and containing appropriate year-to-date information;
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(vi) by no later than December 15th of each calendar year, an annual operating budget for the next succeeding calendar year presented on a monthly basis consistent with the annual operating statement described above for each Individual Property, including cash flow projections for the upcoming year and all proposed capital replacements and improvements and FF&E, which such budget shall not take effect until approved by Lender (after such approval has been given in writing, each such approved budget shall be referred to herein, individually or collectively (as the context requires), as the “Approved Annual Budget”). Until such time that Lender approves a proposed Annual Budget, (1) to the extent that an Approved Annual Budget does not exist for the immediately preceding calendar year, all operating expenses of the Property for the then current calendar year shall be deemed extraordinary expenses of the Property and shall be subject to Lender’s prior written approval (not to be unreasonably withheld or delayed) and (2) to the extent that an Approved Annual Budget exists for the immediately preceding calendar year, such Approved Annual Budget shall apply to the then current calendar year; provided, that such Approved Annual Budget shall be adjusted to reflect actual increases in Taxes, Insurance Premiums and utilities expenses. Without limiting the foregoing, any amendments or modifications to an Approved Annual Budget shall require Lender’s prior written consent and shall not take effect until so approved. Lender hereby acknowledges that: (x) it has reviewed and approved the annual budget for the calendar year 2016 and a budget for the calendar year 2017, each of which shall be deemed an “Approved Annual Budget” for purposes hereunder (Lender further acknowledges that Borrower shall be permitted to modify the Approved Annual Budget for 2017 subject to Lender’s approval, which shall not be unreasonably withheld);
(vii) together with the monthly operating statements required by Section 4.12(a)(iv) above, (A) a calculation of the then current Debt Service Coverage Ratio, together with such back-up information as Lender shall require and (B) a calculation of the amount of Excess Cash Flow generated by each Individual Property for such period together with such back-up information as Lender shall require; and
(b) Upon request from Lender (which such request shall be made no more frequently than quarterly (unless in connection with a Trigger Period or Secondary Market Transaction)), Borrower shall furnish in a timely manner to Lender:
(i) to the extent there are any Leases in place at the Property, an accounting of all Security Deposits, including the nature and type of Security Deposit, the name and identification number of the accounts in which such Security Deposits are held (if applicable), such details regarding any Security Deposit not held in the form of cash as Lender may reasonably require, the name and address of the financial institutions in which such Security Deposits are held or have been otherwise issued by and the name of the Person to contact at such financial institution, along with any authority or release necessary for Lender to obtain information regarding such accounts or other information directly from such financial institutions; and
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(ii) evidence reasonably acceptable to Lender of compliance with the terms and conditions of Articles 5 and 9 hereof.
(c) During a Trigger Period or in connection with any Secondary Market Transaction, Borrower shall, within ten (10) days of request, furnish Lender (and shall cause Sponsor and/or Guarantor to furnish to Lender) with such other additional financial or management information (including State and Federal tax returns) as may, from time to time, be reasonably required by Lender in form and substance satisfactory to Lender. Borrower shall furnish to Lender and its agents convenient facilities for the examination and audit of any such books and records.
(d) Borrower agrees that (i) Borrower shall keep adequate books and records of account and (ii) all Required Financial Items to be delivered to Lender pursuant to Section 4.12 shall: (A) be complete and correct in all material respects; (B) present fairly the financial condition of the applicable Person; (C) disclose all liabilities that are required to be reflected or reserved against; (D) be prepared (1) in the form required by Lender and certified by a Responsible Officer of Borrower (2) in electronic format and, solely to the extent expressly requested by Lender, hardcopy format and (3) in accordance with the Approved Accounting Method; (E) not include any Person other than Borrower and shall show each Borrower and each Individual Property individually and on a combined, aggregate basis with all Borrowers and all Individual Properties; (F) upon request of Lender after the occurrence and during the continuance of an Event of Default, be audited by an independent certified public accountant acceptable to Lender; and (G) upon request of Lender during any Trigger Period, be subjected and evaluated pursuant to a “forensic accounting” (in form and scope satisfactory to Lender) by an independent certified forensic accountant acceptable to Lender. Borrower shall be deemed to warrant and represent that, as of the date of delivery of any such financial statement, there has been no material adverse change in financial condition, nor have any assets or properties been sold, transferred, assigned, mortgaged, pledged or encumbered since the date of such financial statement except as disclosed by Borrower in a writing delivered to Lender. Borrower agrees that all Required Financial Items shall not contain any material misrepresentation or omission of a material fact.
(e) Borrower acknowledges the importance to Lender of the timely delivery of each of the items required by this Section 4.12 and the other financial reporting items required by this Agreement (each, a “Required Financial Item” and, collectively, the “Required Financial Items”). In the event Borrower fails to deliver to Lender any of the Required Financial Items within the time frame specified herein and such failure continues for ten (10) Business Days after Lender provides Borrower notice of the same (each such event, a “Reporting Failure”), the same shall, at Lender’s option, constitute an immediate Event of Default hereunder and, without limiting Lender’s other rights and remedies with respect to the occurrence of such an Event of Default, Borrower shall pay to Lender the sum of $1,000 per occurrence for each Reporting Failure. It shall constitute a further Event of Default hereunder if any such payment is not received by Lender within thirty (30) days of the date on which such payment is due, and Lender shall be entitled to the exercise of all of its rights and remedies provided hereunder.
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Section 4.13. Estoppel Certificates.
(a) After request by Lender (which such request shall be made no more frequently than once per calendar year (unless in connection with a Trigger Period or Secondary Market Transaction)), Borrower, within fifteen (15) days of such request, shall furnish Lender or any proposed assignee with a statement, duly acknowledged and certified, setting forth (i) to Borrower’s knowledge, the original principal amount of the Loan, (ii) to Borrower’s knowledge, the unpaid principal amount of the Loan, (iii) to Borrower’s knowledge, the rate of interest of the Loan, (iv) to Borrower’s knowledge, the terms of payment and maturity date of the Loan, (v) the date installments of interest and/or principal were last paid, (vi) that, except as provided in such statement, no Event of Default exists, (vii) that this Agreement, the Note, the Security Instrument and the other Loan Documents are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification, (viii) whether any offsets or defenses exist against the obligations secured hereby and, if any are alleged to exist, a detailed description thereof, (ix) that all Leases are in full force and effect and have not been modified (or if modified, setting forth all modifications), (x) the date to which the Rents thereunder have been paid pursuant to the Leases, (xi) whether or not, to the best knowledge of Borrower, any of the lessees under the Leases are in default under the Leases, and, if any of the lessees are in default, setting forth the specific nature of all such defaults, (xii) the amount of Security Deposits held by Borrower under each Lease and that such amounts are consistent with the amounts required under each Lease, and (xiii) as to any other matters reasonably requested by Lender and reasonably related to the Leases, the obligations created and evidenced hereby and by the Security Instrument or the Property.
(b) Borrower shall use commercially reasonable efforts to deliver to Lender, promptly upon request (which such request shall be made no more frequently than once per calendar year (unless in connection with a Trigger Period or Secondary Market Transaction)), duly executed estoppel certificates from any one or more Tenants as required by Lender attesting to such facts regarding the Lease as Lender may require, including, but not limited to, attestations that each Lease covered thereby is in full force and effect with no defaults thereunder on the part of any party, that none of the Rents have been paid more than one month in advance, except as security, no free rent or other concessions are due lessee and that the lessee claims no defense or offset against the full and timely performance of its obligations under the Lease.
(c) Intentionally Omitted.
(d) Borrower shall use commercially reasonable efforts to deliver to Lender, within fifteen (15) days of request (which such request shall be made no more frequently than once per calendar year (unless in connection with a Trigger Period or Secondary Market Transaction)), estoppel certificates from each party under any Property Document in form and substance reasonably acceptable to Lender.
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Section 4.14. Leases and Rents.
(a) All Leases and all renewals of Leases executed after the date hereof shall (i) provide for rental rates comparable to existing local market rates for similar properties, (ii) be on commercially reasonable terms with unaffiliated, third parties (unless otherwise consented to by Lender), (iii) provide that such Lease is subordinate to the Security Instrument and that the lessee will attorn to Lender and any purchaser at a foreclosure sale and (iv) not contain any terms which would have a Material Adverse Effect. Notwithstanding anything to the contrary contained herein, Borrower shall not, without the prior written approval of Lender (which approval shall not be unreasonably withheld, conditioned or delayed), enter into, renew, extend, amend, modify, permit any assignment of or subletting under, waive any provisions of, release any party to, terminate, reduce rents under, accept a surrender of space under, or shorten the term of, in each case, any Lease.
(b) Without limitation of subsection (a) above, Borrower (i) shall observe and perform the obligations imposed upon the lessor under the Leases in a commercially reasonable manner; (ii) shall enforce the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed in a commercially reasonable manner; (iii) shall not collect any of the Rents more than one (1) month in advance (other than Security Deposits); (iv) shall not execute any assignment of lessor’s interest in the Leases or the Rents (except as contemplated by the Loan Documents); (v) shall not, without Lender’s prior written consent, alter, modify or change any Lease to the extent the same would, individually or in the aggregate, (A) cause any such Lease to violate 4.14(a)(i) through (iii) above or (B) have a Material Adverse Effect; and (vi) shall hold all Security Deposits in accordance with Legal Requirements. Upon request, Borrower shall furnish Lender with executed copies of all Leases.
(c) Notwithstanding anything contained herein to the contrary, Borrower shall not willfully withhold from Lender any information reasonably requested by Lender regarding renewal, extension, amendment, modification, waiver of provisions of, termination, rental reduction of, surrender of space of, or shortening of the term of, any Lease during the term of the Loan. Borrower further agrees to provide Lender with written notice of a Tenant “going dark” under such Tenant’s Lease within five (5) Business Days after Borrower (or any Affiliate thereof) becomes aware that such Tenant “goes dark”. Borrower agrees to provide Lender with written notice of any event of default under a Lease within five (5) business days after the occurrence of any such event of default. Borrower’s failure to provide any of the aforesaid notices shall, at Lender’s option, constitute an Event of Default. A Tenant “going dark” for a temporary closures due to normal course of business inventory and/or remodeling (provided that the closure for remodeling does not exceed 30 days) shall not be deemed to implicate the foregoing.
(d) Borrower shall notify Lender in writing, within two (2) Business Days following receipt thereof, of Borrower’s receipt of any early termination fee or payment or other termination fee or payment paid by any Tenant under any Lease, and Borrower further covenants and agrees that Borrower shall hold any such termination fee or payment in trust for the benefit of Lender and that any use of such termination fee or payment shall be subject in all respects to Lender’s prior written consent in Lender’s reasonable discretion (which consent may include, without limitation, a requirement by Lender that such termination fee or payment be placed in reserve with Lender to be disbursed by Lender for tenant improvement and leasing commission costs with respect to the Property and/or for payment of the Debt or otherwise in connection with the Loan evidenced by the Note and/or the Property, as so determined by Lender). The foregoing consent right of Lender (including, without limitation, any reserve requirement) shall not be subject to any “cap” or similar limit on the amount of Reserve Funds held by Lender.
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(e) Upon the occurrence of an Event of Default, Borrower shall, within thirty (30) days of demand by Lender, deliver to Lender all Security Deposits. Without limitation of any other term or provision contained herein, for purposes of clarification, for a Security Deposit to be deemed “delivered to Lender” in connection with the foregoing, the same must be in the form of cash or in a letter of credit solely in Lender’s name.
Section 4.15. Management Agreement.
(a) Borrower shall (i) perform, observe and enforce all of the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed, observed and enforced to the end that all things shall be done which are necessary to keep unimpaired the rights of Borrower under the Management Agreement, (ii) promptly notify Lender of any default under the Management Agreement of which Borrower has knowledge; (iii) promptly deliver to Lender a copy of any notice of default or other material notice received by Borrower under the Management Agreement; (iv) promptly give notice to Lender of any notice or information that Borrower receives which indicates that Manager is terminating the Management Agreement or that Manager is otherwise discontinuing its management of the Property; and (v) promptly enforce in all material respects the performance and observance of all of the covenants required to be performed and observed by Manager under the Management Agreement.
(b) Borrower shall not, without the prior written consent of Lender (which such consent shall not be unreasonably withheld, conditioned or delayed), (i) surrender, terminate or cancel the Management Agreement, consent to any assignment of the Manager’s interest under the Management Agreement or otherwise replace Manager or renew or extend any Management Agreement (exclusive of, in each case, any automatic renewal or extension in accordance with its terms) or enter into any other new or replacement management agreement with respect to the Property; provided, however, that Borrower may replace Manager and/or consent to the assignment of Manager’s interest under the Management Agreement, in each case, in accordance with the applicable terms and conditions hereof and of the other Loan Documents; (ii) reduce or consent to the reduction of the term of the Management Agreement; (iii) increase or consent to the increase of the amount of any charges under the Management Agreement; or (iv) otherwise modify, change, alter or amend, in any material respect, or waive or release any of its material rights and remedies under, the Management Agreement in any material respect.
(c) If Borrower shall default in the performance or observance of any material term, covenant or condition of the Management Agreement on the part of Borrower to be performed or observed beyond all applicable notice and cure periods thereunder, then, without limiting the generality of the other provisions of this Agreement, and without waiving or releasing Borrower from any of its obligations hereunder, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act or take any action as may be appropriate to cause all the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed or observed to be promptly performed or observed on behalf of Borrower, to the end that the rights of Borrower in, to and under the Management Agreement shall be kept unimpaired and free from default. Lender and any Person designated by Lender shall have, and are hereby granted, the right to enter upon the Property at any time and from time to time during normal business hours for the purpose of taking any such action. If Manager shall deliver to Lender a copy of any notice sent to Borrower of default under the Management Agreement, such notice shall constitute full protection to Lender for any action taken or omitted to be taken by Lender in good faith, in reliance thereon. Borrower shall notify Lender if Manager sub-contracts to a third party or an Affiliate any or all of its management responsibilities under the Management Agreement.
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(d) Borrower shall, from time to time, use commercially reasonable efforts to obtain from Manager under the Management Agreement such certificates of estoppel with respect to compliance by Borrower with the terms of the Management Agreement as may be requested by Lender. Borrower shall exercise each individual option, if any, to extend or renew the term of the Management Agreement upon demand by Lender made at any time within ninety (90) days of the last day upon which any such option may be exercised, and Borrower hereby expressly authorizes and appoints Lender its attorney-in-fact to exercise any such option in the name of and upon behalf of Borrower, which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest (provided, that, Lender shall only exercise the aforesaid right after the occurrence and during the continuance of an Event of Default).
(e) In the event that the Management Agreement is scheduled to expire at any time during the term of the Loan, Borrower shall submit to Lender by no later than 60 days prior to such expiration a draft replacement management agreement or a draft extension of the Management Agreement for approval in accordance with the terms and conditions hereof. Borrower’s failure to submit the same within such time-frame shall, at Lender’s option, constitute an immediate Event of Default.
(f) Borrower shall have the right to replace Manager or consent to the assignment of Manager’s rights under the Management Agreement, in each case, to the extent that (i) no Event of Default has occurred and is continuing, (ii) Lender receives at least thirty (30) days prior written notice of the same, (iii) such replacement or assignment (as applicable) will not result in a Property Document Event and (iv) the applicable New Manager is a Qualified Manager engaged pursuant to a Qualified Management Agreement. Borrower shall not permit any Affiliated Manager to resign as Manager or otherwise cease managing the Property until a New Manager is engaged to manage the Property in accordance with the applicable terms and conditions hereof and of the other Loan Documents.
(g) Without limitation of the foregoing, if the Management Agreement is terminated or expires (including, without limitation, pursuant to the Assignment of Management Agreement), comes up for renewal or extension (exclusive of, in each case, any automatic renewal or extension in accordance with its terms), ceases to be in full force or effect or is for any other reason no longer in effect (including, without limitation, in connection with any Sale or Pledge), then Lender, at its option, may require Borrower to engage, in accordance with the terms and conditions set forth herein and in the Assignment of Management Agreement, a New Manager to manage the Property, which such New Manager shall (i) to the extent a Trigger Period is continuing and if opted by Lender, selected by Lender and (ii) be a Qualified Manager and shall be engaged pursuant to a Qualified Management Agreement.
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(h) As conditions precedent to any engagement of a New Manager hereunder, (i) New Manager and Borrower shall execute an Assignment of Management Agreement in the form reasonably required by Lender (with such changes thereto as may be required by the Rating Agencies), (ii) to the extent that such New Manager is an Affiliated Manager, Borrower shall deliver to Lender a New Non-Consolidation Opinion with respect to such New Manager and new management agreement and (iii) if requested by Lender, Borrower shall deliver to Lender evidence that the engagement of such New Manager will not result in a Property Document Event.
(i) Borrower shall notify Lender in writing, within five (5) Business Days following receipt thereof, of Borrower’s receipt of any early termination fee or similar payment or other termination fee or similar payment paid by any Manager, and Borrower further covenants and agrees that Borrower shall hold any such termination fee or payment in trust for the benefit of Lender and that any use of such termination fee or payment shall be subject in all respects to Lender’s prior written consent in Lender’s reasonable discretion (which consent may include, without limitation, a requirement by Lender that such termination fee or payment be placed in reserve with Lender to be disbursed by Lender for replacing such Manager and/or for payment of the Debt or otherwise in connection with the Loan evidenced by the Note and/or the Property, as so determined by Lender). The foregoing consent right of Lender (including, without limitation, any reserve requirement) shall not be subject to any “cap” or similar limit on the amount of Reserve Funds held by Lender.
(j) Any sums expended by Lender pursuant to this Section shall bear interest at the Default Rate from the date such cost is incurred to the date of payment to Lender, shall be deemed to constitute a portion of the Debt, shall be secured by the lien of the Security Instrument and the other Loan Documents and shall be immediately due and payable upon demand by Lender therefor.
Section 4.16. Payment for Labor and Materials.
(a) Subject to Section 4.16(b) below, Borrower will promptly pay (or cause to be paid) when due all bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Property (any such bills and costs, a “Work Charge”) and never permit to exist in respect of the Property or any part thereof any lien or security interest, even though inferior to the liens and the security interests hereof, and in any event never permit to be created or exist in respect of the Property or any part thereof any other or additional lien or security interest other than the liens or security interests created hereby and by the Security Instrument, except for the Permitted Encumbrances.
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(b) After prior written notice to Lender, Borrower (which notice shall not be required with respect to immaterial matters provided: (i) no Material Adverse Effect has occurred or is reasonably likely to occur in connection with the applicable contest and alleged violation (including, without limitation, the Property shall not at any time be in danger of being sold, forfeited, terminated, canceled or lost and at no time shall there shall be any danger of the lien of the Security Instrument being primed by any related lien), (ii) the contested payment shall be less than $10,000 in the aggregate and (iii) Borrower diligently pursues its contest rights in full accordance with this Section 4.16(b)), at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the validity of any Work Charge, the applicability of any Work Charge to Borrower or to any Individual Property or any alleged non-payment of any Work Charge and defer paying the same, provided that (i) no Event of Default has occurred and is continuing; (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any instrument to which Borrower is subject and shall not constitute a default thereunder and such proceeding shall be conducted in accordance with all applicable Legal Requirements; (iii) neither the applicable Individual Property nor any part thereof or interest therein will be in imminent danger of being sold, forfeited, terminated, cancelled or lost; (iv) Borrower shall promptly upon final determination thereof pay (or cause to be paid) any such contested Work Charge determined to be valid, applicable or unpaid; (v) such proceeding shall suspend the collection of such contested Work Charge from the applicable Individual Property or Borrower shall have paid the same (or shall have caused the same to be paid or bonded over) under protest; and (vi) Borrower shall furnish (or cause to be furnished) such security as may be required in the proceeding, or as may be reasonably requested by Lender, to insure payment of such Work Charge, together with all interest and penalties payable in connection therewith. Lender may apply any such security or part thereof, as necessary to pay for such Work Charge at any time when, in the judgment of Lender, the validity, applicability or non-payment of such Work Charge is finally established or the applicable Individual Property (or any part thereof or interest therein) shall be in present danger of being sold, forfeited, terminated, cancelled or lost.
Section 4.17. Performance of Other Agreements. Borrower shall observe and perform each and every term to be observed or performed by Borrower pursuant to the terms of: (a) any agreement or recorded instrument affecting or pertaining to the Property and any amendments, modifications or changes thereto (to the extent that Borrower’s failure to so observe and/or perform each and every term and/or agreement would reasonably be expected to result in, or constitute, a Material Adverse Effect) and (b) any agreement or recorded instrument given by Borrower to Lender for the purpose of further securing the Debt.
Section 4.18. Debt Cancellation. Borrower shall not cancel or otherwise forgive or release any claim or debt (other than termination of Leases in accordance herewith) owed to Borrower by any Person, except for adequate consideration and in the ordinary course of Borrower’s business.
Section 4.19. ERISA.
(a) Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights hereunder or under the other Loan Documents) to be a non-exempt prohibited transaction under ERISA.
(b) Borrower further covenants and agrees to deliver to Lender such certifications or other evidence from time to time throughout the term of the Security Instrument, as requested by Lender in its reasonable discretion, that (i) Borrower is not an “employee benefit plan” as defined in Section 3(3) of ERISA, or other retirement arrangement, which is subject to Title I of ERISA or Section 4975 of the IRS Code, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (ii) Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (iii) one or more of the following circumstances is true:
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(A) Equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R. § 2510.3 101(b)(2);
(B) Less than 25 percent of each outstanding class of equity interests in Borrower are held by “benefit plan investors” within the meaning of 29 C.F.R.§ 2510.3 101(f)(2); or
(C) Borrower qualifies as an “operating company” or a “real estate operating company” within the meaning of 29 C.F.R § 2510.3 101(c) or (e) or an investment company registered under The Investment Company Act of 1940, as amended.
(c) Borrower shall not maintain, sponsor, contribute to or become obligated to contribute to, or suffer or permit any member of Borrower’s “controlled group of corporations” to maintain, sponsor, contribute to or become obligated to contribute to a “defined benefit plan” or a “multiemployer pension plan”. The terms in quotes above are defined in Section 3.7 of this Agreement.
Section 4.20. No Joint Assessment. Borrower shall not suffer, permit or initiate the joint assessment of any Individual Property with (a) any other real property constituting a tax lot separate from the applicable Individual Property, or (b) any portion of the applicable Individual Property which may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes which may be levied against such personal property shall be assessed or levied or charged to the applicable Individual Property.
Section 4.21. Alterations. Notwithstanding anything contained herein (including, without limitation, Article 8 hereof) to the contrary, Lender’s prior approval shall be required in connection with any alterations to any Improvements (a) that may have a Material Adverse Effect, (b) the cost of which (including any related alteration, improvement or replacement) is reasonably anticipated to exceed the applicable Alteration Threshold or (c) that are structural in nature, which approval may be granted or withheld in Lender’s reasonable discretion (not to be unreasonably withheld, conditioned or delayed, but subject in each case to REMIC Requirements). Notwithstanding the foregoing or anything to the contrary contained herein, Lender’s consent shall not be required with respect to the Immediate Repairs. If the total unpaid amounts incurred and to be incurred with respect to any alterations to the Improvements shall at any time exceed the applicable Alteration Threshold, Borrower shall promptly deliver to Lender as security for the payment of such excess amounts and as additional security for Borrower’s obligations under the Loan Documents any of the following: (i) cash, (ii) U.S. Obligations, (iii) other security acceptable to Lender, (provided that Lender shall have received a Rating Agency Confirmation as to the form and issuer of same), or (iv) a completion bond (provided that Lender shall have received a Rating Agency Confirmation as to the form and issuer of same). Such security shall be in an amount equal to the excess of the total unpaid amounts incurred and to be incurred with respect to such alterations to the Improvements over the applicable Alteration Threshold.
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Section 4.22. Property Document Covenants. Without limiting the other provisions of this Agreement and the other Loan Documents, Borrower shall (i) promptly perform and/or observe, in all material respects, all of the covenants and agreements required to be performed and observed by it under the Property Documents and do all things necessary to preserve and to keep unimpaired its material rights thereunder; (ii) promptly notify Lender of any material default under the Property Documents of which it is aware; (iii) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, notice, report and estimate received by it under the Property Documents; (iv) enforce the performance and observance, in all material respects, of all of the covenants and agreements required to be performed and/or observed under the Property Documents in a commercially reasonable manner; (v) cause the applicable Individual Property to be operated, in all material respects, in accordance with the Property Documents; and (vi) not, without the prior written consent of Lender (which such consent shall not be unreasonably withheld, conditioned or delayed), (A) enter into any new Property Document or replace or execute modifications to any existing Property Documents or renew or extend the same (exclusive of, in each case, any automatic renewal or extension in accordance with its terms), (B) surrender, terminate or cancel the Property Documents, (C) reduce or consent to the reduction of the term of the Property Documents, (D) increase or consent to the increase of the amount of any charges under the Property Documents, (E) otherwise modify, change, supplement, alter or amend, or waive or release any of its rights and remedies under, the Property Documents in any material respect or (F) following the occurrence and during the continuance of an Event of Default, exercise any rights, make any decisions, grant any approvals or otherwise take any action under the Property Documents.
Section 4.23. Master Lease Covenants. Without limitation of the other provisions herein (including, without limitation, Sections 4.14 and 4.22 hereof), Borrower makes the following covenants with respect to the Master Lease:
(a) Borrower shall, at its sole cost and expense, promptly and timely perform and observe all the terms, covenants and conditions required to be performed and observed by Borrower under the Master Lease (including, but not limited to, the payment of all rent, additional rent, percentage rent and other charges required to be paid under the Master Lease).
(b) If Borrower shall be in default under the Master Lease, Borrower hereby grants Lender the right (but not the obligation) to cause the default or defaults under the Master Lease to be remedied and otherwise exercise any and all rights of Borrower under the Master Lease, as may be necessary to prevent or cure any default provided such actions are necessary to protect Lender’s interest under the Loan Documents, and Lender shall have the right to enter all or any portion of the Property, at such times and in such manner as Lender deems necessary, to prevent or to cure any such default.
(c) The actions or payments of Lender to cure any default by Borrower under the Master Lease shall not remove or waive, as between Borrower and Lender, the default that occurred under this Agreement by virtue of the default by Borrower under the Master Lease. All sums expended by Lender to cure any such default shall be paid by Borrower to Lender, upon demand, with interest on such sum at the rate set forth in this Agreement from the date such sum is expended to and including the date the reimbursement payment is made to Lender. All such indebtedness shall be deemed to be secured by the Security Instrument.
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(d) Borrower shall notify Lender promptly in writing of the occurrence of any material default under the Master Lease, and the receipt by Borrower of any notice (written or otherwise) under the Master Lease noting or claiming the occurrence of any default under the Master Lease. Borrower shall promptly deliver to Lender a copy of any such written notice of default.
(e) Within ten (10) days after receipt of written demand by Lender, Borrower shall furnish to Lender an estoppel certificate relating to the Master Lease duly executed by Borrower stating the date through which rent has been paid and whether or not there are any defaults thereunder and specifying the nature of such claimed defaults, if any.
(f) Borrower shall promptly execute, acknowledge and deliver to Lender such instruments as may reasonably be required to permit Lender to cure any default under the Master Lease or permit Lender to take such other action required to enable Lender to cure or remedy the matter in default and preserve the security interest of Lender under the Loan Documents with respect to the Property. Borrower irrevocably appoints Lender as its true and lawful attorney-in- fact to do, in its name or otherwise, any and all acts and to execute any and all documents that are necessary to preserve any rights of Borrower under or with respect to the Master Lease, including, without limitation, the right to effectuate any extension or renewal of the Master Lease, or to preserve any rights of Borrower whatsoever in respect of any part of the Master Lease (and the above powers granted to Lender are coupled with an interest and shall be irrevocable).
(g) Notwithstanding anything to the contrary contained in this Agreement with respect to the Master Lease:
(i) The lien of the Security Instrument attaches to all of Borrower’s rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, including, without limitation, all of Borrower’s rights, as debtor, to remain in possession of the Property.
(ii) Borrower shall not, without Lender’s written consent, elect to treat the Master Lease as terminated under subsection 365(h)(l) of the Bankruptcy Code. Any such election made without Lender’s prior written consent shall be void.
(iii) As security for the Debt, Borrower unconditionally assigns, transfers and sets over to Lender all of Borrower’s claims and rights to the payment of damages arising from any rejection of the Master Lease under the Bankruptcy Code. Lender and Borrower shall proceed jointly or in the name of Borrower in respect of any claim, suit, action or proceeding relating to the rejection of the Master Lease, including, without limitation, the right to file and prosecute any proofs of claim, complaints, motions, applications, notices and other documents in any case in respect of Borrower under the Bankruptcy Code. This assignment constitutes a present, irrevocable and unconditional assignment of the foregoing claims, rights and remedies, and shall continue in effect until all of the Debt shall have been satisfied and discharged in full. Any amounts received by Lender or Borrower as damages arising out of the rejection of the Master Lease as aforesaid shall be applied to all costs and expenses of Lender (including, without limitation, reasonable attorney’s fees and costs) incurred in connection with the exercise of any of its rights or remedies in accordance with the applicable provisions of this Agreement.
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(iv) If, pursuant to subsection 365(h) of the Bankruptcy Code, Borrower seeks to offset, against the rent reserved in the Master Lease, the amount of any damages caused by the nonperformance by Borrower of any of its obligations thereunder after the rejection of the Master Lease under the Bankruptcy Code, then Borrower shall not effect any offset of the amounts so objected to by Lender. If Lender has failed to object as aforesaid within ten (10) days after notice from Borrower in accordance with the first sentence of this subsection, Borrower may proceed to offset the amounts set forth in Borrower’s notice.
(v) If any action, proceeding, motion or notice shall be commenced or filed in respect of Borrower of all or any part of the Property in connection with any case under the Bankruptcy Code, Lender and Borrower shall cooperatively conduct and control any such litigation with counsel agreed upon between Borrower and Lender in connection with such litigation. Borrower shall, upon demand, pay to Lender all costs and expenses (including reasonable attorneys’ fees and costs) actually paid or actually incurred by Lender in connection with the cooperative prosecution or conduct of any such proceedings. All such costs and expenses shall be secured by the lien of the Security Instrument.
(vi) Borrower shall promptly, after obtaining knowledge of such filing, notify Lender orally of any filing by or against Borrower of a petition under the Bankruptcy Code. Borrower shall thereafter promptly give written notice of such filing to Lender, setting forth any information available to Borrower as to the date of such filing, the court in which such petition was filed, and the relief sought in such filing. Borrower shall promptly deliver to Lender any and all notices, summonses, pleadings, applications and other documents received by Borrower in connection with any such petition and any proceedings relating to such petition.
(h) Borrower shall not, without Lender’s written consent, fail to exercise any option or right to renew or extend the term of the Master Lease in accordance with the terms of the Master Lease, and shall give immediate written notice to Lender and shall execute, acknowledge, deliver and record any document requested by Lender to evidence the lien of the Security Instrument on such extended or renewed lease term; provided, however, Borrower shall not be required to exercise any particular such option or right to renew or extend to the extent Borrower shall have received the prior written consent of Lender (which consent may be withheld by Lender in its sole and absolute discretion) allowing Borrower to forego exercising such option or right to renew or extend. If Borrower shall fail to exercise any such option or right as aforesaid, Lender may exercise the option or right as Borrower’s agent and attorney-in-fact as provided above in Lender’s own name or in the name of and on behalf of a nominee of Lender, as Lender may determine in the exercise of its sole and absolute discretion.
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(i) Borrower shall not waive, excuse, condone or in any way release or discharge any Borrower from their respective material obligations, covenant and/or conditions under the Master Lease, in each case, without the prior written consent of Lender.
(j) Borrower shall not, without Lender’s prior written consent, surrender, terminate, forfeit, or suffer or permit the surrender, termination or forfeiture of, or change, modify or amend in a material or adverse manner, the Master Lease. Consent to one amendment, change, agreement or modification shall not be deemed to be a waiver of the right to require consent to other, future or successive amendments, changes, agreements or modifications. No Borrower may acquire another Borrower’s interest in any Master Lease without Lender’s prior written consent in each instance.
(k) Notwithstanding the foregoing or anything to the contrary contained herein or in any other Loan Document, any Lease executed on or after the date hereof shall expressly provide that in the event the Master Lease is terminated, the tenant under such Lease shall automatically attorn to the landlord under the Master Lease as landlord under such Lease.
(l) Borrower hereby acknowledges and agrees that in the event that any of the terms and conditions of the Master Lease and the terms of this Section 4.23 shall conflict or shall otherwise be inconsistent in any respect, the terms and conditions of this Section 4.23 shall control and govern.
Section 4.24. Franchise Agreement Covenants.
(a) Borrower shall cause the Property to be operated, “flagged” and branded pursuant to the Franchise Agreement. Borrower shall not change the “flag” or other brand applicable to the Property, enter into any Hotel Operating Agreement with respect to the Property, replace or terminate (or permit to be replaced or terminated) Franchisor or the Franchise Agreement or consent to the assignment of Franchisor’s rights under the Franchise Agreement, in each case, unless (i) no Event of Default has occurred and is continuing, (ii) Lender receives at least sixty (60) days prior written notice of the same, (iii) after giving effect to same, the Property will be “flagged”, operated and branded pursuant to a Qualified Franchise Agreement, (iv) the applicable New Franchisor is a Qualified Franchisor engaged pursuant to a Qualified Franchise Agreement, (v) all Hotel Operating Agreements are subsumed within the applicable Qualified Franchise Agreement or otherwise collectively approved hereunder in connection with the approval of the applicable Qualified Franchise Agreement, (vi) the same will not result in a Property Document Event or a default under any Lease or management agreement, (vii) Borrower obtains Lender’s prior written approval in connection therewith (which such approval may be granted or withheld in Lender’s reasonable discretion and may be conditioned upon Lender’s receipt of a Rating Agency Confirmation) and (viii) all other applicable conditions related thereto contained herein and in the other Loan Documents (including, without limitation, under the other provisions of this Section 4.24) are satisfied. Borrower shall not permit the existing Franchise Agreement to be terminated until a New Franchisor is engaged for the Property in accordance with the applicable terms and conditions hereof and of the other Loan Documents.
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(b) With respect to any Franchise Agreement, Borrower shall (i) cause the Property to be “flagged”, operated and branded pursuant to the same; (ii) promptly perform and observe all of the covenants required to be performed and observed by it under such Franchise Agreement and do all things reasonably necessary to preserve and to keep unimpaired its material rights thereunder; (iii) promptly notify Lender of any default under such Franchise Agreement or of any termination, cancellation or other modification thereof; (iv) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, report, estimate and other material notices, in each case, received by it under such Franchise Agreement (including, without limitation, notices of default, notices concerning any of the trademarks licensed under such Franchise Agreement and notices requiring Borrower to perform any repairs, alterations, improvements or remodeling to the Property); (v) promptly enforce the performance and observance of all of the material covenants required to be performed and observed by the Franchisor under such Franchise Agreement; and (vi) deliver any franchisor comfort letters reasonably requested by Lender in form and substance reasonably acceptable to Lender. In addition, Borrower shall not, without Lender’s prior written consent (A) surrender, terminate or cancel any Franchise Agreement, reject any Franchise Agreement in any proceeding under Creditors Rights Laws, consent to any assignment of the Franchisor’s interest under any Franchise Agreement or otherwise replace a Franchisor or any Franchise Agreement; provided, however, that Borrower may replace Franchisor, enter into a new Franchise Agreement and/or consent to the assignment of a Franchisor’s interest under any Franchise Agreement, in each case, in accordance with the applicable terms and conditions hereof and of the other Loan Documents; (B) reduce or consent to the reduction of the term of any Franchise Agreement; (C) increase or consent to the increase of the amount of any charges under any Franchise Agreement; (D) otherwise modify, change, supplement, alter, renew, extend or amend, or waive or release any of its rights and remedies under, any Franchise Agreement; or (E) suffer or permit the occurrence of continuance a default beyond any applicable cure period under any Franchise Agreement. Upon request, Borrower shall promptly furnish Lender with a true, correct and complete copy of the then existing Franchise Agreement (including, without limitation, any amendments, supplements or other modifications thereof).
(c) If (i) a Franchise Agreement Trigger Period exists, (ii) a Franchisor shall become bankrupt or insolvent, (iii) an Event of Default shall have occurred and be continuing or (iv) there exists a default by a Franchisor beyond all applicable notice and cure periods under any Franchise Agreement (each of the foregoing, collectively, the “Franchise Triggers”), Borrower shall, at the request of Lender, terminate the applicable Franchise Agreement then in effect and cause the applicable aspects of the Property to be “flagged”, operated and branded pursuant to a new Qualified Franchise Agreement with a New Franchisor that is a Qualified Franchisor, it being understood and agreed that the franchise fee for such Qualified Franchisor shall not exceed then prevailing market rates.
(d) Without limitation of the foregoing or anything else contained in this Section, (i) any renewal, extension or replacement of a Franchise Agreement shall be with a Qualified Franchisor pursuant to a Qualified Franchise Agreement and (ii) if any Franchise Agreement expires or is terminated, comes up for renewal or extension, ceases to be in full force or effect or is for any other reason no longer in effect (including, without limitation, in connection with any Sale or Pledge), Borrower shall, concurrently with such expiration, termination or other cessation, enter into, as applicable, a Qualified Franchise Agreement with a Qualified Franchisor (or a renewal or extension of an existing Qualified Franchise Agreement with an existing Qualified Franchisor); provided, that, notwithstanding the foregoing, such Qualified Franchisor shall be, if opted by Lender, (A) a new Qualified Franchisor under a new Qualified Franchise Agreement and (B) to the extent a Trigger Period is continuing, in each case, selected by Lender.
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(e) By no later than the earlier of (i) twelve (12) months prior to the then current expiration date of the Franchise Agreement or (ii) one hundred twenty (120) days prior to the latest date a renewal or extension notice is permitted to be sent under the Franchise Agreement, Borrower shall have (1)(A) renewed or extended the existing Franchise Agreement or (B) applied for a Qualified Franchise Agreement for the Property with a Qualified Franchisor and (2) obtained Lender’s prior written consent to the foregoing.
(f) As conditions precedent to any engagement of a New Franchisor hereunder, (i) New Franchisor shall execute and deliver to Lender an estoppel and comfort letter, in each case, in form and substance reasonably acceptable to Lender, (ii) to the extent that such New Franchisor is an Affiliated Franchisor, Borrower shall deliver to Lender (A) a New Non- Consolidation Opinion with respect to such New Franchisor and new franchise agreement and (B) an assignment and subordination of such new franchise agreement in favor of Lender duly executed by Borrower and such New Franchisor in form and substance reasonably acceptable to Lender (which such assignment and subordination shall, without limitation, (1) provide Lender the right to directly (or to require Borrower to) terminate the New Franchise Agreement upon the occurrence of any Franchise Trigger without payment of any Applicable Termination Fees and (2) be in a form and provide such assurances as may, in each case, be necessary or desirable to assign to Lender and grant Lender a perfected a security interest in, in each case, all Permits and Intellectual Property applicable to such New Franchise Agreement) and (iii) if requested by Lender, Borrower shall deliver to Lender evidence that the engagement of such New Franchisor will not result in a Property Document Event or a default under any Lease or management agreement.
(g) Notwithstanding anything to the contrary contained herein (but without limitation of any Lender approval or consent rights or Rating Agency Confirmation requirements set forth herein), to the extent that a Trigger Period exists and any replacement of any Franchise Agreement with respect to the Property is, in each case, required pursuant to the terms hereof or is otherwise exercised as a right hereunder, Lender shall, in each case, have the option to select the replacement Franchise Agreement with respect to the Property.
(h) Borrower shall provide Lender prior written notice of any PIP required in connection with any Franchise Agreement (including, without limitation, any renewal, extension or replacement thereof). Notwithstanding anything herein to the contrary, Borrower shall not agree to any PIP without Lender’s prior written consent thereto (which such consent shall not be unreasonably be withheld, but may be conditioned upon, among other things, Lender’s engagement, at the sole cost and expense of Borrower, of third party consultant(s) to review and approve the PIP). Without limiting the foregoing approval rights of Lender, Borrower’s deposit of the corresponding PIP Deposit as and to the extent required under Section 8.9 hereof shall be deemed an additional condition precedent to Lender granting any approval over any PIP or other matters relating to any Franchise Agreement (including, without limitation, any approval over any renewal or replacement thereof).
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(i) Borrower shall complete and pay for in full any PIP in a good, workmanlike and lien free manner within the time-frame set forth in the PIP. To the extent that Borrower fails to perform any obligation under the Franchise Agreement (including, without limitation, any obligation to perform any PIP), Borrower hereby grants Lender the right, as Borrower’s attorney- in-fact (which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest), to perform any such obligation and, if required, to enter the Property in order to perform the same. The aforesaid right of Lender shall be exercisable by Lender at Lender’s option and in Lender’s sole discretion. Any exercise by Lender of the aforesaid right shall be deemed exercised in accordance with the applicable terms and conditions hereof and of the other Loan Documents.
(j) Notwithstanding anything hereon to the contrary, (i) following the occurrence and during the continuance of an Event of Default, Borrower shall not exercise any rights, make any decisions, grant any approvals or otherwise take any action under the Franchise Agreement without the prior consent of Lender, which consent may be withheld in Lender’s sole discretion and (ii) (A) Borrower’s payment of all Applicable Termination Fees shall be deemed an additional condition precedent to any termination or other replacement of any Franchise Agreement hereunder, (B) Borrower shall, in all events, pay all Applicable Termination Fees as and when due and (C) Borrower paying (and providing Lender evidence of payment reasonably acceptable to Lender) all applicable costs and expenses incurred in connection with Borrower’s satisfying any requirement or complying with any covenant under this Section 4.24 shall be an additional condition precedent to satisfying such requirement or complying with such covenant, as applicable, and no such covenant or requirement shall be deemed satisfied or complied with if such costs and expenses have not been paid or if Lender has not received reasonably acceptable evidence of payment thereof.
(k) The terms and provisions of this Section shall not be deemed to limit the other terms and conditions hereof or of the other Loan Documents. Notwithstanding anything to the contrary contained herein, to the extent that any of the Hotel Operating Agreements are contained or subsumed in, incorporated by reference in or otherwise provided or addressed in any Management Agreement or other similar agreement, such Management Agreement or other agreement shall (i) be deemed to be a Franchise Agreement for all purposes hereunder (including, without limitation, under this Section 4.24), (ii) be subject to all terms and conditions set forth herein and in the other Loan Documents relating to the Franchise Agreement and (iii) shall also be subject to each other applicable provision contained herein and the other Loan Documents (including, without limitation, and to the extent applicable, Section 4.15 hereof). In connection with any Lender approval rights under this Section 4.24, Borrower shall consult with and provide Lender with such information and documentation as Lender may reasonably request, which such consultation, information and documentation shall be provided within a reasonable period following Lender’s request therefor.
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Section 4.25. Permits; Intellectual Property.
(a) Without limiting the other provisions of this Agreement and the other Loan Documents, Borrower shall keep all Permits (including, without limitation, any liquor licenses and any trademark or other Permits applicable to any Franchise Agreement) in full force and effect and, during the continuance of an Event of Default, Borrower will, at the cost of Borrower, and without expense to Lender, execute, acknowledge and deliver all such writings and take any all further actions necessary or reasonably requested by Lender to transfer any Permits (including, without limitation, any liquor licenses and any trademark or other Permits applicable to any Franchise Agreement) with respect to the Property into the name of Lender or its designee. To the extent any such Permits (including, without limitation, any liquor licenses and any trademark or other Permits applicable to any Franchise Agreement) cannot be so transferred to Lender or its designee under applicable law, Borrower shall continue to hold and maintain such Permits in full force and effect for the benefit of Lender until such time as Lender can obtain such Permits in its own name or the name of a designee. Without limiting the foregoing, Borrower shall execute such interim management, leasing or other agreements (which shall be in form and substance (a) satisfactory to Lender and the applicable licensing authorities and (b) reasonably satisfactory to Borrower, which such approval by Borrower shall not be unreasonably withheld, conditioned or delayed) as may be required for Lender to continue operations at the Property pursuant to such Permits until such Permits are transferred to, or are otherwise obtained by, Lender or its designee. Borrower constitutes and appoints Lender its true and lawful attorney-in-fact with full power of substitution to complete or undertake any action required of Borrower under this Section in the name of Borrower in the event Borrower fails to do the same; provided, however, Lender shall not exercise such power of attorney without five (5) Business Days prior written notice to Borrower.
(b) Borrower shall keep and maintain all Intellectual Property relating to the use or operation of the Property and all Intellectual Property (other than any Intellectual Property used by Borrower pursuant to any Franchise Agreement entered into in accordance with the applicable terms and conditions hereof) shall be held by and (if applicable) registered in the name of Borrower. Borrower shall not transfer or let lapse any material Intellectual Property without Lender’s prior consent. Except to the extent the same is required to be maintained by an unaffiliated Franchisor pursuant to the Franchise Agreement, any website with respect to the Property shall be maintained by or on behalf of Borrower and any such website shall be registered in the name of Borrower. Borrower shall not transfer any such website (unless the same is maintained any controlled by an unaffiliated Franchisor) without Lender’s prior consent.
ARTICLE 5
ENTITY COVENANTS
Section 5.1. Single Purpose Entity/Separateness.
(a) Each Borrower has not and will not:
(i) engage in any business or activity other than the ownership, operation and maintenance of the applicable Individual Property, and activities incidental thereto;
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(ii) acquire or own any assets other than (A) the applicable Individual Property, and (B) such incidental Personal Property as may be necessary for the ownership, leasing, maintenance and operation of such applicable Individual Property;
(iii) merge into or consolidate with any Person, or dissolve, terminate, liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure;
(iv) fail to observe all organizational formalities in all material respects, or fail to preserve its existence as an entity duly organized, validly existing and in good standing (if applicable) under the applicable Legal Requirements of the jurisdiction of its organization or formation, or amend, modify, terminate or fail to comply in all material respects with the provisions of its organizational documents (provided, that, such organizational documents may be amended or modified to the extent that, in addition to the satisfaction of the requirements related thereto set forth therein, Lender’s prior written consent (not to be unreasonably withheld, conditioned or delayed) and, if required by Lender, a Rating Agency Confirmation are first obtained);
(v) own any subsidiary, or make any investment in, any Person (other than, with respect to any SPE Component Entity, in the applicable Borrower);
(vi) commingle its funds or assets with the funds or assets of any other Person;
(vii) incur any Indebtedness, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than (A) the Debt, (B) trade and operational indebtedness incurred in the ordinary course of business with trade creditors, provided such indebtedness is (1) unsecured, (2) not evidenced by a note, (3) on commercially reasonable terms and conditions, and (4) due not more than sixty (60) days past the date incurred and paid on or prior to such date, and/or (C) Permitted Equipment Leases; provided however, the aggregate amount of the indebtedness described in (B) and (C) shall not exceed at any time (I) with respect to the Persons constituting Seattle Borrower (in the aggregate and not individually), two percent (2%) of the outstanding aggregate Allocated Loan Amount associated with the Seattle Property and (II) with respect to the Persons constituting SLC Borrower (in the aggregate and not individually), two percent (2%) of the outstanding aggregate Allocated Loan Amount associated with the SLC Property. No Indebtedness other than the Debt may be secured (senior, subordinate or pari passu) by the Property;
(viii) fail to maintain all of its books, records, financial statements and bank accounts separate from those of any other Person (including, without limitation, any Affiliates). Borrower’s assets have not and will not be listed as assets on the financial statement of any other Person; provided, however, that Borrower’s assets may be included in a consolidated financial statement of its Affiliates provided that (i) appropriate notation shall be made on such consolidated financial statements to indicate the separateness of Borrower and such Affiliates and to indicate that Borrower’s assets and credit are not available to satisfy the debts and other obligations of such Affiliates or any other Person and (ii) such assets shall be listed on Borrower’s own separate balance sheet. Borrower has maintained and will maintain its books, records, resolutions and agreements as official records;
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(ix) enter into any contract or agreement with any partner, member, shareholder, principal or Affiliate, except, in each case, upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arm’s-length basis with unaffiliated third parties;
(x) maintain its assets in such a manner that it will be costly or difficult to segregate, ascertain or identify its individual assets from those of any other Person;
(xi) assume or guaranty the debts of any other Person, hold itself out to be responsible for the debts of any other Person, or otherwise pledge its assets for the benefit of any other Person or hold out its credit as being available to satisfy the obligations of any other Person;
(xii) make any loans or advances to any Person;
(xiii) fail to file its own tax returns (unless the applicable Borrower is permitted by law to file a joint tax return with its constituent owner(s) and appropriate notation is made on such tax return to indicate such Borrower’s separate existence)
(xiv) fail to (A) hold itself out to the public and identify itself, in each case, as a legal entity separate and distinct from any other Person and not as a division or part of any other Person, (B) conduct its business solely in its own name, (C) hold its assets in its own name or (D) correct any known misunderstanding regarding its separate identity;
(xv) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations (to the extent there exists sufficient cash flow from the applicable Individual Property to do so);
(xvi) without the prior unanimous written consent of all of its partners, shareholders or members, as applicable, the prior unanimous written consent of its board of directors or managers, as applicable, and the prior written consent of each Independent Director (regardless of whether such Independent Director is engaged at the Borrower or SPE Component Entity level), (a) file or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any Creditors Rights Laws, (b) seek or consent to the appointment of a receiver, liquidator or any similar official, (c) take any action that might cause such entity to become insolvent, (d) make an assignment for the benefit of creditors or (e) take any Material Action with respect to Borrower or any SPE Component Entity (provided, that, none of any member, shareholder or partner (as applicable) of Borrower or any SPE Component Entity or any board of directors or managers (as applicable) of Borrower or any SPE Component Entity may vote on or otherwise authorize the taking of any of the foregoing actions unless, in each case, there are at least one (1) Independent Director then serving in such capacity in accordance with the terms of the applicable organizational documents and such Independent Director has consented to such foregoing action);
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(xvii) fail to allocate shared expenses (including, without limitation, shared office space) or fail to use separate stationery, invoices and checks bearing its own name and not bearing the name of any other Person (provided, that, (A) business conducted on behalf of Borrower by another Person under a business management services agreement entered into on commercially reasonable terms and conditions and otherwise in accordance with the applicable terms and conditions hereof shall not be deemed to violate the foregoing so long as the manager (or equivalent thereof) under such business management services agreement is required thereunder to hold itself out as an agent of Borrower and Borrower enforces said obligation and (B) any such stationary, invoices or checks delivered solely to Lender by Borrower may reference “Lightstone” or any derivation of the foregoing name and such reference will not be deemed to violate the foregoing);
(xviii) fail to pay its own liabilities (including, without limitation, salaries of its own employees, if any) from its own funds or fail to maintain a sufficient number of employees, if any, in light of its contemplated business operations (in each case to the extent there exists sufficient cash flow from the applicable Individual Property to do so);
(xix) acquire obligations or securities of its partners, members, shareholders or other Affiliates, as applicable;
(xx) identify its partners, members, shareholders or other Affiliates, as applicable, as a division or part of it; or
(xxi) violate or cause to be violated the assumptions made with respect to Borrower and its principals in the Non-Consolidation Opinion or in any New Non- Consolidation Opinion.
(b) If Borrower is a partnership or limited liability company (other than an Acceptable LLC), each general partner (in the case of a partnership) and at least one member (in the case of a limited liability company) of Borrower, as applicable, shall be a corporation or an Acceptable LLC (each, an “SPE Component Entity”) whose sole asset is its interest in Borrower. Each SPE Component Entity (i) will at all times comply with each of the covenants, terms and provisions contained in Section 5.1(a)(iii) - (vi) (inclusive) and (viii) – (xxi) (inclusive) and, if such SPE Component Entity is an Acceptable LLC, Section 5.1(c) and (d) hereof, as if such representation, warranty or covenant was made directly by such SPE Component Entity; (ii) will not engage in any business or activity other than owning an interest in Borrower; (iii) will not acquire or own any assets other than its partnership, membership, or other equity interest in Borrower; (iv) will at all times continue to own no less than a 0.5% direct equity ownership interest in Borrower; (v) will not incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation); and (vi) will cause Borrower to comply with the provisions of this Section 5.1.
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(c) In the event Borrower or any SPE Component Entity is an Acceptable LLC, the limited liability company agreement of Borrower or such SPE Component Entity (as applicable) (the “LLC Agreement”) shall provide that (i) upon the occurrence of any event that causes the last remaining member of Borrower or such SPE Component Entity (as applicable) (“Member”) to cease to be the member of Borrower or such SPE Component Entity (as applicable) (other than (A) upon an assignment by Member of all of its limited liability company interest in Borrower or such SPE Component Entity (as applicable) and the admission of the transferee in accordance with the Loan Documents and the LLC Agreement, or (B) the resignation of Member and the admission of an additional member of Borrower or such SPE Component Entity (as applicable) in accordance with the terms of the Loan Documents and the LLC Agreement), any person acting as Independent Director of Borrower or such SPE Component Entity (as applicable) shall, without any action of any other Person and simultaneously with the Member ceasing to be the member of Borrower or such SPE Component Entity (as applicable) automatically be admitted to Borrower or such SPE Component Entity (as applicable) as a member with a 0% economic interest (“Special Member”) and shall continue Borrower or such SPE Component Entity (as applicable) without dissolution and (ii) Special Member may not resign from Borrower or such SPE Component Entity (as applicable) or transfer its rights as Special Member unless (A) a successor Special Member has been admitted to Borrower or such SPE Component Entity (as applicable) as a Special Member in accordance with requirements of Delaware law and (B) after giving effect to such resignation or transfer, there remains at least one (1) Independent Director of such SPE Component Entity or Borrower (as applicable) in accordance with Section 5.2 below. The LLC Agreement shall further provide that (i) Special Member shall automatically cease to be a member of Borrower or such SPE Component Entity (as applicable) upon the admission to Borrower or such SPE Component Entity (as applicable) of the first substitute member, (ii) Special Member shall be a member of Borrower or such SPE Component Entity (as applicable) that has no interest in the profits, losses and capital of Borrower or such SPE Component Entity (as applicable) and has no right to receive any distributions of the assets of Borrower or such SPE Component Entity (as applicable), (iii) pursuant to the applicable provisions of the limited liability company act of the State of Delaware (the “Act”), Special Member shall not be required to make any capital contributions to Borrower or such SPE Component Entity (as applicable) and shall not receive a limited liability company interest in Borrower or such SPE Component Entity (as applicable), (iv) Special Member, in its capacity as Special Member, may not bind Borrower or such SPE Component Entity (as applicable) and (v) except as required by any mandatory provision of the Act, Special Member, in its capacity as Special Member, shall have no right to vote on, approve or otherwise consent to any action by, or matter relating to, Borrower or such SPE Component Entity (as applicable) including, without limitation, the merger, consolidation or conversion of Borrower or such SPE Component Entity (as applicable); provided, however, such prohibition shall not limit the obligations of Special Member, in its capacity as Independent Director, to vote on such matters required by the Loan Documents or the LLC Agreement. In order to implement the admission to Borrower or such SPE Component Entity (as applicable) of Special Member, Special Member shall execute a counterpart to the LLC Agreement. Prior to its admission to Borrower or such SPE Component Entity (as applicable) as Special Member, Special Member shall not be a member of Borrower or such SPE Component Entity (as applicable), but Special Member may serve as an Independent Director of Borrower or such SPE Component Entity (as applicable).
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(d) The LLC Agreement shall further provide that (i) upon the occurrence of any event that causes the Member to cease to be a member of Borrower or such SPE Component Entity (as applicable) to the fullest extent permitted by law, the personal representative of Member shall, within ninety (90) days after the occurrence of the event that terminated the continued membership of Member in Borrower or such SPE Component Entity (as applicable) agree in writing (A) to continue Borrower or such SPE Component Entity (as applicable) and (B) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute member of Borrower or such SPE Component Entity (as applicable) effective as of the occurrence of the event that terminated the continued membership of Member in Borrower or such SPE Component Entity (as applicable), (ii) any action initiated by or brought against Member or Special Member under any Creditors Rights Laws shall not cause Member or Special Member to cease to be a member of Borrower or such SPE Component Entity (as applicable) and upon the occurrence of such an event, the business of Borrower or such SPE Component Entity (as applicable) shall continue without dissolution and (iii) each of Member and Special Member waives any right it might have to agree in writing to dissolve Borrower or such SPE Component Entity (as applicable) upon the occurrence of any action initiated by or brought against Member or Special Member under any Creditors Rights Laws, or the occurrence of an event that causes Member or Special Member to cease to be a member of Borrower or such SPE Component Entity (as applicable).
Section 5.2. Independent Director.
(a) The organizational documents of each Borrower (to the extent such Borrower is a corporation or an Acceptable LLC) or the applicable SPE Component Entity, as applicable, shall provide that at all times there shall be at least one duly appointed independent director or manager of such entity (each, an “Independent Director”) who shall (I) not have been at the time of each such individual’s initial appointment, and shall not have been at any time during the preceding five years, and shall not be at any time while serving as Independent Director, (i) a shareholder (or other equity owner) of, or an officer, director (other than in its capacity as Independent Director), partner, member or employee of, any Borrower, the applicable SPE Component Entity or any of their respective shareholders, partners, members, subsidiaries or Affiliates, (ii) a customer of, or supplier to, or other Person who derives any of its purchases or revenues from its activities with, any Borrower, the applicable SPE Component Entity or any of their respective shareholders, partners, members, subsidiaries or Affiliates, (iii) a Person who Controls or is under common Control with any such shareholder, officer, director, partner, member, employee supplier, customer or other Person, (iv) a member of the immediate family of any such shareholder, officer, director, partner, member, employee, supplier, customer or other Person or (v) a trustee or similar Person in any proceeding under Creditors Rights Laws involving any Borrower, the applicable SPE Component Entity or any of their respective shareholders, partners, members, subsidiaries or Affiliates (II) shall have, at the time of their appointment, had at least three (3) years’ experience in serving as an independent director and (III) be employed by, in good standing with and engaged by Borrower in connection with, in each case, an Approved ID Provider. Borrower hereby represents that (i) Vcorp is an independent, third party and is not affiliated with any Borrower Party and (ii) the Person(s) engaged as Independent Directors of each Borrower as of the date hereof satisfy the requirements set forth herein.
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(b) The organizational documents of each Borrower and each SPE Component Entity shall further provide that (I) the board of directors or managers of Borrower and each SPE Component Entity and the constituent equity owners of such entities (constituent equity owners, the “Constituent Members”) shall not take any action set forth in Section 5.1(a)(xvi) or any other action which, under the terms of any organizational documents of Borrower or any SPE Component Entity, requires the vote of the Independent Director unless, in each case, at the time of such action there shall be at least one Independent Director engaged as provided by the terms hereof and such Independent Director votes in favor of or otherwise consent to such action; (II) any resignation, removal or replacement of any Independent Director shall not be effective without (1) prior written notice to Lender and the Rating Agencies (which such prior written notice must be given on the earlier of five (5) days or three (3) Business Days prior to the applicable resignation, removal or replacement) and (2) evidence that the replacement Independent Director satisfies the applicable terms and conditions hereof and of the applicable organizational documents (which such evidence must accompany the aforementioned notice); (III) to the fullest extent permitted by applicable law, including Section 18-1101(c) of the Act and notwithstanding any duty otherwise existing at law or in equity, the Independent Director shall consider only the interests of the Constituent Members and Borrower and each SPE Component Entity (including Borrower’s and each SPE Component Entity’s respective creditors) in acting or otherwise voting on the matters provided for herein and in Borrower’s and each SPE Component Entity’s organizational documents (which such fiduciary duties to the Constituent Members and Borrower and each SPE Component Entity (including Borrower’s and each SPE Component Entity’s respective creditors), in each case, shall be deemed to apply solely to the extent of their respective economic interests in Borrower or the applicable SPE Component Entity (as applicable) exclusive of (x) all other interests (including, without limitation, all other interests of the Constituent Members), (y) the interests of other Affiliates of the Constituent Members, Borrower and each SPE Component Entity and (z) the interests of any group of Affiliates of which the Constituent Members, Borrower or any SPE Component Entity is a part)); (IV) other than as provided in subsection (III) above, the Independent Director shall not have any fiduciary duties to any Constituent Members, any directors of Borrower or any SPE Component Entity or any other Person; (V) the foregoing shall not eliminate the implied contractual covenant of good faith and fair dealing under applicable law; (VI) to the fullest extent permitted by applicable law, including Section 18-1101(e) of the Act, an Independent Director shall not be liable to Borrower, any SPE Component Entity, any Constituent Member or any other Person for breach of contract or breach of duties (including fiduciary duties), unless the Independent Director acted in bad faith or engaged in willful misconduct; and (VII) except as provided in the foregoing subsections (III) through (VI), the Independent Director shall, in exercising their rights and performing their duties under the applicable organizational documents, have a fiduciary duty of loyalty and care similar to that of a director of a business corporation organized under the General Corporation Law of the State of Delaware.
Section 5.3. Change of Name, Identity or Structure. Borrower shall not change (or permit to be changed) Borrower’s or any SPE Component Entity’s (a) name, (b) identity (including its trade name or names), (c) principal place of business set forth on the first page of this Agreement or (d) if not an individual, Borrower’s or any SPE Component Entity’s corporate, partnership or other structure or state of formation, without, in each case, notifying Lender of such change in writing at least thirty (30) days prior to the effective date of such change and, in the case of a change in Borrower’s or any SPE Component Entity’s structure or state of formation, without first obtaining the prior written consent of Lender and, if required by Lender, a Rating Agency Confirmation with respect thereto. Borrower shall execute and deliver to Lender, prior to or contemporaneously with the effective date of any such change, any financing statement or financing statement change reasonably required by Lender to establish or maintain the validity, perfection and priority of the security interest granted herein. At the reasonable request of Lender, Borrower shall execute a certificate in form satisfactory to Lender listing the trade names under which Borrower or the applicable SPE Component Entity intends to operate the applicable Individual Property, and representing and warranting that Borrower or the applicable SPE Component Entity does business under no other trade name with respect to the applicable Individual Property.
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Section 5.4. Business and Operations. Borrower will continue to engage in the businesses now conducted by it as and to the extent the same are necessary for the ownership, maintenance, management and operation of the Property. Borrower will qualify to do business and will remain in good standing under the laws of the State and each other applicable jurisdiction in which the Property is located, in each case, as and to the extent the same are required for the ownership, maintenance, management and operation of the Property.
Section 5.5. Recycled Entity. Borrower hereby represents and warrants to Lender that Borrower has not, since its formation: (a) failed to be duly formed, validly existing, and in good standing in the applicable jurisdiction(s) of its formation and the State; (b) had any judgments or liens of any nature against it except for (i) tax liens not yet delinquent and (ii) judgments which have been satisfied in full; (c) failed to comply in all material respects with all laws, regulations, and orders applicable to it or failed to receive all Permits necessary for it to operate; (d) been involved in any dispute with any taxing authority which is unresolved as of the Closing Date or failed to pay all taxes owed prior to the delinquency thereof (or, if later, then with all applicable penalties, interest and other sums due in connection therewith); (e) except as specifically disclosed to Lender in connection with the closing of the Loan, ever been party to any lawsuit, arbitration, summons, or legal proceeding that is still pending or that resulted in a judgment against it that has not been paid in full; (f) failed to comply with all separateness covenants contained in its organizational documents since its formation; (g) had any material contingent or actual obligations not related to the Property; or (h) except as expressly disclosed to Lender in connection with the closing of the Loan, amended, modified, supplemented, restated, replaced or terminated its organizational documents (or consented to any of the foregoing).
ARTICLE 6
NO SALE OR ENCUMBRANCE
Section 6.1. Transfer Definitions. As used herein and in the other Loan Documents, “Restricted Party” shall mean Borrower, Sponsor, Guarantor, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor or any shareholder, partner, member or non- member manager, or any direct or indirect legal or beneficial owner of Borrower, Sponsor, Guarantor, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor or any non-member manager; and a “Sale or Pledge” shall mean a voluntary or involuntary sale, conveyance, mortgage, grant, bargain, encumbrance, pledge, assignment, grant of any options with respect to, or any other transfer or disposition of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) of a legal or beneficial interest.
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Section 6.2. No Sale/Encumbrance.
(a) It shall be an Event of Default hereof if, without the prior written consent of Lender, a Sale or Pledge of the Property or any part thereof or any legal or beneficial interest therein (including, without limitation, the Loan and/or Loan Documents) occurs, a Sale or Pledge of an interest in any Restricted Party occurs and/or Borrower shall acquire any real property in addition to the real property owned by Borrower as of the Closing Date (each of the foregoing, collectively, a “Prohibited Transfer”), other than (i) pursuant to Leases of space in the Improvements to Tenants (other than Master Tenant) in accordance with the provisions of Section 4.14 and (ii) as permitted pursuant to the express terms of this Article 6.
(b) A Prohibited Transfer shall include, but not be limited to, (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual, physical occupancy by a Tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower’s right, title and interest in and to any (A) Leases or any Rents or (B) Property Documents; (iii) if a Restricted Party is a corporation, any merger, consolidation or Sale or Pledge of such corporation’s stock or the creation or issuance of new stock in one or a series of transactions; (iv) if a Restricted Party is a limited or general partnership or joint venture, any merger or consolidation or the change, removal, resignation or addition of a general partner or the Sale or Pledge of the partnership interest of any general or limited partner or any profits or proceeds relating to such partnership interests or the creation or issuance of new limited partnership interests; (v) if a Restricted Party is a limited liability company, any merger or consolidation or the change, removal, resignation or addition of a managing member or non-member manager (or if no managing member, any member) or the Sale or Pledge of the membership interest of any member or any profits or proceeds relating to such membership interest; (vi) if a Restricted Party is a trust or nominee trust, any merger, consolidation or the Sale or Pledge of the legal or beneficial interest in a Restricted Party or the creation or issuance of new legal or beneficial interests in a Restricted Party or the revocation, rescission or termination of a Restricted Party; (vii) the removal of Manager (including, without limitation, an Affiliated Manager), the resignation of an Affiliated Manager or the engagement of a New Manager, in each case, other than in accordance with Section 4.15; (viii) any action for partition of the Property (or any portion thereof or interest therein) or any similar action instituted or prosecuted by Borrower or by any other Person, pursuant to any contractual agreement or other instrument or under applicable law (including, without limitation, common law) and/or any other action instituted by (or at the behest of) Borrower or its Affiliates or consented to or acquiesced in by Borrower or its Affiliates which results in a Property Document Event; (ix) the incurrence of any property-assessed clean energy loans or similar indebtedness with respect to Borrower and/or the Property, including, without limitation, if such loans or indebtedness are made or otherwise provided by any Governmental Authority and/or secured or repaid (directly or indirectly) by any taxes or similar assessments; (x) the removal or the resignation of any Franchisor (including, without limitation, any Affiliated Franchisor), the engagement of any new franchisor, any Hotel Operating Agreement being entered into or otherwise encumbering the Property, in each case, other than in accordance with the applicable terms and conditions hereof; and/or (xi) any failure of the Property to be “flagged”, operated and/or branded pursuant to the applicable Franchise Agreement.
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Section 6.3. Permitted Equity Transfers. Notwithstanding the restrictions contained in this Article 6, the following equity transfers shall be permitted without Lender’s consent: (a) a transfer (but not a pledge) by devise or descent or by operation of law upon the death of a Restricted Party or any member, partner or shareholder of a Restricted Party, (b) the transfer (but not the pledge), in one or a series of transactions, of the stock, partnership interests or membership interests (as the case may be) in a Restricted Party, (c) the sale, transfer or issuance of shares of common stock in any Restricted Party that is a publicly traded entity, provided such shares of common stock are listed on the New York Stock Exchange or another nationally recognized stock exchange or (d) the sale, transfer or issuance of shares of common stock in Lightstone Value Plus Real Estate Investment Trust III, Inc., a Maryland corporation (provided, that, the foregoing provisions of clauses (a), (b), (c) and (d) above shall not be deemed to waive, qualify or otherwise limit Borrower’s obligation to comply (or to cause the compliance with) the other covenants set forth herein and in the other Loan Documents (including, without limitation, the covenants contained herein relating to ERISA matters)); provided, further, that, with respect to the transfers listed in clauses (a), (b) and/or (d) above, (A) Lender shall receive not less than thirty (30) days prior written notice of such transfers (provided, that, (I) for purposes of clarification, with respect to the transfers contemplated in subsection (a) above, the aforesaid notice shall only be deemed to be required thirty (30) days prior to the consummation of the applicable transfers made as a result of probate or similar process following such death (as opposed to prior notice of the applicable death) and (II) no notice shall be required with respect to any transfer that (x) does not result in a change to the organization chart delivered to Lender in connection with the origination of the Loan, (y) does not result in any Person (together with its Affiliates) owning more than a ten percent (10%) direct and/or indirect interest in the aggregate in Borrower that did not own said interest prior to consummation of the transfer and (z) does not cause a change in Control (whether direct or indirect) in Borrower, Guarantor, any SPE Component Entity, and/or Sponsor); (B) no such transfers shall result in a change in Control of Sponsor, Guarantor, Affiliated Manager or Affiliated Franchisor; (C) after giving effect to such transfers, Sponsor shall (I) own at least a 51% direct or indirect equity ownership interest in each of each Borrower and each SPE Component Entity; (II) Control each Borrower and each SPE Component Entity and (III) control the day-to-day operation of the Property; (D) after giving effect to such transfers, the Property shall continue to be (I) managed by Manager or a New Manager approved in accordance with the applicable terms and conditions hereof and (II) operated, “flagged” and branded pursuant to a Qualified Franchise Agreement with a Qualified Franchisor; (E) in the case of the transfer of any direct equity ownership interests in Borrower or in any SPE Component Entity, such transfers shall be conditioned upon continued compliance with the relevant provisions of Article 5 hereof; (F) in the case of (1) the transfer of the management of the Property (or any portion thereof) to a new Affiliated Manager in accordance with the applicable terms and conditions hereof, (2) the transfer of the operation, “flagging” and/or branding of the Property to a new Affiliated Franchisor in accordance with the applicable terms and conditions hereof, (3) the addition and/or replacement of a Guarantor and/or Sponsor in accordance with the applicable terms and conditions hereof and of the Guaranty or (4) the transfer of any equity ownership interests (I) directly in Borrower or in any SPE Component Entity, or (II) in any Restricted Party whose sole asset is a direct or indirect equity ownership interest in Borrower or in any SPE Component Entity, such transfers shall be conditioned upon delivery to Lender of a New Non-Consolidation Opinion addressing such transfer, addition and/or replacement; (G) such transfers shall be conditioned upon Borrower’s ability to, after giving effect to the equity transfer in question (I) remake the representations contained herein relating to ERISA matters (and, upon Lender’s request, Borrower shall deliver to Lender an Officer’s Certificate containing such updated representations effective as of the date of the consummation of the applicable equity transfer) and (II) continue to comply with the covenants contained herein relating to ERISA matters; (H) such transfers shall be permitted pursuant to the terms of the Property Documents; and (I) after giving effect to such transfers, the Guarantor Control Condition shall continue to be satisfied. Upon request from Lender, Borrower shall promptly provide Lender with (y) a revised version of the Organizational Chart reflecting any equity transfer consummated in accordance with this Section 6.3 and (z) credit searches (in form, scope and substance and from a provider, in each case, reasonably acceptable to Lender) with respect to any equity transfer consummated in accordance with this Section 6.3.
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Section 6.4. Permitted Property Transfer (Assumption).
(a) Total Assumption. Notwithstanding the foregoing provisions of this Article 6, at any time other than the sixty (60) days prior to and following any Secondary Market Transaction, Lender shall not unreasonably withhold, condition or delay consent to a one-time transfer of the Property in its entirety to, and the related assumptions of the Loan by, any Person (a “Transferee”) provided that each of the following terms and conditions are satisfied:
(i) no Event of Default has occurred;
(ii) Borrower shall have (A) delivered written notice to Lender of the terms of such prospective transfer not less than forty-five (45) days before the date on which such transfer is scheduled to close and, concurrently therewith, all such information concerning the proposed Transferee as Lender shall reasonably require and (B) paid to Lender a non-refundable processing fee in the amount of $5,000. Lender shall have the right to approve or disapprove the proposed transfer based on its then current underwriting and credit requirements for similar loans secured by similar properties which loans are sold in the secondary market, such approval not to be unreasonably withheld (it being acknowledged that Lender may withhold its consent to a Transfer contemplated by this Section 6.4 (and shall not be deemed to be acting unreasonably) in the event that the proposed Transferee or any Constituent Owner of the proposed Transferee that (together with its affiliates) Controls and/or owns more than a 49% direct and/or indirect interest in the Transferee shall: (i) hold a tenancy-in-common interest in the Property after giving effect to the applicable Transfer, (ii) be a statutory trust that is subject to limitations on its behavior pursuant to applicable Legal Requirements related to the tax code and/or (iii) be a “crowdfunded entity” that is funded primarily (A) in reliance upon Regulation Crowdfunding promulgated by the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended and/or (B) though internet-mediated registries, platforms or similar portals, mail-order subscriptions, benefit events and/or other similar methods). In determining whether to give or withhold its approval of the proposed transfer, Lender shall consider the experience and track record of Transferee and its principals in owning and operating facilities similar to the Property, the financial strength of Transferee and its principals, the general business standing of Transferee and its principals and Transferee’s and its principals’ relationships and experience with contractors, vendors, tenants, lenders and other business entities; provided, however, that, notwithstanding Lender’s agreement to consider the foregoing factors in determining whether to give or withhold such approval, such approval shall be given or withheld based on what Lender determines to be commercially reasonable and, if given, may be given subject to such conditions as Lender may deem reasonably appropriate;
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(iii) Borrower shall have paid to Lender, concurrently with the closing of such prospective transfer, (A) a non-refundable assumption fee in an amount equal to one percent (1%) of the then outstanding principal balance of the Loan, (B) all out-of-pocket costs and expenses, including reasonable attorneys’ fees, incurred by Lender in connection therewith and (C) all fees, costs and expenses of all third parties and the Rating Agencies incurred in connection therewith;
(iv) Transferee assumes and agrees to pay the Debt as and when due subject to the provisions of Article 13 hereof and, prior to or concurrently with the closing of such transfer, Transferee and its constituent partners, members, shareholders, Affiliates or sponsors as Lender may require, shall execute, without any cost or expense to Lender, such documents and agreements as Lender shall reasonably require to evidence and effectuate said assumption and an Affiliate of Transferee reasonably acceptable to Lender (but in all events able to satisfy the net worth, liquidity and other similar covenants in the Guaranty (unless otherwise agreed to by Lender)) shall execute a recourse guaranty and an environmental indemnity in form and substance identical to the Guaranty and Environmental Indemnity, respectively, with such changes to each of the foregoing as may be reasonably required by Lender;
(v) Borrower and Transferee, without any cost to Lender, shall furnish any information requested by Lender for the preparation of, and shall authorize Lender to file, new financing statements and financing statement amendments and other documents to the fullest extent permitted by applicable Legal Requirements, and shall execute any additional documents reasonably requested by Lender;
(vi) Borrower shall have delivered to Lender, without any cost or expense to Lender, such endorsements to Lender’s Title Insurance Policy insuring that fee simple or leasehold title to the Property, as applicable, is vested in Transferee (subject to Permitted Encumbrances), hazard insurance endorsements or certificates and other similar materials as Lender may deem necessary at the time of the transfer, all in form and substance satisfactory to Lender;
(vii) Transferee shall have furnished to Lender all appropriate papers evidencing Transferee’s organization and good standing, and the qualification of the signers to execute the assumption of the Debt, which papers shall include certified copies of all documents relating to the organization and formation of Transferee and of the entities, if any, which are partners or members of Transferee. Transferee and such constituent partners, members or shareholders of Transferee (as the case may be), as Lender shall require, shall comply with the covenants set forth in Article 5 hereof;
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(viii) Transferee shall assume the obligations of Borrower under any Management Agreement or provide a new management agreement with a new manager which meets with the requirements of the Assignment of Management Agreement and Section 4.15 hereof and assign to Lender as additional security such new management agreement;
(ix) Transferee shall furnish to Lender a REMIC Opinion, a New Non- Consolidation Opinion and an additional opinion of counsel satisfactory to Lender and its counsel (A) that Transferee’s formation documents provide for the matters described in subparagraph (g) above, (B) that the assumption of the Debt has been duly authorized, executed and delivered, and that the assumption agreement and the other Loan Documents are valid, binding and enforceable against Transferee in accordance with their terms, (C) that Transferee and any entity which is a controlling stockholder, member or general partner of Transferee, have been duly organized, and are in existence and good standing and (D) with respect to such other matters as Lender may reasonably request;
(x) if required by Lender, Lender shall have received (A) a Rating Agency Confirmation with respect to such transfer and (B) evidence that (I) the proposed transfer (1) is permitted pursuant to the Property Documents and (2) will not result in a Property Document Event and (II) after giving effect to the applicable transfer, the Property will be operated, “flagged” and branded pursuant to a Qualified Franchise Agreement with a Qualified Franchisor in accordance with the applicable terms and conditions hereof; and
(xi) Borrower’s obligations under the contract of sale pursuant to which the transfer is proposed to occur shall expressly be subject to the satisfaction of the terms and conditions of this Section 6.4.
(b) No Partial Assumptions. Notwithstanding anything to the contrary contained herein or in any other Loan Document, partial assumptions of the Loan shall not be permitted.
Section 6.5. Lender’s Rights. Lender reserves the right to condition the consent to a Prohibited Transfer requested hereunder upon (a) a modification of the terms hereof and on assumption of this Agreement and the other Loan Documents as so modified by the proposed Prohibited Transfer, (b) payment of a transfer fee of 1% of outstanding principal balance of the Loan and all of Lender’s expenses incurred in connection with such Prohibited Transfer, (c) receipt of a Rating Agency Confirmation with respect to the Prohibited Transfer, (d) the proposed transferee’s continued compliance with the covenants set forth in this Agreement, including, without limitation, the covenants in Article 5, (e) receipt of a New Non-Consolidation Opinion with respect to the Prohibited Transfer and/or (f) such other conditions and/or legal opinions as Lender shall determine in its sole discretion to be in the interest of Lender. All expenses incurred by Lender shall be payable by Borrower whether or not Lender consents to the Prohibited Transfer. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon a Prohibited Transfer without Lender’s consent. This provision shall apply to every Prohibited Transfer, whether or not Lender has consented to any previous Prohibited Transfer.
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Section 6.6. Economic Sanctions, Anti-Money Laundering and Transfers. Borrower shall (and shall cause each Borrower Party and their respective Affiliates to) (a) at all times comply with the representations and covenants contained in Sections 3.29 and 3.30 such that the same remain true, correct and not violated or breached and (b) not permit a Prohibited Transfer to occur and shall cause the ownership requirements specified in this Article 6 (including, without limitation, those stipulated in Section 6.3 hereof) to be complied with at all times. Borrower hereby represents that, other than in connection with the Loan, the Loan Documents and any Permitted Encumbrances, as of the date hereof, there exists no Sale or Pledge of (i) the Property or any part thereof or any legal or beneficial interest therein or (ii) any interest in any Restricted Party. For purposes of clarification, references hereunder and/or under the other Loan Documents to “equity ownership interest” or words of similar import shall be deemed to refer to the legal and/or beneficial interests in a Person (as applicable); provided, that, when hereunder or under the other Loan Documents a specified percentage of the aforesaid “equity ownership interest” (or words of similar import) in a Person is required to be held, the same shall be deemed to refer to both the legal and beneficial interest in such Person.
ARTICLE 7
INSURANCE; CASUALTY; CONDEMNATION; RESTORATION
Section 7.1. Insurance.
(a) Each Borrower shall obtain and maintain, or cause to be obtained and maintained, insurance for each Borrower and each Individual Property providing at least the following coverages:
(i) insurance with respect to the Improvements and the Personal Property insuring against any peril now or hereafter included within the classification “All Risk” or “Special Perils” (including, without limitation, fire, lightning, windstorm, hail, terrorism and similar acts of sabotage, explosion, riot, riot attending a strike, civil commotion, vandalism, aircraft, vehicles and smoke), in each case (A) in an amount equal to 100% of the “Full Replacement Cost,” which for purposes of this Agreement shall mean actual replacement value exclusive of costs of excavations, foundations, underground utilities and footings, with a waiver of depreciation; (B) in an amount sufficient so that no co-insurance penalties shall apply; (C) providing for no deductible in excess of $25,000 except as otherwise expressly and specifically permitted herein; (D) at all times insuring against at least those hazards that are commonly insured against under a “special causes of loss” form of policy, as the same shall exist on the date hereof, and together with any increase in the scope of coverage provided under such form after the date hereof; and (E) providing coverage for contingent liability from Operation of Building Laws, Demolition Costs and Increased Cost of Construction Endorsements together with an “Ordinance or Law Coverage” endorsement. The Full Replacement Cost shall be re-determined from time to time (but not more frequently than once in any twelve (12) calendar months) at the request of Lender by an appraiser or contractor designated and paid by Borrower and approved by Lender, or by an engineer or appraiser in the regular employ of the insurer. After the first appraisal, additional appraisals may be based on construction cost indices customarily employed in the trade. No omission on the part of Lender to request any such ascertainment shall relieve Borrower of any of its obligations under this Subsection;
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(ii) commercial general liability insurance against all claims for personal injury, bodily injury, death or property damage occurring upon, in or about the applicable Individual Property, including “Dram Shop” or other liquor liability coverage if alcoholic beverages are sold, manufactured or distributed from the applicable Individual Property, such insurance (A) to be on the so-called “occurrence” form with a general aggregate limit of not less than $2,000,000 and a per occurrence limit of not less than $1,000,000, with no deductible or self insured retention in excess of $50,000; (B) to continue at not less than the aforesaid limit until required to be changed by Lender in writing by reason of changed economic conditions making such protection inadequate; and (C) to cover at least the following hazards: (1) premises and operations; (2) products and completed operations on an “if any” basis; (3) independent contractors; (4) contractual liability for all insured contracts; (5) contractual liability covering the indemnities contained in Article 13 hereof to the extent the same is available; and (6) acts of terrorism and similar acts of sabotage;
(iii) loss of rents and/or business interruption insurance (A) with loss payable to Lender; (B) covering all risks required to be covered by the insurance provided for in Subsection 7.1(a)(i), (iv) and (vi) through (viii); (C) in an amount equal to 100% of the projected net operating income plus fixed expenses from the applicable Individual Property (on an actual loss sustained basis) for a period continuing until the Restoration of the applicable Individual Property is completed; the amount of such business interruption/loss of rents insurance shall be determined prior to the Closing Date and at least once each year thereafter based on Lender’s determination of the projected net operating income plus fixed expenses from the applicable Individual Property for an twelve (12) month period; and (D) containing an extended period of indemnity endorsement which provides that after the physical loss to the Improvements and the Personal Property has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of six (6) months from the date that the applicable Individual Property is repaired or replaced and operations are resumed, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period. Notwithstanding anything to the contrary contained herein or in any other Loan Documents, to the extent that insurance proceeds are payable to Lender pursuant to this Subsection (the “Rent Loss Proceeds”) and Borrower is entitled to disbursement of Net Proceeds for Restoration in accordance with the terms hereof, (1) a Trigger Period shall be deemed to exist and (2) such Rent Loss Proceeds shall be deposited by Lender in the Cash Management Account and disbursed as provided in Article 9 hereof; provided, however, that (I) nothing herein contained shall be deemed to relieve Borrower of its obligations to pay the obligations secured hereunder on the respective dates of payment provided for in the Note except to the extent such amounts are actually paid out of the Rent Loss Proceeds and (II) in the event the Rent Loss Proceeds are paid in a lump sum in advance and Borrower is entitled to disbursement of such Rent Loss Proceeds in accordance with the terms hereof, Lender or Servicer shall hold such Rent Loss Proceeds in a segregated interest-bearing Eligible Account (which shall deemed to be included within the definition of the “Accounts” hereunder) and Lender or Servicer shall estimate the number of months required for Borrower to restore the damage caused by the applicable Casualty, shall divide the applicable aggregate Rent Loss Proceeds by such number of months and shall disburse such monthly installment of Rent Loss Proceeds from such Eligible Account into the Cash Management Account each month during the performance of such Restoration;
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(iv) at all times during which structural construction, repairs or alterations are being made with respect to the Improvements (A) owner’s contingent or protective liability insurance covering claims not covered by or under the terms or provisions of the above mentioned commercial general liability insurance policy; and (B) the insurance provided for in Subsection 7.1(a)(i) written in a so-called builder’s risk completed value form (1) on a non-reporting basis, (2) against all risks insured against pursuant to Subsection 7.1(a)(i), (3) including permission to occupy the applicable Individual Property, and (4) with an agreed amount endorsement waiving co-insurance provisions;
(v) workers’ compensation, subject to the statutory limits of the state in which the applicable Individual Property is located, and employer’s liability insurance with a limit of at least $1,000,000 per accident and per disease per employee, and $1,000,000 for disease aggregate in respect of any work or operations on or about the applicable Individual Property, or in connection with the applicable Individual Property or its operation (if applicable);
(vi) comprehensive boiler and machinery insurance and equipment breakdown coverage, in each case, covering all mechanical and electrical equipment and pressure vessels and boilers in an amount not less than their replacement cost or in such other amount as shall be reasonably required by Lender;
(vii) if any portion of the Improvements is at any time located in an area identified by (A) the Federal Emergency Management Agency in the Federal Register as an area having special flood hazards and/or (B) the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended, or any successor law (the “Flood Insurance Acts”), flood hazard insurance in an amount equal to the maximum limit of coverage available for the applicable Individual Property under the Flood Insurance Acts (or such higher amount or other related and/or excess coverage as Lender may, in each case, require in its sole discretion);
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(viii) earthquake, sinkhole and mine subsidence insurance, if required, in amounts equal to two times (2x) the probable maximum loss of the applicable Individual Property as determined by Lender in its sole discretion and in form and substance satisfactory to Lender, provided that the insurance pursuant to this Subsection (viii) shall be on terms consistent with the all risk insurance policy required under Section 7.1(a)(i);
(ix) umbrella liability insurance in an amount not less than $20,000,000 per occurrence on terms consistent with the commercial general liability insurance policy required under subsection (ii) above (including, without limitation, the permitted deductible set forth in subsection (ii) above);
(x) if applicable, a blanket fidelity bond or crime/employee dishonesty coverage insuring against losses resulting from employee dishonesty in amounts acceptable to Lender;
(xi) motor vehicle liability coverage for all owned and non-owned vehicles, including rented and leased vehicles containing minimum limits per occurrence, including umbrella coverage, of One Million and No/100 Dollars ($1,000,000); and
(xii) such other insurance and in such amounts as (A) may be required pursuant to the terms of the Property Documents and (B) Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against for property similar to the applicable Individual Property located in or around the region in which the applicable Individual Property is located.
(b) All insurance provided for in Subsection 7.1(a) hereof shall be obtained under valid and enforceable policies (the “Policies” or in the singular, the “Policy”), in such forms and, from time to time after the date hereof, in such amounts as may be satisfactory to Lender, issued by financially sound and responsible insurance companies authorized and admitted to do business in the state in which the applicable Individual Property is located and approved by Lender. The insurance companies must have a general policy rating of A or better and a financial class of VIII or better by A.M. Best Company, Inc., or a claims paying ability/financial strength rating of “A” (or its equivalent) or better by any one of the Rating Agencies (each such insurer shall be referred to below as a “Qualified Insurer”). Not less than five (5) days prior to the expiration dates of the Policies theretofore furnished to Lender pursuant to Subsection 7.1(a), Borrower shall deliver certified copies of the Policies marked “premium paid” or accompanied by evidence satisfactory to Lender of payment of the premiums due thereunder (the “Insurance Premiums”), provided, however, that in the case of renewal Policies, Borrower may furnish Lender with binders and Acord Form 28 Certificates therefor to be followed by the original Policies when issued. Borrower shall, upon request from Lender, provide Lender with updated flood zone certifications for the Property (in form and substance acceptable to Lender).
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(c) The Policies may be “blanket policies” covering multiple locations so long as any such “blanket policy” has been approved by Lender and the coverages for the Property, Lender and Borrower provided thereunder otherwise comply with the provisions hereof. In no event shall any such Policy which is a “blanket policy” provide any lesser coverage than if Borrower, Lender and the Property were insured under a separate, stand-alone Policy.
(d) All Policies of insurance provided for or contemplated by Subsection 7.1(a) shall name Borrower as a named insured and, in the case of liability Policies (except for the Policies referenced in Subsections 7.1(a)(v) and (xi)), shall name Lender as an additional insured, as their respective interests may appear, and, in the case of property damage Policies (including, but not limited to, terrorism, rent loss, business interruption, boiler and machinery, earthquake and flood insurance), such Policies shall contain a standard noncontributing mortgagee clause in favor of Lender providing that the loss thereunder shall be payable to Lender.
(e) All Policies of insurance provided for in Subsection 7.1(a) shall contain clauses or endorsements to the effect that:
(i) the following shall in no way affect the validity or enforceability of the Policy insofar as Lender is concerned: (A) any act or negligence of Borrower, of anyone acting for Borrower or of any other Person named as an insured, (B) any foreclosure or other similar exercise of remedies and (C) the failure to comply with the provisions of the Policy which might otherwise result in a forfeiture of the insurance or any part thereof;
(ii) the Policy shall not be materially changed (other than to increase the coverage provided thereby), terminated or cancelled without at least 30 days’ written notice to Lender, except ten (10) days’ notice for non-payment of premium;
(iii) Lender shall not be liable for any Insurance Premiums thereon or subject to any assessments or commissions thereunder and that the related issuer(s) waive any related claims to the contrary;
(iv) Lender shall, at its option and with no obligation to do so, have the right to directly pay Insurance Premiums in order to avoid cancellation, expiration and/or termination of the Policy due to non-payment of Insurance Premiums; and
(v) with respect to the property, rent loss/business interruption, commercial general liability and umbrella Policies required in Section 7.1(a)(i) through (iii) and (ix), the Policies shall not exclude coverage for acts of terror or similar acts of sabotage.
(f) By no later than five (5) days following the expiration date of any Policies, Borrower shall furnish to Lender certificates of insurance evidencing the amounts of insurance maintained in compliance herewith, of the risks covered by such insurance. Lender may, on its own accord, verify the adequacy of such insurance by an independent insurance broker or appraiser acceptable to Lender. Without limitation of the foregoing, Borrower shall also comply with the foregoing within fifteen (15) days of written request of Lender (which such request shall be made no more frequently than once per calendar year (unless in connection with a Trigger Period or Secondary Market Transaction)). Borrower shall promptly forward to Lender a copy of each written notice received by any Borrower Party of any modification, reduction or cancellation of any of the Policies or of any of the coverages afforded under any of the Policies.
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(g) If at any time Lender is not in receipt of written evidence that all insurance required hereunder is in full force and effect, Lender shall have the right, without notice to Borrower to take such action as Lender deems necessary to protect its interest in the Property, including, without limitation, the obtaining of such insurance coverage as Lender in its sole discretion deems appropriate, and all expenses incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender upon demand and until paid shall be secured by the Security Instrument and shall bear interest at the Default Rate ((provided Lender shall use commercially reasonable efforts to provide Borrower with advanced notice prior to taking such action unless Lender is precluded by applicable Legal Requirements from doing so, Lender has a reasonable basis to believe that the insurance required hereunder has lapsed or Lender determines in its reasonable discretion that it must take immediate action to adequately protect its interest in the Property). Lender acknowledges that if it shall exercise its rights to obtain any insurance coverage pursuant to this Section 7.1(g), Borrower, at its sole cost and expense, may cancel any of the policies obtained by Lender (the “Force Placed Policies”) provided that Borrower simultaneously replaces the applicable Force Placed Policies with new Policies which cover all of the risks that were covered by the applicable Force Placed Policies in accordance with the terms of this Article 7.
(h) In the event of a foreclosure of the Security Instrument or other transfer of title to any Individual Property (or any portion thereof) in extinguishment in whole or in part of the Debt, all right, title and interest of Borrower in and to the Policies then in force concerning the applicable Individual Property (or any portion thereof) and all proceeds payable thereunder shall thereupon vest exclusively in Lender or the purchaser at such foreclosure or other transferee in the event of such other transfer of title.
(i) As an alternative to the Policies required to be maintained pursuant to the preceding provisions of this Section 7.1, Borrower will not be in default under this Section 7.1 if Borrower maintains (or causes to be maintained) Policies which (i) have coverages, deductibles and/or other related provisions other than those specified above and/or (ii) are provided by insurance companies not meeting the credit ratings requirements set forth above (any such Policy, a “Non-Conforming Policy”), provided, that, prior to obtaining such Non-Conforming Policies (or permitting such Non-Conforming Policies to be obtained), Borrower shall have (1) received Lender’s prior written consent thereto and (2) if required by Lender, confirmed that Lender has received a Rating Agency Confirmation with respect to any such Non-Conforming Policy. Notwithstanding the foregoing, Lender hereby reserves the right to deny its consent to any Non-Conforming Policy regardless of whether or not Lender has consented to the same on any prior occasion.
(j) Borrower shall cooperate with Lender in obtaining for Lender the benefits of any Awards or insurance proceeds lawfully or equitably payable in connection with any Individual Property (or any portion thereof), and Lender shall be reimbursed for any expenses incurred in connection therewith (including reasonable, actual attorneys’ fees and disbursements, and the payment by Borrower of the expense of an appraisal on behalf of Lender in case of a Casualty or Condemnation affecting any Individual Property or any part thereto) out of such Awards or insurance proceeds.
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(k) Borrower hereby represents that the physical address(es) for each portion of the Improvements for all purposes (including, without limitation, insurance purposes) are as follows: (i) for the Seattle Property, 380 Upland Drive, Tukwila, Washington 98188 and (ii) for the SLC Property, 10704 South River Front Parkway, South Jordan, Utah 84095.
Section 7.2. Casualty. If any Individual Property shall be damaged or destroyed, in whole or in part, by fire or other casualty (a “Casualty”), Borrower shall give prompt notice of such damage to Lender and shall promptly commence and diligently prosecute the completion of the Restoration of the applicable Individual Property and otherwise comply with the provisions of Section 7.4. Borrower shall pay all costs of Restoration (including, without limitation, any applicable deductibles under the Policies) whether or not such costs are covered by the Net Proceeds. Lender may, but shall not be obligated to, make proof of loss if not made promptly by Borrower.
Section 7.3. Condemnation. Borrower shall promptly give Lender notice of the actual or threatened commencement of any proceeding for the Condemnation of any Individual Property (or any portion thereof) of which Borrower has knowledge and shall deliver to Lender copies of any and all papers served in connection with such proceedings. Lender may participate in any such proceedings, and Borrower shall from time to time deliver to Lender all instruments requested by it to permit such participation. Borrower shall, at its expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. Notwithstanding any taking by any public or quasi-public authority through Condemnation or otherwise (including but not limited to any transfer made in lieu of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Agreement and the Debt shall not be reduced until any Award shall have been actually received and applied by Lender, after the deduction of expenses of collection, to the reduction or discharge of the Debt. Lender shall not be limited to the interest paid on the Award by the condemning authority but shall be entitled to receive out of the Award interest at the rate or rates provided herein or in the Note. If any Individual Property or any portion thereof is taken by a condemning authority, Borrower shall promptly commence and diligently prosecute the Restoration of the Property and otherwise comply with the provisions of Section 7.4. Borrower shall pay all costs of Restoration whether or not such costs are covered by the Net Proceeds. If any Individual Property (or any portion thereof) is sold, through foreclosure or otherwise, prior to the receipt by Lender of the Award, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive the Award, or a portion thereof sufficient to pay the Debt. Notwithstanding the foregoing or anything to the contrary contained herein, if, in connection with any Casualty or Condemnation, a prepayment of the Debt (in whole or in part) is required under REMIC Requirements, (a) the applicable Net Proceeds shall be applied to the Debt in accordance with Section 7.4(c) hereof and (b) to the extent that the amount of the applicable Net Proceeds actually applied to the Debt in connection therewith is insufficient under REMIC Requirements, Borrower shall, within five (5) days of demand by Lender, prepay the principal amount of the Debt in accordance with the applicable terms and conditions hereof in an amount equal to such insufficiency plus the amount of any then applicable Interest Shortfall (such prepayment, together with any related Interest Shortfall payment, collectively, the “REMIC Payment”). Lender may require Borrower to deliver a REMIC Opinion in connection with each of the foregoing.
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Section 7.4. Restoration. The following provisions shall apply in connection with the Restoration of any Individual Property:
(a) If the Net Proceeds shall be less than the Restoration Threshold and the costs of completing the Restoration shall be less than the Restoration Threshold, the Net Proceeds will be disbursed by Lender to Borrower upon receipt, provided that all of the conditions set forth in Section 7.4(b)(i) are met and Borrower delivers to Lender a written undertaking to expeditiously commence and to satisfactorily complete with due diligence the Restoration in accordance with the terms of this Agreement.
(b) If the Net Proceeds are equal to or greater than the Restoration Threshold or the costs of completing the Restoration are equal to or greater than the Restoration Threshold, Lender shall make the Net Proceeds available for the Restoration in accordance with the provisions of this Section 7.4.
(i) The Net Proceeds shall be made available for Restoration provided that each of the following conditions are met:
(A) no Event of Default shall have occurred and be continuing;
(B) (1) in the event the Net Proceeds are insurance proceeds, less than thirty percent (30%) of each of (i) fair market value of the applicable Individual Property as reasonably determined by Lender, (ii) replacement cost of the applicable Individual Property as reasonably determined by Lender, and (iii) rentable area of the applicable Individual Property (which such “rentable area” shall be deemed to include, without limitation, banquet, meeting and conference space and any portions of the applicable Individual Property occupied or otherwise used from time to time by transient hotel guests and/or hotel visitors) has been damaged, destroyed or rendered unusable as a result of a Casualty or (2) in the event the Net Proceeds are condemnation proceeds, less than fifteen percent (15%) of each of (i) the fair market value of the applicable Individual Property as reasonably determined by Lender, (ii) replacement cost of the applicable Individual Property as reasonably determined by Lender and (iii) rentable area of the applicable Individual Property (which such “rentable area” shall be deemed to include, without limitation, banquet, meeting and conference space and any portions of the applicable Individual Property occupied or otherwise used from time to time by transient hotel guests and/or hotel visitors) is taken, such land is located along the perimeter or periphery of the applicable Individual Property, no portion of the Improvements is located on such land and such taking does not materially impair the existing access to the applicable Individual Property;
(C) Leases demising in the aggregate a percentage amount equal to or greater than 75% of the total rentable space in the applicable Individual Property which has been demised under executed and delivered Leases in effect as of the date of the occurrence of such fire or other casualty or taking, whichever the case may be, shall remain in full force and effect during and after the completion of the Restoration, notwithstanding the occurrence of any such Casualty or Condemnation, whichever the case may be, and Borrower furnishes to Lender evidence reasonably satisfactory to Lender that all Tenants under Leases shall continue to operate their respective space at the applicable Individual Property after the completion of the Restoration;
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(D) Borrower shall commence (or shall cause the commencement of) the Restoration as soon as reasonably practicable (but in no event later than sixty (60) days after the issuance of a building permit with respect thereto) and shall diligently pursue the same to satisfactory completion in compliance with all applicable Legal Requirements, including, without limitation, all applicable Environmental Laws, and the applicable requirements of the Property Documents;
(E) Lender shall be satisfied that any operating deficits which will be incurred with respect to the applicable Individual Property as a result of the occurrence of any such fire or other casualty or taking will be covered out of (1) the Net Proceeds, (2) the insurance coverage referred to in Section 7.1(a)(iii) above, or (3) by other funds of Borrower;
(F) Lender shall be satisfied that the Net Proceeds together with any cash or cash equivalent deposited by Borrower with Lender are sufficient to cover the cost of the Restoration;
(G) Lender shall be satisfied that, upon the completion of the Restoration, the fair market value and cash flow of the applicable Individual Property will not be less than the fair market value and cash flow of the applicable Individual Property as the same existed immediately prior to the applicable Casualty or Condemnation;
(H) Lender shall be satisfied that the Restoration will be completed on or before the earliest to occur of (1) six (6) months prior to the Maturity Date, (2) twenty four (24) months after the occurrence of such fire or other casualty or taking, (3) the earliest date required for such completion under the terms of any Leases and the Property Documents, (4) such time as may be required under applicable Legal Requirements (provided, that, to the extent that any entitlements or similar rights under Legal Requirements with respect to the applicable Individual Property (such as continuing a legal non-conforming use) may be lost if Restoration is not completed within a certain timeframe, such timeframe shall be deemed “such time as may be required under applicable Legal Requirements” for purposes of the foregoing) or (5) the expiration of the insurance coverage referred to in Section 7.1(a)(iii) above;
(I) Borrower and Guarantor shall execute and deliver to Lender a completion guaranty in form and substance satisfactory to Lender and its counsel pursuant to the provisions of which Borrower and Guarantor shall jointly and severally guaranty to Lender the lien-free completion by Borrower of the Restoration in accordance with the provisions of this Subsection 7.4(b);
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(J) the applicable Individual Property and the use thereof (as a hotel consistent with the use as of the date hereof) after the Restoration will be in compliance with and permitted under all applicable Legal Requirements and the Property Documents;
(K) the Restoration shall be done and completed in an expeditious and diligent fashion and in compliance in all material respects with all applicable Legal Requirements and the Property Documents;
(L) the Property Documents will remain in full force and effect during and after the Restoration and a Property Document Event shall not occur as a result of the applicable Casualty, Condemnation and/or Restoration; and
(M) Lender shall be satisfied that making the Net Proceeds available for Restoration shall be permitted pursuant to REMIC Requirements and, in that regard, Lender may require Borrower to deliver a REMIC Opinion in connection therewith.
(ii) The Net Proceeds shall be held by Lender and, until disbursed in accordance with the provisions of this Section 7.4(b), shall constitute additional security for the Debt and other obligations under this Agreement, the Security Instrument, the Note and the other Loan Documents. The Net Proceeds (other than the Rent Loss Proceeds) shall be disbursed by Lender to, or as directed by, Borrower from time to time during the course of the Restoration, upon receipt of evidence satisfactory to Lender that (A) all materials installed and work and labor performed (except to the extent that they are to be paid for out of the requested disbursement) in connection with the related Restoration item have been paid for in full, and (B) there exist no notices of pendency, stop orders, mechanic’s or materialman’s liens or notices of intention to file same, or any other liens or encumbrances of any nature whatsoever on the Property which have not either been fully bonded to the satisfaction of Lender and discharged of record or in the alternative fully insured to the satisfaction of Lender by the title company issuing the Title Insurance Policy.
(iii) If the Net Proceeds are greater than the Restoration Threshold or the costs of completing the Restoration are greater than the Restoration Threshold, all plans and specifications required in connection with the Restoration shall be subject to prior review and reasonable acceptance in all respects by Lender and by an independent consulting engineer selected by Lender (the “Casualty Consultant”). Lender shall have the use of the plans and specifications and all permits, licenses and approvals required or obtained in connection with the Restoration. The identity of the contractors, subcontractors and materialmen engaged in the Restoration shall be subject to prior review and acceptance by Lender and the Casualty Consultant. All costs and expenses incurred by Lender in connection with making the Net Proceeds available for the Restoration including, without limitation, reasonable counsel fees and disbursements and the Casualty Consultant’s fees, shall be paid by Borrower. Borrower shall have the right to settle all claims under the Policies jointly with Lender, provided that (a) no Event of Default exists, (b) Borrower promptly and with commercially reasonable diligence negotiates a settlement of any such claims and (c) the insurer with respect to the Policy under which such claim is brought has not raised any act of the insured as a defense to the payment of such claim. If an Event of Default exists, Lender shall, at its election, have the exclusive right to settle or adjust any claims made under the Policies in the event of a Casualty.
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(iv) In no event shall Lender be obligated to make disbursements of the Net Proceeds in excess of an amount equal to the costs actually incurred from time to time for work in place as part of the Restoration, as certified by the Casualty Consultant, minus the Restoration Retainage. The term “Restoration Retainage” as used in this Subsection 7.4(b) shall mean an amount equal to 10% of the costs actually incurred for work in place as part of the Restoration, as certified by the Casualty Consultant, until such time as the Casualty Consultant certifies to Lender that Net Proceeds representing 50% of the required Restoration have been disbursed. There shall be no Restoration Retainage with respect to costs actually incurred by Borrower for work in place in completing the last 50% of the required Restoration. The Restoration Retainage shall in no event, and notwithstanding anything to the contrary set forth above in this Subsection 7.4(b), be less than the amount actually held back by Borrower from contractors, subcontractors and materialmen engaged in the Restoration. The Restoration Retainage shall not be released until the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Subsection 7.4(b) and that all approvals necessary for the re-occupancy and use of the applicable Individual Property have been obtained from all appropriate governmental and quasi-governmental authorities, and Lender receives evidence satisfactory to Lender that the costs of the Restoration have been paid in full or will be paid in full out of the Restoration Retainage, provided, however, that Lender will release the portion of the Restoration Retainage being held with respect to any contractor, subcontractor or materialman engaged in the Restoration as of the date upon which the Casualty Consultant certifies to Lender that the contractor, subcontractor or materialman has satisfactorily completed all work and has supplied all materials in accordance with the provisions of the contractor’s, subcontractor’s or materialman’s contract, and the contractor, subcontractor or materialman delivers the lien waivers and evidence of payment in full of all sums due to the contractor, subcontractor or materialman as may be reasonably requested by Lender or by the title company insuring the lien of the Security Instrument. If required by Lender, the release of any such portion of the Restoration Retainage shall be approved by the surety company, if any, which has issued a payment or performance bond with respect to the contractor, subcontractor or materialman.
(v) Lender shall not be obligated to make disbursements of the Net Proceeds more frequently than once every calendar month.
(vi) If at any time the Net Proceeds or the undisbursed balance thereof shall not, in the reasonable opinion of Lender in consultation with the Casualty Consultant, be sufficient to pay in full the balance of the costs which are estimated by the Casualty Consultant to be incurred in connection with the completion of the Restoration, Borrower shall deposit the deficiency (the “Net Proceeds Deficiency”) with Lender before any further disbursement of the Net Proceeds shall be made. The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration on the same conditions applicable to the disbursement of the Net Proceeds, and until so disbursed pursuant to this Section 7.4(b) shall constitute additional security for the Debt and other obligations under this Agreement, the Security Instrument, the Note and the other Loan Documents.
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(vii) The excess, if any, of the Net Proceeds and the remaining balance, if any, of the Net Proceeds Deficiency deposited with Lender after the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 7.4(b), and the receipt by Lender of evidence satisfactory to Lender that all costs incurred in connection with the Restoration have been paid in full, shall be remitted by Lender to Borrower, provided no Event of Default shall have occurred and shall be continuing under this Agreement, the Security Instrument, the Note or any of the other Loan Documents.
(c) All Net Proceeds not required (i) to be made available for the Restoration or (ii) to be returned to Borrower as excess Net Proceeds pursuant to Subsection 7.4(b)(vii) shall be retained and applied by Lender toward the payment of the Debt (without any prepayment premium or penalty) whether or not then due and payable in such order, priority and proportions as Lender in its discretion shall deem proper. If Lender shall receive and retain Net Proceeds, the lien of the Security Instrument shall be reduced only by the amount thereof received and retained by Lender and actually applied by Lender in reduction of the Debt.
ARTICLE 8
RESERVE FUNDS
Section 8.1. Immediate Repair Funds.
(a) Borrower shall perform the repairs at the Property as set forth on Schedule I hereto (all such repairs are hereinafter referred to as “Immediate Repairs”) and shall complete each of the Immediate Repairs on or before the respective deadline for each repair as set forth on Schedule I hereto (as such deadlines may be extended by Lender in its reasonable discretion). On the Closing Date, Borrower shall deposit into an Eligible Account held by Lender or Servicer (the “Immediate Repair Account”) an amount equal to $194,552.50, such amount representing 125% of the estimated costs of the Immediate Repairs. Amounts deposited pursuant to this Section 8.1 are referred to herein as the “Immediate Repair Funds”.
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(b) Lender shall disburse to Borrower the Immediate Repair Funds upon satisfaction by Borrower of each of the following conditions: (i) Borrower shall submit a 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 Immediate Repairs to be paid; (ii) 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; (iii) Lender shall have received a certificate from Borrower (A) stating that all Immediate Repairs to be funded by the requested disbursement have been completed in a good and workmanlike manner and in accordance with all applicable Legal Requirements, such certificate to be accompanied by a copy of any license, permit or other approval by any Governmental Authority required in connection with the Immediate Repairs (if any is required), (B) identifying each Person that supplied materials or labor in connection with the Immediate Repairs to be funded by the requested disbursement, and (C) stating that each such Person has been paid in full or will be paid in full upon such disbursement, such certificate to be accompanied by lien waivers, invoices and/or other evidence of payment reasonably satisfactory to Lender; (iv) at Lender’s option, if the cost of the Immediate Repairs exceeds $150,000, a title search for the applicable Individual Property indicating that the applicable Individual Property is free from all liens, claims and other encumbrances other than Permitted Encumbrances; (v) at Lender’s option, if the cost of the Immediate Repairs exceeds $150,000, Lender shall have received a report satisfactory to Lender in its reasonable discretion from an architect or engineer approved by Lender in respect of such architect or engineer’s inspection of the required repairs; and (vi) Lender shall have received such other evidence as Lender shall reasonably request that the Immediate Repairs to be funded by the requested disbursement have been completed and are paid for or will be paid upon such disbursement to Borrower. Lender shall not be required to disburse Immediate Repair Funds more frequently than once each calendar month nor in an amount less than the Minimum Disbursement Amount (or a lesser amount if the total Immediate Repair Funds is less than the Minimum Disbursement Amount, in which case only one disbursement of the amount remaining in the account shall be made).
Section 8.2. Intentionally Omitted.
Section 8.3. Intentionally Omitted.
Section 8.4. Operating Expense Funds. On the first Monthly Payment Date occurring after each occurrence of a Trigger Period, Borrower shall make a True Up Payment into the Operating Expense Account. On each Monthly Payment Date occurring on and after the occurrence and continuance of a Trigger Period, Borrower shall deposit (or shall cause there to be deposited) into an Eligible Account held by Lender or Servicer (the “Operating Expense Account”) an amount equal to the aggregate amount of Approved Operating Expenses and Approved Extraordinary Expenses to be incurred by Borrower for the then current Interest Accrual Period (such amount, the “Op Ex Monthly Deposit”). Amounts deposited pursuant to this Section 8.4 are referred to herein as the “Operating Expense Funds”. Provided no Event of Default has occurred and is continuing, Lender shall disburse (i) the Operating Expense Funds to Borrower to pay Approved Operating Expenses and/or Approved Extraordinary Expenses upon Borrower’s request (which such request shall be accompanied by an Officer’s Certificate detailing the applicable expenses to which the requested disbursement relates and attesting that such expense shall be paid with the requested disbursement) and (ii) the remaining Operating Expense Funds to Borrower upon the expiration of the applicable Trigger Period.
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Section 8.5. Excess Cash Flow Funds. On the first Monthly Payment Date occurring after each occurrence of a Trigger Period and on each Monthly Payment Date occurring thereafter during the continuance of such Trigger Period, Borrower shall make a True Up Payment into the Excess Cash Flow Account (provided, that, (i) such True Up Payments shall only be required after the occurrence and during the continuance of any breach of the Cash Management Provisions and (ii) the amount of such True Up Payments shall be determined by Lender based upon Lender’s estimate of the amounts that would have been deposited into the Excess Cash Flow Account on each applicable Monthly Payment Date had the applicable breach not occurred). On each Monthly Payment Date occurring on and after the occurrence and continuance of a Trigger Period, Borrower shall deposit (or cause to be deposited) into an Eligible Account with Lender or Servicer (the “Excess Cash Flow Account”) an amount equal to the Excess Cash Flow generated by the Property for the immediately preceding Interest Accrual Period (each such monthly deposit being herein referred to as the “Monthly Excess Cash Flow Deposits” and the amounts on deposit in the Excess Cash Flow Account being herein referred to as the “Excess Cash Flow Funds”). Provided no Event of Default has occurred and is continuing, (i) with respect to any Excess Cash Flow Funds on deposit in the Excess Cash Flow Account during the continuance of Trigger Period related solely to the Franchise Agreement (the “Applicable ECF Funds”), the same shall be transferred to the PIP Reserve Account, provided, that, (A) Borrower makes written request of Lender for such transfer, (B) such transfer is made in connection with Borrower’s cure of the aforesaid Trigger Period, (C) the deposit of funds in the PIP Reserve Account is required to effect such cure and such cure will be fully consummated upon the transfer of the Applicable ECF Funds, (D) at each of the times such request and transfer are made, no other Trigger Period exists and (E) to the extent that Applicable ECF Funds exist in excess of such required deposit to the PIP Reserve Account, such excess Applicable ECF Funds shall not be transferred; and (ii) any Excess Cash Flow Funds remaining in the Excess Cash Flow Account shall be disbursed to Borrower upon the expiration of any Trigger Period in accordance with the applicable terms and conditions hereof.
Section 8.6. Tax and Insurance Funds. In addition to the initial deposits with respect to Taxes and, if applicable, Insurance Premiums made by Borrower to Lender on the Closing Date to be held in Eligible Accounts by Lender or Servicer and hereinafter respectively referred to as the “Tax Account” and the “Insurance Account”, Borrower shall pay (or cause to be paid) to Lender on each Monthly Payment Date (a) one-twelfth of an amount which would be sufficient to pay the Taxes payable, or estimated by Lender to be payable, during the next ensuing twelve (12) months assuming that said Taxes are to be paid in full on the Tax Payment Date (the “Monthly Tax Deposit”), each of which such deposits shall be held in the Tax Account, and (b) at the option of Lender, if the liability or casualty Policy maintained by Borrower covering the Property (or any portion thereof) shall not constitute an approved blanket or umbrella Policy pursuant to Subsection 7.1(c) hereof, or Lender shall require Borrower to obtain a separate Policy pursuant to Subsection 7.1(c) hereof, one-twelfth of an amount which would be sufficient to pay the Insurance Premiums due for the renewal of the coverage afforded by the Policies upon the expiration thereof (the “Monthly Insurance Deposit”), each of which such deposits shall be held in the Insurance Account (amounts held in the Tax Account and the Insurance Account are collectively herein referred to as the “Tax and Insurance Funds”). In the event Lender shall elect, after the Closing Date, to collect payments in escrow for Insurance Premiums, Borrower shall make a True Up Payment with respect to the same into the applicable Reserve Account. Additionally, if, at any time, Lender reasonably determines that amounts on deposit in or scheduled to be deposited in (i) the Tax Account will be insufficient to pay all applicable Taxes in full on the Tax Payment Date and/or (ii) the Insurance Account will be insufficient to pay all applicable Insurance Premiums in full on the Insurance Payment Date, Borrower shall make a True Up Payment with respect to such insufficiency into the applicable Reserve Account. Borrower agrees to notify Lender immediately of any changes to the amounts, schedules and instructions for payment of any Taxes and Insurance Premiums of which it has or obtains knowledge and authorizes Lender or its agent to obtain the bills for Taxes directly from the appropriate taxing authority. Provided there are sufficient amounts in the Tax Account and Insurance Account, respectively, and no Event of Default exists, Lender shall be obligated to pay the Taxes and Insurance Premiums as they become due on their respective due dates on behalf of Borrower by applying the Tax and Insurance Funds to the payment of such Taxes and Insurance Premiums. If the amount of the Tax and Insurance Funds shall exceed the amounts due for Taxes and Insurance Premiums pursuant to Sections 4.5 and 7.1 hereof, Lender shall, in its discretion, return any excess to Borrower or credit such excess against future payments to be made to the Tax and Insurance Funds.
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Section 8.7. The Accounts Generally.
(a) Borrower grants to Lender a first-priority perfected security interest in each of the Accounts and any and all sums now or hereafter deposited in the Accounts as additional security for payment of the Debt. Until expended or applied in accordance herewith, the Accounts and the funds deposited therein shall constitute additional security for the Debt. The provisions of this Section 8.7 (together with the other related provisions of the other Loan Documents) are intended to give Lender and/or Servicer “control” of the Accounts and the Account Collateral and serve as a “security agreement” and a “control agreement” with respect to the same, in each case, within the meaning of the UCC. Borrower acknowledges and agrees that the Accounts are subject to the sole dominion, control and discretion of Lender, its authorized agents or designees, subject to the terms hereof, and Borrower shall have no right of withdrawal with respect to any Account except with the prior written consent of Lender or as otherwise provided herein. The funds on deposit in the Accounts shall not constitute trust funds and may be commingled with other monies held by Lender. Notwithstanding anything to the contrary contained herein, unless otherwise consented to in writing by Lender, Borrower shall only be permitted to request (and Lender shall only be required to disburse) Reserve Funds on account of the liabilities, costs, work and other matters (as applicable) for which said sums were originally reserved hereunder, in each case, as reasonably determined by Lender.
(b) Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in the Accounts or the sums deposited therein or permit any lien 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. Borrower hereby authorizes Lender to file a financing statement or statements under the UCC in connection with any of the Accounts and the Account Collateral in the form required to properly perfect Lender’s security interest therein. Borrower agrees that at any time and from time to time, at the expense of Borrower, Borrower will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary or desirable, or that Lender may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby (including, without limitation, any security interest in and to any Permitted Investments) or to enable Lender to exercise and enforce its rights and remedies hereunder with respect to any Account or Account Collateral.
(c) Notwithstanding anything to the contrary contained herein or in any other Loan Document, upon the occurrence and during the continuance of an Event of Default, without notice from Lender or Servicer (i) Borrower shall have no rights in respect of the Accounts, (ii) Lender may liquidate and transfer any amounts then invested in Permitted Investments pursuant to the applicable terms hereof to the Accounts or reinvest such amounts in other Permitted Investments as Lender may reasonably determine is necessary to perfect or protect any security interest granted or purported to be granted hereby or pursuant to the other Loan Documents or to enable Lender to exercise and enforce Lender’s rights and remedies hereunder or under any other Loan Document with respect to any Account or any Account Collateral, and (iii) Lender shall have all rights and remedies with respect to the Accounts and the amounts on deposit therein and the Account Collateral as described in this Agreement and in the Security Instrument, in addition to all of the rights and remedies available to a secured party under the UCC, and, notwithstanding anything to the contrary contained in this Agreement or in the Security Instrument, may apply the amounts of such Accounts as Lender determines in its sole discretion including, but not limited to, payment of the Debt.
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(d) The insufficiency of funds on deposit in the Accounts 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) 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 Accounts, the sums deposited therein or the performance of the obligations for which the Accounts were established, except to the extent arising from the gross negligence or willful misconduct of Lender, its agents or employees. Borrower shall assign to Lender all rights and claims Borrower may have against all Persons supplying labor, materials or other services which are to be paid from or secured by the Accounts; provided, however, that Lender may not pursue any such right or claim unless an Event of Default has occurred and remains uncured.
(f) Borrower and Lender (or Servicer on behalf of Lender) shall maintain each applicable Account as an Eligible Account, except as otherwise expressly agreed to in writing by Lender. In the event that Lender or Servicer no longer satisfies the criteria for an Eligible Institution, Borrower shall cooperate with Lender in transferring the applicable Accounts to an institution that satisfies such criteria. Upon the occurrence and during the continuance of an Event of Default, Borrower hereby grants Lender power of attorney (irrevocable for so long as the Loan is outstanding or has not be defeased in full in accordance with the applicable terms and conditions hereof) with respect to any such transfers and the establishment of accounts with a successor institution.
(g) Interest accrued on any Account shall not be required to be remitted either to Borrower or to any Account and may instead be retained by Lender.
(h) Intentionally Omitted.
(i) Borrower acknowledges and agrees that it solely shall be, and shall at all times remain, liable to Lender or Servicer for all fees, charges, costs and expenses in connection with the Accounts, this Agreement and the enforcement hereof, including, without limitation, any monthly or annual fees or charges as may be assessed by Lender or Servicer in connection with the administration of the Accounts and the reasonable fees and expenses of legal counsel to Lender and Servicer as needed to enforce, protect or preserve the rights and remedies of Lender and/or Servicer under this Agreement.
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(j) Upon either indefeasible payment of the Debt in full or consummation of a Defeasance of the Debt in full, in each case, in accordance with the terms hereof, to the extent any funds are remaining in the Reserve Accounts (and to the extent such funds were not credited against the applicable payoff or Defeasance), said funds shall be promptly disbursed to Borrower.
Section 8.8. Intentionally Omitted.
Section 8.9. Other Reserve Funds.
(a) FF&E Reserve Funds.
(i) On each Monthly Payment Date, Borrower shall deposit into an Eligible Account held by Lender or Servicer (the “FF&E Reserve Account”) the FF&E Reserve Monthly Deposit. As used above, the term “FF&E Reserve Monthly Deposit” shall mean, with respect to the corresponding Monthly Payment Date, an amount equal to the greater of (1) the FF&E Payment and (2) the amount of the deposit (if any) then required by the Franchisor on account of FF&E under the Franchise Agreement. As used herein, the term “FF&E Payment” shall mean, with respect to the corresponding Monthly Payment Date, an amount equal to (I) with respect to the Seattle Property, 1/12 of 4% of the greater of (x) the annual gross revenues for the hotel related operations at the Seattle Property for the immediately preceding calendar year as reasonably determined by Lender and (y) the projected annual gross revenues for the hotel related operations at the Seattle Property for the calendar year in which such Monthly Payment Date occurs as set forth in the applicable Approved Annual Budget; provided, that, notwithstanding anything herein to the contrary, if, as of any applicable date of determination, no Approved Annual Budget exists for the applicable calendar year, the amount of the required under this subsection (y) shall be determined by Lender in its reasonable discretion and (II) with respect to the SLC Property, 1/12 of 6.5% of the greater of (x) the annual gross revenues for the hotel related operations at the SLC Property for the immediately preceding calendar year as reasonably determined by Lender and (y) the projected annual gross revenues for the hotel related operations at the SLC Property for the calendar year in which such Monthly Payment Date occurs as set forth in the applicable Approved Annual Budget; provided, that, notwithstanding anything herein to the contrary, if, as of any applicable date of determination, no Approved Annual Budget exists for the applicable calendar year, the amount of the required under this subsection (y) shall be determined by Lender in its reasonable discretion. The FF&E Reserve Monthly Deposit shall be (A) initially determined for the balance of the calendar year 2016 as of the Closing Date and (B) thereafter adjusted and determined by Lender (in accordance with this Section 8.9(a)) annually on the Monthly Payment Date in January, 2017 and on each Monthly Payment Date falling in each subsequent January thereafter. Notwithstanding anything herein to the contrary, Lender may require Borrower to increase the monthly deposits required pursuant to this Section upon thirty (30) days’ notice to Borrower if (1) based on a change in Legal Requirements or other extraordinary circumstances, Lender determines (utilizing a property condition report or similar third party report as backup) in its reasonable discretion that an increase is necessary to maintain proper maintenance and operation of the Property, provided, however, in any such case (I) with respect to the Seattle Property, in no event shall the reference to “4%” above be increased to more than “5%” and (II) with respect to the SLC Property, in no event shall the reference to “6.5%” above be increased to more than “7.5%” and/or (2) an increase is necessary to reflect increased FF&E expenditures required under any Franchise Agreement and/or set forth in any amendment to the most recently determined Approved Annual Budget. Amounts deposited pursuant to this Section are referred to herein as the “FF&E Reserve Funds”.
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(ii) Lender shall make disbursements of the FF&E Reserve Funds as requested by Borrower to reimburse Borrower for, or to pay for, Borrower’s actual, out-of-pocket expenses for Approved FF&E provided that: (1) such request is made (A) on a form of draw request specified or reasonably approved by Lender and which shall at a minimum set forth (1) a general description of the Approved FF&E for which such disbursement is requested and (2) the accuracy of the invoices to be attached thereto, which shall provide the quantity and price of each item purchased, or to be purchased, if the Approved FF&E includes the purchase or replacement of specific items (such as appliances) and the price of all materials (grouped by type or category) used in any item of Approved FF&E other than the purchase or replacement of specific items and the cost of all contracted labor or other services applicable to each item of Approved FF&E for which such request for disbursement is made and (B) at least ten (10) days prior to the date on which Borrower requests such disbursement be made; (2) on the date such request is received by Lender and on the date such disbursement is to be made, no Event of Default shall exist and remain uncured; (3) if required by Lender, Lender shall have verified (by an inspection conducted at Borrower’s expense) performance of the work associated with such Approved FF&E; (4) the request for disbursement is accompanied by (A) an Officer’s Certificate certifying that (1) such funds will be used to reimburse Borrower for, or to pay for, Approved FF&E and a general description thereof, (2) the same has not been previously paid and (3) any construction work associated with the related Approved FF&E has been completed in a good and workmanlike manner and in accordance with the Franchise Agreement and all applicable Legal Requirements, (B) if requested by Lender in its reasonable discretion, such additional reasonably detailed documentation satisfactory to Lender as to the amount, necessity and purpose therefor, (C) to the extent such disbursement is a reimbursement, copies of paid invoices for the amounts requested and, to the extent such disbursement is for payment, copies of the applicable unpaid invoices for the amounts requested and (D) if required by Lender, lien waivers and releases, or conditional lien waivers and releases, as applicable, from all parties furnishing materials and/or services in connection therewith; (5) at Lender’s option, Lender shall have received a title search for the Property indicating that the Property is free from all liens, claims and other encumbrances other than Permitted Encumbrances; and (6) Lender shall have received such other evidence as Lender shall reasonably request that the Approved FF&E to be funded by the requested disbursement has been (x) completed and (y) paid for (or will be paid for upon such disbursement). Lender shall not be required to disburse FF&E Reserve Funds (x) more frequently than once each calendar month, (y) in an amount less than the Minimum Disbursement Amount (unless the total amount of FF&E Reserve Funds is less than the Minimum Disbursement Amount, in which case only one disbursement of the amount remaining in the account shall be made) or (z) with respect to any retail (if any) space at the Property.
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(iii) Nothing in this Section shall (1) make Lender responsible for making or completing any FF&E; (2) require Lender to expend funds in addition to the FF&E Reserve Funds to complete any FF&E; (3) obligate Lender to proceed with any FF&E; or (4) obligate Lender to demand from Borrower additional sums to complete any FF&E; provided, however, that the foregoing clause (4) is not intended to limit Borrower’s preservation and maintenance covenants in the Loan Documents and/or in the Franchise Agreement. The insufficiency of any FF&E Reserve Funds shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents and/or in the Franchise Agreement. Notwithstanding anything to the contrary contained herein, Lender may, in its reasonable discretion, allocate FF&E Reserve Funds to each Individual Property and no portion of any FF&E Reserve Funds so allocated to any Individual Property may be disbursed on account of another Individual Property without Lender’s prior written consent in each instance.
(iv) Borrower shall permit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties to enter onto the Property to inspect the progress of any FF&E and all materials being used in connection therewith and to examine all plans and shop drawings relating to such FF&E. 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.
(b) Intentionally Omitted.
(c) PIP Reserve Funds.
(i) Borrower shall deposit into an Eligible Account held by Lender or Servicer (the “PIP Reserve Account”) (1) on the Closing Date, the sum of $383,676 on account of the Scheduled PIP and (2) the applicable PIP Deposit (less any amounts Lender confirms will be transferred from the Excess Cash Flow Account to the PIP Reserve Account in accordance with the applicable terms and conditions hereof) (A) in the case of any existing or renewal Franchise Agreement, prior to the effective date that any PIP (other than the Scheduled PIP) is imposed thereunder and (B) in the case of any new Franchise Agreement, on or prior to the date such new Franchise Agreement is executed and delivered. Additionally, if, at any time, Lender determines that amounts on deposit in the PIP Reserve Account will be insufficient to pay the then estimated costs for any PIP Work (as estimated by Lender in its reasonable discretion after taking into account any portion thereof with respect to which Lender has received satisfactory evidence that same has previously been performed and paid for by Borrower in accordance with the terms hereof and the related Franchise Agreement), Borrower shall make a True Up Payment with respect to such insufficiency into the PIP Reserve Account. Notwithstanding anything to the contrary contained herein, unless otherwise agreed to by Lender in writing, no disbursement of PIP Reserve Funds shall be made hereunder until such True Up Payment is made. As used herein, “PIP Deposit” shall mean, with respect to any PIP, an amount equal to 125% of the costs of the related PIP Work as estimated by Lender in its reasonable discretion (which such cost shall be exclusive of the cost of any PIP Work which is duplicative of any Approved FF&E for which adequate FF&E Reserve Funds exist hereunder (as reasonably determined by Lender) (the “Duplicative FF&E”)). Amounts deposited in the PIP Reserve Account pursuant to this Section are referred to herein as the “PIP Reserve Funds”.
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(ii) Lender shall make disbursements from the PIP Reserve Funds as requested by Borrower to reimburse Borrower for Borrower’s actual, out-of-pocket expenses incurred in connection with the performance of the related PIP Work; provided that: (1) such request is made (A) on a form of draw request specified or approved by Lender and which shall at a minimum set forth (1) a general description of the PIP Work for which such disbursement is requested and (2) the accuracy of the invoices, to be attached thereto, which shall provide the quantity and price of each item purchased, if the PIP Work includes the purchase or replacement of specific items (such as appliances) and the price of all materials (grouped by type or category) used in any item of PIP Work other than the purchase or replacement of specific items and the cost of all contracted labor or other services applicable to each item of PIP Work for which such request for disbursement is made and (B) at least ten (10) days prior to the date on which Borrower requests such disbursement be made; (2) on the date such request is received by Lender and on the date such disbursement is to be made, no Event of Default shall exist and remain uncured; (3) at Lender’s option, Lender shall have verified (by an inspection conducted at Borrower’s expense) performance of the associated PIP Work; (4) the request for disbursement is accompanied by (A) an Officer’s Certificate certifying that (1) such funds will be used to reimburse Borrower for, or to pay for, PIP Work and a general description thereof, (2) the same has not been the subject of a previous disbursement, (3) all previous disbursements have been used to pay or reimburse for the previously identified PIP Work and (4) any construction work associated with such PIP Work has been completed in a good and workmanlike manner and in accordance with the Franchise Agreement and all applicable Legal Requirements, (B) if requested by Lender, such additional reasonably detailed documentation satisfactory to Lender as to the amount, necessity and purpose therefor, (C) to the extent such disbursement is a reimbursement, copies of paid invoices for the amounts requested and, to the extent such disbursement is for payment, copies of the applicable unpaid invoices for the amounts requested and (D) if required by Lender, lien waivers and releases from all parties furnishing materials and/or services in connection therewith; (5) funds remaining in the PIP Reserve Account are, in Lender’s judgment, sufficient to complete such PIP Work and all other outstanding PIP Work when required; (6) at Lender’s option, Lender shall have received a title search for the Property indicating that the Property is free from all liens, claims and other encumbrances other than Permitted Encumbrances; and (7) Lender shall have received such other evidence as Lender shall reasonably request that the PIP Work to be funded by the requested disbursement has been (x) completed and (y) paid for (or will be paid for upon such disbursement). Notwithstanding the foregoing or anything to the contrary contained herein, Borrower shall not be able to request disbursement of any applicable PIP Reserve Minimum Balance until such time as Lender has received and reasonably approved the PIP Completion Evidence for the PIP Work to which such PIP Reserve Minimum Balance relates. Lender shall not be required to disburse PIP Reserve Funds more frequently than once each calendar month nor in an amount less than the Minimum Disbursement Amount (unless the total amount of PIP Reserve Funds is less than the Minimum Disbursement Amount, in which case only one disbursement of the amount remaining in the account shall be made).
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(iii) Borrower shall permit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties to enter onto the Property during normal business hours to inspect the progress of any PIP and all materials being used in connection therewith and to examine all plans and shop drawings relating to such PIP. 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. Notwithstanding anything to the contrary contained herein, Lender may, in its reasonable discretion, allocate PIP Reserve Funds to each Individual Property and no portion of any PIP Reserve Funds so allocated to any Individual Property may be disbursed on account of another Individual Property without Lender’s prior written consent in each instance.
(iv) Lender shall make disbursements from the PIP Reserve Account to pay Borrower only for the costs of the PIP Work. Nothing in this Section shall (1) make Lender responsible for making or completing any PIP; (2) require Lender to expend funds in addition to the PIP Reserve Funds to complete any PIP; (3) obligate Lender to proceed with any PIP; or (4) obligate Lender to demand from Borrower additional sums to complete any PIP; provided, however, that the foregoing clause (iv) is not intended to limit Borrower’s obligations in respect of any PIP under this Agreement and the other Loan Documents. The insufficiency of any PIP Reserve Funds shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants (including, without limitation, all covenants applicable to any PIP) in the Loan Documents and/or in the Franchise Agreement. Notwithstanding anything to the contrary contained herein, unless agreed to in writing by Lender in advance, (A) no PIP Reserve Funds will be disbursed or otherwise used for FF&E, (B) Borrower shall not be entitled to duplicate draws of FF&E Reserve Funds and PIP Reserve Funds for the same work or cost and (C) FF&E Reserve Funds attributable to the Duplicative FF&E shall only be disbursed for work or costs associated with such Duplicative FF&E and not for any other FF&E.
ARTICLE 9
CASH MANAGEMENT
Section 9.1. Establishment of Certain Accounts.
(a) Borrower shall, simultaneously herewith, establish an Eligible Account (the “Restricted Account”) pursuant to the Restricted Account Agreement in the name of Borrower for the sole and exclusive benefit of Lender into which Borrower shall deposit, or cause to be deposited, all revenue generated by the Property. Pursuant to the Restricted Account Agreement, funds on deposit in the Restricted Account shall be transferred on each Business Day to or at the direction of Borrower unless a Trigger Period exists, in which case such funds shall be transferred on each Business Day to the Cash Management Account.
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(b) Upon the first occurrence of a Trigger Period, Lender, on Borrower’s behalf, shall establish an Eligible Account (the “Cash Management Account”) with Lender or Servicer, as applicable, in the name of Borrower for the sole and exclusive benefit of Lender. Upon the first occurrence of a Trigger Period, Lender, on Borrower’s behalf, shall also establish with Lender or Servicer an Eligible Account into which, during the continuance of any Trigger Period, Borrower shall deposit, or cause to be deposited the amounts required for the payment of Debt Service under the Loan (the “Debt Service Account”).
Section 9.2. Deposits into the Restricted Account; Maintenance of Restricted Account.
(a) Borrower represents, warrants and covenants that, so long as the Debt remains outstanding (or until such time as a defeasance has been consummated in accordance with Section 2.8 hereof), (i) Borrower shall, or shall cause Manager to, immediately deposit all revenue derived from the Property and received by Borrower or Manager, as the case may be, into the Restricted Account; (ii) Borrower shall instruct Manager to immediately deposit (A) all revenue derived from the Property collected by Manager, if any, pursuant to the Management Agreement (or otherwise) into the Restricted Account and (B) all funds otherwise payable to Borrower by Manager pursuant to the Management Agreement (or otherwise in connection with the Property) into the Restricted Account; (iii) (A) on or before the Closing Date, Borrower shall have sent (and hereby represents that it has sent) a notices (each such notice, a “Direction Notice”), substantially in the forms of Exhibit A-1 and Exhibit A-2 attached hereto (as applicable), to (1) all Tenants now occupying space at the Property directing them to pay all rent and other sums due under the Lease to which they are a party into the Restricted Account and (2) each of the credit card companies or credit card clearing banks with which Borrower or Manager has entered into merchant’s or other credit card agreements (any such agreement, a “Credit Card Agreement”) directing them to pay by wire transfer or the ACH System to the Restricted Account all payments which would otherwise be paid to Borrower or Manager under the applicable credit-card processing agreement (B) simultaneously with the execution of any Lease or Credit Card Agreement entered into on or after the date hereof in accordance with the applicable terms and conditions hereof, Borrower shall furnish each Tenant under each such Lease and each credit card company or credit card clearing bank party to each such Credit Card Agreement a Direction Notice and (C) Borrower shall continue to send the aforesaid Direction Notices until each addressee thereof complies with the terms thereof; (iv) there shall be no other accounts maintained by Borrower or any other Person into which revenues from the ownership and operation of the Property are directly deposited; and (v) neither Borrower nor any other Person shall open any other such account with respect to the direct deposit of income in connection with the Property. Until deposited into the Restricted Account, any Rents and other revenues from the Property held by Borrower shall be deemed to be collateral and shall be held in trust by it for the benefit, and as the property, of Lender pursuant to the Security Instrument and shall not be commingled with any other funds or property of Borrower. Borrower warrants and covenants that it shall not rescind, withdraw or change any notices or instructions required to be sent by it pursuant to this Section 9.2 without Lender’s prior written consent.
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(b) Borrower shall maintain the Restricted Account for the term of the Loan, which Restricted Account shall be under the sole dominion and control of Lender (subject to the terms hereof and of the Restricted Account Agreement). The Restricted Account shall have a title evidencing the foregoing in a manner reasonably acceptable to Lender. Borrower hereby grants to Lender a first-priority security interest in the Restricted 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 Restricted Account. Borrower hereby authorizes Lender to file UCC Financing Statements and continuations thereof to perfect Lender’s security interest in the Restricted Account and all deposits at any time contained therein and the proceeds thereof. All costs and expenses for establishing and maintaining the Restricted Account (or any successor thereto) shall be paid by Borrower. All monies now or hereafter deposited into the Restricted Account shall be deemed additional security for the Debt until disbursed to Borrower in accordance with the applicable terms and conditions hereof and of the other Loan Documents. Borrower shall pay all sums due under and otherwise comply with the Restricted Account Agreement. Borrower shall not alter or modify either the Restricted Account or the Restricted Account Agreement, in each case without the prior written consent of Lender. The Restricted Account Agreement shall provide (and Borrower shall provide) Lender online access to bank and other financial statements relating to the Restricted Account (including, without limitation, a listing of the receipts being collected therein). In connection with any Secondary Market Transaction, Lender shall have the right to cause the Restricted Account to be entitled with such other designation as Lender may select to reflect an assignment or transfer of Lender’s rights and/or interests with respect to the Restricted Account. Lender shall provide Borrower with prompt written notice of any such renaming of the Restricted Account. Borrower shall not further pledge, assign or grant any security interest in the Restricted Account or the monies deposited therein or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto. The Restricted Account (i) shall be an Eligible Account and (ii) shall not be commingled with other monies held by Borrower or Bank. Upon (A) Bank ceasing to be an Eligible Institution, (B) the Restricted Account ceasing to be an Eligible Account, (C) any resignation by Bank or termination of the Restricted Account Agreement by Bank or Lender and/or (D) the occurrence and continuance of an Event of Default, Borrower shall, within thirty (30) days of Lender’s request, (1) terminate the existing Restricted Account Agreement, (2) appoint a new Bank (which such Bank shall (I) be an Eligible Institution, (II) other than during the continuance of an Event of Default, be selected by Borrower and approved by Lender (which such approval shall not be unreasonably withheld, conditioned or delayed) and (III) during the continuance of an Event of Default, be selected by Lender), (3) cause such Bank to open a new Restricted Account (which such account shall be an Eligible Account) and enter into a new Restricted Account Agreement with Lender on substantially the same terms and conditions as the previous Restricted Account Agreement and (4) send new Direction Notices and the other notices required pursuant to the terms hereof relating to such new Restricted Account Agreement and Restricted Account. Upon the occurrence and during the continuance of an Event of Default, Borrower constitutes and appoints Lender its true and lawful attorney-in- fact with full power of substitution to complete or undertake any action required of Borrower under this Section 9.2 in the name of Borrower in the event Borrower fails to do the same within five (5) Business Days of notice thereof from Lender. Such power of attorney shall be deemed to be a power coupled with an interest and cannot be revoked.
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Section 9.3. Disbursements from the Cash Management Account. On each Monthly Payment Date, Lender or Servicer, as applicable, shall allocate all funds, if any, on deposit in the Cash Management Account and disburse such funds in the following amounts and order of priority:
(a) First, funds sufficient to pay the Monthly Tax Deposit due for the then applicable Monthly Payment Date, if any, shall be deposited in the Tax Account;
(b) Second, funds sufficient to pay the Monthly Insurance Deposit due for the then applicable Monthly Payment Date, if any, shall be deposited in the Insurance Account;
(c) Third, funds sufficient to pay any interest accruing at the Default Rate and late payment charges, if any, shall be deposited into the Debt Service Account;
(d) Fourth, funds sufficient to pay the Debt Service due on the then applicable Monthly Payment Date shall be deposited in the Debt Service Account;
(e) Fifth, funds sufficient to pay the FF&E Reserve Monthly Deposit for the then applicable Monthly Payment Date, if any, shall be deposited in the FF&E Reserve Account;
(f) Sixth, funds sufficient to pay any other amounts due and owing to Lender and/or Servicer pursuant to the terms hereof and/or of the other Loan Documents, if any, shall be deposited with or as directed by Lender;
(g) Seventh, to the extent that a Trigger Period has occurred and is continuing, funds sufficient to pay the Op Ex Monthly Deposit for the then applicable Monthly Payment Date, if any, shall be deposited in the Operating Expense Account; and
(h) Eighth, all amounts remaining in the Cash Management Account after deposits for items (a) through (g) above (“Excess Cash Flow”) shall (i) to the extent that a Trigger Period has occurred and is continuing, be deposited into the Excess Cash Flow Account and (ii) to the extent that no Trigger Period exists, be disbursed to Borrower.
For purposes of clarification, the first sentence of this Section 9.3 shall not be deemed to require that any funds on deposit in the Restricted Account be transferred to the Cash Management Account at any time other than during the continuance of a Trigger Period.
Section 9.4. Withdrawals from the Debt Service Account. Prior to the occurrence and continuance of an Event of Default, funds on deposit in the Debt Service Account, if any, shall be used to pay Debt Service when due, together with any late payment charges or interest accruing at the Default Rate.
Section 9.5. Payments Received Under this Agreement. Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, provided no Event of Default has occurred and is continuing, Borrower’s obligations with respect to the monthly payment of Debt Service and amounts due for the Reserve Accounts shall (provided Lender is not prohibited from withdrawing or applying any funds in the applicable Accounts by operation of law or otherwise) be deemed satisfied to the extent sufficient amounts are deposited in applicable Accounts to satisfy such obligations on the dates each such payment is required, regardless of whether any of such amounts are so applied by Lender.
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Section 9.6. Capital Distributions. Borrower shall be permitted to make distributions of cash flow to its members and/or shareholders (as applicable) in accordance with its organization documents provided: (i) no Trigger Period is ongoing, (ii) after giving effect to any such distribution, Borrower retains sufficient capital to satisfy all its obligations pursuant to the Loan Documents, (iii) such distribution does not constitute a fraudulent conveyance or otherwise violate and Legal Requirements (including, without limitation, Creditor Rights Laws), (iv) such distribution does not constitute misappropriation and/or misapplication and (v) such distribution does not expressly violate (or in and of itself cause a violation of) the terms and/or conditions of the Loan Documents.
ARTICLE 10
EVENTS OF DEFAULT; REMEDIES
Section 10.1. Event of Default.
The occurrence of any one or more of the following events shall constitute an “Event of Default”:
(a) if (A) any monthly Debt Service payment or the payment due on the Maturity Date is not paid when due, (B) any deposit to any of the Accounts required hereunder or under the other Loan Documents is not paid when due and such non-payment continues for five (5) days following notice to Borrower (it being acknowledged that no notice shall be required from Lender if such deposit was included in the monthly invoice provided to Borrower) or (C) any other portion of the Debt is not paid when due and such non-payment continues for ten (10) days following notice to Borrower that the same is due and payable;
(b) if any of the Taxes or Other Charges are not paid when the same are due and payable except to the extent (A) sums sufficient to pay the Taxes or Other Charges in question had been reserved hereunder prior to the applicable due date for the Taxes or Other Charges in question for the express purpose of paying the Taxes or Other Charges in question and Lender failed to pay the Taxes or Other Charges in question when required hereunder, (B) Lender’s access to such sums was not restricted or constrained in any manner and (C) no Event of Default was continuing;
(c) if the Policies are not kept in full force and effect or if evidence of the same is not delivered to Lender as provided in Section 7.1 hereof (provided, that, the failure to provide such evidence shall not be deemed an Event of Default hereunder to the extent that (i) Borrower cures such failure within five (5) days of notice thereof from Lender and (ii) Borrower provides evidence reasonably acceptable to Lender that the Policies were at all times kept in full force and effect);
(d) if any of the representations or covenants contained in Article 5, Article 6, Sections 3.33, 3.34, 3.35, 4.22, 4.23, 4.24 or 4.25 hereof or in the Property Document Provisions, the Master Lease Provisions and/or the Hotel Provisions are breached or violated;
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(e) if any representation or warranty made herein, in the Guaranty or in the Environmental Indemnity or in any other guaranty, or in any certificate, report, financial statement or other instrument or document furnished to Lender by or on behalf of any Borrower Party in connection with the Loan shall have been false or misleading in any material adverse respect when made;
(f) if (i) Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor, Sponsor or Guarantor shall commence any case, proceeding or other action (A) under any Creditors Rights Laws seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, liquidation or dissolution, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or Borrower or any managing member or general partner of Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor, Sponsor or Guarantor shall make a general assignment for the benefit of its creditors; (ii) there shall be commenced against Borrower or any managing member or general partner of Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor, Sponsor or Guarantor any case, proceeding or other action of a nature referred to in clause (i) above (other than any case, action or proceeding already constituting an Event of Default by operation of the other provisions of this subsection) which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; (iii) there shall be commenced against Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor, Sponsor or Guarantor any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets (other than any case, action or proceeding already constituting an Event of Default by operation of the other provisions of this subsection) which results in the entry of any order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; (iv) Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor, Sponsor or Guarantor shall take any action in furtherance of, in collusion with respect to, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; (v) Borrower, any SPE Component Entity, any Affiliated Manager, any Affiliated Franchisor, Sponsor or Guarantor shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; (vi) any Restricted Party is substantively consolidated with any other entity in connection with any proceeding under the Bankruptcy Code or any other Creditors Rights Laws involving Sponsor or its subsidiaries; or (vii) a Bankruptcy Event occurs;
(g) if Borrower shall be in default beyond applicable notice and grace periods under any other mortgage, deed of trust, deed to secure debt or other security agreement covering any part of the Property whether it be superior or junior in lien to the Security Instrument;
(h) if the Property (or any portion thereof) becomes subject to any mechanic’s, materialman’s or other lien (other than a lien for any Taxes not then due and payable) and the lien shall remain undischarged of record (by payment, bonding or otherwise) as of the earlier of (i) the date occurring thirty (30) days after Borrower’s knowledge of such lien or (ii) the later of (I) the date occurring thirty (30) days after the Property (or applicable portion thereof) first became subject to such lien and (II) the date that enforcement proceedings are brought with respect to such lien;
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(i) if any federal tax lien is filed against Borrower, any SPE Component Entity, Sponsor, Guarantor or the Property (or any portion thereof) and same is not discharged of record (by payment, bonding or otherwise) within thirty (30) days after same is filed;
(j) if Borrower shall fail to deliver to Lender the estoppel certificates required by Section 4.13(a) or (c) hereof within the timeframes prescribed therein;
(k) if any default occurs under any guaranty or indemnity executed in connection herewith (including, without limitation, the Environmental Indemnity and/or the Guaranty) and such default continues after the expiration of applicable grace periods, if any;
(l) if any of the assumptions contained in the Non-Consolidation Opinion, or in any New Non-Consolidation Opinion (including, without limitation, in any schedules thereto and/or certificates delivered in connection therewith) are untrue or shall become untrue in any material respect;
(m) if Borrower defaults under the Management Agreement beyond the expiration of applicable notice and grace periods, if any, thereunder or if the Management Agreement is canceled, terminated or surrendered, expires pursuant to its terms or otherwise ceased to be in full force and effect, unless, in each such case, Borrower, contemporaneously with such cancellation, termination, surrender, expiration or cessation, enters into a Qualified Management Agreement with a Qualified Manager in accordance with the applicable terms and provisions hereof;
(n) if Borrower fails to appoint a New Manager upon the request of Lender and/or fails to comply with any limitations on instructing the Manager, each as required by and in accordance with, as applicable, the terms and provisions of, this Agreement, the Assignment of Management Agreement and the Security Instrument;
(o) if any representation and/or covenant herein relating to ERISA matters is breached;
(p) if (A) Borrower shall fail (beyond any applicable notice or grace period) to pay any rent, additional rent or other charges payable under any Property Document as and when payable thereunder, (B) Borrower defaults under the Property Documents beyond the expiration of applicable notice and grace periods, if any, thereunder, (C) any of the Property Documents are amended, supplemented, replaced, restated or otherwise modified without Lender’s prior written consent or if Borrower consents to a transfer of any party’s interest thereunder without Lender’s prior written consent, (D) any Property Document and/or the estate created thereunder is canceled, rejected, terminated, surrendered or expires pursuant to its terms, unless in such case Borrower enters into a replacement thereof in accordance with the applicable terms and provisions hereof or (E) a Property Document Event occurs;
(q) if Borrower ceases to do business as a hotel at the Property or terminates such business for any reason whatsoever (other than temporary cessation in connection with any continuous and diligent renovation or restoration of the Property following a Casualty or Condemnation in accordance with the applicable terms and conditions hereof);
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(r) if, without Lender’s prior written consent, any liquor license, hotel license, trademark, Intellectual Property and/or other material Permit relating to the Property ceases to be in full force and effect (any such event shall be referred to herein as a “Licensing Failure”), provided, however, any such Licensing Failure shall not constitute an Event of Default hereunder unless the same either (x) causes a Material Adverse Effect or (y) continues for five (5) days;
(s) if Borrower defaults under the Franchise Agreement beyond the expiration of applicable notice and grace periods, if any, thereunder or if the Franchise Agreement is canceled, terminated or surrendered, expires pursuant to its terms or otherwise ceases to be in full force and effect, unless, in each such case, Borrower, contemporaneously with such cancellation, termination, surrender, expiration or cessation, enters into a Qualified Franchise Agreement with a Qualified Franchisor in accordance with the applicable terms and provisions hereof;
(t) if Borrower fails to appoint a New Franchisor upon the request of Lender and/or fails to comply with any limitations on instructing the Franchisor, each as required by and in accordance with, as applicable, the terms and provisions of, this Agreement and the other Loan Documents;
(u) if the Property fails to be operated, “flagged” and/or branded pursuant to a Qualified Franchise Agreement;
(v) if (A) Borrower shall fail in the payment of any rent, additional rent or other charge mentioned in or made payable by the Master Lease as and when such rent or other charge is payable (unless waived by the landlord under the Master Lease), (B) there shall occur any default by Borrower, as tenant under the Master Lease, in the observance or performance of any term, covenant or condition of the Master Lease on the part of Borrower, to be observed or performed (unless waived by the landlord under the Master Lease), (C) if any one or more of the events referred to in the Master Lease shall occur which would cause the Master Lease to terminate without notice or action by the landlord under the Master Lease or which would entitle the landlord under the Master Lease to terminate the Master Lease and the term thereof by giving notice to Borrower, as tenant thereunder (unless waived by the landlord under the Master Lease), (D) if the leasehold estate created by the Master Lease shall be surrendered or the Master Lease shall expire, be terminated or canceled for any reason or under any circumstances whatsoever, or (E) if any of the terms, covenants or conditions of the Master Lease shall in any manner be modified, changed, supplemented, altered, or amended without the consent of Lender;
(w) With respect to any default or breach of any term, covenant or condition of this Agreement not specified in subsections (a) through (v) above or not otherwise specifically specified as an Event of Default in this Agreement, if the same is not cured (i) within ten (10) days after notice from Lender (in the case of any default which can be cured by the payment of a sum of money) or (ii) for thirty (30) days after notice from Lender (in the case of any other default or breach); provided, that, with respect to any default or breach specified in subsection (ii), if the same cannot reasonably be cured within such thirty (30) day period and Borrower shall have commenced to cure the same within such thirty (30) day 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 the same, it being agreed that no such extension shall be for a period in excess of one hundred twenty (120) days; or
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(x) if any default shall exist under any of the other Loan Documents beyond any applicable cure periods contained in such Loan Documents or if any other such event shall occur or condition shall exist, if the effect of such event or condition is to accelerate the maturity of any portion of the Debt or to permit Lender to accelerate the maturity of all or any portion of the Debt.
Section 10.2. Remedies.
(a) Upon the occurrence and during the continuance of an Event of Default (other than an Event of Default described in Section 10.1(f) above with respect to Borrower or any SPE Component Entity) and at any time thereafter Lender may, in addition to any other rights or remedies available to it pursuant to this Agreement, the Security Instrument, the Note and the other Loan Documents or at law or in equity, take such action, without notice or demand, that Lender deems advisable to protect and enforce its rights against Borrower and in the Property, including, without limitation, declaring the Debt to be immediately due and payable, and Lender may enforce or avail itself of any or all rights or remedies provided in this Agreement, the Security Instrument, the Note and the other Loan Documents against Borrower and the Property, including, without limitation, all rights or remedies available at law or in equity. Upon any Event of Default described in Section 10.1(f) above with respect to Borrower or any SPE Component Entity, the Debt and all other obligations of Borrower under this Agreement, the Security Instrument, the Note and the other Loan Documents shall immediately and automatically become due and payable, without notice or demand, and Borrower hereby expressly waives any such notice or demand, anything contained herein or in the Security Instrument, the Note and the other Loan Documents to the contrary notwithstanding.
(b) Upon the occurrence and during the continuance of an Event of Default, all or any one or more of the rights, powers, privileges and other remedies available to Lender against Borrower under this Agreement, the Security Instrument, the Note or the other Loan Documents executed and delivered by, or applicable to, Borrower or at law or in equity may be exercised by Lender at any time and from time to time, whether or not all or any of the Debt shall be declared due and payable, and whether or not Lender shall have commenced any foreclosure proceeding or other action for the enforcement of its rights and remedies under this Agreement, the Security Instrument, the Note or the other Loan Documents with respect to the Property. Any such actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singularly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by applicable law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by applicable law, equity or contract or as set forth herein or in the Security Instrument, the Note or the other Loan Documents. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default with respect to Borrower shall not be construed to be a waiver of any subsequent Default or Event of Default by
Borrower or to impair any remedy, right or power consequent thereon.
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(c) With respect to Borrower and the Properties, nothing contained herein or in any other Loan Document shall be construed as requiring Lender to resort to any Individual Property (or any portion thereof and/or estate or other interest therein) for the satisfaction of any of the Debt in preference or priority to any other Individual Property (or any portion thereof and/or estate or other interest therein), and Lender may seek satisfaction out of all of the Properties (or any portion thereof and/or estate or other interest therein), in its absolute discretion in respect of the Debt. In addition, Lender shall have the right from time to time to partially foreclose the Security Instruments in any manner (including, without limitation, on the fee estate (the “Fee Estate Collateral”) and/or leasehold estate (the “Leasehold Estate Collateral”), in each case, encumbered by said Security Instruments) and for any amounts secured by the Security Instruments then due and payable, in each case, as determined by Lender in its sole discretion including, without limitation, the following circumstances: (i) after the occurrence of an Event of Default, Lender may foreclose one or more of the Security Instruments to recover such delinquent payments, (ii) after the occurrence of an Event of Default, Lender may elect to foreclose one or more of the Security Instruments on the applicable Fee Estate Collateral and/or the applicable Leasehold Estate Collateral simultaneously, singularly and/or in any order or priority, in each case, as determined by Lender in its sole discretion and/or (iii) after the occurrence of an Event of Default, in the event Lender elects to accelerate less than the entire outstanding principal balance of the Loan, Lender may foreclose one or more of the Security Instruments to recover so much of the principal balance of the Loan as Lender may accelerate and such other sums secured by one or more of the Security Instruments as Lender may elect. Notwithstanding one or more partial foreclosures, the Properties shall remain subject to the Security Instruments to secure payment of sums secured by the Security Instruments and not previously recovered.
(d) After the occurrence and during the continuance of an Event of Default, Lender shall have the right from time to time to sever the Note and the other Loan Documents into one or more separate notes, security instruments and other security documents (the “Severed Loan Documents”) in such denominations as Lender shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies provided hereunder. Borrower shall execute and deliver to Lender from time to time, promptly after the request of Lender, a severance agreement and such other documents as Lender shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Lender. Upon the occurrence and during the continuance of an Event of Default, Borrower hereby absolutely and irrevocably appoints Lender as its true and lawful attorney, coupled with an interest, in its name and stead to make and execute all documents necessary or desirable to effect the aforesaid severance, Borrower ratifying all that its said attorney shall do by virtue thereof; provided, however, Lender shall not make or execute any such documents under such power until three (3) days after notice has been given to Borrower by Lender of Lender’s intent to exercise its rights under such power. Borrower shall not be obligated to pay any costs or expenses incurred in connection with the preparation, execution, recording or filing of the Severed Loan Documents and the Severed Loan Documents shall not (i) contain any representations, warranties or covenants not contained in the Loan Documents and any such representations and warranties contained in the Severed Loan Documents will be given by Borrower only as of the Closing Date or (ii) increase Borrower’s costs, obligations or liabilities or decrease Borrower’s rights, in each case, under the Loan Documents (except to the extent such costs, liabilities, rights and/or obligations would have been effected had the Severed Loan Documents existed as of the Closing Date).
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(e) Notwithstanding anything to the contrary contained herein or in any other Loan Document, any amounts recovered from the Property (or any portion thereof) or any other collateral for the Loan and/or paid to or received by Lender may, after an Event of Default, be applied by Lender toward the Debt in such order, priority and proportions as Lender in its sole discretion shall determine.
(f) After the occurrence and during the continuance of an Event of Default, Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder or being deemed to have cured any Event of Default hereunder, make, do or perform any obligation of Borrower hereunder in such manner and to such extent as Lender may deem necessary. Lender is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property for such purposes, and the cost and expense thereof (including reasonable attorneys’ fees to the extent permitted by applicable law), with interest as provided in this Section, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any action or proceeding shall bear interest at the Default Rate, for the period after such cost or expense was incurred into the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by the liens, claims and security interests provided to Lender under the Loan Documents and shall be immediately due and payable upon demand by Lender therefore.
ARTICLE 11
SECONDARY MARKET
Section 11.1. Securitization.
(a) Lender shall have the right (i) to sell or otherwise transfer the Loan (or any portion thereof and/or interest therein), (ii) to sell participation interests in the Loan (or any portion thereof and/or interest therein) or (iii) to securitize the Loan (or any portion thereof and/or interest therein) in a single asset securitization or a pooled asset securitization. The transactions referred to in clauses (i), (ii) and (iii) above shall hereinafter be referred to collectively as “Secondary Market Transactions” and the transactions referred to in clause (iii) shall hereinafter be referred to as a “Securitization”. Any certificates, notes or other securities issued in connection with a Securitization are hereinafter referred to as “Securities”.
(b) If requested by Lender, Borrower shall assist Lender in satisfying the market standards to which Lender customarily adheres or which may be reasonably required in the marketplace or by the Rating Agencies in connection with any Secondary Market Transactions, including, without limitation, to:
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(i) provide (A) updated financial and other information with respect to the Property, the business operated at the Property, Borrower, Guarantor, Sponsor, SPE Component Entity and Manager which are available using currently in place systems of the aforesaid parties, (B) updated budgets relating to the Property, (C) updated appraisals, market studies, environmental reviews (Phase I’s and, if appropriate, Phase II’s), property condition reports and other due diligence investigations of the Property (the “Updated Information”), together, if customary, with appropriate verification of the Updated Information through letters of auditors or opinions of counsel acceptable to Lender and the Rating Agencies and (D) revisions to and other agreements with respect to the Property Documents in form and substance acceptable to Lender and the Rating Agencies;
(ii) provide new and/or updated opinions of counsel, which may be relied upon by Lender, the Rating Agencies and their respective counsel, agents and representatives, as to substantive non-consolidation, fraudulent conveyance, matters of Delaware and federal bankruptcy law relating to limited liability companies, true sale, true lease and any other opinion customary in Secondary Market Transactions or required by the Rating Agencies with respect to the Property, Property Documents, Borrower and Borrower’s Affiliates, which counsel and opinions shall be satisfactory in form and substance to Lender and the Rating Agencies;
(iii) provide updated, as of the closing date of the Secondary Market Transaction, representations and warranties made in the Loan Documents and such additional representations and warranties as the Rating Agencies may require (provided, however, that (without limiting any other provisions hereof or of the other Loan Documents) Borrower’s inability to make any such additional representation or warranty without qualification shall not in and of itself constitute an Event of Default hereunder); and
(iv) execute such amendments to the Loan Documents, the Property Documents and Borrower’s or any SPE Component Entity’s organizational documents as may be reasonably requested by Lender or requested by the Rating Agencies or otherwise to effect any Secondary Market Transaction, including, without limitation, (A) to amend and/or supplement the Independent Director provisions provided herein and therein (including, without limitation, to add an additional Independent Director), in each case, in accordance with the applicable requirements of the Rating Agencies, (B) bifurcating the Loan into two or more components and/or additional separate notes and/or creating additional senior/subordinate note structure(s) (any of the foregoing, a “Loan Bifurcation”) and (C) to modify all operative dates (including but not limited to payment dates, interest period start dates and end dates, etc.) under the Loan Documents, by up to ten (10) days; provided, however, that Borrower shall not be required to so modify or amend any Loan Document if such modification or amendment would (I) change the interest rate, the stated maturity (except as provided in subclause (C) above) or the amortization of principal set forth herein, except in connection with a Loan Bifurcation which may result in varying fixed interest rates and amortization schedules, but which shall have the same weighted average coupon of the original Note and provide for the same aggregate interest payments over the life of the Loan (except that such weighted average coupon and such aggregate interest payments may increase solely as a result of interest rate “creep” following any prepayment of the Loan during the continuance of an Event of Default or in connection with a prepayment of the Loan as a result of a Casualty or Condemnation), (II) change the aggregate outstanding principal balance of the Loan, (III) materially and adversely alter the material restrictions on equity transfers in Borrower or transfers of the Property, in each case, as set forth in this Agreement, (IV) materially and adversely alter any material limitations on recourse against Borrower or Guarantor contained herein, or (V) except as provided above, materially and adversely change any material obligation, material right or material privilege of Borrower or Guarantor set forth in the Loan Documents (except, in the case of each of the foregoing, to the extent the same would have been affected had the Loan Bifurcation existed as of the Closing Date based on the differences in being a party to a bifurcated loan as opposed to a non-bifurcated loan).
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Notwithstanding anything herein to the contrary and except as otherwise provided in the immediately succeeding sentence, with respect to any compliance by any Borrower Party with requests made pursuant to this Section 11.1(b) with respect to any Secondary Market Transaction, (i) Lender shall pay its owns costs and expenses in connection therewith (including, without limitation, attorneys’ fees and expenses), (ii) Borrower shall pay all of Lender’s reasonable, out-of-pocket costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) solely in connection with the Excluded Items and (iii) Lender shall reimburse Borrower for any reasonable, out-of-pocket, third party costs incurred by Borrower prior to the consummation of the corresponding Secondary Market Transaction in Borrower’s complying with requests made pursuant to this Section 11.1(b) (exclusive of the Excluded Items).
(c) Upon request, Borrower shall furnish to Lender from time to time such financial data and financial statements as Lender determines to be necessary, advisable or appropriate for complying with any applicable legal requirements (including those applicable to Lender or any Servicer (including, without limitation and to the extent applicable, Regulation AB)) within the timeframes necessary, advisable or appropriate in order to comply with such legal requirements.
Section 11.2. Disclosure.
(a) Borrower (on its own behalf and on behalf of each other Borrower Party) understands that information provided to Lender by Borrower, any other Borrower Party and/or their respective agents, counsel and representatives may be (i) included in (A) the Disclosure Documents and (B) filings under the Securities Act and/or the Exchange Act and (ii) made available to Investors, the Rating Agencies and service providers, in each case, in connection with any Secondary Market Transaction.
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(b) Borrower shall indemnify Lender and its officers, directors, partners, employees, representatives, agents and affiliates against any losses, claims, damages or liabilities (collectively, the “Liabilities”) to which Lender and/or its officers, directors, partners, employees, representatives, agents and/or affiliates may become subject in connection with (x) any Disclosure Document and/or any Covered Rating Agency Information, in each case, insofar as such Liabilities arise out of or are based upon any untrue statement of any material fact in the Provided Information and/or arise out of or are based upon the omission to state a material fact in the Provided Information required to be stated therein or necessary in order to make the statements in the applicable Disclosure Document and/or Covered Rating Agency Information, in light of the circumstances under which they were made, not misleading, provided, however, such indemnity shall be limited to any untrue statement or material omission made in the Provided Information as of the date of delivery of such Provided Information to Lender and shall only be effective to the extent that Lender accurately states the Provided Information in the applicable Disclosure Document or when providing the same to the Rating Agencies (as applicable) and (y) after a Securitization, any indemnity obligations incurred by Lender or Servicer in connection with any Rating Agency Confirmation.
(c) Promptly after receipt by an indemnified party under this Section 11.2 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 11.2, notify the indemnifying party in writing of the commencement thereof (but the omission to so notify the indemnifying party will not relieve the indemnifying party from any liability which the indemnifying party may have to any indemnified party hereunder except to the extent that failure to notify causes prejudice to the indemnifying party). In the event that any action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled, jointly with any other indemnifying party, to participate therein and, to the extent that it (or they) may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. After notice from the indemnifying party to such indemnified party under this Section 11.2, such indemnifying party shall pay for any legal or other expenses subsequently incurred by such indemnifying party in connection with the defense thereof; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there are any legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party at the cost of the indemnifying party. Borrower shall not be liable for the expenses of more than one separate counsel unless an indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or additional to those available to another indemnified party.
(d) The liabilities and obligations of both Borrower and Lender under this Section 11.2 shall survive the termination of this Agreement and the satisfaction and discharge of the Debt. Failure by Borrower and/or any Borrower Party to comply with the provisions of Section 11.1 and/or Section 11.2 within the timeframes specified therein and/or as otherwise required by Lender shall, at Lender’s option, constitute a breach of the terms thereof and/or an Event of Default. Borrower (on its own behalf and on behalf of each Borrower Party) hereby expressly authorizes and appoints Lender its attorney-in-fact to take any actions required of any Borrower Party under Sections 11.1, 11.2, 11.6 and/or 11.8 in the event any Borrower Party fails to do the same, which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest, provided, however, that Lender shall not exercise said power until five (5) Business Days after notice has been given to Borrower by Lender of Lender’s intent to exercise its rights under such power and Borrower fails to act within such five (5) Business Day period. Notwithstanding anything to the contrary contained herein, (i) except as may otherwise expressly provided to the contrary in this Article 11, each Borrower Party shall bear its own cost of compliance with this Article (including, without limitation, the costs of any ongoing financial reporting or similar provisions contained herein) and (ii) to the extent that the timeframes for compliance with such ongoing financial reporting and similar provisions are shorter than the timeframes allowed for comparable reporting obligations under Section 4.12 hereof (if any), the timeframes under this Article 11 shall control.
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Section 11.3. Reserves/Escrows. In the event that Securities are issued in connection with the Loan, all funds held by Lender in escrow or pursuant to reserves in accordance with this Agreement and the other Loan Documents shall be deposited in “eligible accounts” at “eligible institutions” and, to the extent applicable, invested in “permitted investments” as then defined and required by the Rating Agencies.
Section 11.4. Servicer. At the option of Lender, the Loan may be serviced by one or more servicer/special servicer/trustee selected by Lender (collectively, the “Servicer”) and Lender may delegate all or any portion of its responsibilities under this Agreement and the other Loan Documents to such Servicer pursuant to a servicing agreement between Lender and such Servicer (any such agreement, the “PSA”). Borrower shall pay any customary fees, costs and expenses of the Servicer and any reasonable third-party fees and expenses in connection with a prepayment, release of the Property, approvals under the Loan Documents requested by Borrower, modification of the Loan subject to and in accordance with any servicing agreement or similar agreement entered into in connection with a Securitization, as well as (i) any amounts payable in respect of advances (including protective advances, special servicer fee advances and advances of delinquent debt service payments), together with interest thereon, made pursuant to the servicing agreement, in each case, to the extent late charges and default interest actually paid by Borrower in respect of such payments are insufficient to pay the same, (ii) “liquidation fees” in the amounts set forth in the servicing agreement, (iii) “workout fees” in the amounts set forth in the servicing agreement, and (iv) “special servicing fees” for the Loan upon the Loan becoming a specially serviced loan pursuant to the servicing agreement in the amounts set forth in the servicing agreement; provided, however, as set forth in Section 17.6 hereof, Borrower shall not be responsible for any set-up fees or any other initial costs relating to or arising under any PSA and Borrower shall not be responsible for payment of any initial set-up fees and the monthly master servicing fee due to the master servicer under any PSA. Notwithstanding the foregoing, Borrower shall not be responsible for reimbursement of any duplicative fees, costs and/or expenses that have otherwise been paid by Borrower pursuant to the terms hereof.
Section 11.5. Rating Agency Costs. In connection with any Rating Agency Confirmation or other Rating Agency consent, approval or review required hereunder (other than the initial review of the Loan by the Rating Agencies in connection with a Securitization), Borrower shall pay all of the costs and expenses of Lender, Servicer and each Rating Agency in connection therewith, and, if applicable, shall pay any fees imposed by any Rating Agency in connection therewith.
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Section 11.6. Mezzanine Option. Lender shall have the option (the “Mezzanine Option”) at any time to divide the Loan into two parts, a mortgage loan and a mezzanine loan, provided, that (i) the total loan amounts for such mortgage loan and such mezzanine loan shall equal the then outstanding amount of the Loan immediately prior to Lender’s exercise of the Mezzanine Option, (ii) the weighted average interest rate of such mortgage loan and mezzanine loan shall initially equal the Interest Rate and (iii) Borrower’s other rights and obligations under the Loan Documents shall not be otherwise materially and adversely affected (except to the extent that the same would be affected had the Loan been divided into a mortgage loan and a mezzanine loan on the Closing Date). Borrower shall, at Borrower’s sole cost and expense, cooperate with Lender in Lender’s exercise of the Mezzanine Option in good faith and in a timely manner, which such cooperation shall include, but not be limited to, (i) executing such amendments to the Loan Documents and Borrower or any SPE Component Entity’s organizational documents as may be reasonably requested by Lender or requested by the Rating Agencies, (ii) creating one or more Single Purpose Entities (the “Mezzanine Borrower”), which such Mezzanine Borrower shall (A) own, directly or indirectly, 100% of the equity ownership interests in Borrower (the “Equity Collateral”), and (B) together with such constituent equity owners of such Mezzanine Borrower as may be designated by Lender, execute such agreements, instruments and other documents as may be required by Lender in connection with the mezzanine loan (including, without limitation, a promissory note evidencing the mezzanine loan and a pledge and security agreement pledging the Equity Collateral to Lender as security for the mezzanine loan); and (iii) delivering such opinions, title endorsements, UCC title insurance policies, documents and/or instruments relating to the Property Documents and other materials as may be required by Lender or the Rating Agencies. Notwithstanding anything herein to the contrary, Lender shall reimburse Borrower for any reasonable, out-of-pocket, third party costs incurred by Borrower in connection with this Section 11.6 (exclusive of the Excluded Items).
Section 11.7. Conversion to Registered Form. At the request of Lender, Borrower shall appoint, as its agent, a registrar and transfer agent (the “Registrar”) reasonably acceptable to Lender which shall maintain, subject to such reasonable regulations as it shall provide, such books and records as are necessary for the registration and transfer of the Note in a manner that shall cause the Note to be considered to be in registered form for purposes of Section 163(f) of the IRS Code. The option to convert the Note into registered form once exercised may not be revoked. Any agreement setting out the rights and obligation of the Registrar shall be subject to the reasonable approval of Lender. Borrower may revoke the appointment of any particular person as Registrar, effective upon the effectiveness of the appointment of a replacement Registrar. The Registrar shall not be entitled to any fee from Borrower or Lender or any other lender in respect of transfers of the Note and other Loan Documents.
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Section 11.8. Uncross of Properties.
(a) Borrower agrees that at any time Lender shall have the unilateral right to elect to, from time to time, uncross any of the Properties (such uncrossed Property or Properties, collectively, the “Affected Property” and the remaining Property or Properties, collectively, the “Unaffected Property”) in order to separate the Loan from the portion of the Debt to be secured by the Affected Property (such portion of the Debt to be secured by the Affected Property, the “Uncrossed Loan” and the remaining portion of the Debt secured by the Unaffected Property, the “Remaining Loan”). In furtherance thereof, Lender shall have the right to (i) sever and/or divide the Note and the other Loan Documents so that (A) the original Loan Documents (collectively, the “Remaining Loan Documents”) evidence and secure only the Remaining Loan and relate only to the Unaffected Property and (B) amended and/or new documents and other instruments (collectively, the “Uncrossed Loan Documents”) evidence and secure only the Uncrossed Loan and relate only to the Affected Property, (ii) allocate the applicable portion of each of the Reserve Funds relating to the Affected Property to the Uncrossed Loan, (iii) release any cross-default and/or cross-collateralization provisions applicable to such Affected Property (but such Affected Property shall be cross-defaulted an cross-collateralized with each other Affected Property) and (iv) take such additional actions consistent therewith (including, without limitation, requiring delivery of the Uncrossed Loan Documents and amendments to the Loan Documents, in each case, to give effect to the foregoing); provided, that the Uncrossed Loan Documents and the Remaining Loan Documents, shall not, in the aggregate, increase (A) any material monetary obligation of Borrower under the Loan Documents or (B) any other material obligation of Borrower under the Loan Documents in any material respect. In connection with the uncrossing of any such Affected Property as provided for in this Section 11.8 (an “Uncrossing Event”), the Remaining Loan shall be reduced by an amount equal to amount of the Uncrossed Loan and the Uncrossed Loan shall be in an amount equal to the Allocated Loan Amount applicable to the Affected Property.
(b) Borrower shall (and shall cause each Borrower Party to) fully cooperate with Lender to effectuate each Uncrossing Event. Without limitation of the foregoing, upon Lender’s request, Borrower shall (and shall cause each Borrower Party to), among other things, (i) deliver evidence to Lender that the single purpose nature and bankruptcy remoteness of the Borrower(s) owning Properties other than the Affected Property following such Uncrossing Event have not been adversely affected and are in accordance with the terms and provisions of the Remaining Loan Documents; (ii) deliver evidence to Lender that the single purpose nature and bankruptcy remoteness of the Borrower(s) owning the Affected Property following such release have not been adversely affected and are in accordance with the terms and provisions of the Uncrossed Loan Documents; (iii) deliver to Lender such legal opinions and updated legal opinions as Lender shall reasonably require or the Rating Agencies shall require (including, without limitation, a New Non-Consolidation Opinion and a REMIC Opinion); (iv) take the actions contemplated in subsection (a) above (including, without limitation, executing the Uncrossed Loan Documents and amendments to the Loan Documents); and (v) deliver such title endorsements, title insurance policies, documents and/or instruments relating to the Property Documents and other materials as may be reasonably required by Lender or required by the Rating Agencies.
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ARTICLE 12
INDEMNIFICATIONS
Section 12.1. General Indemnification. Borrower shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses imposed upon or incurred by or asserted against any Indemnified Parties and directly or indirectly arising out of or in any way relating to any one or more of the following: (a) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (b) any use, nonuse or condition in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (c) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; (d) any failure of the Property (or any portion thereof) to be in compliance with any applicable Legal Requirements; (e) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants, or agreements contained in any Lease, management agreement or any Property Document; (f) the payment of any commission, charge or brokerage fee to anyone (other than a broker or other agent retained by Lender) which may be payable in connection with the funding of the Loan evidenced by the Note and secured by the Security Instrument; and/or (g) the holding or investing of the funds on deposit in the Accounts or the performance of any work or the disbursement of funds in each case in connection with the Accounts. Notwithstanding the foregoing, the foregoing indemnity of Borrower shall not be deemed to extend to any Losses incurred by any Indemnified Party that Borrower can establish (to Lender’s reasonable satisfaction) (i) arose as the direct result of the gross negligence or willful misconduct of such Indemnified Party or (ii) were caused by events first occurring (as opposed to being first discovered) after the Lender Control Date. Any amounts payable to Lender by reason of the application of this Section 12.1 shall become immediately due and payable and shall bear interest at the Default Rate from the date loss or damage is sustained by Lender until paid.
Section 12.2. Mortgage and Intangible Tax Indemnification. Borrower shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses imposed upon or incurred by or asserted against any Indemnified Parties and directly or indirectly arising out of or in any way relating to any tax on the making and/or recording of the Security Instrument, the Note or any of the other Loan Documents (but excluding any income, franchise or other similar taxes).
Section 12.3. ERISA Indemnification. Borrower shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses (including, without limitation, reasonable attorneys’ fees and costs incurred in the investigation, defense, and settlement of Losses incurred in correcting any prohibited transaction or in the sale of a prohibited loan, and in obtaining any individual prohibited transaction exemption under ERISA that may be required, in Lender’s sole discretion) that Lender may incur, directly or indirectly, as a result of a default under Sections 3.7 or 4.19 of this Agreement.
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Section 12.4. Duty to Defend, Legal Fees and Other Fees and Expenses. Upon written request by any Indemnified Party, Borrower shall defend such Indemnified Party (if requested by any Indemnified Party, in the name of the Indemnified Party) by attorneys and other professionals approved by the Indemnified Parties (which such approval shall not be unreasonably withheld, conditioned or delayed). Notwithstanding the foregoing, any Indemnified Parties may, in their sole discretion, engage their own attorneys and other professionals to defend or assist them, and, at the option of Indemnified Parties, their attorneys shall control the resolution of any claim or proceeding. Upon demand, Borrower shall pay or, in the sole discretion of the Indemnified Parties, reimburse, the Indemnified Parties for the payment of reasonable fees and disbursements of attorneys, engineers, environmental consultants, laboratories and other professionals in connection therewith.
Section 12.5. Survival. The obligations and liabilities of Borrower under this Article 12 shall fully survive indefinitely notwithstanding any termination, satisfaction, assignment, entry of a judgment of foreclosure, exercise of any power of sale, or delivery of a deed in lieu of foreclosure of the Security Instrument.
Section 12.6. Environmental Indemnity. Simultaneously herewith, Borrower and Guarantor have executed and delivered the Environmental Indemnity to Lender, which Environmental Indemnity is not secured by the Security Instrument.
ARTICLE 13
EXCULPATION
Section 13.1. Exculpation.
(a) Subject to the qualifications below, Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note, this Agreement, the Security Instrument or the other Loan Documents by any action or proceeding wherein a money judgment or any deficiency judgment or other judgment establishing personal liability shall be sought against Borrower, Guarantor or any Exculpated Party, except that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Note, this Agreement, the Security Instrument and the other Loan Documents, or in the Property (or any portion thereof), the Rents, or any other collateral given to Lender pursuant to the Loan Documents; provided, however, that, except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower’s interest in the Property, in the Rents and in any other collateral given to Lender, and Lender, by accepting the Note, this Agreement, the Security Instrument and the other Loan Documents, shall not sue for, seek or demand any deficiency judgment against Borrower or any of the Exculpated Parties in any such action or proceeding under or by reason of or under or in connection with the Note, this Agreement, the Security Instrument or the other Loan Documents. The provisions of this Section shall not, however, (1) constitute a waiver, release or impairment of any obligation evidenced or secured by any of the Loan Documents; (2) impair the right of Lender to name Borrower as a party defendant in any action or suit for foreclosure and sale under the Security Instrument; (3) affect the validity or enforceability of any indemnity, guaranty or similar instrument (including, without limitation, indemnities set forth in Article 12 hereof, Section 11.2 hereof, in the Guaranty and the Environmental Indemnity) made in connection with the Loan or any of the rights and remedies of Lender thereunder (including, without limitation, Lender’s right to enforce said rights and remedies against Borrower and/or Guarantor (as applicable) personally and without the effect of the exculpatory provisions of this Article 13); (4) impair the rights of Lender to (A) obtain the appointment of a receiver and/or (B) enforce its rights and remedies provided in Articles 8 and 9 hereof; (5) impair the enforcement of the assignment of leases and rents contained in the Security Instrument and in any other Loan Documents; (6) impair the right of Lender to enforce Section 4.12(e) of this Agreement (provided, that, there shall be no recourse liability under such Section 4.12(e) if Sufficient Revenue did not exist to pay the sums due thereunder); (7) constitute a prohibition against Lender to seek a deficiency judgment against Borrower in order to fully realize the security granted by the Security Instrument or to commence any other appropriate action or proceeding in order for Lender to exercise its remedies against the Property (or any portion thereof), which such deficiency judgment shall (unless otherwise provided below) be limited to Borrower’s interests in the Property; or (8) constitute a waiver of the right of Lender to enforce the liability and obligation of Borrower, by money judgment or otherwise, to the extent of any Loss incurred by Lender (including attorneys’ fees and costs reasonably incurred) arising out of or in connection with the following:
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(i) fraud or intentional misrepresentation by any Borrower Party in connection with the Loan;
(ii) the gross negligence or willful misconduct of any Borrower Party;
(iii) any litigation or other legal proceeding related to the Debt filed by any Borrower Party or any other action of any Borrower Party that delays, opposes, impedes, obstructs, hinders, enjoins or otherwise interferes with or frustrates the efforts of Lender to exercise any rights and remedies available to Lender as provided herein and in the other Loan Documents;
(iv) physical waste to the Property (or any portion thereof) caused by the intentional acts or intentional omissions of any Borrower Party (to the extent there existed Sufficient Revenue to avoid the same) and/or the removal or disposal of any material portion of the Property after an Event of Default (unless, with respect to the removal of Personal Property, such Personal Property is obsolete or contemporaneously replaced with Personal Property of equal or greater value and utility);
(v) the misapplication, misappropriation or conversion by any Borrower Party of (A) any insurance proceeds paid by reason of any loss, damage or destruction to the Property (or any portion thereof), (B) any Awards or other amounts received in connection with the Condemnation of all or a portion of the Property, (C) any Rents, (D) any Security Deposits or Rents collected in advance or (E) any other monetary collateral for the Loan (including, without limitation, any Reserve Funds and/or any portion thereof disbursed to (or at the direction of) Borrower);
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(vi) failure to pay Taxes, charges for labor or materials or other charges that can create liens on any portion of the Property in accordance with the terms and provisions hereof (provided, that, there shall be no recourse liability under this subsection (vi) (A) if Sufficient Revenue did not exist to pay the applicable sums due or (B) with respect to any Taxes or charges which first accrued following the Lender Control Date);
(vii) failure to pay Insurance Premiums, to maintain the Policies in full force and effect and/or to provide Lender evidence of the same, in each case, as expressly provided herein (provided, that, (A) the failure to provide such evidence shall not be deemed a recourse event hereunder to the extent that (I) Borrower cures such failure within five (5) days of notice thereof from Lender and (II) Borrower provides evidence reasonably acceptable to Lender that the Policies were at all times kept in full force and effect and (B) there shall be no recourse liability under this subsection (vii) with respect to (I) the failure to pay Insurance Premiums if (y) Sufficient Revenue did not exist to pay the applicable sums due or (z) such sums first accrued following the Lender Control Date or (II) the failure to maintain the Policies if such failure first occurred (as opposed to was first discovered) after the Lender Control Date);
(viii) any Security Deposits which are not delivered to Lender within the timeframe required hereunder except to the extent any such Security Deposits were applied in accordance with the terms and conditions of any of the Leases prior to the occurrence of the applicable Event of Default. For purposes of clarification, for a Security Deposit to be deemed “delivered to Lender” in connection with the foregoing, the same must be in the form of cash or in a letter of credit solely in Lender’s name;
(ix) any tax on the making and/or recording of the Security Instrument, the Note or any of the other Loan Documents or any transfer or similar taxes (whether due upon the making of the same or upon Lender’s exercise of its remedies under the Loan Documents), but excluding any income, franchise or other similar taxes;
(x) any violation or breach of any applicable law by any member of the Borrower Group mandating the forfeiture or seizure of the Property (or any portion thereof and/or interest therein);
(xi) the failure by any member of the Borrower Group to make any REMIC Payment and/or any True Up Payment, to permit on-site inspections of the Property (or any portion thereof) as and when required herein (provided, that, there shall be no recourse liability under this subsection (xi) (A) if the applicable failure first occurred (as opposed to was first discovered) after the Lender Control Date and (B) with respect to the failure to make any True Up Payment or REMIC Payment, if Sufficient Revenue did not exist to pay the applicable sums due);
(xii) any violation or breach of the Property Document Provisions, the Hotel Provisions and/or the Master Lease Provisions and/or any Property Document Event caused by the acts or omissions of (or on behalf of) any Borrower Party (or Affiliate thereof) (provided, that, there shall be no recourse liability under this subsection (xii) if the applicable violation, breach or Property Document Event first occurred (as opposed to was first discovered) after the Lender Control Date);
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(xiii) any indemnity obligations of Lender to Bank under the Restricted Account Agreement (provided, that, there shall be no recourse liability under this subsection (xiii) with respect to the failure to make any indemnity payment if Sufficient Revenue did not exist to pay the applicable sums due);
(xiv) any failure by any member of the Borrower Group to comply with the Cash Management Provisions, to appoint a new property manager upon the request of Lender or to comply with any limitations on instructing the property manager, each as required by and in accordance with, as applicable, the terms and provisions of, this Agreement and the other Loan Documents (provided, that, there shall be no recourse liability under this subsection (xiv) if the applicable failure first occurred (as opposed to was first discovered) after the Lender Control Date);
(xv) any violation or breach by any member of the Borrower Group of Sections
11.1, 11.6 and/or 11.8 hereof which continues for ten (10) Business Days after notice of the same is delivered by Lender to Borrower; and/or
(xvi) any breach or violation by any member of the Borrower Group of any representation, warranty or covenant contained in Article 5 hereof (provided, however, that, with respect to breaches or violations of covenants contained in Article 5 hereof (as distinguished from representations or warranties contained therein), any such breach or violation shall not result in recourse liability under this subsection (xvi) if (A) such breach or violation was inadvertent, non-recurring and immaterial and (B) within ten (10) Business Days of the occurrence thereof, (y) Borrower cures such breach or violation and (z) provides Lender with (I) written evidence of same and (II) a New Non-Consolidation Opinion).
(b) Notwithstanding anything to the contrary in this Agreement, the Note or any of the Loan Documents, (A) Lender shall not be deemed to have waived any right which Lender may have under Section 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Debt or to require that all collateral shall continue to secure all of the Debt owing to Lender in accordance with the Loan Documents, and (B) the Debt shall be fully recourse to Borrower in the event that: (i) any representation, warranty or covenant contained in Article 5 hereof is violated or breached (which breach or violation is evidenced by a court, in a proceeding or other action with respect to Creditors Rights Laws involving any one or more direct or indirect constituent owner(s) of Borrower and/or SPE Component Entity (any such person or entity, a “Bankrupt Person”), ordering the substantive consolidation of the assets and liabilities of Borrower and/or SPE Component Entity with the assets and liabilities of any Bankrupt Person on the basis of, among other things, such breach or violation); (ii) any representation, warranty or covenant contained in Article 6 hereof is violated or breached; (iii) a Bankruptcy Event occurs; (iv) without Lender’s prior written consent, the Master Lease is terminated, cancelled, expires or otherwise ceases to exist; and/or (v) any Franchise Agreement is terminated, cancelled, expires or otherwise ceases to exist (unless, prior to or contemporaneously with such termination, cancellation or other cessation, Borrower engages a Qualified Franchisor for the Property pursuant to a Qualified Franchise Agreement in accordance with the applicable terms and conditions hereof).
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(c) Notwithstanding anything to the contrary contained herein or in any Loan Document, (i) no Exculpated Party shall have any personal liability for, nor be joined as a party to any action (except as required by Legal Requirements) with respect to (A) the payment of any sum of money which is or may be payable hereunder or under the Note or the other Loan Documents in accordance with the terms of the Loan Documents, including, but not limited to, the repayment of the Debt or (B) the performance or discharge of any covenants, obligations or undertakings of Borrower or Guarantor with respect thereto and (ii) in no event will the assets of any Exculpated Party (including any distributions made by Borrower, Guarantor and/or Sponsor to their direct or indirect members, partners or shareholders in the ordinary course of business in accordance with the applicable terms and conditions hereof and of the other Loan Documents and the applicable organizational documents) be available to satisfy any obligation of Borrower or Guarantor, as applicable, in respect of Borrower's or Guarantor's, as applicable, obligations pursuant to any Loan Document.
ARTICLE 14
NOTICES
Section 14.1. Notices. All notices or other written communications hereunder shall be deemed to have been properly given (a) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof and confirmed by telephone by sender, (b) one (1) Business Day after having been deposited for overnight delivery with any reputable overnight courier service, or (c) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:
| If to Borrower: | c/o The Lightstone Group LLC |
| 1985 Cedar Bridge Avenue, Suite 1 | |
| Lakewood, NJ 08701 | |
| Attention: Joseph E. Teichman, Esq. | |
| Facsimile No.: (732) 612-1444 | |
| With a copy to: | Eckert Seamans Cherin & Mellott, LLC |
| 600 Grant Street, 44th Floor | |
| Pittsburgh, PA 15219 | |
| Attention: Timothy Q. Hudak, Esq. | |
| Facsimile No.: (412) 566-6099 | |
| If to Lender: | Citigroup Global Markets Realty Corp. |
| 390 Greenwich Street | |
| 7th Floor | |
| New York, New York 10013 | |
| Attention : Ana Rosu Marmann | |
| Facsimile No.: (646) 328-2938 |
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| With a copy to: | Wells Fargo Bank |
| 550 Tryon Street, 12th Floor | |
| Charlotte, NC 28202 | |
| MAC D1086-120 | |
| Attention: Luke Mayes | |
| Facsimile No.: (704) 715-0347 | |
| With a copy to: | Alston & Bird LLP |
| 90 Park Avenue | |
| New York, New York 10016 | |
| Attention: Gerard Keegan, Esq. | |
| Facsimile No.: (212) 210-9444 |
or addressed as such party may from time to time designate by written notice to the other parties.
Either party by notice to the other may designate additional or different addresses for subsequent notices or communications.
ARTICLE 15
FURTHER ASSURANCES
Section 15.1. Replacement Documents. Upon receipt of an affidavit of an officer of Lender as to the loss, theft, destruction or mutilation of the Note, this Agreement or any of the other Loan Documents which is not of public record, and, in the case of any such mutilation, upon surrender and cancellation of the Note, this Agreement or such other Loan Document, Borrower will issue, in lieu thereof, a replacement thereof, dated the date of the Note, this Agreement or such other Loan Document, as applicable, in the same principal amount thereof and otherwise of like tenor.
Section 15.2. Recording of Security Instrument, etc.
(a) Borrower forthwith upon the execution and delivery of the Security Instrument and thereafter, from time to time, will cause the Security Instrument and any of the other Loan Documents creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect and perfect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all taxes, filing, registration or recording fees, and all expenses incident to the preparation, execution, acknowledgment and/or recording of the Note, the Security Instrument, this Agreement, the other Loan Documents, any note, deed of trust or mortgage supplemental hereto, any security instrument with respect to the Property and any instrument of further assurance, and, except as expressly provided to the contrary herein, any modification or amendment of the foregoing documents, and all federal, state, county and municipal taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Security Instrument, any deed of trust or mortgage supplemental hereto, any security instrument with respect to the Property or any instrument of further assurance, and, except as expressly provided to the contrary herein, any modification or amendment of the foregoing documents, except where prohibited by applicable law so to do. The foregoing taxes, fees, expenses, duties, imposts, assessments and charges, as applicable, are herein referred to as the “Security Instrument Taxes”.
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(b) Borrower represents that it has paid, or will pay upon recording (in which event sufficient funds for said payment are on reserve with the applicable title insurance company), all Security Instrument Taxes imposed upon the execution and recordation of each Security Instrument. If at any time Lender reasonably determines, based on applicable Legal Requirements, that Lender is not being afforded the maximum amount of security available from any one or more of the Properties as a direct or indirect result of applicable Security Instrument Taxes not having been paid with respect to any Individual Property, Borrower agrees that Borrower will execute, acknowledge and deliver to Lender, immediately upon Lender’s request, supplemental affidavits increasing the amount of the Debt attributable to any such Individual Property to an amount reasonably determined by Lender to be equal to the lesser of (i) the greater of the fair market value of the applicable Individual Property (1) as of the date hereof and (2) as of the date such supplemental affidavits are to be delivered to Lender, and (ii) the amount of the Debt attributable to any such Individual Property (as set forth on Schedule III hereof), and Borrower shall, on demand, pay any additional Security Instrument Taxes.
Section 15.3. Further Acts, etc. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every further acts, deeds, conveyances, deeds of trust, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, reasonably require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender the property and rights hereby mortgaged, deeded, granted, bargained, sold, conveyed, confirmed, pledged, assigned, warranted and transferred or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out the intention or facilitating the performance of the terms of this Agreement or for filing, registering or recording the Security Instrument, or for complying with all Legal Requirements. Borrower, on demand, will execute and deliver, and in the event it shall fail to so execute and deliver, hereby authorizes Lender to execute in the name of Borrower or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements to evidence more effectively the security interest of Lender in the Property. Upon the occurrence and during the continuance of an Event of Default, Borrower grants to Lender an irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to Lender at law and in equity, including without limitation, such rights and remedies available to Lender pursuant to this Section 15.3.
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Section 15.4. Changes in Tax, Debt, Credit and Documentary Stamp Laws.
(a) If any law is enacted or adopted or amended after the date of this Agreement which deducts the Debt from the value of the Property for the purpose of taxation and which imposes a tax, either directly or indirectly, on the Debt or Lender’s interest in the Property, Borrower will pay the tax, with interest and penalties thereon, if any. If Lender is advised by counsel chosen by it that the payment of tax by Borrower would be unlawful or taxable to Lender or unenforceable or provide the basis for a defense of usury then Lender shall have the option by written notice of not less than one hundred twenty (120) days to declare the Debt immediately due and payable.
(b) Borrower will not claim or demand or be entitled to any credit or credits on account of the Debt for any part of the Taxes or Other Charges assessed against the Property, or any part thereof, and no deduction shall otherwise be made or claimed from the assessed value of the Property, or any part thereof, for real estate tax purposes by reason of the Security Instrument or the Debt. If such claim, credit or deduction shall be required by applicable law, Lender shall have the option, by written notice of not less than one hundred twenty (120) days, to declare the Debt immediately due and payable.
(c) If at any time the United States of America, any State thereof or any subdivision of any such State shall require revenue or other stamps to be affixed to the Note, the Security Instrument, or any of the other Loan Documents or impose any other tax or charge on the same, Borrower will pay for the same, with interest and penalties thereon, if any.
(d) Borrower shall not be required to defease the Loan or to pay any prepayment premium, fee or penalty whatsoever in connection with any mandatory prepayment required pursuant to this Section 15.4.
ARTICLE 16
WAIVERS
Section 16.1. Remedies Cumulative; Waivers.
The rights, powers and remedies of Lender under this Agreement shall be cumulative and not exclusive of any other right, power or remedy which Lender may have against Borrower pursuant to this Agreement, the Security Instrument, the Note or the other Loan Documents, or existing at law or in equity or otherwise. Lender’s rights, powers and remedies may be pursued singularly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender’s sole discretion. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default with respect to Borrower shall not be construed to be a waiver of any subsequent Default or Event of Default by Borrower or to impair any remedy, right or power consequent thereon.
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Section 16.2. Modification, Waiver in Writing.
No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement, the Security Instrument, the Note and the other Loan Documents, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances.
Section 16.3. Delay Not a Waiver.
Neither any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege under this Agreement, the Security Instrument, the Note or the other Loan Documents, or any other instrument given as security therefor, shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under this Agreement, the Security Instrument, the Note or the other Loan Documents, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Agreement, the Security Instrument, the Note and the other Loan Documents, or to declare a default for failure to effect prompt payment of any such other amount.
Section 16.4. Waiver of Trial by Jury.
BORROWER AND LENDER, BY ACCEPTANCE OF THIS AGREEMENT, HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN, THE APPLICATION FOR THE LOAN, THIS AGREEMENT, THE NOTE, THE SECURITY INSTRUMENT OR THE OTHER LOAN DOCUMENTS OR ANY ACTS OR OMISSIONS OF LENDER OR BORROWER.
Section 16.5. Waiver of Notice.
Borrower shall not be entitled to any notices of any nature whatsoever from Lender except (a) with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to Borrower and (b) with respect to matters for which Lender is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement does not specifically and expressly provide for the giving of notice by Lender to Borrower.
Section 16.6. Remedies of Borrower.
In the event that a claim or adjudication is made that Lender or its agents have acted unreasonably or unreasonably delayed acting in any case where by applicable law or under this Agreement, the Security Instrument, the Note and the other Loan Documents, Lender or such agent, as the case may be, has an obligation to act reasonably or promptly, Borrower agrees that neither Lender nor its agents shall be liable for any monetary damages, and Borrower’s sole remedies shall be limited to commencing an action seeking injunctive relief or declaratory judgment. The parties hereto agree that any action or proceeding to determine whether Lender has acted reasonably shall be determined by an action seeking declaratory judgment. Lender agrees that, in such event, it shall cooperate in expediting any action seeking injunctive relief or declaratory judgment.
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Section 16.7. Marshalling and Other Matters.
Borrower hereby waives, to the extent permitted by applicable Legal Requirements, the benefit of all appraisement, valuation, stay, extension, reinstatement and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale under the Security Instrument of the Property or any part thereof or any interest therein. Further, Borrower hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of the Security Instrument on behalf of Borrower, and on behalf of each and every person acquiring any interest in or title to the Property subsequent to the date of the Security Instrument and on behalf of all persons to the extent permitted by applicable Legal Requirements.
Section 16.8. Waiver of Statute of Limitations. To the extent permitted by applicable Legal Requirements, Borrower hereby expressly waives and releases to the fullest extent permitted by applicable Legal Requirements, the pleading of any statute of limitations as a defense to payment of the Debt or performance of its obligations hereunder, under the Note, Security Instrument or other Loan Documents.
Section 16.9. Waiver of Counterclaim. Borrower hereby waives the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents.
Section 16.10. Sole Discretion of Lender. Wherever pursuant to this Agreement (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision to approve or disapprove all decisions that arrangements or terms are satisfactory or not satisfactory, and all other decisions and determinations made by Lender, shall be in the sole discretion of Lender, except as may be otherwise expressly and specifically provided herein.
ARTICLE 17
MISCELLANEOUS
Section 17.1. Survival. This Agreement and all covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making by Lender of the Loan and the execution and delivery to Lender of the Note, and shall continue in full force and effect so long as all or any of the Debt is outstanding and unpaid unless a longer period is expressly set forth in this Agreement, the Security Instrument, the Note or the other Loan Documents. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the legal representatives, successors and assigns of such party. All covenants, promises and agreements in this Agreement, by or on behalf of Borrower, shall inure to the benefit of the legal representatives, successors and assigns of Lender.
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Section 17.2. Governing Law. THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK, THE LOAN WAS MADE BY LENDER AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND THE PROCEEDS OF THE LOAN DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS AND THE OBLIGATIONS ARISING HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS) AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED PURSUANT HERETO AND PURSUANT TO THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION, VALIDITY AND ENFORCEABILITY OF ALL LOAN DOCUMENTS AND ALL OF THE OBLIGATIONS ARISING HEREUNDER OR THEREUNDER. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, AND THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.
ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS WILL, AT LENDER’S OPTION, BE INSTITUTED IN (OR, IF PREVIOUSLY INSTITUTED, MOVED TO) ANY FEDERAL OR STATE COURT DESIGNATED BY LENDER IN THE CITY OF NEW YORK, COUNTY OF NEW YORK. EACH OF LENDER AND BORROWER HEREBY (I) WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING AND (II) IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. BORROWER AND LENDER HEREBY ACKNOWLEDGE AND AGREE THAT THE FOREGOING AGREEMENT, WAIVER AND SUBMISSION ARE MADE PURSUANT TO SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW.
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BORROWER DOES HEREBY DESIGNATE AND APPOINT:
The Lightstone Group
460 Park Avenue
13th Floor
New York, NY 10022
Attention: General Counsel
AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND NOTICE OF SAID SERVICE MAILED OR DELIVERED TO BORROWER IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON BORROWER IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF NEW YORK. BORROWER (I) SHALL GIVE PROMPT NOTICE TO LENDER OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (II) MAY AT ANY TIME AND FROM TIME TO TIME DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN OFFICE IN NEW YORK, NEW YORK (WHICH SUBSTITUTE AGENT AND OFFICE SHALL BE DESIGNATED AS THE PERSON AND ADDRESS FOR SERVICE OF PROCESS), AND (III) SHALL PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS AUTHORIZED AGENT CEASES TO HAVE AN OFFICE IN NEW YORK, NEW YORK OR IS DISSOLVED WITHOUT LEAVING A SUCCESSOR.
Section 17.3. Headings. The Article and/or Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
Section 17.4. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable Legal Requirements, but if any provision of this Agreement shall be prohibited by or invalid under applicable Legal Requirements, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.
Section 17.5. Preferences. Lender shall have the continuing and exclusive right to apply or reverse and reapply any and all payments by Borrower to any portion of the obligations of Borrower hereunder. To the extent Borrower makes a payment or payments to Lender, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any Creditors Rights Laws, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the obligations hereunder or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender.
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Section 17.6. Expenses. Borrower covenants and agrees to pay its own costs and expenses and pay, or, if Borrower fails to pay, to reimburse, Lender, upon receipt of written notice from Lender, for Lender’s reasonable costs and expenses (including reasonable, actual attorneys’ fees and disbursements) in each case, incurred by Lender in accordance with this Agreement in connection with (i) the preparation, negotiation, execution and delivery of this Agreement, the Security Instrument, the Note and the other Loan Documents and the consummation of the transactions contemplated hereby and thereby and all the costs of furnishing all opinions by counsel for Borrower (including without limitation any opinions requested by Lender as to any legal matters arising under this Agreement, the Security Instrument, the Note and the other Loan Documents with respect to the Property); (ii) Borrower’s ongoing performance of and compliance with Borrower’s respective agreements and covenants contained in this Agreement, the Security Instrument, the Note and the other Loan Documents on its part to be performed or complied with after the Closing Date, including, without limitation, confirming compliance with environmental and insurance requirements; (iii) Lender’s ongoing performance and compliance with all agreements and conditions contained in this Agreement, the Security Instrument, the Note and the other Loan Documents on its part to be performed or complied with after the Closing Date (including, without limitation, those contained in Articles 8 and 9 hereof); (iv) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement, the Security Instrument, the Note and the other Loan Documents and any other documents or matters requested by Lender (except as otherwise expressly provided to the contrary herein); (v) securing Borrower’s compliance with any requests made pursuant to the provisions of this Agreement; (vi) the filing and recording fees and expenses, title insurance and reasonable fees and expenses of counsel for providing to Lender all required legal opinions, and other similar expenses incurred in creating and perfecting the lien in favor of Lender pursuant to this Agreement, the Security Instrument, the Note and the other Loan Documents; (vii) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting Borrower, this Agreement, the Security Instrument, the Note, the other Loan Documents, the Property, or any other security given for the Loan; (viii) servicing the Loan (including, without limitation, enforcing any obligations of or collecting any payments due from Borrower under this Agreement, the Security Instrument, the Note and the other Loan Documents or with respect to the Property) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a “work-out” or of any insolvency or bankruptcy proceedings; and (ix) the preparation, negotiation, execution, delivery, review, filing, recording or administration of any documentation associated with the exercise of any of Borrower’s rights hereunder and/or under the other Loan Documents regardless of whether or not any such right is consummated (including, without limitation, Borrower’s rights hereunder to defease the Loan and to permit or undertake transfers (including under Sections 6.3 and 6.4 hereof), in each case, in accordance with the applicable terms and conditions hereof); provided, however, that, with respect to each of subsections (i) though (ix) above, (A) none of the foregoing subsections shall be deemed to be mutually exclusive or limit any other subsection, (B) the same shall be deemed to (I) include, without limitation and in each case, any related special servicing fees, liquidation fees, modification fees, work-out fees and other similar costs or expenses payable to any Servicer, trustee and/or special servicer of the Loan (or any portion thereof and/or interest therein) and (II) exclude any requirement that Borrower directly pay the base monthly servicing fees due to any master servicer on account of the day to day, routine servicing of the Loan (provided, further, that the foregoing subsection (II) shall not be deemed to otherwise limit any fees, costs, expenses or other sums required to be paid to Lender under this Section, the other terms and conditions hereof and/or of the other Loan Documents) and (C) Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender.
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Section 17.7. Cost of Enforcement. In the event (a) that the Security Instrument is foreclosed in whole or in part, (b) of the bankruptcy, insolvency, rehabilitation or other similar proceeding in respect of Borrower or any of its constituent Persons or an assignment by Borrower or any of its constituent Persons for the benefit of its creditors, or (c) Lender exercises any of its other remedies under this Agreement, the Security Instrument, the Note and the other Loan Documents, Borrower shall be chargeable with and agrees to pay all costs of collection and defense, including attorneys’ fees and costs, incurred by Lender or Borrower in connection therewith and in connection with any appellate proceeding or post judgment action involved therein, together with all required service or use taxes.
Section 17.8. Schedules Incorporated. The Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof.
Section 17.9. Offsets, Counterclaims and Defenses. Any assignee of Lender’s interest in and to this Agreement, the Security Instrument, the Note and the other Loan Documents shall take the same free and clear of all offsets, counterclaims or defenses which are unrelated to such documents which Borrower may otherwise have against any assignor of such documents, and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower.
Section 17.10. No Joint Venture or Partnership; No Third Party Beneficiaries.
(a) Borrower and Lender intend that the relationships created under this Agreement, the Security Instrument, the Note and the other Loan Documents be solely that of borrower and lender. Nothing herein or therein is intended to create a joint venture, partnership, tenancy-in- common, or joint tenancy relationship between Borrower and Lender nor to grant Lender any interest in the Property other than that of mortgagee, beneficiary or lender.
(b) This Agreement, the Security Instrument, the Note and the other Loan Documents are solely for the benefit of Lender and Borrower and nothing contained in this Agreement, the Security Instrument, the Note or the other Loan Documents shall be deemed to confer upon anyone other than Lender and Borrower any right to insist upon or to enforce the performance or observance of any of the obligations contained herein or therein. All conditions to the obligations of Lender to make the Loan hereunder are imposed solely and exclusively for the benefit of Lender and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make the Loan in the absence of strict compliance with any or all thereof and no other Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender if, in Lender’s sole discretion, Lender deems it advisable or desirable to do so.
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(c) The general partners, members, principals and (if Borrower is a trust) beneficial owners of Borrower are experienced in the ownership and operation of properties similar to the Property, and Borrower and Lender are relying solely upon such expertise and business plan in connection with the ownership and operation of the Property. Borrower is not relying on Lender’s expertise, business acumen or advice in connection with the Property.
(d) Notwithstanding anything to the contrary contained herein, Lender is not undertaking the performance of (i) any obligations related to the Property (including, without limitation, under the Leases); or (ii) any obligations with respect to any agreements, contracts, certificates, instruments, franchises, permits, trademarks, licenses and other documents to which any Borrower Party and/or the Property (or any portion thereof) is subject.
(e) By accepting or approving anything required to be observed, performed or fulfilled or to be given to Lender pursuant to this Agreement, the Security Instrument, the Note or the other Loan Documents, including, without limitation, any officer’s certificate, balance sheet, statement of profit and loss or other financial statement, survey, appraisal, or insurance policy, Lender shall not be deemed to have warranted, consented to, or affirmed the sufficiency, the legality or effectiveness of same, and such acceptance or approval thereof shall not constitute any warranty or affirmation with respect thereto by Lender.
(f) Borrower recognizes and acknowledges that in accepting this Agreement, the Note, the Security Instrument and the other Loan Documents, Lender is expressly and primarily relying on the truth and accuracy of the representations and warranties set forth in Article 3 of this Agreement without any obligation to investigate the Property and notwithstanding any investigation of the Property by Lender; that such reliance existed on the part of Lender prior to the date hereof, that the warranties and representations are a material inducement to Lender in making the Loan; and that Lender would not be willing to make the Loan and accept this Agreement, the Note, the Security Instrument and the other Loan Documents in the absence of the warranties and representations as set forth in Article 3 of this Agreement.
Section 17.11. Publicity. All news releases, publicity or advertising by Borrower or its Affiliates through any media intended to reach the general public which refers to this Agreement, the Note, the Security Instrument or the other Loan Documents or the financing evidenced by this Agreement, the Note, the Security Instrument or the other Loan Documents, to Lender or any of its Affiliates shall be subject to the prior written approval of Lender, not to be unreasonably withheld.
Section 17.12. Limitation of Liability. No claim may be made by Borrower, or any other Person against Lender or its Affiliates, directors, officers, employees, attorneys or agents of any of such Persons for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or any act, omission or event occurring in connection therewith; and Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor.
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Section 17.13. Conflict; Construction of Documents; Reliance. In the event of any conflict between the provisions of this Agreement and the Security Instrument, the Note or any of the other Loan Documents, the provisions of this Agreement shall control. The parties hereto acknowledge that they were represented by competent counsel in connection with the negotiation, drafting and execution of this Agreement, the Note, the Security Instrument and the other Loan Documents and this Agreement, the Note, the Security Instrument and the other Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. Borrower acknowledges that, with respect to the Loan, Borrower shall rely solely on its own judgment and advisors in entering into the Loan without relying in any manner on any statements, representations or recommendations of Lender or any parent, subsidiary or Affiliate of Lender. Lender shall not be subject to any limitation whatsoever in the exercise of any rights or remedies available to it under this Agreement, the Note, the Security Instrument and the other Loan Documents or any other agreements or instruments which govern the Loan by virtue of the ownership by it or any parent, subsidiary or Affiliate of Lender of any equity interest any of them may acquire in Borrower, and Borrower hereby irrevocably waives the right to raise any defense or take any action on the basis of the foregoing with respect to Lender’s exercise of any such rights or remedies. Borrower acknowledges that Lender engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse-to or competitive with the business of Borrower or its Affiliates.
Section 17.14. Entire Agreement. This Agreement, the Note, the Security Instrument and the other Loan Documents contain the entire agreement of the parties hereto and thereto in respect of the transactions contemplated hereby and thereby, and all prior agreements among or between such parties, whether oral or written between Borrower and Lender are superseded by the terms of this Agreement, the Note, the Security Instrument and the other Loan Documents.
Section 17.15. Liability. If Borrower consists of more than one Person, the obligations and liabilities of each such Person hereunder shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever.
Section 17.16. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder.
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Section 17.17. Brokers. Borrower agrees (i) to pay any and all fees imposed or charged by all brokers, mortgage bankers and advisors (each a “Broker”) hired or contracted by any Borrower Party or their Affiliates in connection with the transactions contemplated by this Agreement and (ii) to indemnify and hold Lender harmless from and against any and all claims, demands and liabilities for brokerage commissions, assignment fees, finder’s fees or other compensation whatsoever arising from this Agreement or the making of the Loan which may be asserted against Lender by any Person. The foregoing indemnity shall survive the termination of this Agreement and the payment of the Debt. Borrower hereby represents and warrants that no Broker was engaged by any Borrower Party in connection with the transactions contemplated by this Agreement. Lender hereby agrees to pay any and all fees imposed or charged by any Broker hired solely by Lender. Borrower acknowledges and agrees that (a) any Broker is not an agent of Lender and has no power or authority to bind Lender, (b) Lender is not responsible for any recommendations or advice given to any Borrower Party by any Broker, (c) Lender and the Borrower Parties have dealt at arms-length with each other in connection with the Loan, (d) no fiduciary or other special relationship exists or shall be deemed or construed to exist among Lender and the Borrower Parties and (e) none of the Borrower Parties shall be entitled to rely on any assurances or waivers given, or statements made or actions taken, by any Broker which purport to bind Lender or modify or otherwise affect this Agreement or the Loan, unless Lender has, in its sole discretion, agreed in writing with any such Borrower Party to such assurances, waivers, statements, actions or modifications. Borrower acknowledges and agrees that Lender may, in its sole discretion, pay fees or compensation to any Broker in connection with or arising out of the closing and funding of the Loan. Such fees and compensation, if any, (i) shall be in addition to any fees which may be paid by any Borrower Party to such Broker and (ii) create a potential conflict of interest for Broker in its relationship with the Borrower Parties. Such fees and compensation, if applicable, may include a direct, one-time payment, servicing fees and/or incentive payments based on volume and size of financings involving Lender and such Broker.
Section 17.18. Set-Off. In addition to any rights and remedies of Lender provided by this Agreement and by law, Lender shall have the right in its sole discretion, without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by Lender or any Affiliate thereof to or for the credit or the account of Borrower; provided however, Lender may only exercise such right during the continuance of an Event of Default. Lender agrees promptly to notify Borrower after any such set-off and application made by Lender; provided that the failure to give such notice shall not affect the validity of such set- off and application.
Section 17.19. Contributions and Waivers.
(a) As a result of the transactions contemplated by this Agreement and the other Loan Documents, each Borrower will benefit, directly and indirectly, from each Borrower’s obligation to pay the Debt and perform its obligations hereunder and under the other Loan Documents (collectively, the “Obligations”) and in consideration therefore each Borrower desires to enter into an allocation and contribution agreement among themselves as set forth in this Section to allocate such benefits among themselves and to provide a fair and equitable agreement to make contributions among each of Borrowers in the event any payment is made by any individual Borrower hereunder to Lender (such payment being referred to herein as a “Contribution,” and for purposes of this Section, includes any exercise of recourse by Lender against any Property of a Borrower and application of proceeds of such Property in satisfaction of such Borrower’s obligations, to Lender under the Loan Documents).
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(b) Each Borrower shall be liable hereunder with respect to the Obligations only for such total maximum amount (if any) that would not render its Obligations hereunder or under any of the Loan Documents subject to avoidance under Section 548 of the Bankruptcy Code or any comparable provisions of applicable Legal Requirements.
(c) In order to provide for a fair and equitable contribution among Borrowers in the event that any Contribution is made by an individual Borrower (a “Funding Borrower”), such Funding Borrower shall be entitled to a reimbursement Contribution (“Reimbursement Contribution”) from all other Borrowers for all payments, damages and expenses incurred by that Funding Borrower in discharging any of the Obligations, in the manner and to the extent set forth in this Section.
(d) For purposes hereof, the “Benefit Amount” of any individual Borrower as of any date of determination shall be the net value of the benefits to such Borrower from extensions of credit made by Lender to (i) such Borrower and (ii) to the other Borrowers hereunder and the Loan Documents to the extent such other Borrowers have guaranteed or mortgaged their property to secure the Obligations of such Borrower to Lender.
(e) Each Borrower shall be liable to a Funding Borrower in an amount equal to the greater of (i) the (A) ratio of the Benefit Amount of such Borrower to the total amount of Obligations, multiplied by (B) the amount of Obligations paid by such Funding Borrower, or (ii) ninety-five percent (95%) of the excess of the fair saleable value of the Property of such Borrower over the total liabilities of such Borrower (including the maximum amount reasonably expected to become due in respect of contingent liabilities) determined as of the date on which the payment made by a Funding Borrower is deemed made for purposes hereof (giving effect to all payments made by other Funding Borrowers as of such date in a manner to maximize the amount of such Contributions).
(f) In the event that at any time there exists more than one Funding Borrower with respect to any Contribution (in any such case, the “Applicable Contribution”), then Reimbursement Contributions from other Borrowers pursuant hereto shall be allocated among such Funding Borrowers in proportion to the total amount of the Contribution made for or on account of the other Borrowers by each such Funding Borrower pursuant to the Applicable Contribution. In the event that at any time any Borrower pays an amount hereunder in excess of the amount calculated pursuant to this Section above, that Borrower shall be deemed to be a Funding Borrower to the extent of such excess and shall be entitled to a Reimbursement Contribution from the other Borrowers in accordance with the provisions of this Section.
(g) Each Borrower acknowledges that the right to Reimbursement Contribution hereunder shall constitute an asset in favor of Borrower to which such Reimbursement Contribution is owing.
| - 133 - |
(h) No Reimbursement Contribution payments payable by a Borrower pursuant to the terms of this Section shall be paid until all amounts then due and payable by all of Borrowers to Lender, pursuant to the terms of the Loan Documents, are paid in full in cash. Nothing contained in this Section shall limit or affect in any way the Obligations of any Borrower to Lender under the Loan Documents.
(i) To the extent permitted by applicable Legal Requirements, each Borrower waives:
(i) any right to require Lender to proceed against any other Borrower or any other Person or to proceed against or exhaust any security held by Lender at any time or to pursue any other remedy in Lender’s power before proceeding against Borrower;
(ii) any defense based upon any legal disability or other defense of any other Borrower, any guarantor of any other Person or by reason of the cessation or limitation of the liability of any other Borrower or any guarantor from any cause other than full payment of all sums payable under the Loan Documents;
(iii) any defense based upon any lack of authority of the officers, directors, partners or agents acting or purporting to act on behalf of any other Borrower or any principal of any other Borrower or any defect in the formation of any other Borrower or any principal of any other Borrower;
(iv) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal;
(v) any defense based upon any failure by Lender to obtain collateral for the indebtedness or failure by Lender to perfect a lien on any collateral;
(vi) presentment, demand, protest and notice of any kind;
(vii) any defense based upon any failure of Lender to give notice of sale or other disposition of any collateral to any other Borrower or to any other Person or any defect in any notice that may be given in connection with any sale or disposition of any collateral;
(viii) any defense based upon any failure of Lender to comply with applicable laws in connection with the sale or other disposition of any collateral, including any failure of Lender to conduct a commercially reasonable sale or other disposition of any collateral;
(ix) any defense based upon any use of cash collateral under Section 363 of the Bankruptcy Code;
(x) any defense based upon any agreement or stipulation entered into by Lender with respect to the provision of adequate protection in any bankruptcy proceeding;
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(xi) any defense based upon any borrowing or any grant of a security interest under Section 364 of the Bankruptcy Code;
(xii) any defense based upon the avoidance of any security interest in favor of Lender for any reason;
(xiii) any defense based upon any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding, including any discharge of, or bar or stay against collecting, all or any of the obligations evidenced by the Note or owing under any of the Loan Documents;
(xiv) any defense or benefit based upon Borrower’s, or any other party’s, resignation of the portion of any obligation secured by the Security Instrument to be satisfied by any payment from any other Borrower or any such party;
(xv) all rights and defenses arising out of an election of remedies by Lender even though the election of remedies, such as non-judicial foreclosure with respect to security for the Loan or any other amounts owing under the Loan Documents, has destroyed Borrower’s rights of subrogation and reimbursement against any other Borrower; and
(xvi) all rights and defenses that Borrower may have because any of the Debt is secured by real property. This means, among other things (subject to the other terms and conditions of the Loan Documents): (1) Lender may collect from Borrower without first foreclosing on any real or personal property collateral pledged by any other Borrower, and (2) if Lender forecloses on any real property collateral pledged by any other Borrower, (I) the amount of the Debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price and (II) Lender may collect from Borrower even if any other Borrower, by foreclosing on the real property collateral, has destroyed any right Borrower may have to collect from any other Borrower. This is an unconditional and irrevocable waiver of any rights and defenses Borrower may have because any of the Debt is secured by real property; and except as may be expressly and specifically permitted herein, any claim or other right which Borrower might now have or hereafter acquire against any other Borrower or any other Person that arises from the existence or performance of any obligations under the Loan Documents, including any of the following: (i) any right of subrogation, reimbursement, exoneration, contribution, or indemnification; or (ii) any right to participate in any claim or remedy of Lender against any other Borrower or any collateral security therefor, whether or not such claim, remedy or right arises in equity or under contract, statute or common law.
(j) Each Borrower hereby restates and makes the waivers made by Guarantor in the Guaranty for the benefit of Lender. Such waivers are hereby incorporated by reference as if fully set forth herein (and as if applicable to each Borrower) and shall be effective for all purposes under the Loan (including, without limitation, in the event that any Borrower is deemed to be a surety or guarantor of the Debt (by virtue of each Borrower being co-obligors and jointly and severally liable hereunder, by virtue of each Borrower encumbering its interest in the Property for the benefit or debts of the other Borrowers in connection herewith or otherwise)).
| - 135 - |
Section 17.20. Cross-Default; Cross-Collateralization.
(a) Borrower acknowledges that Lender has made the Loan to Borrower upon the security of its collective interest in the Properties and in reliance upon the aggregate of the Properties taken together being of greater value as collateral security than the sum of each Individual Property taken separately. Borrower agrees that each of the Loan Documents (including, without limitation, the Security Instruments) are and will be cross collateralized and cross defaulted with each other so that (i) an Event of Default under any of Loan Documents shall constitute an Event of Default under each of the other Loan Documents; (ii) an Event of Default hereunder shall constitute an Event of Default under each Security Instrument; (iii) each Security Instrument shall constitute security for the Note as if a single blanket lien were placed on all of the Properties as security for the Note; and (iv) such cross collateralization shall in no event be deemed to constitute a fraudulent conveyance and Borrower waives any claims related thereto.
(b) To the fullest extent permitted by law, Borrower, for itself and its successors and assigns, waives all rights to a marshalling of the assets of Borrower, Borrower’s partners and others with interests in Borrower, and of the Properties (or any portion thereof and/or estate or other interest therein), or to a sale in inverse order of alienation in the event of foreclosure of all or any of the Security Instruments (whether in whole or in part), and agrees not to assert any right under any laws pertaining to the marshalling of assets, the sale in inverse order of alienation, homestead exemption, the administration of estates of decedents, or any other matters whatsoever to defeat, reduce or affect the right of Lender under the Loan Documents to a sale of the Properties (or any portion thereof and/or estate or other interest therein) for the collection of the Debt without any prior or different resort for collection or of the right of Lender to the payment of the Debt out of the net proceeds of the Properties (or any portion thereof and/or estate or other interest therein) in preference to every other claimant whatsoever. In addition, Borrower, for itself and its successors and assigns, waives in the event of foreclosure of any or all of the Security Instruments (whether in whole or in part), any equitable right otherwise available to Borrower which would require the separate sale of the Properties (or any portion thereof and/or estate or other interest therein) or require Lender to exhaust its remedies against any Individual Property (or any portion thereof and/or estate or other interest therein) or any combination of the Properties (or any portion thereof and/or estate or other interest therein) before proceeding against any other Individual Property (or any portion thereof and/or estate or other interest therein) or combination of Properties (or any portion thereof and/or estate or other interest therein); and further in the event of such foreclosure Borrower does hereby expressly consent to and authorize, at the option of Lender, the foreclosure and sale either separately or together of any combination of the Properties (or any portion thereof and/or estate or other interest therein).
[NO FURTHER TEXT ON THIS PAGE]
| - 136 - |
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written.
| BORROWER: | ||
| LVP H2S SALT LAKE CITY LLC, a Delaware limited liability company | ||
| By: | LVP H2S SALT LAKE CITY HOLDINGS LLC, a | |
| Delaware limited liability company, its Managing Member | ||
| By: | ||
| Name: | Joseph E.Teichman | |
| Title: | Executive Vice President | |
| LVP H2S SALT LAKE CITY HOLDING CORP., a Delaware corporation | ||
| By | ||
| Name: | Joseph E. Teichman | |
| Title: | President and Secretary | |
| LVP H2S SEATTLE LLC, a Delaware limited liability company | ||
| By: | LVP H2S SEATTLE HOLDINGS LLC, a Delaware limited liability company, its Managing Member | |
| By | ||
| Name: | Joseph E. Teichman | |
| Title: | Executive Vice President | |
[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
| - 137 - |
| LVP H2S SEATTLE HOLDING CORP., a | ||
| Delaware corporation | ||
| By | ||
| Name: | Joseph E. Teichman | |
| Title: | Executive Vice President | |
[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
| - 138 - |
| LENDER: | ||
| CITIGROUP GLOBAL MARKETS REALTY CORP., a New York corporation | ||
| By | ||
| Name: | Ana Rosu Marmann | |
| Title: | Authorized Signatory | |
| - 139 - |
Exhibit 21.1
Subsidiaries of Registrant
| Property Name | State Organization | |
| Lightstone Value Plus REIT III, LP | Delaware | |
| LVP CY Durham LLC | Delaware | |
| LVP CY Durham Holdings LLC | Delaware | |
| LVP CY Durham Holding Corp | Delaware | |
| LVP HMI Des Moines LLC | Delaware | |
| LVP HMI Des Moines Holdings LLC | Delaware | |
| LVP HMI Des Moines Holding Corp | Delaware | |
| LVP HMI Lansing LLC | Delaware | |
| LVP HMI Lansing Holdings LLC | Delaware | |
| LVP HMI Lansing Holding Corp | Delaware | |
| LVP CY Warwick LLC | Delaware | |
| LVP CY Warwick Holdings LLC | Delaware | |
| LVP CY Warwick Holding Corp | Delaware | |
| LVP SHS Green Bay LLC | Delaware | |
| LVP SHS Green Bay Holdings LLC | Delaware | |
| LVP SHS Green Bay Holding Corp | Delaware | |
| LVP H2S Salt Lake City LLC | Delaware | |
| LVP H2S Salt Lake City Holdings LLC | Delaware | |
| LVP H2S Salt Lake City Holding Corp | Delaware | |
| LVP H2S Seattle LLC | Delaware | |
| LVP H2S Seattle Holdings LLC | Delaware | |
| LVP H2S Seattle Holding Corp | Delaware | |
| LVP FFI Austin LLC | Delaware | |
| LVP FFI Austin Holdings LLC | Delaware | |
| LVP FFI Austin Holding Corp | Delaware | |
| LVP SBS Austin LLC | Delaware | |
| LVP SBS Austin Holdings LLC | Delaware | |
| LVP SBS Austin Holding Corp | Delaware | |
| REIT III COVE LLC | Delaware |
EXHIBIT 31.1
Certifications
I, David Lichtenstein, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust III, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ David Lichtenstein | |
| David Lichtenstein | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: March 28, 2017 |
EXHIBIT 31.2
Certifications
I, Donna Brandin, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust III, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Donna Brandin | |
| Donna Brandin | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| Date: March 28, 2017 |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Lichtenstein, the Chief Executive Officer and Chairman of the Board of Directors of Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ David Lichtenstein | |
| David Lichtenstein | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: March 28, 2017 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Donna Brandin, the Chief Financial Officer, Treasurer and Principal Accounting Officer of Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Donna Brandin | |
| Donna Brandin | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| Date: March 28, 2017 |
Document And Entity Information - USD ($) shares in Millions, $ in Millions |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Mar. 15, 2017 |
Jun. 30, 2016 |
|
| Document Information [Line Items] | |||
| Document Type | 10-K | ||
| Amendment Flag | false | ||
| Document Period End Date | Dec. 31, 2016 | ||
| Document Fiscal Year Focus | 2016 | ||
| Document Fiscal Period Focus | FY | ||
| Entity Registrant Name | Lightstone Value Plus Real Estate Investment Trust III, Inc. | ||
| Entity Central Index Key | 0001563756 | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Public Float | $ 0 | ||
| Entity Common Stock, Shares Outstanding | 12.9 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Preferred Stock, par value per share | $ 0.01 | $ 0.01 |
| Preferred Stock, shares authorized | 50,000,000 | 50,000,000 |
| Preferred Stock, shares issued | 0 | 0 |
| Preferred Stock, shares outstanding | 0 | 0 |
| Common Stock, par value per share | $ 0.01 | $ 0.01 |
| Common Stock, shares authorized | 200,000,000 | 200,000,000 |
| Common Stock, shares issued | 11,656,877 | 4,009,656 |
| Common Stock, shares outstanding | 11,656,877 | 4,009,656 |
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Revenues | $ 22,551,234 | $ 6,203,341 |
| Expenses: | ||
| Property operating expenses | 13,111,144 | 3,685,843 |
| Real estate taxes | 926,424 | 251,400 |
| General and administrative costs | 2,869,290 | 946,228 |
| Depreciation and amortization | 3,184,298 | 746,492 |
| Total operating expenses | 20,091,156 | 5,629,963 |
| Operating income | 2,460,078 | 573,378 |
| Interest expense | (2,499,238) | (904,302) |
| Other expense, net | (73,862) | (9,306) |
| Net loss | (113,022) | (340,230) |
| Less: net (income)/loss attributable to noncontrolling interests | (7) | 44 |
| Net loss applicable to Company's common shares | $ (113,029) | $ (340,186) |
| Net loss per Company's common shares, basic and diluted | $ (0.01) | $ (0.20) |
| Weighted average number of common shares outstanding, basic and diluted | 7,865,348 | 1,675,534 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) |
Total |
Common Shares [Member] |
Additional Paid-In Capital [Member] |
Subscription Receivable [Member] |
Accumulated Deficit [Member] |
Total Noncontrolling Interests [Member] |
|---|---|---|---|---|---|---|
| BALANCE at Dec. 31, 2014 | $ 315,526 | $ 2,867 | $ 455,880 | $ 0 | $ (145,196) | $ 1,975 |
| BALANCE, shares at Dec. 31, 2014 | 286,674 | |||||
| Net (loss)/income | (340,230) | $ 0 | 0 | 0 | (340,186) | (44) |
| Distributions declared | (1,014,588) | 0 | 0 | 0 | (1,014,588) | 0 |
| Distributions paid to noncontrolling interests | (116) | 0 | 0 | 0 | 0 | (116) |
| Contributions from noncontrolling interests | 700,000 | 0 | 0 | 0 | 0 | 700,000 |
| Proceeds from offering | 36,240,503 | $ 36,887 | 36,547,987 | (344,371) | 0 | 0 |
| Proceeds from offering, shares | 3,688,657 | |||||
| Selling commissions and dealer manager fees | (3,377,887) | $ 0 | (3,377,887) | 0 | 0 | 0 |
| Other offering costs | (1,870,078) | 0 | (1,870,078) | 0 | 0 | 0 |
| Shares issued from distribution reinvestment program | 326,089 | $ 343 | 325,746 | 0 | 0 | 0 |
| Shares issued from distribution reinvestment program, Shares | 34,325 | |||||
| BALANCE at Dec. 31, 2015 | 30,979,219 | $ 40,097 | 32,081,648 | (344,371) | (1,499,970) | 701,815 |
| BALANCE, shares at Dec. 31, 2015 | 4,009,656 | |||||
| Net (loss)/income | (113,022) | $ 0 | 0 | 0 | (113,029) | 7 |
| Distributions declared | (4,732,111) | 0 | 0 | 0 | (4,732,111) | 0 |
| Distributions paid to noncontrolling interests | (120) | 0 | 0 | 0 | 0 | (120) |
| Contributions from noncontrolling interests | 11,390,870 | 0 | 0 | 0 | 0 | 11,390,870 |
| Proceeds from offering | 73,903,459 | $ 74,951 | 73,589,137 | 239,371 | 0 | 0 |
| Proceeds from offering, shares | 7,495,057 | |||||
| Selling commissions and dealer manager fees | (7,008,694) | $ 0 | (7,008,694) | 0 | 0 | 0 |
| Other offering costs | (770,493) | 0 | (770,493) | 0 | 0 | 0 |
| Shares issued from distribution reinvestment program | 1,762,881 | $ 1,865 | 1,761,016 | 0 | 0 | 0 |
| Shares issued from distribution reinvestment program, Shares | 186,522 | |||||
| Redemption and cancellation of shares | (343,184) | $ (344) | (342,840) | 0 | 0 | 0 |
| Redemption and cancellation of shares, shares | (34,358) | |||||
| BALANCE at Dec. 31, 2016 | $ 105,068,805 | $ 116,569 | $ 99,309,774 | $ (105,000) | $ (6,345,110) | $ 12,092,572 |
| BALANCE, shares at Dec. 31, 2016 | 11,656,877 |
Organization |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 | ||
| Organization [Abstract] | ||
| Organization | 1. Organization Lightstone Value Plus Real Estate Investment Trust III, Inc. (‘‘Lightstone REIT III’’), incorporated on October 5, 2012, in Maryland, elected to qualify and be taxed as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. Through December 31, 2016, the Company has acquired nine wholly-owned hotels and it will continue to seek to acquire additional hotels and other commercial real estate assets primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate. The Lightstone REIT III is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the ‘‘Operating Partnership’’). Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns refers to Lightstone REIT III, its Operating Partnership or the Company as required by the context in such pronoun used. Offering and Structure Our sponsor David Lichtenstein (“Lichtenstein”), who does business as the Lightstone Group (the “Sponsor”) and majority owns the limited liability company of that name with a diversified portfolio of over 120 properties containing approximately 10,000 multifamily units, approximately 250,000 square feet of office space, 1.5 million square feet of industrial space, 31 hotels and 4.6 million square feet of retail space. The residential, office, industrial, hotel and retail properties are located in 26 states. Based in New York and supported by a regional office in New Jersey, our sponsor employs approximately 397 staff and professionals. Our advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by our Sponsor. Our Advisor, together with our board of directors (the “Board of Directors”), is and will continue to be primarily responsible for making investment decisions and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP III LLC, which has subordinated participation interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership. We do not have and will not have any employees that are not also employed by our Sponsor or its affiliates. We depend substantially on our Advisor, which generally has responsibility for our day-to-day operations. Under the terms of the advisory agreement, the Advisor also undertakes to use its reasonable best efforts to present to us investment opportunities consistent with our investment policies and objectives as adopted by our Board of Directors. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a broker-dealer registered with FINRA, serves as the dealer manager of the Company’s public offering. The Dealer Manager also has opened an OSJ (“Office of Supervisory Jurisdiction”) that does business as “Lightstone Capital Markets” and focuses primarily on distributing interests in programs sponsored by our Sponsor. Our Sponsor has various majority owned and controlled affiliated property managers, which may manage certain of the properties we acquire. However, we also contract with other unaffiliated third-party property managers, principally for the management of our hospitality properties. Our registration statement on Form S-11 (the “Offering”), pursuant to which we are offering to sell up to 30.0 million shares of our common stock, par value $0.01 per share (which may be referred to herein as “shares of common stock” or as “Common Shares”) for an initial price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10.0 million shares of common stock available pursuant to our distribution reinvestment program (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014 and we began offering our shares of our common stock for sale to the public. As of December 31, 2016, we had received aggregate gross proceeds of approximately $112.8 million from the sale of 11.5 million shares of our common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in our Sponsor) in our Offering. The Company initially expected to offer the Common Shares offered in its Primary Offering over a two-year period, or until July 15, 2016. However, because the Company had not sold all the Common Shares offered in its Primary Offering within two years, the Company will continue the Primary Offering for an additional year, until July 15, 2017, provided that the Offering will be terminated if all 30.0 million shares of our common stock are sold before such date. The Company reserves the right to reallocate the shares of common stock it is offering between the Primary offering and the DRIP. Additionally, the Offering may be terminated at any time. As of December 31, 2016, our Advisor owned 20,000 shares of common stock which were issued on December 24, 2012 for $200,000 or $10.00 per share. As of December 11, 2014, we had reached the minimum offering under our Offering by receiving subscriptions of our Common Shares, representing gross offering proceeds of approximately $2.0 million, and effective December 11, 2014 investors were admitted as stockholders and our Operating Partnership commenced operations. Through December 31, 2016, cumulative gross offering proceeds of approximately $112.8 million were released to us. Our shares of common stock are not currently listed on a national securities exchange. We may seek to list our shares of common stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares of common stock at this time. We do not anticipate that there would be any market for our shares of common stock until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to the eighth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio. Noncontrolling Interests Partners of Operating Partnership On July 16, 2014, our Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. A limited partner has the right to convert operating partnership units into cash or, at our option, an equal number of our common shares, as allowed by the limited partnership agreement. Lightstone REIT III invested the proceeds received from the Offering and its Advisor in the Operating Partnership, and as a result, held a 99% general partnership interest as of December 31, 2016 and 2015 in the Operating Partnership’s common units. Special Limited Partner Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and has committed to make a significant equity investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum amount of the Offering. Specifically, the Special Limited Partner has committed to purchase subordinated participation interests in the Operating Partnership (the “Subordinated Participation Interests”) quarterly in an amount equal to the product of (i) $10.00 minus our then current estimated NAV per Common Share, multiplied by (ii) the number of our Common Shares outstanding. The Operating Partnership will issue one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributes. The Special Limited Partner’s obligation will continue until the earlier of: (i) the termination of the Offering; (ii) the Special Limited Partner’s purchase of an aggregate of $36.0 million of Subordinated Participation Interests and (iii) the receipt of gross offering proceeds of $300.0 million. Through December 31, 2016, the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million, including approximately 228 Subordinated Participation Interests in consideration of $11.4 million during the year ended December 31, 2016. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III. Related Parties Our Advisor and its affiliates and the Special Limited Partner are related parties of the Company. Certain of these entities have or will receive compensation for services related to the Offering and will continue to receive compensation and services for the investment, management and disposition of our assets. These entities have and/or will receive compensation during the offering, acquisition, operational and liquidation stages. The compensation levels during our offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements. See Note 6 – Related Party Transactions for additional information. |
Summary of Significant Accounting Policies |
12 Months Ended | |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which Lightstone REIT III exercises financial and operating control). As of December 31, 2016, the Company had a 99% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Investments in other real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary will be accounted for using the equity method. Investments in other real estate entities where the Company has virtually no influence will be accounted for using the cost method. Hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Investments in Real Estate Accounting for Acquisitions When the Company makes an investment in real estate, the fair value of the real estate acquired will be allocated to the acquired tangible assets, consisting of land, building and improvements, furniture and fixtures and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases, and the value of tenant relationships, based in each case on their fair values. Purchase accounting will be applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions will be expensed as incurred and recorded in general and administrative costs in the consolidated statements of operations. Transaction costs incurred related to the Company’s investments in unconsolidated affiliated entities, accounted for under the equity method of accounting, will be capitalized as part of the cost of the investment. Upon the acquisition of real estate operating properties, the Company will estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and certain liabilities such as assumed debt and contingent liabilities, at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Based on these estimates, the Company will evaluate the existence of goodwill or a gain from a bargain purchase and will allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation. The allocations will be finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date. Carrying Value of Assets The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets will be depreciated or amortized, will be determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates. Impairment Evaluation Management will evaluate the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets will be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss will be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The Company will evaluate the long-lived assets for potential impairment on an annual basis and record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value will be based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial. Depreciation and Amortization Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Maintenance and repairs will be charged to expense as incurred. Investments in Unconsolidated Entities We will evaluate investments in other entities for consolidation. We will consider the percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining if the investment qualifies for consolidation. Under the equity method, the investment will be recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of each investor will be allocated in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity will be amortized over the respective lives of the underlying assets as applicable. These items will be reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. Under the cost method of accounting, the investment will be recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Dividends earned from the underlying entity will be recorded as interest income. On a quarterly basis, we will assess whether the value of our investments in unconsolidated entities has been impaired. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we will record an impairment charge. Deferred Costs We will capitalize initial direct costs associated with financing activities. The costs will be capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs will begin in the period during which the loan is originated using the effective interest method over the term of the loan. Income Taxes The Company elected to qualify and be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2015. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its net taxable income that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at regular corporate rates, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. The Company engages in certain activities through taxable REIT subsidiaries ("TRSs"). When the Company purchases a hotel it establishes a TRS and enters into an operating lease agreement for the hotel. As such, the Company may be subject to U.S. federal and state income taxes and franchise taxes from these activities. As of December 31, 2016 and 2015, we had no material uncertain income tax positions. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income. Additionally, even if the Company qualifies as a REIT, it may still be subject to some U.S. federal, state and local taxes on its income and property and to U.S. federal income taxes and excise taxes on its undistributed income. To maintain our qualification as a REIT, we may engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we will be subject to U.S. federal and state income and franchise taxes from these activities. Selling Commission, Dealer Manager Fees and Organization and Offering Costs Selling commissions and dealer manager fees paid to the Dealer Manager, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred. Any organization costs are expensed as general and administrative costs. Through December 31, 2016, the Company has incurred approximately $10.4 million in selling commissions and dealer manager fees and $4.8 million of other offering costs. From the commencement of the offering through December 31, 2016, the Company has recorded approximately $15.2 million of these costs against APIC. Concentration of Risk The Company maintains its cash in bank deposit accounts, which, at times, may exceed U.S. federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. Basic and Diluted Net Earnings per Common Share Net earnings per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share takes into account the effect of any dilutive instruments. The Company had no potentially dilutive securities outstanding during the periods presented. Financial Instruments The carrying amounts of cash, accounts receivable (included in other assets) and accounts payable and other accrued expenses approximate their fair values because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates. As of December 31, 2015, the estimated fair value of our revolving promissory notes payable – related party approximated its carrying value ($2.1 million) because of its floating interest rate. New Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the requirements and impact of this update on its financial statements. In January 2017, FASB issued guidance that amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force meetings. The SEC guidance that specifically relates to our consolidated financial statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, on revenue and leases. Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The adoption this guidance did not have a material effect on the Company's consolidated financial statements. In August 2016, the issued FASB an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. This guidance will not have a material impact on the Company’s consolidated financial statements. In September 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to simplify the accounting for adjustments made to provisional amounts during the measurement period of a business combination. The amendment requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective with earlier application permitted for financial statements that have not been issued. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The SEC staff noted that this update did not address situations where a company has debt issuance costs related to line-of-credit arrangements. As a result, the FASB issued an additional update which states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted this standard during the quarter ended March 31, 2016. As a result of adopting this standard on a retrospective basis, $51,667 was reclassified out of prepaid expenses and other assets and was reclassified into revolving promissory notes payable, net - related party on the consolidated balance sheet as of December 31, 2015. In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows. The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations. |
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Acquisitions |
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions |
2015 Acquisitions: Hampton Inn – Des Moines On February 4, 2015, the Company completed the acquisition of a 120-room select service hotel located in Des Moines, Iowa (the “Hampton Inn – Des Moines”) from an unrelated third party, for an aggregate purchase price of approximately $10.9 million less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $0.1 million. The acquisition was funded with approximately $2.7 million of offering proceeds and approximately $8.2 million of proceeds under a $10.0 million revolving promissory note (the “Des Moines Promissory Note”) from the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by the Company’s Sponsor. The acquisition of the Hampton Inn – Des Moines was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Hampton Inn – Des Moines has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.2 million was allocated to land and improvements, $9.2 million was allocated to building and improvements, and $0.5 million was allocated to furniture and fixtures and other assets. Courtyard – Durham On May 15, 2015, the Company completed the acquisition of a 146-room select service hotel located in Durham, North Carolina (the “Courtyard – Durham”) from an unrelated third party, for an aggregate purchase price of $16.0 million, less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, $0.2 million. The acquisition was funded with $4.0 million of offering proceeds and $12.0 million of proceeds under a $13.0 million revolving promissory note (the “Durham Promissory Note”) from the operating partnership of Lightstone II. The acquisition of the Courtyard – Durham was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Courtyard – Durham has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.0 million was allocated to land and improvements, $13.1 million was allocated to building and improvements, and $1.9 million was allocated to furniture and fixtures and other assets. 2016 Acquisitions: Hampton Inn – Lansing On March 10, 2016, the Company completed the acquisition of an 86-room select service hotel located in Lansing, Michigan (the “Hampton Inn – Lansing”) from an unrelated third party, for an aggregate purchase price of approximately $10.5 million less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, $105,000. The acquisition was funded with offering proceeds. The acquisition of the Hampton Inn – Lansing was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Hampton Inn – Lansing has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $0.4 million was allocated to land and improvements, $9.0 million was allocated to building and improvements, and $1.1 million was allocated to furniture and fixtures and other assets. The capitalization rate for the acquisition of the Hampton Inn — Lansing was approximately 12.0% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended November 30, 2015. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation. Courtyard – Warwick On March 23, 2016, the Company completed the acquisition of a 92-room select service hotel located in Warwick, Rhode Island (the “Courtyard – Warwick”) from an unrelated third party, for an aggregate purchase price of $12.4 million, less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, $124,000. The acquisition was funded with offering proceeds. The acquisition of the Courtyard – Warwick was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Courtyard – Warwick has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $0.7 million was allocated to land and improvements, $11.1 million was allocated to building and improvements, and $0.6 million was allocated to furniture and fixtures and other assets. The capitalization rate for the acquisition of the Courtyard – Warwick was approximately 8.3% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended January 31, 2016. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation. SpringHill Suites – Green Bay On May 2, 2016, the Company completed the acquisition of a 127-room select service hotel located in Green Bay, Wisconsin (the “SpringHill Suites – Green Bay”) from an unrelated third party, for an aggregate purchase price of approximately $18.3 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $183,000. The acquisition was funded with approximately $8.1 million of offering proceeds and approximately $10.2 million of proceeds from a $14.5 million revolving promissory note (the “Green Bay Promissory Note”) from the operating partnership of Lightstone II (see Note 6 – Related Party Transactions for additional information). The acquisition of the SpringHill Suites – Green Bay was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the SpringHill Suites – Green Bay has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $0.8 million was allocated to land and improvements, $15.2 million was allocated to building and improvements, and $2.3 million was allocated to furniture and fixtures and other assets. The capitalization rate for the acquisition of the SpringHill Suites – Green Bay was approximately 9.8% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended November 30, 2015. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation. Home2 Suites Hotel Portfolio On August 2, 2016, the Company completed the portfolio acquisition of a 139-room select service hotel located in Tukwila, Washington (the “Home2 Suites – Tukwila”) and a 125-room select service hotel located in Salt Lake City, Utah (the “Home2 Suites – Salt Lake” and collectively the “Home2 Suites Hotel Portfolio”) from an unrelated third party, for an aggregate purchase price of approximately $47.3 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $473,000. The acquisition was funded with offering proceeds. The acquisition of the Home2 Suites Hotel Portfolio was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Home2 Suites Hotel Portfolio has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $16.2 million was allocated to land and improvements, $26.4 million was allocated to building and improvements, and $4.7 million was allocated to furniture and fixtures and other assets. The capitalization rate for the acquisition of the Home2 Suites Hotel Portfolio was approximately 8.4% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was determined using the projected or budgeted net operating income of the property based upon then-current projections. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation. Fairfield Inn– Austin On September 13, 2016, the Company completed the acquisition of an 84-room select service hotel located in Austin, Texas (the “Fairfield Inn– Austin”) from an unrelated third party, for an aggregate purchase price of approximately $12.0 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $120,000. The acquisition was funded with offering proceeds. The acquisition of the Fairfield Inn – Austin was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Fairfield Inn– Austin has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.5 million was allocated to land and improvements, $9.0 million was allocated to building and improvements, and $1.5 million was allocated to furniture and fixtures and other assets. The capitalization rate for the acquisition of the Fairfield Inn – Austin was approximately 8.7% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended April 30, 2016. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation. Staybridge Suites – Austin On October 7, 2016, the Company completed the acquisition of an 80-room select service hotel located in Austin, Texas (the “Staybridge Suites – Austin”) from an unrelated third party, for an aggregate purchase price of approximately $10.0 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $100,000. The acquisition was funded with offering proceeds. The acquisition of the Staybridge Suites – Austin was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Staybridge Suites – Austin has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.9 million was allocated to land and improvements, $6.7 million was allocated to building and improvements, and $1.4 million was allocated to furniture and fixtures and other assets. The capitalization rate for the acquisition of the Staybridge Suites – Austin was approximately 9.4% (“unaudited”). We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was based upon the twelve-month period ended April 30, 2016. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation. Financial Information The following table provides the total amount of rental revenue and net income included in the Company’s consolidated statements of operations from the Hampton Inn – Des Moines, Courtyard – Durham, Hampton Inn – Lansing, Courtyard – Warwick, SpringHill Suites – Green Bay, Home2 Suites Hotel Portfolio, Fairfield Inn – Austin and Staybridge Suites – Austin since their respective dates of acquisition for the period indicated:
The following table provides unaudited pro forma results of operations for the periods indicated, as if the Hampton Inn – Des Moines, Courtyard – Durham, Hampton Inn – Lansing, Courtyard – Warwick, SpringHill Suites – Green Bay, Home2 Suites Hotel Portfolio, Fairfield Inn – Austin and Staybridge Suites – Austin had been acquired at the beginning of each period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.
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| Mortgage Loans on Real Estate, by Loan Disclosure [Text Block] | 4. Mortgages payable, net Mortgages payable, net consisted of the following:
Principal Maturities The following table, based on the initial terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of December 31, 2016:
On July 13, 2016, the Company, through certain subsidiaries, entered into a $60.0 million revolving credit facility (the “Revolving Credit Facility”), with a bank. The Revolving Credit Facility bears interest at Libor plus 4.95% and provides a line of credit over the next three years, with two, one-year options to extend solely at the discretion of the bank. Interest is payable monthly and the entire unpaid principal balance is due upon expiration of the Revolving Credit Facility. Under the terms of the Revolving Credit Facility, the Company may designate properties as collateral that allows it to borrow up to a 65.0% loan-to-value ratio of the properties. On July 13, 2016, we received an initial loan of $45.4 million under the Revolving Credit Facility which was secured by five hotel properties (SpringHill Suites - Green Bay, Hampton Inn – Des Moines, Hampton Inn - Lansing, Courtyard - Durham, and Courtyard – Warwick). On November 2, 2016, we received an additional loan of $14.3 million under the Revolving Credit Facility and added two more hotel properties (Fairfield Inn – Austin and Staybridge Suites – Austin) as additional collateral under the Revolving Credit Facility. As a result, the Revolving Credit Facility had an outstanding balance and remaining availability of $59.7 million and $0.3 million, respectively, as of December 31, 2016. On October 5, 2016, the Company entered into a promissory note (the “Promissory Note”) for $28.4 million. The Promissory Note has a term of five years, bears interest at 4.73% and requires monthly interest and principal payments of $147,806 through its stated maturity with the entire unpaid balance due upon maturity. The Promissory Note is cross-collateralized by two hotel properties (Home2 Suites – Tukwila and Home2 Suites – Salt Lake City). Debt Compliance Pursuant to the Company’s debt agreements, approximately $0.9 million was held in restricted escrow accounts as of December 31, 2016. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios including debt service coverage and fixed leverage charge ratio. The Company is currently in compliance with respect to all of its financial debt covenants. |
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Stockholder's Equity |
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| Stockholder's Equity [Abstract] | ||
| Stockholder's Equity | 5. Stockholder’s Equity Preferred Stock The Company’s charter authorizes its board of directors to designate and issue one or more classes or series of preferred stock without approval of the stockholders of Common Shares. On July 11, 2014, the Company amended and restated its charter to authorize the issuance of 50,000,000 shares of preferred stock. Prior to the issuance of shares of each class or series, the Company’s board of directors is required by Maryland law and by the Company’s charter to set, subject to the Company’s charter restrictions on ownership and transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of each class or series of preferred stock so issued, which may be more beneficial than the rights, preferences and privileges attributable to Common Shares. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. As of December 31, 2016 and December 31, 2015, the Company had no outstanding shares of preferred stock. Common Shares All of the common stock being offered by the Company will be duly authorized, fully paid and nonassessable. Subject to the restrictions on ownership and transfer of stock contained in the Company’s charter and except as may otherwise be specified in the charter, the holders of Common Shares are entitled to one vote per Common Share on all matters submitted to a stockholder vote, including the election of the Company’s directors. There is no cumulative voting in the election of directors. Therefore, the holders of a majority of outstanding Common Shares can elect the Company’s entire board of directors. Except as the Company’s charter may provide with respect to any series of preferred stock that the Company may issue in the future, the holders of Common Shares will possess exclusive voting power. Holders of the Company’s Common Shares will be entitled to receive such distributions as authorized from time to time by the Company’s board of directors and declared out of legally available funds, subject to any preferential rights of any preferred stock that the Company issues in the future. In any liquidation, each outstanding Common Share entitles its holder to share (based on the percentage of Common Shares held) in the assets that remain after the Company pays its liabilities and any preferential distributions owed to preferred stockholders. Holders of Common Shares do not have preemptive rights, which means that there is no automatic option to purchase any new Common Shares that the Company issues, nor do holders of Common Shares have any preference, conversion, exchange, sinking fund or redemption rights. Holders of Common Shares will not have appraisal rights unless the board of directors determines that appraisal rights apply, with respect to all or any classes or series of stock, to a particular transaction or all transactions occurring after the date of such determination in connection with which holders of such Common Shares would otherwise be entitled to exercise appraisal rights. Common Shares will be nonassessable by the Company upon its receipt of the consideration for which the board of directors authorized its issuance. On July 11, 2014, the Company amended and restated its charter to authorize the issuance of 200,000,000 Common Shares. Under its charter, the Company cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, and (3) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in which the Company is the acquirer, however, do not require stockholder approval. Distributions U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are at the discretion of our Board of Directors. We may pay such distributions from the sale of shares of our common stock or borrowings if we do not generate sufficient cash flow from our operations to fund distributions. Our ability to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distributions that we have established or may establish. We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of our REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, but only to the extent of a stockholder’s adjusted tax basis in our shares, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for depreciation and other non-cash items, it is likely that a portion of each distribution will constitute a tax-deferred return of capital for U.S. federal income tax purposes. On January 14, 2015, the Board of Directors of the Company authorized and the Company declared a distribution rate calculated based on stockholders of record each day during the applicable period at a rate of $0.00164383 per day, and which equals a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00. The Company’s first distribution began to accrue on December 11, 2014 (date of breaking escrow) through February 28, 2015 (the end of the month following the Company’s initial property acquisition) and subsequent distributions have been declared on a monthly basis thereafter. The first distribution was payable on March 15, 2015 and subsequent distributions have been paid on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month. Our stockholders may elect to have their distributions reinvested in additional shares of Common Shares under our DRIP. Total distributions declared during the years ended December 31, 2016 and 2015 were $4.7 million and $1.0 million. Distribution Payments On November 15, 2016, December 15, 2016 and January 13, 2017, the Company paid distributions for the months ended October 31, 2016, November 30, 2016 and December 31, 2016, respectively, totaling $1.7 million. The distributions were paid in full using a combination of cash and 79,794 shares of the Company’s common stock issued pursuant to the Company’s DRIP, at a price of $9.50 per share, equal to 95% of the Company’s current Offering price of $10.00 per common share. The distributions were paid from a combination of cash flows provided by operations ($793,928 or 48%) offering proceeds ($101,569 or 6%) and excess cash proceeds from the issuance of common stock through the Company’s DRIP ($758,041 or 46%). Distribution Declaration On March 27, 2017, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending June 30, 2017. The distributions will be calculated based on shareholders of record at a rate of $0.00164383 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00 payable on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month. The Company’s stockholders have an option to elect the receipt of Common Shares under the Company’s distribution reinvestment program. The amount of distributions to be paid to our stockholders in the future will be determined by our Board of Directors and are dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Code. |
Related Party and Other Transactions |
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| Related Party and Other Transactions | 6.Related Party and Other Transactions The Company has agreements with the Dealer Manager, the Advisor and its affiliates and the Special Limited Partner pursuant to which is has and/or will pay certain fees and liquidation distributions in exchange for services performed or consideration given by these entities and other affiliated entities. The following table summarizes all the compensation and fees the Company may pay to the Dealer Manager, the Advisor and its affiliates, including amounts to reimburse their costs in providing services. The Special Limited Partner has committed to contribute to the Operating Partnership cash or interests in real property in exchange for Subordinated Participation Interests in the Operating Partnership that may entitle the Special Limited Partner to subordinated distribution as described in the table below.
The following table represents the selling commissions and dealer manager and other offering costs for the periods indicated:
Since commencement of its Offering through December 31, 2016, the Company has incurred $10.4 million in selling commissions and dealer manager fees and $4.8 million of other offering costs in connection with the public offering of shares of its common stock. No amounts were paid to the affiliates of the Advisor for property management services for the years ended December 31, 2016 and 2015. Revolving promissory notes payable, net – related party With the Company's acquisitions of the Hampton Inn – Des Moines, the Courtyard – Durham, the Hampton Inn – Lansing and the SpringHill Suites – Green Bay, the Company entered into various related party promissory notes payable. See Note 3 for details. Des Moines Promissory Note On February 4, 2015, the Company entered into the Des Moines Promissory Note with the operating partnership of Lightstone II. The Des Moines Promissory Note had a term of one year, bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $100,000 to Lightstone II in connection with the Des Moines Promissory Note and pledged its ownership interest in the Hampton Inn – Des Moines as collateral. During the year ended December 31, 2015, the Company incurred interest expense of $421,651 (including origination fees of $91,667) on the Des Moines Promissory Note. During the year ended December 31, 2016, the Company incurred interest expense of $8,333 as a result of the amortization of the remaining origination fee. The Des Moines Promissory Note had no outstanding balance as of December 31, 2015 and expired on February 4, 2016. Durham Promissory Note On May 15, 2015, the Company entered into the Durham Promissory Note with the operating partnership of Lightstone II. The Durham Promissory Note had a term of one year, bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $130,000 to Lightstone II in connection with the Durham Promissory Note and pledged its ownership interest in the Courtyard – Durham as collateral. On March 1, 2016, the Company took additional borrowings on the note of $8 million. On May 2, 2016, the Durham Promissory Note was repaid in full and has now expired. The outstanding principal balance was $2.1 million as of December 31, 2015. The Durham Promissory Note is included in revolving promissory note payable, net – related party on our consolidated balance sheet (net of debt issuance costs of $51,667 as of December 31, 2015). During the year ended December 31, 2015, the Company incurred interest expense of $482,651 (including origination fees of $86,667) and during the year ended December 31, 2016, the Company incurred interest expense of $151,751 (including origination fees of $43,333) on the Durham Promissory Note. Lansing Promissory Note On May 2, 2016, the Company entered into an $8.0 million Revolving Promissory Note (the “Lansing Promissory Note”) with the operating partnership of Lightstone II. The Lansing Promissory Note had a term of one year (with an option for an additional year), bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $80,000 to Lightstone II in connection with the Lansing Promissory Note and pledged its ownership interest in the Hampton Inn – Lansing as collateral. On July 13, 2016, the Lansing Promissory Note was repaid in full and terminated. During the year ended December 31, 2016, the Company incurred interest expense of $161,428, including origination fees expensed of $80,000 on the Lansing Promissory Note. Green Bay Promissory Note On May 2, 2016, the Company entered into the Green Bay Promissory Note with the operating partnership Lightstone II. The Green Bay Promissory Note had a term of one year (with an option for an additional year), bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $145,000 to Lightstone II in connection with the Green Bay Promissory Note and pledged its ownership interest in the SpringHill Suites – Green Bay as collateral. On July 13, 2016, the Green Bay Promissory Note was repaid in full and terminated. During the year ended December 31, 2016, the Company incurred interest expense of $284,635, including origination fees expensed of $145,000 on the Green Bay Promissory Note. Due to related parties and other transactions In addition to certain agreements with the Sponsor (see Note 1) and Dealer Manager, the Company has agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor and its affiliates to perform such services as provided in these agreements. Furthermore, the Advisor has and is expected to continue to advance certain organization and offering costs on behalf of the Company to the extent the Company does not have sufficient funds to pay such costs. As of December 31, 2016 and 2015, the Company owed the Advisor and its affiliated entities an aggregate of $109,532 and $1.2 million, respectively, which was principally for organization and offering costs paid on its behalf, and is classified as due to related parties on the consolidated balance sheets. During the year ended December 31, 2016 and 2015, the Company paid $36,298 and $403,589, respectively, to an affiliate of the Sponsor for the Sponsor’s marketing expenses related to the offering that were recorded as a reduction to APIC. During the years ended December 31, 2016 and 2015, the Company paid the Advisor acquisition fees of approximately $1.1 million and $269,000, respectively. During the years ended December 31, 2016 and 2015, the Company paid the advisor development fees of $19,847 and $0, respectively. From time to time, the Company may purchase title insurance from an agent in which its Sponsor owns a 50% limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, before the Company purchases any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. During the years ended December 31, 2016 and 2015, the Company paid approximately $154,000 and $21,000, respectively, to the title insurance agent. |
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Commitments and Contingencies |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 | ||
| Commitments and Contingencies [Abstract] | ||
| Commitments and Contingencies | 7. Commitments and Contingencies Management Agreements The Company’s hotels operate pursuant to management agreements with various third-party management companies. The management companies perform management functions including, but not limited to, hiring and supervising employees, establishing room prices, establishing administrative policies and procedures, managing expenditures and arranging and supervising public relations and advertising. The Management Agreements are for terms ranging from 1 year to 10 years however, the agreements can be cancelled for any reason by the Company after giving sixty days notice after the one year anniversary of the commencement of the agreements. The Management Agreements provide for the payment of a base management fee equal to 3% to 3.5% of gross revenues, as defined, and an incentive management fee based on the operating results of the hotel, as defined. The base management fee and incentive management fee, if any, are recorded as property operating expenses in the consolidated statements of operations. Franchise Agreements As of December 31, 2016, the Company’s hotels operated pursuant to franchise agreements. Under the franchise agreements, the Company generally pays a fee equal to 3% to 5.5% of gross room sales, as defined, and a marketing fund charge from 2.0% to 2.5% of gross room sales. The franchise fee and marketing fund charge are recorded as property operating expenses in the consolidated statements of operations. The franchise agreements are for terms ranging from 15 years to 20 years, expiring between 2028 and 2034. Legal Proceedings From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. |
Quarterly Financial Data |
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| Quarterly Financial Data [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quarterly Financial Data | 8. Quarterly Financial Data (Unaudited) The following table presents selected unaudited quarterly financial data for each quarter during the years ended December 31, 2016 and 2015:
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Subsequent Events |
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Dec. 31, 2016 | ||
| Subsequent Events [Abstract] | ||
| Subsequent Events | 9. Subsequent Events The Cove Transaction On January 31, 2017, the Company, through a subsidiary of the Operating Partnership, REIT III COVE LLC (“REIT III Cove”) and REIT IV COVE LLC (“REIT IV Cove”), a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment trust also sponsored by the Sponsor and a related party, collectively, the “Assignees”, entered into an Assignment and Assumption Agreement (the “Assignment”) with another of the Lightstone IV’s wholly owned subsidiaries, REIT COVE LLC (the “Assignor”). Under the terms of the Assignment, the Assignees were assigned the rights and obligations of the Assignor with respect to that certain Sale and Purchase Agreement (the “Purchase Agreement”), dated September 29, 2016, made between the Assignor, as the purchaser, LSG Cove LLC (“LSG Cove”), an affiliate of the Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party (collectively, the “Buyer”) and an unrelated third party, RP Cove, L.L.C (the “Seller”), pursuant to which the Buyer will acquire the Seller’s membership interest in RP Maximus Cove, L.L.C. (the “Joint Venture”) for approximately $255.0 million. The Joint Venture owns and operates The Cove at Tiburon (“The Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Joint Venture. On January 31, 2017, REIT IV Cove, REIT III Cove, LSG Cove, and Maximus (the “Members”) completed the Cove Transaction for aggregate consideration of approximately $255.0 million, which consisted of $80 million of cash and $175 million of proceeds from a loan from a financial institution. The Company paid approximately $20.0 million for a 22.5% membership interest in the Joint Venture. The Company’s interest in the Joint Venture is a non-managing interest, because the Company exerts significant influence over but does not control the Joint Venture, it will account for its ownership interest in the Joint Venture in accordance with the equity method of accounting. All distributions of earnings from the Joint Venture will be made on a pro rata basis in proportion to each Members’ equity interest percentage. Any distributions in excess of earnings from the Joint venture will be made to the Members pursuant to the terms of the Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of The Cove and receives certain fees as defined in the Property Management Agreement for the management of The Cove. The Company will commence recording its allocated portion of profit and cash distributions beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Joint Venture. In connection with the closing of the Cove Transaction, the Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date. The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by The Cove and an affiliate of the Sponsor (the “Guarantor”) has guaranteed the Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The Members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which the Company’s share is up to approximately $10.9 million. The Cove is a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres originally constructed in 1967. As of January 31, 2017, The Cove was 81.5% occupied. The average remaining term for existing leases in The Cove is 4 months and the average rental price per square foot is $4.47. Starting in 2013, approximately $38 million has been invested in an extensive refurbishment of The Cove; of which to date, 97% of the apartment buildings have been completed. The Members intend to use the remaining proceeds from the Loan and to invest additional capital if necessary to complete the refurbishment of The Cove. The Guarantor provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide the necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million. |
Schedule III Real Estate and Accumulated Depreciation |
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| SEC Schedule III, Real Estate and Accumulated Depreciation Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule III Real Estate and Accumulated Depreciation |
Notes: (1) - The Company's Revolving Credit Facility is cross-collateralized by seven hotels. (2) - The Company's Promissory Note is cross-collateralized by two hotels, each of which has an allocated loan amount. Notes to Schedule III:
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Summary of Significant Accounting Policies (Policies) |
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Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||
| Basis of Presentation | Basis of Presentation The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which Lightstone REIT III exercises financial and operating control). As of December 31, 2016, the Company had a 99% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Investments in other real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary will be accounted for using the equity method. Investments in other real estate entities where the Company has virtually no influence will be accounted for using the cost method. |
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| Revenue | Revenue Hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. |
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| Investments in Real Estate | Investments in Real Estate Accounting for Acquisitions When the Company makes an investment in real estate, the fair value of the real estate acquired will be allocated to the acquired tangible assets, consisting of land, building and improvements, furniture and fixtures and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases, and the value of tenant relationships, based in each case on their fair values. Purchase accounting will be applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions will be expensed as incurred and recorded in general and administrative costs in the consolidated statements of operations. Transaction costs incurred related to the Company’s investments in unconsolidated affiliated entities, accounted for under the equity method of accounting, will be capitalized as part of the cost of the investment. Upon the acquisition of real estate operating properties, the Company will estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and certain liabilities such as assumed debt and contingent liabilities, at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Based on these estimates, the Company will evaluate the existence of goodwill or a gain from a bargain purchase and will allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation. The allocations will be finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date. Carrying Value of Assets The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets will be depreciated or amortized, will be determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates. Impairment Evaluation Management will evaluate the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets will be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss will be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The Company will evaluate the long-lived assets for potential impairment on an annual basis and record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value will be based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial. |
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| Depreciation and Amortization | Depreciation and Amortization Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Maintenance and repairs will be charged to expense as incurred. |
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| Investments in Unconsolidated Entities | Investments in Unconsolidated Entities We will evaluate investments in other entities for consolidation. We will consider the percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining if the investment qualifies for consolidation. Under the equity method, the investment will be recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of each investor will be allocated in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity will be amortized over the respective lives of the underlying assets as applicable. These items will be reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. Under the cost method of accounting, the investment will be recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Dividends earned from the underlying entity will be recorded as interest income. On a quarterly basis, we will assess whether the value of our investments in unconsolidated entities has been impaired. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we will record an impairment charge. |
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| Deferred Costs | Deferred Costs We will capitalize initial direct costs associated with financing activities. The costs will be capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs will begin in the period during which the loan is originated using the effective interest method over the term of the loan. |
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| Income Taxes | Income Taxes The Company elected to qualify and be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2015. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its net taxable income that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at regular corporate rates, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. The Company engages in certain activities through taxable REIT subsidiaries ("TRSs"). When the Company purchases a hotel it establishes a TRS and enters into an operating lease agreement for the hotel. As such, the Company may be subject to U.S. federal and state income taxes and franchise taxes from these activities. As of December 31, 2016 and 2015, we had no material uncertain income tax positions. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income. Additionally, even if the Company qualifies as a REIT, it may still be subject to some U.S. federal, state and local taxes on its income and property and to U.S. federal income taxes and excise taxes on its undistributed income. To maintain our qualification as a REIT, we may engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we will be subject to U.S. federal and state income and franchise taxes from these activities. |
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| Selling Commission, Dealer Manager Fees and Organization and Offering Costs | Selling Commission, Dealer Manager Fees and Organization and Offering Costs Selling commissions and dealer manager fees paid to the Dealer Manager, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred. Any organization costs are expensed as general and administrative costs. Through December 31, 2016, the Company has incurred approximately $10.4 million in selling commissions and dealer manager fees and $4.8 million of other offering costs. From the commencement of the offering through December 31, 2016, the Company has recorded approximately $15.2 million of these costs against APIC. |
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| Concentration of Risk | Concentration of Risk The Company maintains its cash in bank deposit accounts, which, at times, may exceed U.S. federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. |
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| Basic and Diluted Net Earnings per Common Share | Basic and Diluted Net Earnings per Common Share Net earnings per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share takes into account the effect of any dilutive instruments. The Company had no potentially dilutive securities outstanding during the periods presented. |
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| Financial Instruments | Financial Instruments The carrying amounts of cash, accounts receivable (included in other assets) and accounts payable and other accrued expenses approximate their fair values because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates. As of December 31, 2015, the estimated fair value of our revolving promissory notes payable – related party approximated its carrying value ($2.1 million) because of its floating interest rate. |
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| New Accounting Pronouncements | New Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the requirements and impact of this update on its financial statements. In January 2017, FASB issued guidance that amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force meetings. The SEC guidance that specifically relates to our consolidated financial statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, on revenue and leases. Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The adoption this guidance did not have a material effect on the Company's consolidated financial statements. In August 2016, the issued FASB an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. This guidance will not have a material impact on the Company’s consolidated financial statements. In September 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to simplify the accounting for adjustments made to provisional amounts during the measurement period of a business combination. The amendment requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective with earlier application permitted for financial statements that have not been issued. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The SEC staff noted that this update did not address situations where a company has debt issuance costs related to line-of-credit arrangements. As a result, the FASB issued an additional update which states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted this standard during the quarter ended March 31, 2016. As a result of adopting this standard on a retrospective basis, $51,667 was reclassified out of prepaid expenses and other assets and was reclassified into revolving promissory notes payable, net - related party on the consolidated balance sheet as of December 31, 2015. In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows. The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations. |
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Summary of Significant Accounting Policies (Tables) |
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Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||
| Schedule Of Mortgage Payable [Table Text Block] | The estimated fair value of our mortgages payable is as follows:
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Acquisitions (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||
| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Revenue and Net Income Included in Consolidated Statements of Operations | Financial Information The following table provides the total amount of rental revenue and net income included in the Company’s consolidated statements of operations from the Hampton Inn – Des Moines, Courtyard – Durham, Hampton Inn – Lansing, Courtyard – Warwick, SpringHill Suites – Green Bay, Home2 Suites Hotel Portfolio, Fairfield Inn – Austin and Staybridge Suites – Austin since their respective dates of acquisition for the period indicated:
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| Schedule of Pro Forma Results of Operations | The following table provides unaudited pro forma results of operations for the periods indicated, as if the Hampton Inn – Des Moines, Courtyard – Durham, Hampton Inn – Lansing, Courtyard – Warwick, SpringHill Suites – Green Bay, Home2 Suites Hotel Portfolio, Fairfield Inn – Austin and Staybridge Suites – Austin had been acquired at the beginning of each period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.
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Mortgages payable, net (Tables) |
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| Loans Payable [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Debt [Table Text Block] | Mortgages payable, net consisted of the following:
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| Schedule of Maturities of Long-term Debt [Table Text Block] | The following table, based on the initial terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of December 31, 2016:
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Related Party and Other Transactions (Tables) |
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| Selling Commission, Dealer Manager Fees And Other Offering Costs [Abstract] | ||||||||||||||||||||||||||||||||||||||||||
| Selling Commissions Dealer Manager Fees And Other Offering Costs [Text Block] | The following table represents the selling commissions and dealer manager and other offering costs for the periods indicated:
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Quarterly Financial Data (Tables) |
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| Quarterly Financial Data [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Quarterly Financial Data | The following table presents selected unaudited quarterly financial data for each quarter during the years ended December 31, 2016 and 2015:
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Summary of Significant Accounting Policies (Details) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Mortgages payable, Carrying Amount | $ 88,027,880 | $ 0 |
| Mortgages payable, Estimated Fair Value | $ 87,252,072 |
Summary of Significant Accounting Policies (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Accounting Policies [Line Items] | ||
| Organization and offering expenses incurred | $ 4,800,000 | |
| REIT annual distribution, percent of taxable income | 90.00% | |
| Notes Payable, Related Parties | $ 2,100,000 | |
| Selling commissions and dealer manager fees | $ 10,400,000 | |
| Debt Related Commitment Fees and Debt Issuance Costs | 4,800,000 | |
| Prepaid Expenses and Other Current Assets [Member] | ||
| Accounting Policies [Line Items] | ||
| Notes Payable, Related Parties | $ 51,667 | |
| Lightstone Value Plus REIT III LLC [Member] | ||
| Accounting Policies [Line Items] | ||
| General partner ownership interest | 99.00% | 99.00% |
Acquisitions (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Business Acquisition [Line Items] | ||
| Rental revenue | $ 22,551,234 | $ 6,203,341 |
| Net income | $ 618,623 | $ 4,244 |
Acquisitions (Details 1) - USD ($) |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
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| Business Acquisition [Line Items] | |||||
| Pro forma rental revenue | $ 34,445,574 | $ 30,832,283 | |||
| Pro forma net income | [1] | $ 1,247,195 | $ 4,686,920 | ||
| Pro forma net income per Company's common share, basic and diluted | [1] | $ 0.16 | $ 2.80 | ||
| |||||
Mortgages payable, net (Details 1) - USD ($) |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Principal maturities, Repayments of Principal in 2017 | $ 424,252 | |
| Principal maturities, Repayments of Principal in 2018 | 445,052 | |
| Principal maturities, Repayments of Principal in 2019 | 60,162,871 | |
| Principal maturities, Repayments of Principal in 2020 | 486,092 | |
| Principal maturities, Repayments of Principal in 2021 | 26,509,613 | |
| Principal maturities, Repayments of Principal Thereafter | 0 | |
| Principal maturities | 88,027,880 | $ 0 |
| Less: Deferred financing costs | 1,157,537 | |
| Total principal maturiteis, net | $ 86,870,343 | $ 0 |
Mortgages payable, net (Details Textual) - USD ($) |
Nov. 02, 2016 |
Jul. 13, 2016 |
Dec. 31, 2016 |
Oct. 05, 2016 |
Dec. 31, 2015 |
|---|---|---|---|---|---|
| Long-term Debt, Gross | $ 88,027,880 | $ 0 | |||
| Revolving Credit Facility [Member] | |||||
| Line of Credit Facility, Maximum Borrowing Capacity | $ 60,000,000 | ||||
| Line of Credit Facility, Interest Rate Description | Libor plus 4.95% | ||||
| Line Of Credit Facility Current Borrowing Capacity Percentage | 65.00% | ||||
| Proceeds from Lines of Credit | $ 14,300,000 | $ 45,400,000 | |||
| Long-term Debt, Gross | 59,696,000 | $ 0 | |||
| Line of Credit Facility, Remaining Borrowing Capacity | 300,000 | ||||
| Debt Instrument, Face Amount | $ 28,400,000 | ||||
| Debt Instrument, Interest Rate, Stated Percentage | 4.73% | ||||
| Escrow Deposits Related to Debt Compliance | $ 900,000 |
Related Party and Other Transactions (Operational Stage) (Details) $ in Millions |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
USD ($)
| |
| Related Party Transaction [Line Items] | |
| Acquisition fee, percent of property purchase price | 1.00% |
| Acquisition fee, percent of loan advancement or other investment | 1.00% |
| Estimated acquisition fee | $ 1.4 |
| Acquisition expenses, percent of property purchase price | 0.60% |
| Acquisition expenses, percent of loan advancement or other investment. | 0.60% |
| Acquisition fees, financing coordination fees and acquisition expenses, percent of property purchase price | 5.00% |
| Acquisition fees, financing coordination fees and acquisition expenses, percent of loan advancement or other investment | 5.00% |
| Construction management fee, percent | 5.00% |
| Minimum percentage of average invested assets | 2.00% |
| Minimum percentage of net income | 25.00% |
| Financing coordination fee, percent | 0.75% |
| Asset management fee, percent of average invested assets | 0.75% |
Related Party and Other Transactions (Liquidation/Listing Stage) (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2016
$ / shares
| |
| Real estate disposition commission, percent of contract sales price of the property | 2.00% |
| Real estate commission, percent | 6.00% |
| Annual cumulative, pre-tax, non-compounded return on net investments, percent | 6.00% |
| Annual subordinated performance fee after cumulative return, percent | 15.00% |
| Annual subordinated performance fee, maximum percentage of aggregate return payable | 10.00% |
| Net investment per share | $ 10.00 |
| Liquidation distributions, percent payable to company | 85.00% |
| Liquidation distributions, percent payable to Special Limited Partner | 15.00% |
Related Party and Other Transactions (Selling Commissions and Dealer Manager) (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Selling Commission, Dealer Manager Fees and Other Offering Costs [Line Items] | ||
| Selling commissions and dealer manager fees | $ 7,008,694 | $ 3,377,887 |
| Other offering costs | $ 770,493 | $ 1,870,078 |
Commitments and Contingencies (Details Textual) |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| Franchise Agreements, Terms | The franchise agreements are for terms ranging from 15 years to 20 years, expiring between 2028 and 2034. |
| Minimum [Member] | |
| Percentage Of Management Fees On Gross Revenue | 3.00% |
| Property Management Fee, Percent Fee | 3.00% |
| Maximum [Member] | |
| Percentage Of Management Fees On Gross Revenue | 3.50% |
| Property Management Fee, Percent Fee | 5.50% |
| Marketing Fund Charge [Member] | Minimum [Member] | |
| Property Management Fee, Percent Fee | 2.00% |
| Marketing Fund Charge [Member] | Maximum [Member] | |
| Property Management Fee, Percent Fee | 2.50% |
Quarterly Financial Data (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2015 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Quarterly Financial Data [Line Items] | ||||||||||
| Total revenue | $ 8,002,767 | $ 7,623,494 | $ 4,953,528 | $ 1,971,445 | $ 1,860,740 | $ 2,168,262 | $ 1,620,917 | $ 553,422 | $ 22,551,234 | $ 6,203,341 |
| Operating income/(loss) | 865,200 | 1,479,384 | 425,788 | (310,294) | 196,459 | 450,803 | 46,076 | (119,960) | 2,460,078 | 573,378 |
| Net (loss)/income | (429,371) | 580,516 | 137,444 | (401,611) | (31,724) | 122,075 | (213,953) | (216,628) | (113,022) | (340,230) |
| Less (income)/loss attributable to noncontrolling interests | 5 | (14) | (8) | 10 | (4) | (25) | 39 | 34 | (7) | 44 |
| Net (loss)/income applicable to Company's common shares | $ (429,366) | $ 580,502 | $ 137,436 | $ (401,601) | $ (31,728) | $ 122,050 | $ (213,914) | $ (216,594) | $ (113,029) | $ (340,186) |
| Net (loss)/income per common share, basic and diluted | $ (0.04) | $ 0.06 | $ 0.02 | $ (0.08) | $ (0.01) | $ 0.06 | $ (0.19) | $ (0.41) | $ (0.01) | $ (0.20) |
Schedule III Real Estate and Accumulated Depreciation (Details 1) - USD ($) |
12 Months Ended | ||||||
|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
||||||
| Balance at beginning of year | $ 28,140,343 | $ 0 | |||||
| Acquisitions, at cost | 110,400,000 | 26,900,000 | |||||
| Improvements | 2,087,298 | 1,240,343 | |||||
| Balance at end of year | $ 140,627,641 | [1],[2] | $ 28,140,343 | ||||
| |||||||
Schedule III Real Estate and Accumulated Depreciation (Details 2) - USD ($) |
12 Months Ended | ||||||
|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
||||||
| Balance at beginning of year | $ 731,289 | $ 0 | |||||
| Depreciation expense | 3,130,836 | 731,289 | |||||
| Balance at end of year | $ 3,862,125 | [1],[2] | $ 731,289 | ||||
| |||||||
Schedule III Real Estate and Accumulated Depreciation (Details 3) |
12 Months Ended |
|---|---|
Dec. 31, 2016 | |
| Building and Building Improvements [Member] | |
| Life Used for Depreciation | 39 years |
| Furniture and Fixtures [Member] | Minimum [Member] | |
| Life Used for Depreciation | 5 years |
| Furniture and Fixtures [Member] | Maximum [Member] | |
| Life Used for Depreciation | 10 years |