-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UjipxZ2k+lo6L4KaKJyW/m349vx6OFg3M9sobekdakZnR/bfmKY8lKATu478mXp5 v6XY5D0CXIDm6r5+LgSqgA== 0000950148-96-000333.txt : 19960308 0000950148-96-000333.hdr.sgml : 19960308 ACCESSION NUMBER: 0000950148-96-000333 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960307 SROS: AMEX SROS: BSE SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD LODGING TRUST CENTRAL INDEX KEY: 0000048595 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 520901263 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06828 FILM NUMBER: 96532124 BUSINESS ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 550 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105753900 MAIL ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 550 CITY: LOS ANGELES STATE: CA ZIP: 90064 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS TRUST /MD/ DATE OF NAME CHANGE: 19930506 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS DATE OF NAME CHANGE: 19800720 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARWOOD LODGING CORP CENTRAL INDEX KEY: 0000316206 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 521193298 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07959 FILM NUMBER: 96532125 BUSINESS ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 560 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105753900 MAIL ADDRESS: STREET 1: 11845 W OLYMPIC BLVD STREET 2: SUITE 560 CITY: LOS ANGELES STATE: CA ZIP: 90064 FORMER COMPANY: FORMER CONFORMED NAME: HOTEL INVESTORS CORP DATE OF NAME CHANGE: 19920703 10-K 1 JOINT ANNUAL REPORT ON FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____ to _____ Commission File Number: 1-6828 Commission File Number: 1-7959 STARWOOD LODGING STARWOOD LODGING TRUST CORPORATION (Exact name of registrant as specified in its (Exact name of registrant as specified in its charter) charter) Maryland Maryland (State or other jurisdiction (State or other jurisdiction of incorporation or organization) of incorporation or organization) 52-0901263 52-1193298 (I.R.S. employer identification no.) (I.R.S. employer identification no.) 11835 W. Olympic Blvd., Suite 695 11835 W. Olympic Blvd., Suite 675 Los Angeles, California 90064 Los Angeles, California 90064 (Address of principal executive (Address of principal executive offices, including zip code) offices, including zip code) (310) 575-3900 (310) 575-3900 (Registrant's telephone number, (Registrant's telephone number, including area code) including area code)
2 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Shares of Beneficial Interest, $0.01 par value, of Starwood Lodging Trust ("Trust Shares") paired with New York Stock Exchange Shares of Common Stock, $0.01 par value, of Starwood Lodging Corporation ("Corporation Shares") 1986 Warrants to purchase Trust Shares paired with American Stock Exchange 1986 Warrants to purchase Corporation Shares
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each 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 [ ]. As of February 23, 1996, the aggregate market value of the Registrants' voting stock held by non-affiliates(1) was $462,822,000. As of February 23, 1996, the Registrants had outstanding 13,822,617 Trust Shares and 13,822,617 Corporation Shares. __________________________________ 1 For purposes of this Joint Annual Report only, includes all voting shares other than those held by the Registrants' Trustees or Directors and executive officers. 3 TABLE OF CONTENTS
Item Number in Form 10-K PART I Page ---- ---- 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 26 PART II 5. Market for Registrants' Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 30 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 31 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 39 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . 39 PART III 10. Trustees, Directors and Executive Officers of the Registrants . . . . . 39 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 43 12. Security Ownership of Certain Beneficial Owners and Management . . . . 48 13. Certain Relationships and Related Transactions . . . . . . . . . . . . 50 PART IV 14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 54
1 4 PART I ITEM 1. BUSINESS. Starwood Lodging Trust, formerly Hotel Investors Trust (the "Trust"), was organized in 1969 as a Maryland real estate investment trust, and has invested in fee, ground leasehold and mortgage loan interests in hotel properties located throughout the United States. In order for the Trust to qualify for favorable tax status as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"), the Trust leases its properties to third party operators. In 1980, Starwood Lodging Corporation, formerly Hotel Investors Corporation (the "Corporation" and, together with the Trust, "Starwood Lodging"), was organized as a Maryland corporation and has leased hotel properties from the Trust since that date. Unless the context otherwise requires, all references herein to "Starwood Lodging" refer to the Trust and the Corporation, and all references to the "Trust" and to the "Corporation" include the Trust and the Corporation, respectively, and those entities respectively owned or controlled by the Trust or the Corporation, including the Realty Partnership (defined below) and the Operating Partnership (defined below). Since 1980, the shares of beneficial interest of the Trust ("Trust Shares") and the shares of common stock of the Corporation ("Corporation Shares") have been "paired" on a one-for-one basis and may only be held or transferred in units consisting of one Trust Share and one Corporation Share ("Paired Shares"). The Code has prohibited the "pairing" of shares between a REIT and a management company since 1983. This rule does not apply to the Trust because its Paired Share structure has existed since 1980. At December 31, 1995, Starwood Lodging owned equity interests in 36 hotel properties, including two hotel/casinos, and owned mortgage interests in another 13 hotel properties. At such date, of the 36 hotels in which Starwood Lodging owned an equity interest (including the two hotel/casinos), four hotels were being managed by third-party operators and three hotels were leased to a third-party operator. For information as to such interests and properties, see Item 2 of this Joint Annual Report. ACQUISITION STRATEGY Starwood Lodging intends to continue to expand and diversify its hotel portfolio through the acquisition of primarily midscale and upscale hotels in major metropolitan areas. Starwood Lodging believes that hotels primarily in these segments can be purchased at prices below replacement cost and offer better potential for cash flow growth than hotels in other market segments. Starwood Lodging generally seeks investments in hotels where management believes that such hotels' profits can be increased by the introduction of more professional and efficient management techniques or the injection of 1 5 capital for maintenance and renovations. Properties are targeted throughout the United States, but Starwood Lodging generally focuses on markets located near other properties owned and operated by Starwood Lodging, markets with significant barriers to entry or markets with stable demand generators such as universities, government agencies or large companies. Consistent with this strategy, Starwood Lodging acquired equity and mortgage interests in the following hotels during 1995:
Approximate Date of Purchase Hotel Location Purchase Price (000s) Rooms ----- -------- -------- ------------ ----- Omni Chapel Hill, NC 4/6/95 $ 10,500 168 Sheraton Colony Square Atlanta, GA 7/18/95 34,000 462 Embassy Suites Tempe, AZ 7/27/95 19,300 224 Doral Inn New York, NY 9/20/95 43,000 652 Grand Hotel (1) Washington, DC 9/28/95 19,500 263 Terrace Garden Atlanta, GA 10/31/95 27,900 364 Lenox Inn Atlanta, GA 10/31/95 9,000 180 Holiday Inn Beltsville, MD 11/30/95 11,500 206 -------- ----- $174,700 2,519 ======== =====
(1) Represents a mortgage interest. The equity interest was purchased on January 4, 1996 for approximately $13.5 million. This hotel is now known as the Westin Washington. In addition, during the first month of 1996, Starwood Lodging completed the acquisition of the Grand Hotel in Washington D.C. for an additional $13.5 million and for approximately $41.6 million, acquired a 58.2% interest in a joint venture that acquired the 960-room Boston Park Plaza and related real estate assets in Boston, Massachusetts. Starwood Lodging is evaluating numerous other hotel properties for acquisition, and as of the date of this Joint Annual Report has entered into agreements to purchase and has made offers on eight properties in the aggregate amount of approximately $170 million, all but one of which are subject to the satisfaction of a number of conditions prior to closing. Starwood Lodging has fully performed under such other agreement to purchase; however, the closing remains subject to certain limited conditions on the part of the other parties. Starwood Lodging intends to finance the acquisition of these or other hotel properties through cash flow from operations, through borrowings under credit facilities and, when market conditions warrant, through the issuance of debt or equity securities. The Trust and the Corporation intend that the Operating Partnership lease and operate hotels owned or acquired by the Realty Partnership thereby retaining for shareholders the economic benefits otherwise retained by third party operators. During 1995, the 2 6 Operating Partnership assumed management of 13 hotels and in January of 1996 assumed management of the Grand Hotel in Washington, D.C. (now a Westin hotel) and the Boston Park Plaza. In addition, in early 1996, the Operating Partnership expects to terminate two of the third-party management agreements currently in place for three hotels which are currently majority owned by the Realty Partnership and operated on behalf of the Operating Partnership by third-party management companies. Upon such termination, the Operating Partnership intends to assume the management of these hotels. THE REORGANIZATION On January 31, 1995 (the "Closing Date"), the Trust and the Corporation consummated a reorganization (the "Reorganization") with Starwood Capital Group, L.P. ("Starwood Capital") and certain affiliates of Starwood Capital (the "Starwood Partners") effective January 1, 1995. The Reorganization involved a number of related transactions that occurred simultaneously on the Closing Date. Such transactions included (i) the contribution by the Trust to SLT Realty Limited Partnership (the "Realty Partnership"), a newly formed Delaware limited partnership, of substantially all of the properties and assets of the Trust, subject to substantially all of the liabilities of the Trust (including the senior debt (the "Senior Debt") of the Trust), in exchange for an approximate 28.3% interest as a general partner in the Realty Partnership, (ii) the contribution by the Starwood Partners to the Realty Partnership of approximately $12.6 million in cash and certain hotel properties and first mortgage notes, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Realty Partnership, (iii) the contribution by the Corporation and its subsidiaries to SLC Operating Limited Partnership (the "Operating Partnership" and together with the Realty Partnership, the "Partnerships"), a newly formed Delaware limited partnership, of substantially all of their properties and operating assets (except for their gaming assets, which are to be contributed upon approval by Nevada gaming authorities), subject to substantially all of their liabilities, in exchange for an approximate 28.3% interest as a general partner in the Operating Partnership, and (iv) the contribution by the Starwood Partners to the Operating Partnership of approximately $1.4 million in cash and fixtures, furnishings and equipment of the hotel properties, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Operating Partnership. On March 24, 1995, a Starwood Partner exchanged $12 million of Senior Debt for additional limited partnership units of the Realty Partnership and the Operating Partnership resulting in the Starwood Partners owning approximately 74.6% of each of the Partnerships. The following equity interests and mortgage notes were contributed to the Realty Partnership by the Starwood Partners in the Reorganization: Equity Interests contributed as part of the Reorganization: 3 7
Hotel Location Rooms ----- -------- ----- Doubletree Hotel Rancho Bernardo, California 209 Capitol Hill Suites Washington, D.C. 152 Harvey Wichita Wichita, Kansas 259 French Quarter Suites Lexington, Kentucky 155
Mortgage notes contributed as part of the Reorganization:
Hotel Outstanding Principal Securing Balance on Note January 1, 1995 -------- --------------------- Harvey Hotel Addison (1) . . . . . . $10,403,000 Harvey Hotel Bristol (1) . . . . . . 16,645,000 Harvey Hotel DFW (1) . . . . . . . . 25,892,000 Atlantic City Quality Inn (2) . . . . 11,411,000 Secaucus, New Jersey Ramada (2) . . . 12,458,000 ----------- $76,809,000 - ------------------ ===========
(1) Represent first mortgage notes bearing interest at 8% payable quarterly in arrears. The mortgage notes have a 15-year amortization period and a balloon payment at maturity. The mortgage notes mature on December 31, 2002 and are cross-collateralized. (2) The mortgage notes bear interest at various rates and are payable monthly in arrears, except that for the months of November 1994 through April 1995, debt service for the Atlantic City Quality Inn was to accrue and be paid from excess cash flow. Commencing May 1, 1995 fixed payments of debt service were required to be resumed. The mortgages mature between 1996 and 2010. As part of the Reorganization, the Realty Partnership assumed certain mortgage notes payable, all of which were refinanced during 1995 with the proceeds of the Prior Credit Agreement (defined below) or the Facilities (defined below). The terms of the assumed mortgage notes are summarized as follows: A $39,013,000 note issued in connection with the acquisition of the Harvey mortgage notes receivable under the terms of a Loan Agreement with a third party dated October 15, 1993. The note was nonrecourse, was to mature on January 31, 2003 and bore interest on a monthly basis at variable rates based on the London Interbank Offer Rate ("LIBOR") plus 3%. A $2,122,000 construction loan funded in 1994 and used to renovate the Harvey Wichita Hotel. The note bore interest at 7.5%. Principal and interest was payable monthly and the note was to mature in the year 2000. In addition, as part of the Reorganization, the Realty Partnership assumed other mortgage notes payable in the aggregate principal amount of $17,750,000, which notes were refinanced with the proceeds of the Loan (defined below) pursuant to the Prior Credit Agreement. THE OFFERING 4 8 On July 6, 1995, Starwood Lodging completed a public offering (the "Offering") of 11,787,500 Paired Shares at a price of $23.00 per Paired Share. Net proceeds of the Offering of approximately $245.7 million in aggregate were contributed by the Trust and the Corporation to the Realty Partnership and the Operating Partnership, respectively, thereby increasing the general partnership interest of the Trust and the Corporation to approximately 69.9% of the Realty Partnership and the Operating Partnership, respectively, with the Starwood Partners' limited partnership interests representing the remaining approximate 30.1% interest in each of the Partnerships. Proceeds from the Offering were used to repay amounts outstanding under the Prior Credit Agreement. Shortly prior to the Offering, the Trust and the Corporation effected a one-for-six reverse stock split of the Paired Shares in which each six Paired Shares held on the record date for the reverse split were converted into one Paired Share. STRUCTURE As of the date of this Joint Annual Report, the structure of Starwood Lodging is as follows: Holders of Paired Shares Starwood Lodging Starwood Lodging Trust Shares are Corporation Owns 69.9% of SLT ------------------ Owns 69.9% of SLC Realty Limited Paired Operating Limited Partnership Partnership SLT Realty SLT Operating Limited Partnership Limited Partnership Starwood Partners Own 30.1% of each of SLT Realty Limited Partnership and SLC Operating Limited Partnership The limited partnership units of the Realty Partnership and the Operating Partnership held by the Starwood Partners are (subject to the ownership limit provisions of the Trust and the Corporation) exchangeable by the Starwood Partners, for, at the option of the Trust and the Corporation, either cash, Paired Shares of Starwood Lodging representing up to approximately 30.1% of the Paired Shares after such exchange, or a combination of 5 9 cash and such Paired Shares. The ownership limit provisions of Starwood Lodging are designed to preserve the status of the Trust as a REIT for tax purposes by providing that in general no shareholder may own, directly or indirectly, more than 8% of the outstanding Paired Shares. Since the Reorganization, the Trust has conducted substantially all of its business and operations through the Realty Partnership. As of December 31, 1995, the Realty Partnership held fee interests, ground leaseholds and mortgage loan interests in 49 hotel properties containing over 10,500 rooms located in 21 states throughout the United States and the District of Columbia. The Trust controls the Realty Partnership as the sole general partner of the Realty Partnership. Since the Reorganization, the Corporation (together with its wholly-owned subsidiaries) has conducted substantially all of its business and operations (other than its gaming operations) through the Operating Partnership. As of December 31, 1995, the Operating Partnership leased from the Realty Partnership all but four of the 35 hotel properties owned in fee or held pursuant to long-term leases by the Realty Partnership. In addition, the Operating Partnership owns a 51% general partnership interest in a joint venture that owns the Milwaukee Marriott hotel. GAMING APPROVALS Upon receipt of Nevada gaming regulatory approvals, the Corporation will control the Operating Partnership as its managing general partner. Prior to the receipt of such approvals, the Operating Partnership is being managed by a management committee, the members of which are identical to the members of the Board of Directors of the Corporation that will hold office upon receipt of Nevada gaming regulatory approvals (see Item 10 of this Joint Annual Report) and the gaming operations (which consist of two hotel/casinos located in Las Vegas, Nevada) are being operated through Hotel Investors Corporation of Nevada ("HICN") a wholly-owned subsidiary of the Corporation. Upon receipt of such approvals (or such time as such approvals are no longer required), HICN will become a wholly-owned subsidiary of the Operating Partnership. Nevada gaming regulatory approvals are expected to be received by the end of 1997. CREDIT FACILITIES On July 25, 1995, the Realty Partnership and the Trust, entered into a Mortgage Loan Funding Facility Agreement (together with subsequent amendments the "Repo Facility") with Lehman Commercial Paper Inc. ("Lehman Commercial Paper"). Pursuant to the Repo Facility, Lehman Commercial Paper has agreed to advance up to $71 million to the Realty Partnership for a period of 18 months ending January 25, 1997. Advances under the Repo Facility bear interest at a rate based on one month LIBOR plus 150 basis points for the period ending July 25, 1996 and one month LIBOR plus 175 basis points thereafter and are secured by certain mortgage notes receivable and other collateral of the Realty Partnership. 6 10 On October 25, 1995, the Realty Partnership and the Trust entered into a line of credit agreement (together with subsequent amendments, the "Acquisition Facility") with Lehman Brothers Holdings, Inc ("Lehman Holdings") pursuant to which Lehman Holdings agreed to make advances to the Realty Partnership of up to $135 million for a period expiring on October 1, 1998. The Acquisition Facility superseded and replaced the Prior Credit Agreement. Advances under the Acquisition Facility bear interest at a rate based upon one, two or three-month LIBOR plus 162.5 basis points and are secured by liens on 29 of the hotel equity interests of the Realty Partnership and may be secured by other properties, all on a cross-collateralized basis. A $60 million portion of the Acquisition Facility is being syndicated. Up to $58 million of the obligations under the Acquisition Facility has been guaranteed by the Operating Partnership, in consideration for the cancellation by the Realty Partnership of intercompany indebtedness in 1994. Such guaranty is secured by first priority liens on all of the assets of the Operating Partnership relating to the hotels owned or leased by the Realty Partnership which are subject to liens under the Acquisition Facility. The Repo Facility and the Acquisition Facility (together, the "Facilities") contain a number of covenants including (i) a requirement that the Realty Partnership maintain a net worth equal to at least $215 million plus 75% of the net proceeds of equity offerings by the Trust; (ii) a restriction on the ability of the Realty Partnership and the Trust to incur combined indebtedness in excess of 55% of the net book value of their combined assets; and (iii) maintenance of certain loan to value and debt service coverage ratios. The Facilities also provide a right of the Trust and the Corporation, subject to certain limitations, to pay distributions to their shareholders. See Item 5 - Distributions of this Joint Annual Report. In addition, on January 17, 1996, the Realty Partnership entered into $100 million in notional amount Treasury Lock Transactions with Merrill Lynch and Chemical Bank. The transactions have the effect of fixing the base interest rate at 5.7 percent for up to $100 million of debt, with an assumed term of seven years from October 15, 1996, issued by the Realty Partnership on or before October 15, 1996. The actual rate of interest is expected to be the base rate plus an amount determined at the time of issuance based on several factors including, without limitation, any credit enhancements provided by Starwood Lodging, the terms and conditions of the specific transaction, and then existing market conditions. PRIOR DEBT REFINANCING On March 24, 1995, the Realty Partnership and the Trust entered into an Amended and Restated Credit Agreement (the "Prior Credit Agreement") pursuant to which the Realty Partnership borrowed $131.75 million (the "Loan") primarily to refinance all outstanding Senior Debt and approximately $27 million of first mortgage debt. The Loan was to mature on April 1, 1997 and bore interest at a rate based on LIBOR plus 300 basis points. All amounts outstanding under the Prior Credit Agreement were repaid with a portion of the proceeds of the Offering and the Prior Credit Agreement was superseded and replaced by the Acquisition Facility. 7 11 TAX STATUS OF THE TRUST The Trust intends to elect to be taxed as a REIT, commencing with its taxable year ended December 31, 1995. The Trust expects to make this election for the year ended December 31, 1995 when it files its tax return for such period, which is due no later than September 15, 1996. The Trust was taxed as a REIT beginning in 1969 through and including its taxable year ended December 31, 1990. During 1994, the Trust discovered that it may not have qualified as a REIT in 1991 through 1994 due to its failure to comply with certain procedural requirements of the Code. The Trust requested and received a letter from the Internal Revenue Service providing that the Trust's election to be taxed as a REIT terminated beginning with the Trust's taxable year ended December 31, 1991 and permitting the Trust to re-elect to be taxed as a REIT commencing with its taxable year ended December 31, 1995. Because the Trust had net losses for tax purposes for its 1991 through 1994 taxable years, the Trust does not owe any federal income tax for such years. OTHER INFORMATION Seasonality and Competition. The hotel industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters due to generally decreased travel during the winter months. The hotel industry is highly competitive. The properties of the Trust and the Corporation compete with other hotel properties in their geographic markets. Many of the competitors of the Trust and the Corporation may have substantially greater marketing and financial resources than Starwood Lodging. The Trust and the Corporation may compete for acquisition opportunities with entities which have substantially greater financial resources than the Trust and the Corporation. These entities may generally be able to accept more risk than the Trust and the Corporation can prudently manage. Competition may generally reduce the number of suitable investment opportunities and increase the bargaining power of property owners seeking to sell. Further, management of the Trust believes that it will face competition for acquisition opportunities from entities organized for purposes substantially similar to the objectives of the Trust. Environmental Matters. Neither the Trust, the Corporation, the Realty Partnership nor the Operating Partnership has been identified by the U.S. Environmental Protection Agency or any similar state agency as a responsible or potentially responsible party for, nor have they been the subject of any governmental proceeding with respect to, any hazardous waste contamination. If the Trust, the Corporation, the Realty Partnership or the Operating Partnership were to be identified as a responsible party, they would in most circumstances be strictly liable, jointly and severally with other responsible parties, for environmental investigation and clean-up costs incurred by the government and, to a more limited extent, by private persons. 8 12 In connection with the Acquisition Facility, preliminary or "Phase I" environmental site assessments were prepared with respect to 29 of the Trust's fee interest and ground leasehold properties. The results of the Phase I assessments and subsequent "Phase II" assessments performed at six of the properties led to an assessment by the Trust and its outside consultants that the Trust's overall potential for environmental impairment was low. A release of petroleum from an underground storage tank at the Bay Valley Hotel and Resort was reported to the appropriate state agency in 1992. After the tank and surrounding soils were removed, additional soils and groundwater testing was performed, which revealed environmental contamination in a localized area. Environmental testing has been performed to identify the vertical and horizontal extent of the contamination released from the tank. The consultant initially proposed to remedy the contamination through installation of a groundwater pump and treatment system to capture and treat impacted groundwater and excavation of about 390 cubic yards of impacted soil. Recent amendments to the relevant state environmental clean-up laws reduced the extent of the clean-up required at the site and the Trust is now only required to monitor the site. Any further remediation costs that are incurred will be borne by the Realty Partnership. With respect to the remaining majority owned fee-interest properties, a 1991 Phase I environmental assessment and a tank leak test conducted at the Bourbon Street Hotel in early 1992 and a Phase I environmental assessment prepared for the Milwaukee Marriott in 1991 revealed no material impairments. The last six properties acquired by Starwood Lodging (the Doral Inn in New York, New York, the Terrace Garden Inn and Lenox Inn in Atlanta, Georgia, the Holiday Inn in Beltsville, Maryland, the Grand Hotel in Washington, D.C., and the Boston Park Plaza in Boston, Massachusetts) had Phase I environmental assessments prepared in 1995 which evidenced no material impairments. Based upon the environmental reports described above, the Trust believes that a substantial number of its hotels incorporate potentially asbestos-containing materials. Under applicable current Federal, state and local laws, asbestos need not be removed from or encapsulated in a hotel unless and until the hotel is renovated or remodeled. The Trust has asbestos operation and maintenance plans for each property testing positive for asbestos. Based upon the above-described environmental reports and testing and facts known to the managements of the Trust and the Corporation, future remediation costs are not expected to have a material adverse effect on the results of operations, financial position or cash flows of the Trust or the Corporation and compliance with environmental laws has not had and is not expected to have a material effect on the capital expenditures, earnings or competitive position of the Trust or the Corporation. Regulation and Licensing. The ownership and operation of the casino gaming facilities of the Corporation in Nevada are subject to extensive licensing and regulatory control by the Nevada Gaming Commission, the Nevada Sate Gaming Control Board and the Clark County Liquor and Gaming Licensing Board. See Item 2, "Regulation and Licensing" of this Joint Annual Report. 9 13 Employees. As of December 31, 1995, the Trust had four employees and the Corporation had approximately 3,800 employees. The Trust's executive offices are located at 11835 West Olympic Boulevard, Suite 695, Los Angeles, California 90064 (telephone (310) 575-3900) and the Corporation's executive offices are located at 11835 West Olympic Boulevard, Suite 675, Los Angeles, California 90064 (telephone (310) 575-3900). Financial information with respect to the two segments of the hospitality industry (hotels and gaming) in which the Corporation operates is included in Note 16 of the Notes to Financial Statements included in Item 8 of this Joint Annual Report. ITEM 2. PROPERTIES. At December 31, 1995, the Trust owned and the Corporation operated and managed, a portfolio of hotel assets, including fee, ground leasehold and first mortgage interests. At such date, all but four of the Trust's fee and ground leasehold hotels were leased to the Corporation or its subsidiaries pursuant to leases between the Trust and the Corporation (the "Intercompany Leases"). As described in Item 1 of this Joint Annual Report, upon the closing of the Reorganization, substantially all of the properties and assets of the Trust were contributed to the Realty Partnership and substantially all of the properties and assets of the Corporation and its subsidiaries (except for their gaming assets, which are to be contributed upon approval by Nevada gaming authorities) were contributed to the Operating Partnership. Accordingly, since the Reorganization, the Trust has conducted substantially all of its business and operations through the Realty Partnership and the Corporation has conducted substantially all of its business and operations (other than its gaming operations) through the Operating Partnership. As of the date of this Joint Annual Report, the Trust had an approximate 69.9% interest in the Realty Partnership and the Corporation had an approximate 69.9% interest in the Operating Partnership. THE TRUST AND THE REALTY PARTNERSHIP Equity Investments. As of December 31, 1995, the Trust had equity investments in 35 properties (including two hotel/casinos) containing a total of over 7,100 guest rooms. As of that date, the Trust owned fee interests in 30 hotels (including two hotel/casinos), held three hotels pursuant to ground leases, owned one hotel partially in fee and partially pursuant to a ground lease, and also had a 5% equity interest in, and was the general partner of, a limited partnership that owns the Omaha Marriott Hotel which contains 303 guestrooms. See Note 11 to the Financial Statements included in Item 8 of this Joint Annual Report. Of the 35 hotels in which the Trust had an equity interest at December 31, 1995, 23 operate under one of the following nationally recognized names: Sheraton(R), 10 14 Marriott(R), Doubletree(R), Omni(R), Radisson(R), Embassy Suites(R), Holiday Inn(R), Residence Inn(R), Days Inn(R), Best Western(R) and Vagabond Inn(R). Each of the Intercompany Leases provides for the lessee's payment of annual minimum rent in a specified amount plus additional rent based on a percentage of the gross revenues (or items thereof) of the leased property. The Intercompany Leases have an average remaining term of four years. The Intercompany Leases are "triple-net" - i.e., the lessee is generally responsible for paying all operating expenses of the hotel property, including maintenance and repair costs, insurance premiums and real estate and personal property taxes, and for making all rental and other payments required pursuant to any underlying ground leases. As lessee, the Operating Partnership retains all of the profits, net of rents and other expenses, and bears all risk of losses, generated by the hotel property's operations. In addition to the Intercompany Leases, the three Vagabond Inns are leased to a third party and such leases expire in 2001, 2007 and 2008, respectively. The lease expiring in 2001 contains options to extend the term of the lease for two additional five year periods. Each of these leases provides for the payment of percentage rent equal to 26% of room revenues against specified minimum rents. The leases are "triple net." The following table sets forth the 1995, 1994, and 1993 average occupancy, room rates, revenue per available room ("REVPAR") and certain other information concerning the hotels owned by the Trust as of December 31, 1995: 11 15
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Occupancy ----------------- Rate ---- ARIZONA Embassy Suites Phoenix, Arizona 1981/1983 227 suites, restaurant, 80% 76% 72% lounge and meeting facilities Embassy Suites 1984/1995 224 suites, restaurant, 80% 83% 82% Tempe, Arizona lounge and meeting facilities Plaza Hotel 1971/1983 149 guest rooms, restaurant, 77% 77% 74% Tucson, Arizona (2) lounge and meeting facilities CALIFORNIA Doubletree Hotel 1988/1995 209 guest rooms, restaurant, 68% 66% 61% Rancho Bernardo, California lounge and meeting facilities Vagabond Inn 1974/1974 102 guest rooms and 33% 39% 44% Rosemead, California (3) restaurant Vagabond Inn 1975/1975 108 guest rooms and 52% 63% 59% Sacramento, California (3) restaurant Vagabond Inn 1973/1973 101 guest rooms and 52% 69% 58% Woodland Hills, California (3) restaurant DISTRICT OF COLUMBIA
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Room ------------- Rate ---- ARIZONA Embassy Suites Phoenix, Arizona 1981/1983 227 suites, restaurant, $85.14 $80.23 $74.04 lounge and meeting facilities Embassy Suites 1984/1995 224 suites, restaurant, $95.75 $83.37 $76.24 Tempe, Arizona lounge and meeting facilities Plaza Hotel 1971/1983 149 guest rooms, restaurant, $48.34 $46.12 $45.05 Tucson, Arizona (2) lounge and meeting facilities CALIFORNIA Doubletree Hotel 1988/1995 209 guest rooms, restaurant, $71.02 $65.68 $63.62 Rancho Bernardo, California lounge and meeting facilities Vagabond Inn 1974/1974 102 guest rooms and $38.09 $37.47 $38.14 Rosemead, California (3) restaurant Vagabond Inn 1975/1975 108 guest rooms and $59.57 $55.89 $52.17 Sacramento, California (3) restaurant Vagabond Inn 1973/1973 101 guest rooms and $48.04 $46.72 $43.68 Woodland Hills, California (3) restaurant DISTRICT OF COLUMBIA
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Revenue per ----------- Available Room -------------- ARIZONA Embassy Suites Phoenix, Arizona 1981/1983 227 suites, restaurant, $68.34 $60.63 $53.20 lounge and meeting facilities Embassy Suites 1984/1995 224 suites, restaurant, $76.78 $68.99 $62.29 Tempe, Arizona lounge and meeting facilities Plaza Hotel 1971/1983 149 guest rooms, restaurant, $37.37 $35.58 $33.54 Tucson, Arizona (2) lounge and meeting facilities CALIFORNIA Doubletree Hotel 1988/1995 209 guest rooms, restaurant, $48.52 $43.09 $38.68 Rancho Bernardo, California lounge and meeting facilities Vagabond Inn 1974/1974 102 guest rooms and $12.49 $14.53 $16.68 Rosemead, California (3) restaurant Vagabond Inn 1975/1975 108 guest rooms and $31.04 $34.93 $30.49 Sacramento, California (3) restaurant Vagabond Inn 1973/1973 101 guest rooms and $24.79 $32.26 $25.44 Woodland Hills, California (3) restaurant DISTRICT OF COLUMBIA
12 16 Capitol Hill Suites 1955/1995 152 guest rooms 69% 64% 63% Washington, D.C. FLORIDA Radisson Hotel 1974/1986 195 guest rooms, restaurant, 58% 59% 62% Gainesville, Florida lounge and meeting facilities GEORGIA Holiday Inn 1989/1989 151 guest rooms, restaurant, 77% 79% 74% Albany, Georgia lounge and meeting facilities Lenox Inn 1965/1995 180 guest rooms, restaurant 77% 77% 75% Atlanta, Georgia and meeting facilities Sheraton Colony Square 1973/1995 462 guest rooms, restaurant, 72% 72% 67% Atlanta, Georgia lounge and meeting facilities Terrace Garden Inn 1975/1995 368 guest rooms, restaurant, 64% 65% 63% Atlanta, Georgia lounge and meeting facilities. Best Western Riverfront Inn 1971/1986 142 guest rooms, restaurant, 64% 57% 55% Savannah, Georgia lounge and meeting facilities KANSAS Harvey Wichita 1974/1995 259 guest rooms, restaurant, 64% 58% 59% Wichita, Kansas lounge and meeting facilities
Capitol Hill Suites 1955/1995 152 guest rooms $95.09 $91.93 $89.60 Washington, D.C. FLORIDA Radisson Hotel 1974/1986 195 guest rooms, restaurant, $60.43 $59.89 $56.63 Gainesville, Florida lounge and meeting facilities GEORGIA Holiday Inn 1989/1989 151 guest rooms, restaurant, $59.08 $56.06 $56.96 Albany, Georgia lounge and meeting facilities Lenox Inn 1965/1995 180 guest rooms, restaurant $69.23 $63.57 $60.10 Atlanta, Georgia and meeting facilities Sheraton Colony Square 1973/1995 462 guest rooms, restaurant, $89.59 $86.57 $81.47 Atlanta, Georgia lounge and meeting facilities Terrace Garden Inn 1975/1995 368 guest rooms, restaurant, $93.27 $88.39 $82.62 Atlanta, Georgia lounge and meeting facilities. Best Western Riverfront Inn 1971/1986 142 guest rooms, restaurant, $46.75 $47.27 $46.21 Savannah, Georgia lounge and meeting facilities KANSAS Harvey Wichita 1974/1995 259 guest rooms, restaurant, $62.52 $50.62 $43.92 Wichita, Kansas lounge and meeting facilities
Capitol Hill Suites 1955/1995 152 guest rooms $65.82 $58.93 $56.72 Washington, D.C. FLORIDA Radisson Hotel 1974/1986 195 guest rooms, restaurant, $35.07 $35.57 $35.21 Gainesville, Florida lounge and meeting facilities GEORGIA Holiday Inn 1989/1989 151 guest rooms, restaurant, $45.59 $44.23 $41.92 Albany, Georgia lounge and meeting facilities Lenox Inn 1965/1995 180 guest rooms, restaurant $53.43 $49.15 $45.10 Atlanta, Georgia and meeting facilities Sheraton Colony Square 1973/1995 462 guest rooms, restaurant, $64.84 $62.64 $54.91 Atlanta, Georgia lounge and meeting facilities Terrace Garden Inn 1975/1995 368 guest rooms, restaurant, $58.88 $57.73 $51.98 Atlanta, Georgia lounge and meeting facilities. Best Western Riverfront Inn 1971/1986 142 guest rooms, restaurant, $29.78 $26.92 $25.23 Savannah, Georgia lounge and meeting facilities KANSAS Harvey Wichita 1974/1995 259 guest rooms, restaurant, $39.85 $29.21 $25.74 Wichita, Kansas lounge and meeting facilities
13 17
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Occupancy ----------------- Rate ---- KENTUCKY French Quarter Suites 1989/1995 155 guest rooms, restaurant, 75% Lexington, Kentucky (4) lounge, meeting facilities, retail and office space MARYLAND Calverton Holiday Inn 1987/1995 206 guest rooms, restaurant, 61% 58% 58% Beltsville, Maryland lounge and meeting facilities MICHIGAN Bay Valley Hotel & Resort 1973/1984 151 guest rooms, restaurant, 63% 64% 52% Bay City, Michigan lounge and meeting facilities; 18-hole golf course and tennis club NEBRASKA Omaha Marriott Hotel 1982/1982 303 guest rooms, restaurant, 80% 76% 76% Omaha, Nebraska (5) lounge and meeting facilities NEVADA Bourbon Street 1975/1988 150 guest rooms, restaurant, 88% 90% 92% Las Vegas, Nevada lounge and casino
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Room ------------- Rate ---- KENTUCKY French Quarter Suites 1989/1995 155 guest rooms, restaurant, $82.93 Lexington, Kentucky (4) lounge, meeting facilities, retail and office space MARYLAND Calverton Holiday Inn 1987/1995 206 guest rooms, restaurant, $67.46 $63.37 $56.92 Beltsville, Maryland lounge and meeting facilities MICHIGAN Bay Valley Hotel & Resort 1973/1984 151 guest rooms, restaurant, $62.02 $62.22 $66.39 Bay City, Michigan lounge and meeting facilities; 18-hole golf course and tennis club NEBRASKA Omaha Marriott Hotel 1982/1982 303 guest rooms, restaurant, $94.40 $87.21 $82.56 Omaha, Nebraska (5) lounge and meeting facilities NEVADA Bourbon Street 1975/1988 150 guest rooms, restaurant, $33.21 $32.89 $31.63 Las Vegas, Nevada lounge and casino
Years Ended December 31, Year Constructed ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Revenue per ----------- Available Room -------------- KENTUCKY French Quarter Suites 1989/1995 155 guest rooms, restaurant, $61.84 $58.57 $58.37 Lexington, Kentucky (4) lounge, meeting facilities, retail and office space MARYLAND Calverton Holiday Inn 1987/1995 206 guest rooms, restaurant, $41.37 $36.43 $32.94 Beltsville, Maryland lounge and meeting facilities MICHIGAN Bay Valley Hotel & Resort 1973/1984 151 guest rooms, restaurant, $39.13 $39.53 $34.62 Bay City, Michigan lounge and meeting facilities; 18-hole golf course and tennis club NEBRASKA Omaha Marriott Hotel 1982/1982 303 guest rooms, restaurant, $75.52 $66.42 $62.75 Omaha, Nebraska (5) lounge and meeting facilities NEVADA Bourbon Street 1975/1988 150 guest rooms, restaurant, $29.09 $29.62 $29.16 Las Vegas, Nevada lounge and casino
14 18
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Occupancy ----------------- Rate ---- King 8 Hotel and Gambling Hall 1974/1988 300 guest rooms, restaurant, 81% 82% 82% Las Vegas, Nevada lounge and casino
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Room ------------- Rate ---- King 8 Hotel and Gambling Hall 1974/1988 300 guest rooms, restaurant, $31.88 $32.80 $29.46 Las Vegas, Nevada lounge and casino
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Revenue per ----------- Available Room -------------- King 8 Hotel and Gambling Hall 1974/1988 300 guest rooms, restaurant, $25.77 $26.76 $24.15 Las Vegas, Nevada lounge and casino
15 19
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Occupancy ----------------- Rate ---- NEW MEXICO Best Western Airport Inn 1980/1984 120 guest rooms and leased 83% 86% 80% Albuquerque, New Mexico (6) restaurant adjacent to property Best Western Mesilla Valley Inn 1974/1982 166 guest rooms, restaurant, 75% 71% 71% Las Cruces, New Mexico lounge and meeting facilities NEW YORK Doral Inn 1927/1995 652 guest rooms, two 75% 81% 77% New York, New York restaurants, lounge, ball room and meeting facilities NORTH CAROLINA Omni Chapel Hill 1981/1995 172 guest rooms, restaurant, 71% 65% 56% Chapel Hill, North Carolina lounge and meeting facility. OHIO Best Western North 1974/1992 180 guest rooms, restaurant, 65% 70% 66% Columbus, Ohio lounge and meeting facilities and sports club OREGON
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Room ------------- Rate ---- NEW MEXICO Best Western Airport Inn 1980/1984 120 guest rooms and leased $56.70 $54.45 $52.38 Albuquerque, New Mexico (6) restaurant adjacent to property Best Western Mesilla Valley Inn 1974/1982 166 guest rooms, restaurant, $44.94 $42.74 $41.67 Las Cruces, New Mexico lounge and meeting facilities NEW YORK Doral Inn 1927/1995 652 guest rooms, two $96.34 $88.31 $87.71 New York, New York restaurants, lounge, ball room and meeting facilities NORTH CAROLINA Omni Chapel Hill 1981/1995 172 guest rooms, restaurant, $84.33 $74.54 $67.35 Chapel Hill, North Carolina lounge and meeting facility. OHIO Best Western North 1974/1992 180 guest rooms, restaurant, $44.37 $42.34 $42.12 Columbus, Ohio lounge and meeting facilities and sports club OREGON
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Revenue per ----------- Available Room -------------- NEW MEXICO Best Western Airport Inn 1980/1984 120 guest rooms and leased $47.02 $47.02 $41.98 Albuquerque, New Mexico (6) restaurant adjacent to property Best Western Mesilla Valley Inn 1974/1982 166 guest rooms, restaurant, $33.73 $30.42 $29.44 Las Cruces, New Mexico lounge and meeting facilities NEW YORK Doral Inn 1927/1995 652 guest rooms, two $70.15 $72.07 $67.50 New York, New York restaurants, lounge, ball room and meeting facilities NORTH CAROLINA Omni Chapel Hill 1981/1995 172 guest rooms, restaurant, $59.87 $48.28 $37.99 Chapel Hill, North Carolina lounge and meeting facility. OHIO Best Western North 1974/1992 180 guest rooms, restaurant, $29.02 $29.76 $27.88 Columbus, Ohio lounge and meeting facilities and sports club OREGON
16 20
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Occupancy ----------------- Rate ---- Days Inn City Center 1962/1984 173 guest rooms, restaurant, 78% 71% 63% Portland, Oregon lounge and meeting facilities Riverside Inn 1964/1984 137 guest rooms, restaurant, 78% 78% 79% Portland, Oregon lounge and meeting facilities TEXAS Park Central Hotel 1972/1972 445 guest rooms, restaurant, 36% 42% 62% Dallas, Texas lounge and meeting facilities Best Western Airport Inn 1974/1985 175 guest rooms and leased 79% 80% 70% El Paso, Texas restaurant adjacent to property VIRGINIA Residence Inn 1984/1984 96 suites with full kitchens 85% 83% 78% Tysons Corner, Virginia and fireplaces WASHINGTON Days Inn Town Center 1957/1984 90 guest rooms, restaurant and 81% 79% 75% Seattle, Washington (7) lounge
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Room ------------- Rate ---- Days Inn City Center 1962/1984 173 guest rooms, restaurant, $60.71 $53.12 $57.50 Portland, Oregon lounge and meeting facilities Riverside Inn 1964/1984 137 guest rooms, restaurant, $71.35 $64.69 $63.96 Portland, Oregon lounge and meeting facilities TEXAS Park Central Hotel 1972/1972 445 guest rooms, restaurant, $55.03 $59.97 $62.34 Dallas, Texas lounge and meeting facilities Best Western Airport Inn 1974/1985 175 guest rooms and leased $36.12 $34.76 $35.56 El Paso, Texas restaurant adjacent to property VIRGINIA Residence Inn 1984/1984 96 suites with full kitchens $103.87 $99.68 $103.07 Tysons Corner, Virginia and fireplaces WASHINGTON Days Inn Town Center 1957/1984 90 guest rooms, restaurant and $62.73 $60.99 $60.85 Seattle, Washington (7) lounge
Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Revenue per ----------- Available Room -------------- Days Inn City Center 1962/1984 173 guest rooms, restaurant, $47.25 $37.51 $36.32 Portland, Oregon lounge and meeting facilities Riverside Inn 1964/1984 137 guest rooms, restaurant, $55.30 $50.49 $50.21 Portland, Oregon lounge and meeting facilities TEXAS Park Central Hotel 1972/1972 445 guest rooms, restaurant, $19.82 $25.37 $38.89 Dallas, Texas lounge and meeting facilities Best Western Airport Inn 1974/1985 175 guest rooms and leased $28.68 $27.96 $25.01 El Paso, Texas restaurant adjacent to property VIRGINIA Residence Inn 1984/1984 96 suites with full kitchens $88.25 $82.70 $80.55 Tysons Corner, Virginia and fireplaces WASHINGTON Days Inn Town Center 1957/1984 90 guest rooms, restaurant and $51.08 $48.40 $45.81 Seattle, Washington (7) lounge
17 21
Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Occupancy ----------------- Rate ---- Meany Tower Hotel 1932/1984 155 guest rooms, restaurant, 73% 71% 62% Seattle, Washington lounge and meeting facilities, including ballroom Sixth Avenue Inn 1959/1984 166 guest rooms, restaurant, 79% 75% 62% Seattle, Washington (8) lounge and meeting facilities West Coast Tyee 1961/1987 155 guest rooms, restaurant, 58% 57% 62% Tumwater, Washington lounge and meeting facilities
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Years Ended December 31, Year Constructed/ ------------------------ Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Average Room ------------- Rate ---- Meany Tower Hotel 1932/1984 155 guest rooms, restaurant, $72.83 $70.47 $76.29 Seattle, Washington lounge and meeting facilities, including ballroom Sixth Avenue Inn 1959/1984 166 guest rooms, restaurant, $74.42 $70.04 $72.37 Seattle, Washington (8) lounge and meeting facilities West Coast Tyee 1961/1987 155 guest rooms, restaurant, $61.64 $60.63 $56.28 Tumwater, Washington lounge and meeting facilities
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Years Ended December 31, Year Constructed/ ------------------------- Property Year Acquired (1) Property Description 1995 1994 1993 -------- ----------------- -------------------- ---- ---- ---- Revenue per ----------- Available Room -------------- Meany Tower Hotel 1932/1984 155 guest rooms, restaurant, $53.07 $50.14 $46.92 Seattle, Washington lounge and meeting facilities, including ballroom Sixth Avenue Inn 1959/1984 166 guest rooms, restaurant, $58.53 $52.57 $44.67 Seattle, Washington (8) lounge and meeting facilities West Coast Tyee 1961/1987 155 guest rooms, restaurant, $35.97 $34.78 $34.78 Tumwater, Washington lounge and meeting facilities
18 22 (1) "Year constructed" represents the calendar year in which construction of the property was completed; "Year acquired" represents the calendar year in which the Trust (or a predecessor) made its initial investment in the property. (2) Property is held subject to ground leases expiring in (assuming that renewal options are exercised) 2019. (3) Property is leased to Imperial Hotels Corporation. (4) ADR and occupancy for 1993 and 1994 are not available. (5) The Trust is the general partner of, and owns a 5% equity interest in, the limited partnership which owns the property. (6) Property is held subject to a ground lease expiring in 2029. (7) Property is subject to a ground lease expiring in October 2007, which is terminable by the ground lessor after September 1, 1999 upon six months' notice under certain circumstances. (8) Property is subject to a ground lease expiring in September 2008, which is terminable by the ground lessor after September 1, 1999 upon six months' notice under certain circumstances. Mortgage and Other Notes Receivables. At December 31, 1995, in addition to the three promissory notes related to the Milwaukee Marriott referred to below, the Trust held eighteen promissory notes either contributed by the Starwood Partners as part of the Reorganization or executed by third-party purchasers of its hotels, all of which are secured by mortgages (including deeds of trust) on thirteen hotels in the aggregate. Eleven of the notes ($104.1 million in aggregate principal amount at December 31, 1995) are secured by first mortgages; five notes ($1.6 million in aggregate principal amount as of December 31, 1995) are secured by second mortgages; one note ($1.3 million in principal amount as of December 31, 1995) is secured by a third mortgage; and one note ($173,000 in principal amount as of December 31, 1995) is secured by a fourth mortgage. Ten of the notes have fixed interest rates that currently range from 7.0% to 10.0% per annum and five of the notes have variable interest rates that range from 7.16% to 9.75% per annum at December 31, 1995. The remaining three notes require principal payments only. Two of the notes also provide for contingent interest based on a percentage of the gross revenues of the properties securing such notes. The maturity dates of the notes range from 1996 to 2017. For additional information with respect to certain of the third-party promissory notes and the three promissory notes held by the Trust and issued by a partnership affiliated with the Corporation in connection with the Milwaukee Marriott Hotel, see Notes 8 and 9 of Notes to Financial Statements included in Item 8 of this Joint Annual Report. In December 1987, in connection with the Corporation's acquisition of the leasehold interest in two Atlanta, Georgia area hotels owned by the Trust (which have been subsequently sold) from an affiliated partnership, John F. Rothman, former president and chief executive officer of the Trust and general partner of the partnership, assumed certain obligations of such partnership, which obligations are evidenced by an unsecured promissory note to the Trust in the principal amount of $800,000. Interest on the outstanding principal amount of this note accrues interest at an annual rate of 10% and is payable annually; the entire principal amount of the note is due in December 1999. 19 23 All of the notes described above were contributed by the Trust or the Starwood Partners to the Realty Partnership in connection with the Reorganization. THE CORPORATION AND THE OPERATING PARTNERSHIP At December 31, 1995, 28 of the 31 hotel properties leased by the Trust to the Corporation were operated directly by the Corporation, and the remaining three were managed by three independent hotel companies. The Operating Partnership, the general partner of the partnership that owns the Milwaukee Marriott, also operates the Milwaukee Marriott. The following table sets forth the 1995, 1994 and 1993 average occupancy and room rates, REVPAR, and certain other information concerning the hotel in which the Operating Partnership is the general partner, Milwaukee Marriott Hotel, as of December 31, 1995.
Year Constructed/ Year Property Acquired Property Description -------- ---------------- -------------------- Milwaukee Marriott 1972/1990 393 guest rooms, restaurant, lounge and Milwaukee, WI meeting facilities.
Years Ended December 31, ------------------------------------------------------------------------------------------ 1995 1994 1993 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- Average Occupancy Rate Average Room Revenue per Available ---------------------- ------------ ---------------------- Rate Room ---- ---- 71% 70% 55% $72.19 $67.91 $71.99 $51.44 $47.42 $39.24
Management Agreements. Each management agreement with a third party provides that the management company has the exclusive right to direct the operations of the hotel subject to that agreement. The management company is responsible for maintaining and making all necessary repairs to the managed hotel, hiring, training and supervising all hotel employees, and performing all hotel bookkeeping and other administrative duties. Each management company is required to submit to the Operating Partnership for its approval an annual budget that includes proposed capital expenditures, and the management company makes only those capital expenditures that are approved by the 20 24 Operating Partnership. The Realty Partnership is required to make available to each management company sufficient working capital to permit that company to operate the managed property. For their services in managing the hotels, each third party management company receives a management fee equal to a specified percentage (generally 2% - 2-1/2%) of the gross revenues of the managed hotel, plus additional incentive fees based upon the hotel's operating profits. Two of the management agreements expire in 1998 and one expires in 1999. Of the remaining four third-party management agreements currently in place, two are expected to be terminated in early 1996 and management of the underlying properties assumed by the Operating Partnership. Franchise Agreements. All but twelve of the hotel properties in which Starwood Lodging had an equity interest at December 31, 1995 are operated pursuant to franchise or license agreements ("Franchise Agreements"). The Franchise Agreements generally require the payment of a monthly royalty fee based on gross sales and various other marketing fees associated with certain marketing or advertising and centralized reservation service funds, usually based on gross sales. Such fees may vary among individual hotels within a franchise system based on the type of marks, restaurants or other aspects of the franchise system used. The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage, and protection of marks. Compliance with such standards could require significant expenditures for capital improvements. Ongoing training costs, requirements to purchase only from approved suppliers, financial reporting requirements, insurance requirements and various covenants not to compete imposed upon the franchisee are other common terms in the Franchise Agreements. Required insurance usually must cover both the franchisor and franchisee with respect to certain specified liabilities, must fall within certain approved coverage limits and be written by an approved insurance company. The Franchise Agreements generally require the consent of the franchisor to a transfer of an interest in the applicable franchise, and both the consent of the franchisor and the execution of a new franchise agreement in the event of a transfer of all or controlling portion of the franchisee under the relevant Franchise Agreement. In addition, some franchise agreements may require payment of an initial fee upon establishment of a franchise relationship. Mortgage Notes Payable Maturing During 1996 Six mortgage notes payable secured by two hotels mature in 1996. Five of the mortgage notes, aggregating $31.2 million at December 31, 1995, are secured by the 21 25 Milwaukee Marriott, in which the Corporation holds a 51% interest. All but $2.9 million in principal amount of these notes are held by the Trust. The net book value of the Milwaukee Marriott is $22.1 million at December 31, 1995. One mortgage note in the amount of $25.1 million at December 31, 1995, is secured by the Boston Park Plaza, in which the Trust acquired a 58.2% interest in January 1996. Regulation and Licensing The ownership and operation of the casino gaming facilities of Starwood Lodging in Nevada are subject to extensive licensing and regulatory control of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board") and the Clark County Liquor and Gaming Licensing Board (the "Clark County Board" and, together with the Nevada Commission and the Nevada Board, the "Nevada Gaming Authorities"). The gaming laws, regulations and supervisory procedures of Nevada seek to (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Nevada Gaming Authorities; (iv) prevent cheating and fraudulent practices; and (v) provide a source of state and local revenues through taxation and licensing fees. Changes in these laws, regulations and procedures could have an adverse effect on the Corporation's gaming operations. The Corporation is registered with the Nevada Commission as a publicly traded corporation and has been found suitable as a holding company by the Nevada Gaming Authorities to own all of the outstanding capital stock of HICN. HICN which operates two hotel/casinos, the King 8 Hotel, Gambling Hall & Truck Plaza (the "King 8") and the Bourbon Street Hotel & Casino ("Bourbon Street") is licensed by the Nevada Gaming Authorities. The Trust was likewise found suitable by the Nevada Gaming Authorities to be the landlord of the King 8 and Bourbon Street. No person may become a stockholder of, or receive any percentage of profits from, HICN without first obtaining licenses and approvals from the Nevada Gaming Authorities. Prior approval of the Nevada Commission is required for the sale, assignment, transfer, pledge or other disposition of any security issued by HICN. The licenses and approvals held by HICN are not transferable and must be renewed periodically upon the payment of appropriate taxes and license fees. The licensing authorities have broad discretion with regard to the renewal of the licenses. The issuing agency may at any time revoke, suspend, condition, limit or restrict a license or approval to own stock in a corporate licensee for any cause deemed reasonable by the issuing agency. Substantial fines for each violation of gaming laws or regulations may be levied against HICN, the Corporation and the individuals involved. A violation under any one of the 22 26 licenses held by HICN may be deemed a violation of one or more other licenses or approvals held by HICN. If HICN's licenses are revoked or suspended or are not renewed, the Nevada Commission may petition a Nevada district court to appoint a supervisor to operate the affected property until it is sold. When sold, the net proceeds would be paid to the Trust. The Trust could, however, under certain circumstances, receive only the reasonable rental value of any property earnings under the supervisor's management with any excess in earnings over the reasonable rental value of the property being forfeited to the State of Nevada. Suspension or revocation of the license of HICN, disapproval of the Corporation to own the stock of HICN or court appointment of a supervisor over operations of the King 8 or Bourbon Street could have a material adverse effect upon the Trust and the Corporation. Directors, officers and certain key employees of HICN must file license applications with the Nevada Gaming Authorities. Certain officers, directors and key employees of HICN are licensed by the Nevada Gaming Authorities, and any required license applications of the remaining officers, directors or key employees have been filed with the Nevada Board. An application for licensing may be denied for any cause deemed reasonable by the issuing agency. Changes in corporate management or executive positions must be reported to the Nevada Gaming Authorities. In addition to its authority to deny an application for a license, the Nevada Commission has jurisdiction to disapprove a change in a management or executive position with a regulated corporation. If the Nevada Gaming Authorities were to find a director, officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with HICN or the Corporation, the Corporation and HICN would have to sever all relationships with that person. The Corporation and HICN would have similar obligations with regard to any person who refused to file appropriate applications. Each gaming employee must obtain, and periodically renew, a work permit, which may be revoked upon the occurrence of certain specified events. HICN must submit detailed financial and operating reports to the Nevada Commission, which are subject to routine audit by the Nevada Board. Substantially all loans, leases, sales of securities and similar financing transactions entered into by HICN must be reported to or approved by the Nevada Commission. The fiscal stability of HICN must be adequate to satisfy gaming financial obligations such as state and local government taxes and fees, and the payment of winning wagers to patrons. Failure to satisfy these gaming financial obligations is grounds for the Nevada Gaming Authorities to limit, condition, restrict, suspend or revoke the gaming licenses and approvals of HICN and the registration and approvals of the Corporation, or to impose administrative fines against HICN or the Corporation. As a registered publicly traded holding company found suitable as the sole stockholder of HICN, the Corporation is required periodically to submit detailed financial and operating reports to the Nevada Commission and to furnish any other information that the Nevada Commission or Nevada Board may require. The Corporation's directors, officers and key employees who are actively and directly engaged in the administration or supervision of gaming are subject to licensing and findings of suitability by the Nevada Commission. Certain directors and officers of the Corporation have filed their license 23 27 applications as requested by the Nevada Board. The finding of suitability is comparable to licensing, and both require submission of detailed personal background and personal financial information followed by a thorough investigation, and payment by the applicant of all investigative costs and charges. Any individual who is found to have a material relationship to or material involvement with the Corporation also may be required to be found suitable or be licensed and may be investigated. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of the Corporation, or are actively engaged in the administration or supervision of gaming activities, may be deemed to have this type of a relationship or involvement. Any beneficial holder of the Corporation's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Corporation's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. Any person who acquires more than 5% of any class of voting securities of the Corporation must report the acquisition to the Nevada Commission. Beneficial owners of more than 10% of any class of the Corporation's voting securities must apply to be found suitable by the Nevada Commission within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing, and any beneficial owner of the Corporation's voting securities, whether or not such person is a controlling stockholder, may be required to be found suitable if the Nevada Commission has reason to believe that such ownership would be inconsistent with the declared policy of the state of Nevada that licensed gaming be conducted honestly and competitively and that the gaming industry be free from criminal and corruptive elements. An "institutional investor" (as defined by the Regulations of the Nevada Commission) holding at least 10%, and in certain circumstances up to 15%, of the voting securities of the Corporation may apply for and hold a waiver of the mandatory suitability determination requirement prescribed by the Nevada Gaming Control Act. To qualify as an "institutional investor," a person or entity must satisfy one of several alternative criteria under the federal Securities Exchange Act of 1934, the Investment Company Act of 1940, or state and federal pension and retirement laws, as well as acquire and hold the voting securities for investment purposes in the ordinary course of business and not for the purpose of effecting any change of control in or the management or policies of the registered holding company or its gaming affiliates. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. 24 28 A change in investment intent of an institutional investor must be reported to the Chairman of the Nevada Board within two business days of such change of intent. The Chairman of the Nevada Board may require an institutional investor to apply for a finding of suitability upon receipt of notice of change in investment intent, or at any time deemed necessary to protect the public interest. An aggrieved institutional investor may apply for Nevada Commission review of the decision of the Chairman of the Nevada Board ordering the filing of a suitability determination application. The Corporation or HICN must promptly report to the Nevada Commission any information that materially affects the institutional investor's eligibility to hold a waiver. If the stockholder who must be found suitable is a corporation, partnership or trust, that stockholder must submit detailed business and financial information including a list of beneficial owners. In addition, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling more than two percent of the stock of a gaming licensee or of any corporation controlling a gaming licensee. The applicant is required to pay all costs of investigation. Any stockholder found unsuitable by the Nevada Commission who directly or indirectly holds any beneficial or ownership interest in the Corporation's Common Stock beyond whatever period of time may be prescribed by the Nevada Commission may be guilty of a criminal offense. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or Chairman of the Nevada Board may be found unsuitable. The same restrictions that apply to a security holder who is found unsuitable may be held to apply to a beneficial owner of the Corporation's securities if the record owner, after request, fails to identify the beneficial owner. The Corporation is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relations with the Corporation or its gaming subsidiaries, the Corporation (i) pays the unsuitable person any dividend or interest upon any voting securities of the Corporation or makes any other unpermitted payment or distribution of any kind whatsoever; (ii) recognizes the exercise, directly or indirectly, of any voting rights in the Corporation's securities by the unsuitable person; (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances; or (iv) fails to pursue all lawful efforts to require the unsuitable person to divest himself of his voting securities, including, if necessary, the immediate purchase by the Corporation of the voting securities for cash at fair market value. In addition, Nevada law requires that any holder or owner of a voting security who is found unsuitable by the Nevada Commission immediately offer those securities to the Corporation for purchase, which securities would be purchased by the Corporation for cash at fair market value within 10 days from the date the securities are offered. The Nevada Commission may, in its discretion, require the holder of any debt security of a corporation registered under the Nevada Gaming Control Act to file applications, be investigated and be found suitable to own the debt security of a registered corporation. If the Nevada Commission determines that a person is unsuitable to own such debt security, then pursuant to the Regulations of the Nevada Commission, the registered 25 29 corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission it (i) pays to the unsuitable person any dividend, interest or other distribution whatsoever; (ii) recognizes any voting right of such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Corporation is required to maintain a current and comprehensive stock ledger in the state of Nevada, which ledger may be examined by the Nevada Gaming Authorities at all reasonable times, but without notice. If any securities are held in trust, by an agent or by a nominee, the owner of record of those securities may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make this disclosure may be grounds for finding the owner of record unsuitable. The Corporation must render maximum assistance to the Nevada Gaming Authorities in determining the identity of the beneficial owner. The Nevada Commission has the power at any time to require that the Corporation's stock certificates bear a legend to the general effect that the securities of the Corporation are subject to the Nevada Gaming Control Act and the regulations of the Nevada Commission. However, to date, the Nevada Commission has not imposed such a requirement on the Corporation. The Clark County Board also claims jurisdiction to approve or disapprove holders of the Corporation's securities. The Nevada Gaming Authorities, through the power to regulate licensees and otherwise by Nevada law, have the power to impose additional restrictions on the holders of the Corporation's securities at any time. The Regulations of the Nevada Commission provide that changes in the control of the Corporation or HICN through a merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover cannot occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of the Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of the Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of securities and corporate defense tactics affecting corporate gaming licensees in Nevada, and publicly traded corporations affiliated with those licensees may be injurious to stable and productive corporate gaming operations. The Nevada Commission has established a regulatory scheme to ameliorate the potential adverse effects of these business practices upon Nevada's gaming industry and to advance Nevada's policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals may be required from the Nevada Commission before the Corporation may make exceptional 26 30 repurchases of securities above current market price (commonly referred to as "greenmail"), and before a corporate acquisition opposed by management can be consummated. Nevada's gaming regulations also require prior approval of the Nevada Commission in the event of a Corporation plan of recapitalization proposed by the board of directors in opposition to a tender offer made directly to shareholders for the purpose of acquiring control of the Corporation. Nevada law prohibits the Corporation from making a public offering of its securities without the approval of the Nevada Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Nevada, or to retire or extend obligations incurred for one or more such purposes. Approval of the public offering will not constitute a finding by the Nevada Commission as to the accuracy, adequacy or investment merit of the securities offered to the public. Any representation to the contrary is unlawful. The gaming regulatory requirements discussed above apply to certain aspects of the Reorganization. The contribution by HICN of the Gaming Assets (and the transfer of certain liabilities to be retained by HICN) to the Operating Partnership will occur on receipt of certain licenses or approvals by the Nevada Gaming Authorities. Likewise, the election of the new members of the Board of Directors of the Corporation since the Reorganization will be effective upon receipt of certain licenses or approvals by the Nevada Commission. Nevada gaming regulatory approvals are expected to be received by the end of 1997. In conjunction with applying for and obtaining such licenses and approvals, the Corporation has developed various policies and procedures subject to review, approval and oversight by the Nevada Board. The purpose of these corporate policies and procedures is to ensure compliance with the regulatory requirement that prior approval of the Nevada Commission is obtained for any transaction that would result in either Starwood Capital or Starwood Partners acquiring control of the Corporation or its Nevada gaming operations. The Corporation expects that these policies and procedures will be eliminated upon receipt of certain licenses and approvals from the Nevada Commission. If the required licenses or approvals of the Nevada Gaming Authorities are not received on or before December 31, 1996, then on such date HICN has agreed to contribute to the Operating Partnership cash equal to the fair value of the Gaming Assets on such date. License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Nevada and to the County of Clark where HICN's gaming operations are conducted. Depending upon the particular fee or tax involved, these assessments are payable either monthly, quarterly, or annually and are based upon either (i) a percentage of the gross gaming revenues received by the casino operations; (ii) the number of slot machines or other gaming devices operated by the casino; or (iii) the number of table games operated by the casino. A casino entertainment tax is also paid by the licensees where entertainment is furnished in connection with the selling of food or refreshments. 27 31 The sale of alcoholic beverages by HICN is subject to licensing, control and regulation by the Clark County Board. Such liquor licenses are revocable and are not transferable. The Clark County Board has full power to limit, condition, suspend or revoke any liquor license, and any disciplinary action of this nature or license revocation would have a material adverse effect on HICN's gaming operations. ITEM 3. LEGAL PROCEEDINGS. During the year ended December 31, 1995, the Trust and the Corporation completed settlements of two purported class action complaints and one complaint which was purportedly brought on behalf of the Trust and the Corporation (collectively, the "Shareholder Actions"). The Shareholder Actions were brought in 1991 and 1992 in each case in connection with the Trust's purchase of the Ramada Inn in Indian Wells, California (which has been subsequently sold) and its two hotel/casinos. The two purported class actions were filed in the United States District Court for the Southern District of California in August 1991 and February 1992 against the Trust, the Corporation and certain current and former officers, Directors and Trustees. The complaint alleged fraud, violations of federal and California securities laws, the federal Racketeer Influenced and Corrupt Organizations Act and ERISA. The actions sought compensatory damages, rescission and/or treble and exemplary damages plus interest, costs and attorney's fees and statutory damages under ERISA. The third action was filed in the Superior Court for the State of California for San Diego County in March 1992 against current and former officers, Directors and Trustees and alleged breach of fiduciary duty, gross negligence and corporate waste. The action sought compensatory damages, certain remuneration and costs. The plaintiffs and defendants in the Shareholder Actions entered into stipulations of settlement providing for the release of all claims that were or might have been made in the Shareholder Actions and provided for a $3,250,000 cash settlement fund which, after payment of fees and expenses of plaintiffs' counsel, was distributed to the certified plaintiff classes. The Trust and the Corporation paid $400,000 into the settlement fund, with the balance of the settlement being paid by the insurance company that issued the directors and officers policy applicable to the period to which the Shareholder Actions relate and by two former officers and Trustees of the Trust. The Trust and the Corporation paid the legal fees and other costs incurred prior to October 12, 1993 by the defendants in the Shareholder Actions. Holders of an aggregate of 199,833 Paired Shares (as adjusted for the one-for-six reverse stock split in June 1995), all of which were owned by Mr. Leonard Ross and his affiliates (collectively, "Ross"), opted out of the Shareholder Action and did not share in the settlement. As required by the stipulation, the Trust's Board of Trustees and the Corporation's Board of Directors established a joint transaction committee of independent Trustees and Directors to make recommendations to those Boards with respect to any transaction proposed by management and having a fair market value of $20 million or more. 28 32 In connection with the settlement of the Shareholder Actions, Messrs. Ronald A. Young and John F. Rothman and certain of their affiliated partnerships terminated the management agreements (the "Management Contracts") that existed between those partnerships and the Corporation's subsidiary, Western Host, Inc. ("Western Host"), and Western Host agreed not to dispute such action and withdrew as a general partner of two additional affiliated partnerships. In satisfaction of any damages that the Trust and the Corporation may incur as a result of the termination of the Management Contracts, Messrs. Rothman and Young paid $800,000 to the Trust and the Corporation. They also agreed to be responsible for a percentage of any retroactive adjustments in worker's compensation insurance premiums. Starwood Lodging has paid $167,041 for retroactive worker's compensation insurance premiums and has sought reimbursement from Messrs. Young and Rothman of their share of that amount (in an aggregate amount of approximately $56,000). In October 1995, the Corporation commenced litigation against Messrs. Young and Rothman to collect such amounts (Starwood Lodging Corp. v. Ronald A. Young, et al., San Diego Superior Court Case No. 693822). Ross, who as of December 31, 1994 held approximately 9.8% of the outstanding Paired Shares of the Trust and Corporation (approximately 1.4% as of December 31, 1995), opted out of the settlement of the Shareholder Actions. Ross threatened to bring a separate action alleging similar causes of action as those alleged in the Shareholder Actions as well as other alleged causes of action. In November 1994, Ross assigned to Starwood Capital all of his claims against the Trust and Corporation. In connection with such assignment, Starwood Capital agreed to purchase all of Ross's Paired Shares at Ross's election during a 60-day period beginning in December 1995, at a price of $33.75 per Paired Share subject to certain adjustments. Starwood Capital, as the assignee of Ross's claims against the Trust and the Corporation, agreed that the maximum amount Starwood Capital may recover under such claims would not exceed an aggregate of $1.8 million and the Trust and the Corporation agreed to toll the statute of limitations respecting such claims until January 31, 1996. The Trust and Corporation also agreed that under certain circumstances they may be obligated severally to indemnify Starwood Capital with respect to Starwood Capital's obligations to Ross, up to a maximum of $1.8 million, upon receipt of a full release from Starwood Capital of all of the claims assigned by Ross. Ross elected to sell his Paired Shares, and in January 1996 those Paired Shares were sold to a third party through Merrill Lynch. The Paired Shares were sold at a price of $29.625 per Paired Share; the Trust and Corporation paid $1,375,743 in the aggregate pursuant to their indemnity obligations, and Starwood Capital released the Trust and the Corporation from all the claims assigned to it by Ross. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 7, 1995, (i) the Trust held its 1995 annual meeting of shareholders of the Trust (the "Trust Meeting") to elect two Trustees to the Board of Trustees of the Trust and to approve a share option plan of the Trust and (ii) the Corporation held its 1995 annual meeting of stockholders of the Corporation (the "Corporation Meeting") to elect four 29 33 Directors to the Board of Directors of the Corporation and to approve a stock option plan of the Corporation. At the Trust Meeting, shareholders of the Trust voted upon and approved (i) the election as Trustees of the Trust of Messrs. Madison F. Grose and William E. Simms, and (ii) the adoption of the 1995 Share Option Plan of the Trust. Messrs. Lapin, Quazzo, Duncan, Stern and Sternlicht continued as Trustees after the Trust Meeting. The following sets forth, with respect to each matter voted upon at the Trust Meeting, the number of votes cast for, the number of votes cast against, and the number of votes abstaining (or, with respect to the election of Trustees, the number of votes withheld) with respect to such matter:
Votes Votes Votes For Against Abstentions Withheld ---------- --------- ----------- -------- Election of Trustees: Madison F. Grose 12,336,209 0 0 209,107 William E. Simms 12,329,822 0 0 215,494 Adoption of the 1995 Share Option Plan 8,289,406 2,752,511 163,279 0
At the Corporation Meeting, stockholders of the Corporation voted upon and approved (i) the election as Directors of the Corporation of the following nominees: Bruce M. Ford, Earle F. Jones, Graeme W. Henderson, and Daniel W. Yih (Mr. Yih to take office upon receipt of Gaming Approval), and (ii) the adoption of the 1995 Share Option Plan of the Corporation. Messrs. Chapus, Goldman, Leven, Eilian and Sternlicht continued as members of the Management Committee and Directors (to take office upon receipt of Gaming Approval) after the Corporation Meeting. The following sets forth, with respect to each matter voted upon at the Corporation Meeting, the number of votes cast for, the number of votes cast against, and the number of votes abstaining (or, with respect to the election of Directors, the number of votes withheld) with respect to such matter: 30 34
Votes Votes Votes For Against Abstentions Withheld ---------- --------- ----------- -------- Election of Directors: Bruce M. Ford 12,354,381 0 0 204,890 Earle F. Jones 12,355,118 0 0 204,153 Graeme W. Henderson 12,355,252 0 0 204,019 Daniel W. Yih 12,354,634 0 0 204,637 Adoption of 1995 Share 7,305,949 2,742,455 185,675 0 Option Plan
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information The Paired Shares are traded principally on the New York Stock Exchange (the "NYSE") under the symbol "HOT". The following table sets forth, for the fiscal periods indicated, the high and low sales prices per Paired Share on the NYSE Composite Tape (as adjusted for the one-for-six reverse stock split in June 1995).
1995 Distributions Return of Capital High Low Made GAAP Basis (a) ---- --- ----------- ---------- First quarter $24.00 $15.75 None N/A Second quarter $24.75 $21.00 None N/A Third quarter $29.13 $23.63 $0.47 $0.22 Fourth quarter $30.00 $26.88 $0.47 (b) $0.07 1994 First quarter $15.00 $11.25 None N/A Second quarter $18.00 $9.75 None N/A Third quarter $20.25 $17.25 None N/A Fourth quarter $20.25 $15.75 None N/A
(a) Represents distributions per share in excess of net income per share on a GAAP basis, and is not the same as return of capital on a tax basis. 31 35 (b) The Trust declared a dividend for the fourth quarter of 1995 to shareholders of record on December 29, 1995. The dividend was paid in January 1996. Holders As of February 27, 1996, there were approximately 1,276 holders of record of Paired Shares. Distributions Made/Declared The Trust declared and paid a dividend of $0.47 per Paired Share for the third quarter of 1995. In addition, the Trust declared a dividend of $0.47 per Paired Share for the fourth quarter of 1995. This dividend was paid in January 1996. No distributions were made by the Trust during 1994. The Corporation has not paid any cash dividend since its organization and does not anticipate that it will make any such distributions in the foreseeable future. Under the terms of the Facilities, Starwood Lodging is generally permitted to distribute to its shareholders on an annual basis an amount equal to the greatest of (1) 100% of funds from operations for any four consecutive calendar quarters; (2) an amount sufficient to maintain the Trust's tax status as a real estate investment trust; (3) the amount necessary for the Trust to avoid the payment of federal income or excise tax; and (4) through June 30, 1996, $0.47 per share per quarter. ITEM 6. SELECTED FINANCIAL DATA. The following data sets forth certain financial information for each of the Trust and the Corporation, and the Trust and the Corporation on a combined basis. This information is based on and should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Joint Annual Report. (in thousands, except per share amounts)
Historical Pro ---------------------------------------------------------- Forma As and for the Year Ended December 31, ------------------------------------------------------------------ 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- Operating Data Revenue: Trust . . . . . . $ 48,953 $ 44,023 $ 21,671 $ 20,342 $ 26,784 $ 29,550 Corporation . . . 164,038 149,184 110,962 114,828 116,172 110,361 Combined (1) . . . 176,570 161,716 113,997 117,155 117,656 113,436
32 36
Historical Pro ---------------------------------------------------------- Forma As of and for the Year Ended December 31, ----- ---------------------------------------------------------- 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- Net Income (Loss): Trust (2) . . . . 23,239 10,709 (3,465) (3,889) (9,818) (10,952) Corporation (2) . (2,094) (1,739) (1,198) (3,143) (9,925) (11,132) Combined . . . . . 21,145 8,970 (4,663) (7,032) (19,743) (22,084) Net Income (Loss) Per Share: Trust . . . . . . $ 1.68 $ 1.37 $ (1.72) $ (1.92) $ (4.86) $ (5.42) Corporation . . . (.15) (.22) (0.59) (1.56) (4.90) (5.50) ------- ------- -------- -------- -------- -------- Combined . . . . . $ 1.53 $ 1.15 $ (2.31) $ (3.48) $ (9.76) $ (10.92) ------- ======= ======== ======== ======== ======== Historical ---------------------------------------------------------- At December 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Balance Sheet Data Total Assets: Trust . . . . . . 425,737 $162,245 $232,845 $245,540 $246,498 Corporation . . . 120,721 48,626 49,993 53,611 55,807 Combined (1) . . . 459,994 183,955 195,352 210,945 221,917 Total Debt: Trust . . . . . . 119,200 146,734 156,526 157,541 158,295 Corporation . . . 90,749 40,664 101,846 100,246 66,873 Combined (1) . . . 123,485 160,482 170,886 170,297 171,271 Shareholders' Equity (Deficit): Trust . . . . . . 204,728 10,450 72,205 76,371 86,188 Corporation . . . 10,740 (1,742) (58,879) (55,752) (45,828) Combined . . . . 215,467 8,708 13,326 20,351 40,083 Shares outstanding at end of period . . . 13,825 2,022 2,022 2,022 2,022
33 37
Historical ---------------------------------------------------------- As of and for the Year Ended December 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Cash Flow and Dividend Data Net cash provided by (used in) operating activities: Trust . . . . . . $ 11,267 $ 4,455 $ 3,136 $ 2,773 $(8,812) Corporation . . . 5,144 4,438 2,396 1,917 2,654 Combined . . . . . 16,411 8,893 5,532 4,690 (6,158) Net cash provided by (used in) investing activities: Trust . . . . . . . (175,506) $ 8,239 $ 2,474 $ (161) $12,889 Corporation . . . . (44,003) 215 (4,426) (942) 472 Combined (1) . . . (181,995) 4,489 (3,645) (1,514) 12,159 Net cash provided by (used in) financing activities: Trust . . . . . . . 164,694 (13,357) (7,307) (850) (7,507) Corporation . . . . 42,671 (4,577) (1,138) (816) (834) Combined (1) . . . 169,851 (13,969) (6,752) (1,255) (7,139) Dividends/Distributions to shareholders-Trust (3) 9,265 $0 $0 $0 $0 Dividends/Distributions per share-Trust (3) . $0.47 $0 $0 $0 $0
_______________ (1) The individual amounts with respect to the Trust and Corporation do not add to Combined amounts due to accounting elimination entries. (2) For the Trust, includes gains (losses) on sales in the amount of ($125,000), $432,000, ($53,000), ($791,000) and $390,000 for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively, and provisions for investment losses of $759,000, $2,369,000, $3,419,000 and $8,867,000 in the years ended December 31, 1994, 1993, 1992, and 1991, respectively. For the Corporation, includes gains on sales of $24,000, $74,000, $4,000 and $1,208,000 for the years ended December 31, 1994, 1993, 1992, and 1991, respectively, and provisions for investment losses of $713,000 in the year ended December 31, 1991. (3) Presented only for the Trust, as the Corporation did not pay dividends for the periods presented. 34 38 Due to the impact of the Reorganization and other transactions during 1995, management believes that the following presentation and discussion of the pro forma results of operations is more meaningful to the users of the financial statements for an understanding of the comparative operating results than the historical information which follows the discussion of the pro forma results of operations. UNAUDITED COMBINED PRO FORMA STATEMENTS OF OPERATIONS
Years Ended December 31, -------------------------------------- 1995 1994 -------- -------- REVENUE Hotel . . . . . . . . . . . . . . . . . . . $136,104,000 $118,558,000 Gaming . . . . . . . . . . . . . . . . . . . 26,929,000 27,981,000 Interest from mortgage and other notes . . . 10,905,000 10,858,000 Rents from leased hotel properties and income from joint ventures . . . . . . 791,000 411,000 Other income . . . . . . . . . . . . . . . . 1,966,000 927,000 Gain (loss) on sales of hotel assets . . . . (125,000) 456,000 ------------ ------------ 176,570,000 159,191,000 ------------ ------------ EXPENSES Hotel operations . . . . . . . . . . . . . . 94,487,000 84,357,000 Gaming operations . . . . . . . . . . . . . 24,242,000 24,454,000 Interest . . . . . . . . . . . . . . . . . . 2,940,000 3,259,000 Depreciation and amortization . . . . . . . . 18,934,000 16,666,000 Administrative and operating . . . . . . . . 5,722,000 4,203,000 ------------ ------------ 146,325,000 132,937,000 ------------ ------------ Income before minority interest . . . . . . 30,245,000 26,254,000 Minority interest in Partnerships . . . . . 9,100,000 7,900,000 ------------ ------------ Net income . . . . . . . . . . . . . . . . . $ 21,145,000 $ 18,354,000 ============ ============ Net income per Paired Share . . . . . . . . $1.53 $1.33 ============ ============ Funds from operations . . . . . . . . . . . $ 48,634,000 $ 42,464,000 ============ ============
35 39 NOTES TO THE UNAUDITED COMBINED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 NOTE 1. BASIS OF PRESENTATION The Trust and the Corporation have unilateral control of the Realty Partnership and the Operating Partnership, respectively, and, therefore, the historical financial statements of the Realty Partnership and the Operating Partnership are consolidated with those of the Trust and the Corporation. Due to the impact of the Offering and the acquisition of properties acquired in connection with the Offering, the historical results of operations and earnings per share are not indicative of future results of operations and earnings per share. The Unaudited Combined Pro Forma Statements of Operations for the years ended December 31, 1995 and 1994 give effect to the Reorganization, the Offering, and the acquisition of the Sheraton Colony Square in Atlanta, Georgia, the Embassy Suites in Tempe, Arizona, and the Omni Europa in Chapel Hill, North Carolina as of the beginning of each period presented. Pro forma results include the results of the other acquired properties (the Doral Inn in New York, New York - acquired on September 20, 1995, the Terrace Garden Inn and Lenox Inn in Atlanta, Georgia - acquired on October 31, 1995, and the Holiday Inn in Beltsville, Maryland - acquired on November 30, 1995) from their respective dates of acquisition and exclude the results from properties sold in 1994. Additional pro forma information reflecting the inclusion of the Doral Inn, Terrace Garden Inn, Lenox Inn and the Beltsville Holiday Inn (the "New Properties") from the beginning of each respective period is included in Note 18 to the historical financial statements included in Item 8 of this Joint Annual Report. The pro forma information is based upon historical information and does not purport to present what actual results would have been had such transactions, in fact, occurred at the beginning of each period presented, or to project results for any future period. Listed below are the combined pro forma adjustments for each contributed and acquired hotel: FOR THE YEAR ENDED DECEMBER 31, 1995
Acquired Properties ---------------------------------------------------------------------------------- Omni Sheraton Embassy Suites Chapel Hill Colony Square Tempe Total ----------- ------------- -------------- ----- Hotel Revenues $ 1,265,000 $ 9,557,000 $ 4,032,000 $14,854,000 Hotel Expenses . . . 887,000 7,009,000 2,271,000 10,167,000 Depreciation . . . . 163,000 2,073,000 1,229,000 3,465,000 ----------- ----------- ----------- ----------- Net Income $ 215,000 $ 475,000 $ 532,000 $ 1,222,000 =========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1994
Contributed by Starwood Capital --------------------------------------------------------------------------------------- Capitol French Hill Quarter Doubletree Wichita Total ------- ------- ---------- ------- ----- Hotel Revenues $3,484,000 $5,247,000 $3,753,000 $3,983,000 $16,467,000 Hotel Expenses . 2,228,000 3,789,000 2,795,000 3,939,000 12,751,000 Depreciation . . 556,000 858,000 481,000 601,000 2,496,000 ---------- ---------- ---------- ---------- ----------- Net Income $ 700,000 $ 600,000 $ 477,000 $(557,000) $ 1,220,000 ========== ========== ========== ========== ===========
36 40
Acquired Properties ---------------------------------------------------------------------------------- Omni Sheraton Embassy Suites Chapel Hill Colony Square Tempe Total ----------- ------------- -------------- ----- Hotel Revenues $4,407,000 $16,200,000 $6,025,000 $26,632,000 Hotel Expenses 3,024,000 12,656,000 3,823,000 19,503,000 Depreciation 884,000 3,363,000 2,006,000 6,253,000 ---------- ----------- ---------- ----------- Net Income $ 499,000 $ 181,000 $ 196,000 $ 876,000 ========== =========== ========== ===========
NOTE 2. NET INCOME PER PAIRED SHARE Net income per Paired Share has been computed using the pro forma weighted average number of Paired Shares and equivalent Paired Shares outstanding for the period presented of 13,822,617 Paired Shares. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As discussed in Item 1 of this Joint Annual Report under the caption "The Reorganization", the Trust and the Corporation consummated the Reorganization on the Closing Date effective as of January 1, 1995. Since the Reorganization, the Trust has conducted substantially all of its business and operations through the Realty Partnership and the Corporation has conducted substantially all of its business and operations (other than its gaming operations) through the Operating Partnership. The Trust controls the Realty Partnership as its sole general partner. The Corporation controls the Operating Partnership as its managing general partner, although until the receipt of required gaming approvals, a management committee of the Operating Partnership will manage the Operating Partnership. As discussed in Item 1 of this Joint Annual Report under the caption "The Offering", on July 6, 1995, the Trust and Corporation consummated a public offering of Paired Shares and received aggregate net proceeds of approximately $245.7 million. As discussed in Item 1 of this Joint Annual Report under the caption, "Credit Facilities" in 1995 the Realty Partnership entered into the Repo Facility and the Acquisition Facility and, as of December 31, 1995, had borrowed $119.1 million to acquire hotel assets and for general corporate purposes. COMBINED PRO FORMA RESULTS OF OPERATIONS PRO FORMA NET INCOME On a pro forma basis (see Item 6, Pro Forma Financial Statements), combined net income for the year ended December 31, 1995 grew by 15.2 % to $21.1 million, or $1.53 per Paired Share, on combined revenues of $176.6 million, compared to combined net income of $18.4 million, or $1.33 per Paired Share, on combined revenues of $159.2 million for the corresponding period in 1994. On a year-to-year basis, while occupancy rates 37 41 remained relatively constant, average daily rate ("ADR") for Starwood Lodging's owned and operated nongaming hotels for the year ended December 31, 1995 (including the New Properties in each year), increased 11.2%, from $67.43 to $74.98, and REVPAR for such hotels increased 12.9%, from $47.61 to $53.76. The 10.9% increase in pro forma revenues for 1995 resulted from the impact of revenues from the New Properties together with increases in ADR for Starwood Lodging's upscale, midscale and economy segment hotels of 14.4%, 4.4% (2.2% excluding the Dallas, Texas property which lost the benefit of a Marriott franchise in 1994) and 10.0 percent, respectively. Management believes that ADR increases, particularly in the upscale segment, reflect increases in demand which continue to exceed increases in supply. The increase in the economy segment (consisting of two hotels) primarily reflects management's decision to reposition and flag the formerly independent Portland, Oregon property in October of 1994. The following tables summarize average occupancy, ADR and REVPAR on a year-to-year basis for Starwood Lodging's owned and operated, nongaming hotels (including the New Properties for the period beginning with their respective dates of acquisition and ending at the end of each period) for the years ended December 31, 1995 and 1994.
Years Ended December 31, 1995 1994 ---- ---- All Nongaming Hotels: Occupancy rate 71.7% 70.6% ADR $74.98 $67.43 REVPAR $53.76 $47.61 REVPAR % change 12.9% Upscale Hotels: Occupancy rate 73.0% 71.8% ADR $86.39 $75.49 REVPAR $63.78 $54.20 REVPAR % change 17.7% Midscale Hotels (excluding Dallas Park Central): Occupancy rate 68.8% 68.5% ADR $58.44 $55.99 REVPAR $39.92 $38.35 REVPAR % change 4.1%
38 42
Economy Hotels: Occupancy rate 79.1% 73.6% ADR $61.40 $55.81 REVPAR $48.57 $41.08 REVPAR % change 18.2%
Management believes that the increases in REVPAR resulted primarily from increases in demand due to more favorable economic conditions which have created increased business and leisure travel throughout the United States, while the supply of hotel rooms has not increased as rapidly. REVPAR increases were greatest at the upscale hotels (16.3% increase) as well as the Harvey Hotel in Wichita, Kansas (renovated in 1994) and the Days Inn in Portland, Oregon, which was flagged a Days Inn in late 1994. Management believes that there are several important factors that have contributed to the improved profitability of Starwood Lodging's hotel properties, including increased occupancy and average room rate and effective cost management. Because a substantial portion of the hotels' operating costs and expenses are generally fixed, Starwood Lodging derives substantial operating leverage from increases in revenue. Consequently, primarily as a result of the stronger growth in ADR than in occupancy, gross margins for the year ended December 31, 1995 rose to 30.6% from 28.9% for the year ended December 31, 1994. ACQUISITIONS During 1995, excluding the properties contributed as part of the Reorganization, Starwood Lodging acquired: the 168-room Omni Hotel in Chapel Hill, North Carolina; the 462-room Sheraton Colony Square Hotel in Atlanta, Georgia; the 224-room Embassy Suites in Tempe, Arizona; the 652-room Doral Inn in New York, New York; a $19.5 million mortgage interest in the 263-room Grand Hotel in Washington, D.C.; the 364-room Terrace Garden Inn and the 180-room Lenox Inn in Atlanta, Georgia; and the 206-room Calverton Holiday Inn in Beltsville, Maryland. In the first month of 1996, Starwood Lodging acquired the equity in the Grand Hotel in Washington, D.C., and a 58.2% interest in a joint venture that acquired the Boston Park Plaza. In total, Starwood Lodging's growth through acquisitions since the beginning of 1995 has exceeded $250 million, including the assumption by the Operating Partnership of the management of eight of these hotels containing over 2,800 rooms. SELF MANAGEMENT Consistent with its business objective to capture the economic benefits otherwise retained by a third-party operator, the Operating Partnership has assumed management of eight hotels acquired since the beginning of 1995 as well as seven properties owned as of January 1, 1995. Of the remaining four third-party management agreements currently in place, two are expected to be terminated in early 1996 and management of the 39 43 underlying properties assumed by the Operating Partnership. Management believes that the assumption of direct control over the operations of these hotels will allow Starwood Lodging to effectively use its experience to improve operations and implement renovations and expansions. RENOVATIONS AND REPOSITIONING HOTELS Starwood Lodging has commenced an estimated $10.0 million renovation and conversion of the Dallas property to a Radisson. Additionally, Starwood Lodging has commenced an estimated $6.0 million renovation of the Atlanta Sheraton Colony Square Hotel and a $2.0 million renovation of the Portland Riverside Inn. Starwood Lodging reflagged the Grand Hotel in Washington, D.C. as a Westin effective February 1, 1996 and is currently negotiating the flagging of the French Quarter Suites Hotel in Lexington, Kentucky which is expected to benefit from a national franchise affiliation and reservation system. Starwood Lodging is currently planning renovations of the Doral Inn, the Boston Park Plaza and certain other properties and may plan and commence other renovations of existing and new properties as it deems appropriate. Renovations of specific hotels are expected to have a negative impact on the revenues of such hotels during the pendency of major renovations. GAMING Revenues from the two hotel/casinos in Las Vegas declined $1.1 million to $26.9 million reflecting a reduction in revenues primarily at the Bourbon Street casino. Earnings from the two hotel/casinos declined $840,000 in line with the decrease in revenues. Both properties are currently being marketed for sale. INTEREST INCOME Interest from mortgage and other notes, on a pro forma basis, increased slightly reflecting interest received from the mortgage on the Grand Hotel for the last three months of 1995 and which was partially offset by overall reduced interest income for the year ended December 31, 1995, primarily due to repayment of notes secured by mortgages on hotels in Albany, Georgia, Irving, Texas, Stockton, California and Jefferson City, Missouri. OTHER INCOME Other income of $2.0 million for the year ended December 31, 1995 was $1.0 million higher than the previous year. Included in other income for the year ended December 31, 1995 are (i) $800,000 received as a result of the termination of management contracts in connection with the settlement of certain shareholder actions against former officers of Starwood Lodging (see Item 3 of Part I) and (ii) the retention of a $500,000 deposit related to the failure of the 40 44 prospective purchaser of the Bourbon Street Hotel and Casino to complete the purchase of the hotel from Starwood Lodging. ADMINISTRATIVE AND OPERATING EXPENSES Administrative and operating expenses for the year ended December 31, 1995 increased to $5.7 million representing 3.2 percent of total revenue, from $4.2 million or 2.6 percent of revenue for the corresponding period in 1994. The increases were primarily a result of increases in payroll costs due to additions to the corporate staffs of Starwood Lodging. INTEREST EXPENSE On a pro forma basis, interest expense declined approximately $300,000 to $2.9 million in 1995, reflecting a lower amount outstanding in 1995 on notes payable secured by the Milwaukee Marriott together with lower overall interest rates in 1995 as compared to 1994. DEPRECIATION AND AMORTIZATION Depreciation and amortization on a pro forma basis increased to $18.9 million in 1995 reflecting depreciation relating primarily to the New Properties. ACCOUNTING POLICIES In March and October 1995, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and No. 123 "Accounting for Stock-Based Compensation," respectively. These statements are effective for financial statements for fiscal years beginning after December 15, 1995. Management believes that adoption of Standard No. 121 will not have a material effect on its financial position or results of operations. Management intends to adopt the disclosure method of Standard No. 123 and, accordingly, there will be no impact on Starwood Lodging's financial position or results of operations. COMBINED LIQUIDITY AND CAPITAL RESOURCES Cash Flow Provided by Operating Activities. The principal source of cash to be used to fund Starwood Lodging's operating expenses, interest expense, recurring capital expenditures and dividend payments is cash flow provided by operating activities. Starwood Lodging anticipates that its cash flow provided by operating activities will provide the necessary funds on a short and long term basis to meet the cash requirements described above, including all distributions to shareholders. 41 45 Cash flows from Investing and Financing Activities. Starwood Lodging intends to finance the acquisition of additional hotel properties, major hotel renovations and other non-recurring capital expenditures through cash flow from operations, through borrowings under the Facilities and, when market conditions warrant, through the issuance of equity or debt securities. As of December 31, 1995, the Realty Partnership had borrowed approximately $119.1 million under the Facilities to fund the acquisition of the New Properties. As previously discussed, Starwood Lodging has commenced an approximately $10.0 million renovation and conversion of the Dallas Park Central Hotel to a Radisson, an approximately $6.0 million renovation of the Atlanta Sheraton Colony Square Hotel and an approximately $2.0 million renovation of the Portland Riverside Inn. Starwood Lodging is currently planning renovations of the Doral Inn and the Boston Park Plaza and may plan and commence other renovations of existing and new properties as it deems appropriate. Renovations of specific hotels are expected to have a negative impact on the revenues of such hotels during the pendency of major renovations. Management believes the renovations should result in increases in REVPAR and cash flow after completion. From January 1, 1995 to the date of the filing of this Joint Annual Report, Starwood Lodging has invested over $225 million in acquiring hotels ($171 million plus capital expenditures of $4.2 million for the year ended December 31, 1995). As part of its investment strategy, Starwood Lodging plans to acquire additional hotels. Starwood Lodging intends to incur additional indebtedness in a manner consistent with its policy of maintaining a Ratio of Debt - to - Total Market Capitalization of not more than 50%. Management of each of the Trust and the Corporation believes that it will have access to capital resources sufficient to satisfy the cash requirements of each of the Trust and of the Corporation and to expand and develop their business in accordance with their strategy for future growth. The Trust paid dividends in the fourth quarter of 1995 by declaring a dividend of $0.47 per Paired Share for the quarter ended September 30, 1995 which was paid on October 27, 1995. The Trust also declared a dividend of $0.47 per Paired Share for the fourth quarter ended December 31, 1995 which was paid in January of 1996. Pro Forma Funds From Operations. Management believes that FFO is one measure of financial performance of an equity REIT such as the Trust. On a pro forma basis, combined FFO (as defined by the National Association of Real Estate Investment Trusts ("NAREIT") (1)) for the year 1995 grew by 14.4 percent to $48.6 million, compared to combined FFO of $42.5 million, for the corresponding period in 1994. The following table shows the calculation of pro forma combined FFO for the indicated periods:
Year Ended December 31, ----------------------------- 1995 1994 ---- ---- (in thousands) Income before minority interest $30,245 $26,254
42 46 Real estate related depreciation and amortization, net of amortization of financing costs 18,264 16,666 Loss (gain) on sales of hotel assets 125 (456) ------- ------- Funds from Operations $48,634 $42,464 ======= =======
(1) With respect to the presentation of FFO, management elected early adoption of the "new definition" as recommended in the March 1995 NAREIT White Paper on Funds from Operations beginning January 1, 1995. Management and industry analysts generally consider funds from operations to be one measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs and it is presented to assist investors in analyzing the performance of Starwood Lodging. Funds from operations is defined as income before minority interest (computed in accordance with generally accepted accounting principles), excluding gains and losses from debt restructuring and sales of property, and real estate related depreciation and amortization (excluding amortization of financing costs). Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. Funds from operations should not be considered an alternative to net income as an indication of Starwood Lodging's financial performance or as an alternative to cash flows from operating activities as a measure of liquidity. FFO includes $1 million of interest income recognized in excess of the actual cash received on mortgage notes receivable (as a result of the notes having been purchased at a discount) for each of the years ended December 31, 1995 and 1994. HISTORICAL RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 The following discussion and analysis of the historical results of operations for the years ended December 31, 1995 and 1994 give effect to transactions on the actual date they were consummated; in the case of the Reorganization, as of January 1, 1995; in the case of the Offering, July 6, 1995; and in the case of acquisitions of hotel properties as of the date each was purchased. Combined Funds From Operations. Management believes that FFO is one measure of financial performance of an equity REIT such as the Trust. Combined FFO for the twelve months of 1995 rose by 379 percent to $33.1 million compared to combined FFO of $6.9 million on combined revenues of $161.7 million for the comparable period in 1994. The following table shows the calculation of pro forma combined FFO for the indicated periods:
Year Ended December 31, ------------------------------ 1995 1994 ---- ---- (in thousands) Income before minority interest and $18,138 $(4,663) extraordinary items
43 47 Shareholder litigation expense --- 2,648 Provision for loss --- 759 Real estate related depreciation and 14,799 8,161 amortization, net of amortization of financing costs Loss (gain) on sales of hotel assets 125 ------- ------ Funds from Operations $33,062 $6,905 ======= ======
THE TRUST Net income for the Trust for the year ended December 31, 1995 was $10.7 million as compared to a loss of $3.5 million in the prior year. Rents from the Corporation, which are primarily based on hotel revenues, increased $9.8 million to $26.7 million for the year ended December 31, 1995, as compared to the corresponding period in 1994. The increase was primarily the result of rents earned by the Realty Partnership on four hotels contributed by the Starwood Partners to the Realty Partnership and the Operating Partnership effective January 1, 1995 and seven additional hotels acquired during the year ended December 31, 1995. The four contributed hotels (the Doubletree Hotel located in Rancho Bernardo, California; Capitol Hill Suites located in Washington, DC; the Harvey Wichita located in Wichita, Kansas; and the French Quarter Suites located in Lexington, Kentucky) and the seven hotels acquired during the year accounted for increased rents of $9.5 million for the year. In addition, rents earned by the Trust from continuously owned properties leased by the Corporation increased $838,000. These increases were offset by a decrease in rents of $543,000 resulting from the sale of hotels in Austin, Texas (May 1994), Brunswick, Georgia (August 1994), New Port Richey, Florida (August 1994), Fayetteville, North Carolina (November 1994) and Jacksonville, Florida (November 1994). Interest from the Corporation increased by $3.0 million to $4.8 million for the year ended December 31, 1995 as compared to the corresponding period in 1994. The increase in interest income resulted primarily from (i) interest on the intercompany mortgage note relating to the Doral Inn from September 20, 1995 to the end of the year; (ii) interest on unsecured notes from the Corporation having an average balance of $11.1 million and bearing interest at prime plus two percent for the year ended December 31, 1995 (a moratorium on the payment of interest on such unsecured notes was in effect throughout 1994); and (iii) interest on the first mortgage of the Milwaukee Marriott Hotel (owned by a partnership of which the Operating Partnership is the sole general partner) which was purchased by the Realty Partnership in July 1995. Interest from mortgage and other notes amounted to $10.8 million for the year ended December 31, 1995, as compared to $1.5 million for the corresponding period in 1994. The increase primarily resulted from the contribution of notes receivable by the Starwood Partners to the Realty Partnership in the Reorganization, together with interest earned on the mortgage note receivable relating to the Grand Hotel purchased in September 1995. 44 48 Other income for the year ended December 31, 1995 of $1.1 million resulted primarily from the retention of a $500,000 deposit related to the proposed sale of the Bourbon Street hotel/casino and the receipt of $289,000 and $48,000 of proceeds relating to land comprising part of the King 8 hotel/casino and Bourbon Street hotel/casino, respectively, which was transferred pursuant to eminent domain proceedings. The Trust and the Corporation periodically estimate the value of their hotel assets and compare these values to the net book values of the hotel assets. For hotel assets not held for sale, the undiscounted future cash flows of the assets on a hotel-by-hotel basis, are compared to the net book value of the assets; and if the undiscounted future cash flows are less than the net book value of the assets, the excess of the net book values over the estimated fair values is charged to current earnings. When it is the opinion of management that the fair value of a hotel that has been identified for sale is less than the net book value of the hotel, a reserve for losses is established. Fair value is determined based upon the discounted cash flow of the properties at rates (generally ranging from 11.0% to 21.0%) deemed reasonable for the type of property and prevailing market conditions, and, if appropriate, then current net proceeds of sale from pending offers. In determining whether to accept an offer for the sale of a property, management considers the fairness of the offer in comparison to the value of the property, the terms of the offer, and whether the offer is all cash or includes seller financing. Based on the foregoing methodology, a provision for loss in the amount of $759,000 was recorded in 1994. No provision for loss was recorded in 1995. Interest expense decreased by $3.8 million to $12.4 million for the year ended December 31, 1995, as compared to the corresponding period in 1994. The decrease was due to the repayment of approximately $206.5 million of existing indebtedness following the Offering and to the retiring of mortgage notes in 1995, which were secured by the Embassy Suites Hotel in Phoenix, Arizona and the Bay Valley Resort in Bay City, Michigan and was partially offset by the assumption of additional notes payable by the Realty Partnership in the Reorganization, three of which were also repaid during 1995. Depreciation and amortization expense increased by $3.8 million for the year ended December 31, 1995, as compared to the corresponding period in 1994, principally due to the above mentioned property contributions and acquisitions and to the amortization of reorganization and financing costs which were partially offset by the above mentioned property sales. Administrative and operating expenses for the year ended December 31, 1995 increased $856,000 to $2.4 million reflecting increased payroll costs due to the growth of the Trust and costs incurred relating to the potential acquisition of hotels which ultimately were not acquired. Minority interest represents the interest of the Starwood Partners in the Realty Partnership for the year ended December 31, 1995. 45 49 During 1995, the Trust recognized an extraordinary loss of $2.2 million net of minority interests of $163,000 relating to two items: (a) An extraordinary loss before minority interest of $3.6 million due to the early extinguishment of debt in respect of the Prior Credit Agreement which was terminated during the year; and (b) An extraordinary gain before minority interest of $1.3 million relating to the reversal of outstanding amounts accrued in 1993, due to the early extinguishment of debt. THE CORPORATION Hotel revenues increased by $38.6 million for the year ended December 31, 1995, as compared to the corresponding period in 1994. The addition of the four contributed properties and the seven acquired properties as discussed above resulted in increases in hotel revenue of $42.2 million for the year ended December 31, 1995. This increase was offset by the hotel sales discussed above resulting in decreased revenues of $7.2 million. The remaining increase of $3.6 million for the year ended December 31, 1995, is attributable to other continuously owned properties. Gaming revenues for the year ended December 31, 1995 as compared to the year ended December 31, 1994 decreased by $1.1 million to $26.9 million. Management believes that operating performance from its gaming assets in 1996 will be comparable to that of the prior year. Included in other income for the year ended December 31, 1995 is $800,000 received by the Corporation as a result of the termination of management contracts in connection with the settlement of certain shareholder actions against former officers of Starwood Lodging (see Item 3 of Part I). Administrative and operating expenses increased by $653,000 for the year ended December 31, 1995, as compared to the corresponding period in 1994. The increase was primarily the result of increases in payroll costs due to the Corporation's growth. Depreciation and amortization expense increased by $3.5 million for the year ended December 31, 1995, as compared to the corresponding period in 1994. The increase was primarily the result of the hotels contributed by Starwood Capital in connection with the Reorganization and those hotels acquired by Starwood Lodging and amortization of Reorganization costs as discussed above. Minority interest represents the interest of the Starwood Partners in the Operating Partnership for the year ended December 31, 1995. 46 50 For information with respect to rent and interest paid to the Trust during the years ended December 31, 1995 and 1994, see "The Trust" above. HISTORICAL RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 THE TRUST Rents from the Corporation totaled $16.9 million and $16.5 million for the years ended December 31, 1994 and 1993, respectively. The increase was due to higher hotel revenues for the hotels leased by the Corporation from the Trust (which resulted in higher percentage rents) offset by a decrease in rental income of $802,000 resulting from the sale of hotels in Tucker, Georgia (June 1993), St. Louis, Missouri (December 1993), Austin, Texas (April 1994), New Port Richey, Florida (August 1994), Brunswick, Georgia (August 1994), Fayetteville, North Carolina (November 1994) and Jacksonville, Florida (November 1994). Interest from the Corporation increased to $1.7 million from $1.5 million for the years ended December 31, 1994 and 1993, respectively. The increase in interest income was a result of the higher amounts outstanding under the Milwaukee notes, which increased from $15.2 million at December 31, 1993 to $16.9 million at December 31, 1994. (For information pertaining to such notes see Notes 4 and 5 of Notes to Financial Statements.) For additional information with respect to rents and interest from the Corporation in future periods, see "Liquidity and Capital Resources" below. Interest from mortgage and other notes receivable increased by $224,000 for the year ended December 31, 1994 as compared to 1993. The increase resulted from the higher balances outstanding from the additional notes received upon sales of the hotel properties discussed above and the receipt of the final payment under three notes receivable relating to the Vagabond Inns in Rosemead, Sacramento and Woodland Hills, California, the interest on such notes having been previously deferred. Gains on sales of hotel assets for the year ended December 31, 1994 totaling $432,000 reflected the sales of hotels discussed above and $208,000 related to the in substance foreclosure and subsequent all cash sale of the underlying property collateralizing the Trust's mortgage note receivable on the Ramada Inn in Merrimack, New Hampshire. Interest expense totaled $16.3 million and $14.0 million for the years ended December 31, 1994 and 1993, respectively, an increase of $2.3 million. The increase was primarily due to an increase in the average interest rate under a subsequently refinanced credit agreement, such rate varying with the prime rate charged by one of the Senior Lenders. The sales of the properties discussed above and an increase in the provision for investment losses are the primary reasons for the decline in depreciation and amortization expense of $425,000 between 1994 and 1993. 47 51 Administrative and operating expenses totaled $1.6 million and $1.9 million for the years ended December 31, 1994 and 1993, respectively, a decrease of $365,000. The decrease was primarily the result of lower insurance expense and professional fees unrelated to the debt restructuring. During 1994 a provision for investment losses (a non-cash charge to operations) totaling $759,000 was recorded. The provision included $439,000 which was recorded as a result of the acceptance of offers to sell the Jacksonville and Fayetteville properties, which had previously been identified for sale at amounts lower than the then current net book values. The provision also included $320,000 which was established based upon an analysis of the net realizable value of the underlying property collateralizing the Trust's mortgage note receivable on the Ramada Inn in Merrimack, New Hampshire. See Part I, Item 3, Legal Proceedings, of this Joint Annual Report for a description of an agreement between Ross and Starwood Capital with respect to certain claims of Ross purchased by Starwood Capital and an agreement by Starwood Capital to purchase the Paired Shares of the Trust and Corporation owned by Ross at a price of $33.75 per Paired Share subject to certain adjustments. Starwood Capital also had the right to purchase such Paired Shares at the same time and on the same terms. During 1994, the Trust and the Corporation recorded a charge to shareholder litigation expense of $1.3 million and $1.3 million, respectively, the estimated fair market value of the agreement, as determined by an investment banker using an option pricing model. In 1995, Starwood Capital and Starwood Lodging agreed, among other things, that the maximum amount Starwood Capital could recover under such claims would not exceed an aggregate of $1.8 million. In January 1996, Ross elected to sell his Paired Shares, which were sold at a price of $29.625 per Paired Share and the Trust and the Corporation paid $1,375,743 in the aggregate pursuant to their indemnity obligations. No distributions were made by the Trust for the years ended December 31, 1994 or 1993. The Trust's net loss totaled $3.5 million, or $(1.72) per share, and $3.9 million or $(1.92) per share, for the years ended December 31, 1994 and 1993, respectively. THE CORPORATION Hotel revenues totaled $82.7 million and $86.9 million for the years ended December 31, 1994 and 1993, respectively, representing a decrease of $4.2 million. The hotel sales described under the caption "The Trust" above resulted in decreased revenue of $5.3 million. In March 1994, the franchise agreement and management agreement with Marriott Corporation for the Dallas property were terminated. The property was then being managed for the Corporation by Sage Hospitality, and operated as the Dallas Park Central Hotel. Revenues at the Dallas property decreased by $3.8 million. The decrease from property sales and the Dallas property were offset by increased revenues of $4.9 million at the properties which continued to be leased from the Trust by the Corporation, including an 48 52 increase of $1.5 million at the Milwaukee Marriott, which was renovated during 1993. The following table summarizes average occupancy and average room rates for properties which were operated by the Corporation under lease from the Trust at December 31, 1994:
Year Ended December 31, ------------------------------------ 1994 1993 ------ ------ Including Dallas Park Central: Occupancy Rate 68.03% 65.32% Average Room Rate $59.85 $60.30 Excluding Dallas Park Central: Occupancy Rate 71.76% 65.75% Average Room Rate $59.84 $59.88
Management of the Corporation believes that the increases in the average occupancy rate resulted primarily from more favorable economic conditions which created increased business and pleasure travel throughout the United States and improved operational systems. Gaming revenues totaled $28.0 million and $27.5 million for the years ended December 31, 1994 and 1993, respectively. For information regarding the carrying value of properties held for sale, see the Trust above. Gain on sales of hotel assets totaled $24,000 and $74,000 for the years ended December 31, 1994 and 1993, respectively, reflecting the property sales described above. Hotel expenses totaled $60.8 million and $68.1 million or 73.6% and 78.4% of hotel revenues, for the years ended December 31, 1994 and 1993, respectively. The decrease in hotel expenses as a percentage of hotel revenue are primarily due to the lower cost of operating the Dallas property (see discussion of hotel revenues above) where operating expenses have historically been higher than at other hotel properties, the improved operating margin resulting from the renovation of the Milwaukee Marriott discussed above and the effect of the sale of the properties having higher operating costs as a percentage of revenues than properties that continue to be operated by the Corporation. Gaming expenses totaled $24.4 million and $24.1 million, or 87.4% and 87.5% of gaming revenues, for the years ended December 31, 1994 and 1993, respectively. For information with respect to rent and interest to the Trust during the years ended December 31, 1994 and 1993, see "The Trust - Results of Operations for the Years Ended December 31, 1994 and 1993" above. Administrative and operating expenses decreased by $161,000, or 6%, for the year ended December 31, 1994 as compared to 1993. The decrease was primarily the result of a reduction in the level of corporate staff. 49 53 The Corporation's net loss totaled $1.2 million, or $(0.59) per share, in 1994, as compared to $3.1 million, or $(1.56) per share, for 1993. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this Item are included in Item 14 of this Joint Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The required disclosure has been previously reported in Starwood Lodging's Joint Proxy Statement dated November 3, 1995. PART III ITEM 10. TRUSTEES, DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. Trustees and Executive Officers of the Trust The following table sets forth, for each of the current members of the Trust's Board of Trustees as of the date of this Joint Annual Report, the class of Trustees to which such Trustee has been elected, the name and age of such Trustee, the principal occupation or employment of such Trustee during the past five years and the principal business of such Trustee's employer, other directorships held by such Trustee and the year in which such Trustee first became a Trustee of the Trust. Trustees Whose Terms Expire at the 1996 Annual Meeting
Name and Age Principal Occupation and Business Experience Trustee Since ------------ -------------------------------------------- ------------- Jeffrey C. Lapin (39) President and Chief Operating Officer of the Trust. September 1992 Mr. Lapin was President and Chief Executive Officer of the Trust from May 1991 to December 1994 and has been a Trustee since September 1992. Prior to that time, he was Vice President (from January 1988) and Secretary (from September 1986) of the Trust. Prior to 1986 Mr. Lapin was a real estate attorney at Mitchell, Silberberg & Knupp in Los Angeles. Mr. Lapin is a director of THQ, Inc., a licensee of Nintendo products. Stephen R. Quazzo (36) President since April 1991 of Equity Institutional Investors, Inc., a subsidiary of Equity Group Investments, Inc., a Chicago based holding company controlled by Samuel Zell. Prior to that time, Mr. Quazzo was a Vice President of Goldman, Sachs & Co., responsible for the firm's real estate
50 54 investment banking activities in the Midwest. Mr. Quazzo is a member of the Urban Land Institute and is August 1995 on the advisory board of City Year Chicago.
Trustees Whose Terms Expire at the 1997 Annual Meeting
Name and Age Principal Occupation and Business Experience Trustee Since ------------ -------------------------------------------- ------------- Bruce W. Duncan (44) President and Chief Executive Officer of The Cadillac August 1995 Fairview Corporation Limited since January, 1996. From October 1994 to December 1995, President of Blakely Capital, Inc., a private firm focusing on investments in real estate and telecommunications. From 1992 to April 1994, Mr. Duncan was President and Co-Chief Executive Officer of JMB Institutional Realty Corporation and from 1984 to 1991 Executive Vice President of JMB Realty Corporation. Mr. Duncan holds an MBA from the University of Chicago. He is on the Board of Trustees of Kenyon College. Daniel H. Stern (34) Co-founder and President of Ziff Brothers Investments, August 1995 L.L.C., a diversified New York based investment management firm. Prior to co-founding Ziff Brothers Investments in December 1992, Mr.Stern was the Co- Managing Director of William A.M. Burden & Co., a private investment management firm where he was responsible for asset allocation and investment policy. Mr. Stern is a member of the Board of Directors of Commodore Media. Inc. Barry S. Sternlicht (35) Chairman and Chief Executive Officer of the Trust. He is founder of Starwood Capital Group, L.P., a real estate investment firm (and co-founder of its predecessor entity in September 1991), and has been the President and CEO of Starwood Capital Group, L.P. since its formation. Prior to forming Starwood Capital, he was Vice President and then Senior Vice President (from 1989 to 1991) of JMB Realty Corporation, a real estate investment firm. Mr. Sternlicht is currently a member of the Management Committee, a Trustee of each of Equity Residential Properties Trust, a multi-family REIT, and Angeles Participating Mortgage Trust, a REIT, Co-Chairman of the board of directors of Westin Hotels & Resorts and is a director of
51 55 U.S. Franchise Systems. Mr. Sternlicht is on the December 1994 Board of Governors of NAREIT and is a member of the Urban Land Institute and of the National Multi-Family Housing Council.
Trustees Whose Terms Expire at 1998 Annual Meeting
Name and Age Principal Occupation and Business Experience Trustee Since ------------ -------------------------------------------- ------------- Madison F. Grose (42) Executive Vice President and General Counsel of December 1994 Starwood Capital Group, L.P. (and its predecessor entity) since July 1992. From November 1983 through June 1992, Partner of the law firm of Pircher, Nichols & Meeks. William E. Simms (51) President of the Risk Management Product Services August 1995 Group, Transamerica Life Companies, and a member of its board of directors. Over the past 24 years, he has held various other management positions with that company. He is active in civic organizations; he is Chairman of the Charlotte-Mecklenburg Urban League and the Charlotte-Mecklenburg Arts and Science Council, and he is a member of the board of directors of the Mecklenburg County United Way and the Mecklenburg Hospital Authority. He is a part owner of the Carolina Panthers National Football League team. Mr. Simms is a director of NationsBank N.A.
The following table includes certain information with respect to the current executive officers of the Trust other than Messrs. Sternlicht and Lapin:
Name Age Position(s) with the Trust - ---- --- -------------------------- Ronald C. Brown 41 Vice President and Chief Financial Officer
Ronald C. Brown. Mr. Brown has been Vice President and Chief Financial Officer of the Trust since July 1995. Prior to joining the Trust, Mr. Brown was President of Sonoran Hotel Advisors, a hotel REIT advisory firm. From December 1993 to August 1994, Mr. Brown was President of Doubletree Corporation, a public hotel operating company. From January 1991 to December 1993, Mr. Brown was Executive Vice President - Finance & Planning and then Chairman of Doubletree 52 56 Hotels Corporation. From March 1988 to April 1992, Mr. Brown was Vice President - Finance & Accounting for Canadian Pacific Hotels Corporation. The executive officers of the Trust serve at the pleasure of the Board of Trustees, subject in the case of Mr. Lapin to the provisions of his employment agreement with the Trust. (See "Employment Agreement with Executive Officer" included in Item 11 of this Joint Annual Report.) There is no family relationship among any of the Trustees or executive officers of the Trust. Directors and Executive Officers of the Corporation The current Board of Directors of the Corporation consists of Earle F. Jones, Bruce M. Ford, and Graeme W. Henderson. In addition, the stockholders of the Corporation have elected Mr. Sternlicht and Daniel W. Yih, Jean-Marc Chapus, Steven R. Goldman, Michael A. Leven and Jonathan D. Eilian as directors of the Corporation to take office upon the receipt of necessary regulatory approvals from the Nevada Gaming Authorities ("Gaming Approval"). Gaming Approvals are expected to be received by the end of 1997. Messrs. Henderson and Ford have indicated their intention to resign from the Board of Directors of the Corporation when the required Gaming Approval is received. Pending receipt of any required Gaming Approval, the current Directors of the Corporation are continuing as such and the Operating Partnership is being managed by a management committee (the "Management Committee") consisting of the current Directors of the Corporation, as well as the additional persons elected to take office upon receipt of any required Gaming Approval. While awaiting Gaming Approval, the Corporation's existing management and Board of Directors will be responsible for the operation and control of the gaming assets of the Corporation, and the other Management Committee members will be prohibited from any influence or control of the gaming assets. The following table sets forth, for each of the current members of the Corporation's Board of Directors as of the date of this Joint Annual Report, the name and age of such Director, the principal occupation or employment of such Director during the past five years and the principal business of such Director's employer, other directorships held by such Director and the year in which such Director first became a Director of the Corporation. The terms of each of such Directors will expire at the 1998 Annual Meeting.
Name and Age Principal Occupation and Business Experience Director Since ------------ -------------------------------------------- -------------- Bruce M. Ford (56) President of FST Management Corporation and President September 1983 and Managing Partner of F.K.B. Management Corporation, hotel and restaurant management companies, since January 1988, and a member of Gibson 25 Associates, LLC, a hotel developer since March 1995. President of Ford Management Corporation, a hotel/motel management and development company, since June 1988. Prior to that time, Mr. Ford was Senior Vice President of Operations of Ramada Inns.
53 57 Graeme W. Henderson (62) Chairman of the Trust from July 1989 to December 1994 September 1986 and Trustee of the Trust from September 1986 to December 1994. He has been an independent financial consultant since January 1990. Prior to January 1990, Mr. Henderson was President of Henderson Consulting, Inc., a private financial consulting firm. Mr. Henderson has been President of Capstan, Inc. (Formerly Seymour, Inc.), a manufacturer of machine tool controls, since 1982. Mr. Henderson is currently a director of Capital Southwest Corporation. Earle F. Jones (69) Chairman of the Board of Directors of the Corporation September 1985 since February 1989. Co-Chairman since 1988 of MMI Hotel Group, a hotel company. From 1967 to 1968, Mr. Jones was President of the International Association of Holiday Inns and served two terms as a director. Mr Jones is a Trustee and Chairman of Communications Improvement Trust, whose beneficiaries are public broadcasting and Tougaloo College, a member of the Board of Trustees for Millsaps College and the Catholic Foundation and Co-Chairman of the Mississippi Olympic Committee.
The following table sets forth, for each of the current members of the Management Committee who will become Directors of the Corporation upon receipt of any required Gaming Approval, the name and age of such member, the principal occupation or employment of such member during the past five years and the principal business of such member's employer, other directorships held by such member and the year in which such member first became a member of the Management Committee. Members Whose Terms Expire at the 1996 Annual Meeting
Member of Management Name and Age Principal Occupation and Business Experience Committee Since ------------ -------------------------------------------- --------------- Jean-Marc Chapus (36) Managing Director and Portfolio Manager of Trust August 1995 Company of the West since March 1995. Prior to that time he was a Managing Director and Principal of Crescent Capital Corporation with primary responsibility of the firm's private lending and private placement activities. From 1986 to 1991, Mr. Chapus served as First Vice President at Drexel Burnham Lambert Incorporated. From
54 58 1982 to 1984, Mr. Chapus was a member of the mergers and acquisitions department at Lehman Brothers Kuhn Loeb Incorporated. Steven R. Goldman (34) Senior Vice President of the Corporation since March December 1994 1995. Mr. Goldman was a Vice President of Starwood Capital Group, L.P., specializing in hotel acquisitions and hotel asset management, from August 1993 to February 1995. From 1990 to 1993, he was Senior Development Manger of Disney Development Company, the real estate investment development and management division of the Walt Disney Company. From 1986 to 1990, Mr. Goldman was Director of Development of The Hyatt Development Corporation. Michael A. Leven (58) President and Chief Executive Officer of U.S. August 1995 Franchise Systems, a hotel franchising and development company, since October 1995. From November 1990 to September 1995, Mr. Leven was President and Chief Operating Officer of Holiday Inn Worldwide. Prior to that time he was President of Days Inn (from 1985 to 1990), a senior executive, including President and Chief Operating Officer, of Americana hotels (from 1976 to 1985) and an executive at Dunfey Family Hotels (1973 to 1976) and Sonesta hotels (1961 to 1973). Mr. Leven is also a member of the Board of Governors of the American Red Cross.
Members Whose Terms Expire at the 1997 Annual Meeting
Member of Management Name and Age Principal Occupation and Business Experience Committee Since ------------ -------------------------------------------- --------------- Jonathan D. Eilian (28) Vice President and then Senior Vice President of August 1995 Starwood Capital Group, L.P. (and its predecessor entity) since its formation in September 1991. Prior to 1991 he was Acquisitions Associate for JMB Realty Corporation,a real estate investment firm, and for The Palmer Group, L.P., a private investment firm specializing in corporate acquisitions. Mr. Eilian received an MBA from the Wharton Graduate School of Business in 1991.
55 59 Barry S. Sternlicht (35) Chairman and Chief Executive Officer of the Trust. He December 1994 was founder of Starwood Capital Group, L.P. (and co- founder of its predecessor entity in September 1991) and has been the President and CEO of Starwood Capital Group, L.P. since its formation. Prior to forming Starwood Capital, he was Vice President and then Senior Vice President (from 1989 to 1991) of JMB Realty Corporation, a real estate investment firm. Mr. Sternlicht is currently a Trustee of the Trust, a Trustee of each of Equity Residential Properties Trust, a multi-family REIT, and Angeles Participating Mortgage Trust, a REIT, Co-Chairman of the board of directors of Westin Hotels & Resorts and is a director of U.S. Franchise Systems. Mr. Sternlicht is on the Board of Governors of NAREIT and is a member of the Urban Land Institute and of the National Multi-Family Housing Council.
Members Whose Terms Expire at the 1998 Annual Meeting
Member of Management Name and Age Principal Occupation and Business Experience Committee Since ------------ -------------------------------------------- --------------- Daniel W. Yih (37) General partner of Chilmark Partners, L.P. since June August 1995 1995. Mr. Yih had served as Chief Financial Officer of Midway Airlines Corporation (from September 1995 to December 1995) and as President of Merco-Savory, Inc., a manufacturer of food preparation equipment (from March 1995 to June 1995) and as a senior executive of Welbilt Corporation (from September 1990 to March 1995). Prior to that time, Mr. Yih served as an associate of Kohlberg & Co.
The following table includes certain information with respect to each of the Corporation's current executive officers other than Mr. Goldman:
Name Age Position(s) with the Corporation - ---- --- -------------------------------- Kevin E. Mallory 36 Executive Vice President
Kevin E. Mallory. Mr. Mallory has been Executive Vice President since July 1992. From December 1991 to July 1992 he was President of Merit Hotel Group, a hotel development and consulting company. From September 1989 to November 1991, he was Development Director, Westin Hotels & Resorts, a hotel management company. Prior to that time he was Assistant Vice President and Asset Manager, VMS Realty Partners, a real estate syndicator. 56 60 The executive officers of the Corporation serve at the pleasure of the Board of Directors. There is no family relationship among any of the Directors or executive officers of the Corporation. ITEM 11. EXECUTIVE COMPENSATION. Summary of Cash and Certain Other Compensation The Trust. The following table provides certain summary information concerning the compensation paid for the fiscal years ended December 31, 1995, 1994 and 1993 to the Trust's Chief Executive Officer and each other executive officer of the Trust whose total compensation for 1995 exceeded $100,000 for services rendered in all capacities to the Trust. SUMMARY COMPENSATION TABLE
Long Term All Other Annual Compensation Compensation Compensation ($) ------------------------- ------------ ---------------- Name and Securities Principal Position Underlying - ------------------ Year Salary ($) Bonus ($) Options/SARs (#) ---- ---------- --------- ---------------- Barry S. Sternlicht 1995 91,667 150,000 417,000 (1) Chairman and Chief Executive Officer Jeffrey C. Lapin 1995 199,167 75,000 73,667 (1) President and Chief 1994 190,000 75,000 2,000 (1)(2) Operating Officer 1993 170,834 20,000 Ronald C. Brown 1995 66,666 65,000 55,000 (1) Vice President and Chief Financial Officer Michael W. Mooney 1995 50,000 75,000 (3) Vice President and 1994 150,000 20,000 1,500 (1)(2) Chief Financial 1993 140,416 11,667 Officer
(1) For information with respect to these options, see "Option Exercises and Holdings" below. (2) Adjusted for one-for-six reverse stock split which occurred in June 1995. (3) Amount shown reflects cash paid for severance. The Corporation. The following table provides certain summary information concerning the compensation paid for the fiscal years ended December 31, 1995, 1994 and 57 61 1993 to each executive officer of the Corporation whose total compensation for 1995 exceeded $100,000 for services rendered in all capacities to the Corporation. SUMMARY COMPENSATION TABLE
Long Term All Other Annual Compensation Compensation Compensation ($) ---------------------------- ----------------- ---------------- Securities Name and Underlying Principal Options/ Position Year Salary($) Bonus($) SARs (#) - -------- ---- --------- -------- ----------------- Kevin E. Mallory 1995 156,244 50,000 30,000(2) Executive Vice 1994 150,000 37,500 1,500(1)(2) President 1993 140,416 11,667 Steven R. Goldman 1995 114,583 75,000 46,000(2) 19,800(3) Senior Vice President
__________________ (1) Adjusted for one-for-six reverse stock split which occurred in June 1995. (2) For information with respect to these options, see "Option Exercises and Holdings" below. (3) Amount shown reflects cash paid for housing allowance. Option Grants The following table shows, as to each executive officer of the Trust and the Corporation named in the Summary Compensation Tables above, information concerning the options granted to that officer during the year ended December 31, 1995. 58 62 OPTION/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
Potential Realizable % of Total Value at Assumed Number of Options/ Annual Rates of Stock Securities SARs Granted Price Appreciation for Underlying to Employees Option Term Options/ in Last Exercise Price Expiration ---------------------- Name SARs Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($) ---- ---------------- ------------ -------------- ---------- ------- ------- Barry S. 417,000(3) 43.1 $23.00(6) June 29, 479,550 959,100 Sternlicht 2005 Jeffrey C. 36,667(1)(2) 3.79 $16.50(1)(6) January 31, 30,250 60,501 Lapin 2000 31,000(3) 3.80 $23.00(6) June 29, 35,650 71,300 2005 Ronald C. 55,000(4) 5.68 $24.375(6) July 10, 67,031 134,063 Brown 2005 Kevin E. 30,000(5) 3.0 $23.00(6) June 29, 34,500 69,000 Mallory 2005 Steven R. 46,000(3) 4.75 $23.00(6) June 29, 52,900 105,800 Goldman 2005
- ----------------------------- (1) Adjusted for one-for-six reverse stock split which occurred in June 1995. (2) Options will become exercisable as to one-third of the amount granted on January 31, 1995, as to an additional one-third of the amount granted on January 31, 1996 and as to the remaining amount granted on January 31, 1997. (3) Except for options for 6,000 shares which were exercisable upon granting, options will become exercisable as to one-third of the amount granted on June 29, 1996, as to an additional one-third of the amount granted on June 29, 1997 and as to the remaining amount granted on June 29, 1998. (4) Options will become exercisable as to one-third of the amount granted on July 10, 1996, as to an additional one-third of the amount granted on July 10, 1997 and as to the remaining amount granted on July 10, 1998. (5) Options will become exercisable as to one-third of the amount granted on June 29, 1996, as to an additional one-third of the amount granted on June 29, 1997 and as to the remaining amount granted on June 29, 1998. 59 63 (6) The per Paired Share exercise prices are equal to the fair market value of a Paired Share on the day the options were granted. Option Exercises and Holdings The following table provides information with respect to the options held as of December 31, 1995 by the executive officers of the Trust and the executive officers of the Corporation named in the Summary Compensation Tables above. 60 64 AGGREGATED OPTION/SAR EXERCISES IN 1995 AND DECEMBER 31, 1995 OPTION VALUES
Number of Shares Underlying Unexercised Value of Unexercised In-the- Options/SARs at Fiscal Money Options/SARs Shares Year-End (#) at Fiscal Year-End ($) (1) Acquired on Value ----------------------------- ----------------------------- Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- ------------ ------------ ----------- ------------- ----------- ------------- Barry S. Sternlicht 6,000 411,000 39,000 2,671,500 Jeffrey C. Lapin 8,333 194,784 20,556 54,111 228,228 540,930 Ronald C. Brown 0 55,000 0 281,875 Michael W. Mooney 4,667 1,000 110,675 13,000 Kevin E. Mallory 4,667 31,000 110,675 208,000 Steven R. Goldman 6,000 40,000 39,000 260,000
_________________ (1) Value is defined as the market price of the Paired Shares at December 31, 1995 less the exercise price of the option. The average of the high and low market prices of the Paired Shares at December 31, 1995 was $29.50. 61 65 Compensation of Trustees/Directors Each Trustee, Director or member of the Management Committee who is not also an officer of the Trust or the Corporation receives annual Trustee's or Director's fees of $6,000 (other than Directors of the Corporation who will continue to receive annual Director's fees of $12,000) and is reimbursed for any out-of-pocket expenses incurred in attending meetings of the Board of Trustees or the Board of Directors. Each Trustee, Director and member of the Management Committee has received options to purchase 6,000 Paired Shares and Trustees, Directors and members of the Management Committee will each receive additional options to purchase 6,000 Paired Shares on June 30 of each year, beginning June 30, 1996. The Chairman of each Board receives an additional fee of $2,500 per year. In addition, each non-officer Trustee or Director receives a fee of $750 for each meeting in which he participates (or, in the case of telephonic meetings, $500) and a fee of $500 for each committee meeting in which he participates ($1,000 per meeting for committee chairman). Share Purchase Agreements Prior to December 1989, the Trust and the Corporation maintained share purchase plans pursuant to which Trustees, Directors, officers and employees of the Trust or the Corporation were granted rights to purchase Paired Shares from the Trust and the Corporation at prices based upon the then fair market value of the Paired Shares. A purchaser of Paired Shares under a share purchase plan made a cash down payment equal to 10% of the purchase price and executed a promissory note in favor of the Trust or the Corporation for the balance. Certificates evidencing Paired Shares purchased under a share purchase plan were pledged to the Trust or the Corporation as collateral to secure payment of the promissory note. Prior to the satisfaction of the obligations represented by the note, the purchaser was entitled to vote the Paired Shares held in pledge, but not to transfer the purchaser's interest in those shares. In 1995, the only share purchase agreements remaining in effect were those between the Trust and each of Mr. Henderson, a former trustee of the Trust and a director of the Corporation, and Mr. Samuels, and between the Corporation and each of Messrs. Jones and Ford. Upon the effectiveness of the Reorganization, the share purchase agreements with Messrs. Henderson, Samuels and Ford were terminated and the non-recourse indebtedness thereunder was canceled (an aggregate of $56,250 with respect to Mr. Henderson, $82,391 with respect to Mr. Samuels, and $108,784 with respect to Mr. Ford). In addition, the Paired Shares pledged in respect of such indebtedness were either released from such pledge, to the extent that such Paired Shares had been paid for (an aggregate of 223 Paired Shares for which $20,625 was paid with respect to Mr. Henderson, 356 Paired Shares for which $32,922 was paid with respect to Mr. Samuels, and 465 Paired Shares for which $45,279 was paid with respect to Mr. Ford) or were forfeited by the individual, to the extent such Paired Shares had not been paid for. 62 66 Employment and Compensation Agreements with Executive Officers The Trust has an employment agreement with Mr. Lapin and the Corporation had an employment agreement with Mr. Mallory which provide that they receive annual salaries in 1995 of $200,000 and $150,000, respectively, and such annual bonuses, if any, as the Boards of the Trust and the Corporation, respectively, may determine. Mr. Lapin's employment agreement expires on January 31, 1997 and Mr. Mallory's employment agreement expired June, 1995. Mr. Lapin is entitled to an annual bonus of not less than $75,000 and was granted options to purchase 41,667 Paired Shares at an exercise price equal to $16.50 per Paired Share (the fair market value of the Paired Shares on the date of grant) which will vest at a rate no longer than the most rapid rate of vesting of options granted to any other executive during the term of his employment agreement. Mr. Lapin's annual salary increased to $225,000 in 1996. Mr. Lapin also is eligible to participate in all employee benefit plans and fringe benefits, if any, the Trust or the Corporation, respectively, makes available to its other executive officers. Mr. Lapin may terminate his employment for "Good Reason" as defined in his employment agreement including an assignment of duties inconsistent with his position, a substantial alteration of his responsibilities, a breach of the agreement by the Trust, removal from office without cause (as defined), a change in the composition of 51% of the Trustees, a decision by the Board of Trustees that the Trust shall merge, sell or dispose of all or substantially all of its assets, dissolve or liquidate, or the failure of Mr. Lapin to be a member of the Board of Trustees other than for cause (as defined). If Mr. Lapin so terminates his employment, he will be entitled to receive a lump sum payment equal to the base salary and bonuses that would have been payable had he continued to be employed for the remainder of the term of the employment agreement, and all fringe benefits to which he would have been entitled through the remainder of the term of the employment agreement (other than stock options or stock loans not granted prior to the date of termination). Pursuant to Mr. Lapin's employment agreement, the Trust loaned $250,000 to Mr. Lapin in 1995. The loan has a term of 10 years, bears interest at the lowest applicable rate prescribed by section 1274(d) of the Code and is unsecured. Mr. Lapin will have the right at any time to repay up to 50% of the loan (plus 50% of accrued interest and any collection costs) by delivering Paired Shares for credit at the rate of $11.50 per Paired Share (which is one-half of the price to the public per Paired Share in the Offering). In February, 1996, the Trust granted to Barry S. Sternlicht, Chairman and Chief Executive Officer, two warrants, each to purchase up to 15,000 Paired Shares at an exercise price of $1.00 per Paired Share. One warrant is exercisable immediately (the "1996 Warrant") and one is exercisable only after January 1, 1997 (the "1997 Warrant"). Any Paired Shares purchased upon exercise of such a warrant will vest ratably over the balance of the year in which that warrant first became exercisable, to the extent Mr. Sternlicht has not theretofore resigned or been discharged for "cause." Exercise of the 1997 Warrant is also subject to the condition that Mr. Sternlicht not have previously resigned or been discharged for "cause." All Paired Shares purchased upon exercise of either the 1996 Warrant or the 1997 Warrant are non-transferable prior to February, 1998. The Board of Trustees of the Trust and the Board of Directors of the Corporation intend to develop incentive compensation programs for 63 67 their officers and key employees which are expected to include similar grants of warrants, options or restricted stock or other forms of incentive compensation. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1995 and early 1996, the compensation committee of the Trust (the "Trust Compensation Committee") was comprised of Messrs. Sternlicht, Grose and Simms. Based on informal discussions, the Trust Compensation Committee made recommendations to the Trust's Board of Trustees regarding the compensation of the Trust's executive officers (other than with respect to Mr. Sternlicht, as to which Messrs. Sternlicht and Grose recused themselves). Based in part on the recommendations of the Trust Compensation Committee, the Board of Trustees of the Trust and the executive committee of the Board of Trustees (Messrs. Sternlicht, Lapin and Grose) made decisions with respect to the compensation of the Trust's executive officers. Messrs. Sternlicht and Lapin, who are executive officers of the Trust and members of the Board of Trustees of the Trust, did not participate at the meetings related to their own compensation. During 1995 and early 1996, the compensation committee of the Management Committee (the "Corporation Compensation Committee") was made up of Messrs. Sternlicht, Jones and Chapus. The Corporation Compensation Committee met informally during 1995 and early 1996 to discuss the compensation of the Corporation's executive officers. Based in part on the recommendations of the Corporation Compensation Committee, the executive committee of the Management Committee comprised of Messrs. Sternlicht, Eilian and Goldman, made decisions with respect to the compensation of the Corporation's executive officers (except that Mr. Goldman recused himself with respect to his own compensation). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Certain Beneficial Owners. To the knowledge of the Trust and the Corporation, no person owns beneficially 5% or more of the Paired Shares, except as follows:
Name and Address Amount Percent of of Beneficial Owner Beneficially Owned Class (1) ------------------- ------------------ ---------- FMR Corp. (2) (2) 82 Devonshire Street Boston, MA 02109 Starwood Capital Group, L.P. and 1,195,885 (3) 8.0% affiliated entities Three Pickwick Plaza, Suite 250 Greenwich, CT 06830
64 68 Cohen & Steers Capital 1,033,300 (4) 7.5% Management, Inc. 757 Third Avenue New York, NY 10017 T. Rowe Price Associates, Inc. 799,500 (5) 5.7% 100 East Pratt Street Baltimore, MD 21202
(1) Based on the number of Paired Shares outstanding on February 23, 1996. (2) Based on information contained in Amendment No. 1 to Schedule 13G dated February 14, 1996, FMR Corp. beneficially owns 1,795,255 Paired Shares (or 13.0% of the Paired Shares). Of these Paired Shares 1,472,389 Paired Shares are held by Fidelity Management & Research Company (a wholly owned subsidiary of FMR Corp.) and 322,866 Paired Shares are held by Fidelity Management Trust Company (a wholly owned subsidiary of FMR Corp.). FMR Corp. has sole voting power with respect to 316,266 Paired Shares and dispositive power with respect to all of these Paired Shares. Based on additional information provided to Starwood Lodging, these Paired Shares are held by various distinct entities no one of which, directly or by attribution, holds in excess of 8.0% of the outstanding Paired Shares. (3) Based on additional information contained in Amendment No. 1 to Schedule 13D dated January 23, 1996 filed by Starwood Capital, Barry S. Sternlicht and the following Starwood Partners: Berl Holdings L.P., Starwood-Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood-Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., Starwood- Huntington Partners, L.P., Woodstar Partners I, L.P., Firebird Consolidated Partners, L.P., Starwood Opportunity Fund II, L.P. ("SOFI II"), Berl Holdings I, Inc., SAHI, Inc., SNHI, Inc., BSS Capital Partners, L.P., Sternlicht Holdings II, Inc., and SRL Holdings, Inc. Such Schedule 13D reports that Mr. Sternlicht has sole power to vote and dispose of 20,000 Paired Shares held by him and that SOFI II beneficially owns 49,933 Paired Shares and that SOFI II and Mr. Sternlicht have the power to vote and dispose of such Paired Shares and that the Starwood Partners hold units in the Realty Partnership and the Operating Partnership which are, subject to the 8.0% Paired Share ownership limit, exchangeable for an aggregate of 5,944,027 Paired Shares (approximately 30.1% of the outstanding Paired Shares after such exchange). Such units were acquired in the Reorganization described in Part I, Item 1 of this Joint Annual Report. Mr. Sternlicht also owns 15,000 Paired Shares, which are subject to the terms of a presently exercisable restricted stock warrant and may not be transferred prior to February, 1998, and 6,000 Paired Shares subject to presently exercisable options. Such Amendment No. 1 to Schedule 13D reports that because of the 8.0% ownership limit, the Starwood Partners cannot beneficially own more than 8.0% of the outstanding Paired Shares. The amount beneficially owned and the percent of class assumes that Starwood Partners exchange units for Paired Shares to the maximum extent permitted within the ownership limit provision; provided, however, that prior to receipt of any required Gaming Approval, Starwood Capital's ownership of Paired Shares may not exceed 4.9% of the outstanding Paired Shares. (4) Based on information contained in Schedule 13G dated January 29, 1996. Cohen & Steers Capital Management, Inc. has sole voting power with respect to 879,400 Paired Shares and dispositive power with respect to all of these Paired Shares. 65 69 (5) Based on information contained in Schedule 13G dated February 14, 1996. T. Rowe Price Associates, Inc. has sole dispositive power with respect to all these Paired Shares and T. Rowe Price Associates, Inc. and T. Rowe Price Growth Stock Fund, Inc. have sole voting power with respect to 10,200 and 700,000 Paired Shares, respectively. Trustees and Officers of the Trust. The following table sets forth the beneficial ownership of the Paired Shares as of February 23, 1996 by each Trustee and each executive officer of the Trust named in the Summary Cash Compensation Table included in Item 11 hereof who owns Paired Shares and by all Trustees and executive officers of the Trust as a group. Except as otherwise provided below, each beneficial owner has sole voting and investment power with respect to all Paired Shares beneficially owned.
Amount Name of Beneficially Percent of Beneficial Owner Owned Class (1) ---------------- ------------- ---------- Barry S. Sternlicht 1,195,885 (3) 8.0% Jeffrey C. Lapin 41,680 (4) (2) Ronald C. Brown 0 (2) Bruce W. Duncan 12,666 (5) (2) Stephen R. Quazzo 6,465 (5) (2) Madison F. Grose 7,200 (5) (2) William E. Simms 6,000 (5) (2) Daniel H. Stern 6,000 (5) (2) All Trustees and officers as a group 1,275,896 (6) 8.7%
(1) Based on the number of Paired Shares outstanding on February 23, 1996, including the exchange of units for Paired Shares as discussed in note (3) below.. (2) Less than 1%. (3) See Note (3) under "Certain Beneficial Owners" above. (4) Includes 20,556 Paired Shares subject to presently exercisable options and 2,166 Paired Shares owned in a pension plan of which Mr. Lapin is sole trustee and beneficiary. (5) Includes 6,000 Paired Shares subject to presently exercisable options. 66 70 (6) Includes 56,556 Paired Shares that may be acquired upon the exercise of presently exercisable options, and 1,104,952 Paired Shares issuable upon exchange of units of the Realty Partnership and the Operating Partnership (see Note (3) above). Directors and Officers of the Corporation. The following table sets forth the beneficial ownership of Paired Shares as of February 23, 1996 by each Director and each executive officer of the Corporation named in the Summary Cash Compensation Table included in Item 11 hereof who owns Paired Shares and by all Directors and executive officers of the Corporation as a group. Except as otherwise provided below, each beneficial owner has sole voting and investment power with respect to all Paired Shares beneficially owned.
Name of Number of Shares Percent of Beneficial Owner Beneficially Owned Class (1) ---------------- ------------------ --------- Kevin E. Mallory 6,982 (3) (2) Bruce M. Ford 6,694 (4) (2) Earle F. Jones 8,748 (5) (2) Graeme W. Henderson 6,962 (6) (2) Barry S. Sternlicht 1,195,885 (7) 8.0% Daniel W. Yih 7,474 (8) (2) Jean-Marc Chapus 6,000 (8) (2) Steven R. Goldman 7,000 (8) (2) Michael A. Leven 6,000 (8) (2) Jonathan D. Eilian 6,000 (8) (2) All Directors and officers as a group 1,257,745 (9) 8.6%
(1) Based on the number of Paired Shares outstanding on February 23, 1996, including the exchange of units as described in note (7) below. (2) Less than 1%. (3) Includes 4,667 Paired Shares subject to presently exercisable options. (4) Includes 172 Paired Shares issuable upon exercise of paired warrants issued by the Trust and the Corporation, 57 Paired Shares owned by Mr. Ford's wife and 6,000 Paired Shares subject to presently exercisable options. (5) Includes 83 Paired Shares issuable upon exercise of paired warrants issued by the Trust and the Corporation and 6,000 Paired Shares subject to presently exercisable options. (6) Includes 850 Paired Shares owned in a Keogh Plan and 6,000 Paired Shares subject to presently exercisable options. 67 71 (7) See Note (3) under "Certain Beneficial Owners" above. (8) Includes 6,000 Paired Shares subject to presently exercisable options. (9) Includes 58,667 Paired Shares that may be acquired upon the exercise of presently exercisable options, 255 Paired Shares issuable upon exercise of paired warrants issued by the Trust and the Corporation and 1,104,952 Paired Shares issuable upon exchange of units of the Realty Partnership and the Operating Partnership (see Note (7) above). Compliance with the Reporting Requirements of Section 16(a). Section 16(a) of the Exchange Act requires Starwood Lodging's Trustees, Directors and executive officers, and persons who own more than ten percent of a registered class of Starwood Lodging's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Paired Shares and other equity securities of Starwood Lodging. Trustees, Directors, officers and greater than ten percent shareholders are required to furnish Starwood Lodging with copies of all Section 16(a) forms they file. To Starwood Lodging's knowledge, based solely on a review of the copies of such reports furnished to Starwood Lodging and written representations that no other reports were required, during the fiscal year ended December 31, 1995, all Section 16(a) filing requirements applicable to its Trustees, Directors, officers and greater than ten percent beneficial owners were complied with; except that one report, covering one transaction involving the purchase of Paired Shares, was filed late by Mr. Goldman, an officer and Director of the Corporation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reorganization. Pursuant to the Reorganization, the Trust contributed to the Realty Partnership substantially all of the Trust's properties and assets, subject to all of its liabilities, in exchange for a general partner interest in the Realty Partnership and Starwood Capital contributed to the Realty Partnership cash, certain hotel properties, first mortgage notes and senior debt of the Realty Partnership in exchange for a limited partner interest in the Realty Partnership. In addition, the Corporation and its subsidiaries contributed to the Operating Partnership substantially all of their assets, excluding the Gaming Assets, subject to certain liabilities, in exchange for general partner interests in the Operating Partnership and 68 72 Starwood Capital contributed to the Operating Partnership cash, furnishings, equipment and other hotel operating assets in exchange for a limited partner interest in the Operating Partnership. The Reorganization was approved by the shareholders of the Trust and the Corporation at meetings held on December 15, 1994. The limited partnership interests of the Realty Partnership and the Operating Partnership held by Starwood Capital are exchangeable on a one-for-one basis for Paired Shares. See "Security Ownership of Certain Beneficial Owners and Management." Barry S. Sternlicht, the President and Chief Executive Officer of the general partners of Starwood Capital is also the Chairman and Chief Executive Office of the Trust and is a Trustee of the Trust, is a member of the Management Committee of the Operating Partnership and has been elected as a Director of the Corporation to take office upon the receipt of any required Gaming Approval. In addition, Mr. Grose, a Trustee of the Trust, is Executive Vice President and General Counsel of Starwood Capital and Mr. Eilian, who is a member of the Management Committee of the Operating Partnership and has been elected as a Director of the Corporation to take office upon the receipt of any required Gaming Approval, is Senior Vice President of Starwood Capital. Certain Reimbursements and Payments to Starwood Capital. Starwood Capital and Starwood Lodging have agreed that, subject to approval by the independent Trustees or Directors, as appropriate, Starwood Capital will be reimbursed for out-of-pocket costs and expenses for any services provided to Starwood Lodging. Starwood Capital will also be reimbursed for its internal cost (including allocation of overhead) for services provided to Starwood Lodging, provided that, where such costs are currently expensed by Starwood Lodging, such reimbursement will not exceed $250,000 for the twelve months ending June 30, 1996. As of December 31, 1995, Starwood Lodging has not reimbursed Starwood Capital for any of these costs since July 1, 1995, and accordingly has included an accrual of $250,000 in accounts payable and other liabilities at December 31, 1995. During 1995, the Trust reimbursed Starwood Capital approximately $1.6 million, the majority of which represented a deposit on the Boston Park Plaza. Aside from Starwood Capital's internal cost (as referred to above), during 1995 Starwood Capital incurred approximately $1.2 million of additional costs which were paid directly by Starwood Lodging to third party vendors for services provided to Starwood Lodging, representing costs associated with the Reorganization, the Offering and hotel acquisitions. Starwood Capital provided to the Trust a $9.6 million loan, all of which has been repaid, in order to enable the Trust to acquire the Omni Hotel in Chapel Hill, North Carolina. This loan bore interest at 12% per annum. 69 73 The Trust also received a $5 million unsecured loan from Starwood Capital to fund the deposit for the acquisition of the Sheraton Colony Square Hotel in Atlanta, Georgia. This loan bore interest at 12% per annum and was repaid in July 1995. As part of the consideration to Starwood Capital in connection with the Reorganization (which was approved by the shareholders of the Trust and the Corporation in December 1994), the Partnerships agreed to pay an amount to Starwood Capital only if the Trust and the Corporation consummated a public offering of Paired Shares prior to June 30, 1996, which offering results in the receipt by the Trust and the Corporation of gross proceeds of not less than $150 million. Upon the consummation of the Offering in July 1995, the Trust and the Corporation paid $3.7 million to Starwood Capital pursuant to such agreement. Westin Agreement. Starwood Capital owns an interest in the Westin Hotel Company and certain affiliates ("Westin"), which own equity interests in domestic and international hotels and which manage, franchise or represent hotels worldwide. The Trust and the Corporation have entered into an agreement with Westin pursuant to which Westin has agreed that during the period in which an officer, director, general partner or employee of Starwood Capital is on either the Board of Trustees or the Board of Directors, and Starwood Capital co-controls Westin, Westin will not acquire or seek to acquire United States hotel equity interests, other than certain specified acquisitions, including, without limitation, minority equity investments made in connection with Westin's acquisition of a management company. The Trust and the Corporation have agreed that under certain circumstances if Westin is prohibited from consummating an opportunity which was not being independently pursued by the Trust and the Corporation prior to such prohibition, the Trust and the Corporation will not pursue such opportunity for 270 days after such prohibition. Management Obligations of Western Host. In connection with the settlement of shareholder litigation (see Item 3 - "Legal Proceedings"), Messrs. Rothman and Young caused each of the Western Host Partnerships (other than Western Host Santa Maria Partners) to terminate Western Host's management obligations with respect to that partnership's hotel, indemnified the Corporation and Western Host against all claims that might be made against Western Host in connection with its status as a general partner of Western Host Santa Maria Partners, Western Host Pasadena Partners and Western Host San Francisco Partners or in connection with any fact or circumstance occurring since January 1, 1993 with respect to any of the Western Host Hotels, and delivered to the Corporation an irrevocable letter of credit in the amount of $800,000. Western Host has agreed to accept the termination of its management obligations with respect to the Western Host Hotels and has drawn on the letter of credit for the full $800,000. In addition, $120,000 of the management fees and all costs and amounts advanced to the 70 74 partnerships which were payable to Western Host were paid in full settlement of such amounts due at December 31, 1993. Messrs. Young and Rothman also agreed to be responsible for a percentage of any retroactive adjustments in worker's compensation insurance premiums. Starwood Lodging has paid $167,041 for retroactive worker's compensation insurance premiums and have sought reimbursement from Messrs. Young and Rothman of their share of that amount (approximately an aggregate of $56,000). (See Item 3 - "Legal Proceedings.") Senior Debt Related Transactions. In May 1994, Starwood Capital purchased (at a discount) approximately $21 million of the Trust's senior debt at a public auction by the institutional holder of such debt. In August 1994, an affiliate of Merrill Lynch (the "New Lender") purchased $74 million of the Trust's senior debt, including the senior debt previously held by Starwood Capital, pursuant to a privately negotiated transaction and at a discount. In conjunction with such purchase by the New Lender, it entered into an agreement (the "Swap Agreement") providing that (i) Starwood Capital could acquire such senior debt within a specified period at the New Lender's cost basis and (ii) the excess of debt service payments made on such senior debt over the New Lender's cost basis, together with a specified return thereon, would be payable to Starwood Capital. In March 1995, the senior debt was refinanced by the New Lender and the Swap Agreement was terminated with Starwood Capital receiving (a) the return of $13.1 million of cash collateral which it had deposited as security for its obligations in respect of the Swap Agreement, (b) additional cash of $2.7 million, (c) $12 million of the senior debt and (d) certain warrants attendant to the senior debt. Starwood Capital contributed such senior debt to the Partnerships in exchange for 813,880 Units of the Partnerships. The Trust and the Corporation paid $786,000 to Starwood Capital to cancel certain warrants relating to the senior debt in accordance with the requirements of such senior debt. Other Relationships Sherwin L. Samuels, the General Counsel and Secretary of the Trust, is a partner through a professional corporation of the law firm of Sidley & Austin. Sidley & Austin provides legal services to the Trust, the Corporation and Starwood Capital and certain of its affiliates. On March 24, 1995, the Realty Partnership and the Trust entered into the Prior Credit Agreement pursuant to which the Realty Partnership borrowed $131.75 million under the Loan which was used primarily to refinance all outstanding Senior Debt (after the exchange by a Starwood Partner of $12 million of Senior Debt for units of the Realty Partnership and the Operating Partnership) and approximately $27 million of first mortgage debt. In connection with the refinancing under the Prior Credit Agreement, the Realty Partnership paid $514,000 to one of the Senior Lenders and a portion of the Lender Warrants 71 75 issued in connection with an existing credit agreement could be canceled upon the payment to a Starwood Partner of a $786,000 cancellation fee. Effective March 31, 1995, the Realty Partnership issued an unsecured note payable to the Starwood Partner and the remaining Lender Warrants were canceled. The transactions relating to the cancellation of Lender Warrants were recorded as a reduction in paid-in capital. For information with respect to the agreement with Ross, see "Legal Proceedings" contained in Item 3 of this Joint Annual Report. For information with respect to the Share Purchase Agreements of Messrs. Henderson, Samuels, Jones and Ford see "Share Purchase Agreements" contained in Item 11 of this Joint Annual Report. For information with respect to the employment agreements of Messrs. Lapin and Mallory see "Employment Agreements with Executive Officers" contained in Item 11 of this Joint Annual Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed. Financial Statements and Financial Statement Schedules The financial statements and financial statements schedules listed in the Index to Financial Statements and Financial Statements Schedules following the signature pages hereof are filed as part of this Joint Annual Report. Exhibits
Exhibit No. Description of Exhibit - ----------- ---------------------- 2.1 Formation Agreement dated as of November 11, 1994 among the Trust, the Corporation, Starwood Capital and the Starwood Partners (incorporated by reference to Exhibit 2 to the Trust's and the Corporation's Joint Current Report on Form 8-K dated November 16, 1994).2
__________________________________ 2 The Securities and Exchange Commission file numbers of all filings made pursuant to the Securities Act of 1934, as amended, and referenced herein are: 1-6828 (Starwood Lodging Trust) and 1-7959 (Starwood Lodging Corporation). 72 76 3.1 Amended and Restated Declaration of Trust of the Trust dated June 6, 1988, as amended (incorporated by reference to Exhibit 3A to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 3.2 Amendment and Restatement of Articles of Incorporation of the Corporation (incorporated by reference to Exhibit 3B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 3.3 Trustees' Regulations of the Trust, as amended (incorporated by reference to Exhibit 3.3 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")). 3.4 By-laws of the Corporation, as amended (incorporated by reference to Exhibit 3.4 to the 1994 Form 10-K).
73 77
Exhibit No. Description of Exhibit - ----------- ---------------------- 4.1 Pairing Agreement dated June 25, 1986, between the Trust and the Corporation, as amended (incorporated by reference to Exhibit 4.1 to the 1994 Form 10-K). 4.2 Amendment No. 1 to the Pairing Agreement dated as of February 1, 1995 between the Trust and the Corporation. 4.3 Form of Warrant Agreement dated as of September 16, 1986, between the Trust and City National Bank ("CNB") (incorporated by reference to Exhibit 4.3 to the Trust's and the Corporation's Registration Statement on Form S-4 (the "S-4 Registration Statement") filed with the Securities and Exchange Commission (the "SEC") on August 1, 1986 (Registration No. 33-7694)). 4.4 Form of Warrant Agreement dated as of September 16, 1986, between the Corporation and CNB (incorporated by reference to Exhibit 4.3A to the S-4 Registration Statement). 10.1 Incentive and Non-Qualified Share Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.8 to the Trust and the Corporation's Joint Annual Report on Form 10-K for the year ended August 31, 1986 (the "1986 Form 10-K")).3 10.2 Corporation Stock Non-Qualified Stock Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.9 to the 1986 Form 10-K).2 10.3 Stock Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.10 to the 1986 Form 10-K).2 10.4 Trust Shares Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K).2
__________________________________ 2 Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. 74 78
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.5 1995 Share Option Plan of the Corporation.2 10.6 1995 Share Option Plan of the Trust.2 10.7 Form of Indemnification Agreement and Amendment No. 1 to Indemnification Agreement between the Trust and each of Messrs. Barry S. Sternlicht, Jeffrey C. Lapin, Jonathan Eilian, Michael W. Mooney, Bruce M. Ford, Madison F. Grose, Bruce W. Duncan, Steven R. Quazzo, William E. Simms, Daniel H. Stern and Ronald C. Brown.2 10.8 Form of Indemnification Agreement and Amendment No. 1 to Indemnification Agreement between the Corporation and each of Messrs. Earle F. Jones, Kevin E. Mallory, Bruce M. Ford, Steven R. Goldman, Graeme W. Henderson, Barry S. Sternlicht, Jean-Marc Chapus, Jonathan Eilian, Michael A. Leven, Daniel W. Yih and Alan M. Schnaid.2 10.9 Form of Indemnification Agreement dated as of February 3, 1992, between the Corporation and each of Messrs. Ronald A. Young, Graeme W. Henderson, Bruce M. Ford, Earle M. Jones and William H. Ling (incorporated by reference to Exhibit 10.30 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1991).2 10.10 Executive Employment Agreement dated as of January 31, 1995, between the Trust and Jeffrey C. Lapin (incorporated by reference to Exhibit 10.12 to the 1994 Form 10-K).2 10.11 Form of Amended and Restated Lease Agreement entered into as of January 1, 1993, between the Trust as Lessor and the Corporation (or a subsidiary) as Lessee (incorporated by reference to Exhibit 10.19 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1992). 10.12 Exchange Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation, the Realty Partnership, the Operating Partnership and the Starwood Partners (incorporated by reference to Exhibit 2B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.13 Registration Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation and Starwood Capital (incorporated by reference to Exhibit 2C to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995). 10.14 Amended and Restated Limited Partnership Agreement for the Realty Partnership among the Trust and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 10.21 to the Trust's and the Corporation's Registration Statement on Form S-2 filed with the
75 79 Securities and Exchange Commission (Registration Nos. 33-59155 and 33-59155-01) (the "S-2 Registration Statement")). 10.15 Amended and Restated Limited Partnership Agreement for the Operating Partnership among the Corporation and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 10.22 to the S-2 Registration Statement). 10.16 Mortgage Loan Funding Facility Agreement, dated as of July 25, 1995, among the Realty Partnership and SLT Realty Company, LLC, as the borrower, and Lehman Commercial Paper, Inc., as lender, together with Amendment No. 1 thereto, dated as of October 30, 1995. 10.17 Collateral Substitution Agreement, dated as of January 4, 1996, between the Realty Partnership and SLT Realty Company, LLC, as borrower, and Lehman Commercial Paper, Inc., as lender. 10.18 Amended and Restated Line of Credit Agreement, dated as of October 25, 1995, among the Trust and the Realty Partnership, as borrower, and Bankers Trust Company, as collateral agent, and Lehman Brothers Holdings, Inc., d/b/a Lehman Capital, a division of Lehman Brothers Holdings, Inc., individually and as agent, together with First Amendment thereto, dated as of January 3, 1996 and effective as of October 25, 1995. 10.19 Form of Amendment No. 1 to Formation Agreement among the Trust, the Corporation and the Starwood Partners (incorporated by reference to Exhibit 10.23 to the S-2 Registration Statement). 10.20 Form of Westin/HOT Agreement among W&S Hotel L.L.C., W&S Hotel Holding Corp., Westin Hotel Company, the Realty Partnership, the Operating Partnership, WHWE L.L.C. and Woodstar Limited Partnership (incorporated by reference to Exhibit 10.24 to the S-2 Registration Statement). 21. Subsidiaries of the Corporation. SLC Operating Limited Partnership Hotel Investors of Arizona, Inc. Hotel Investors of Nebraska, Inc. Hotel Investors of Michigan, Inc. Hotel Investors of Missouri, Inc. Hotel Investors Corporation of Nevada Hotel Investors of Virginia, Inc. Columbus Operators, Inc. Lyntex Properties, Inc. Western Host, Inc.
76 80 Subsidiaries of the Trust. SLT Realty Limited Partnership Starlex Company LLC SLT Realty Company LLC 23. Consent of Independent Accountants. 27.1 Financial Data Schedule for Starwood Lodging Corporation. 27.2 Financial Data Schedule for Starwood Lodging Trust. (b) Reports on Form 8-K. ------------------- During the fourth quarter of 1995, the Trust and the Corporation filed the following Joint Current Reports on Form 8-K: On October 9, 1995, the Trust and Corporation filed a Joint Current Report on Form 8-K to report the purchase of the Doral Inn in New York, New York. On December 1, 1995 the Trust and the Corporation filed an amendment to such Joint Current Report. On October 31, 1995, the Trust and Corporation filed a Joint Current Report on Form 8-K to report a change in certifying accountants.
77 81 SIGNATURE 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. STARWOOD LODGING TRUST (Registrant) Date: March 5, 1996 By: /s/ Jeffrey C. Lapin --------------------------------- Jeffrey C. Lapin, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Barry S. Sternlicht Chairman, Chief March 5, 1996 - -------------------------- Executive Officer Barry S. Sternlicht and Trustee (Principal Executive Officer) /s/ Jeffrey C. Lapin President, Chief March 5, 1996 - -------------------------- Operating Officer Jeffrey C. Lapin and Trustee /s/ Ronald C. Brown Vice President and March 5, 1996 - -------------------------- Chief Financial Officer Ronald C. Brown (Principal Financial and Accounting Officer) /s/ Bruce W. Duncan Trustee March 5, 1996 - -------------------------- Bruce W. Duncan /s/ Madison F. Grose Trustee March 5, 1996 - -------------------------- Madison F. Grose /s/ Stephen R. Quazzo Trustee March 5, 1996 - -------------------------- Stephen R. Quazzo /s/ William E. Simms Trustee March 5, 1996 - -------------------------- William E. Simms /s/ Daniel H. Stern Trustee March 5, 1996 - -------------------------- Daniel H. Stern
78 82 SIGNATURE 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. STARWOOD LODGING CORPORATION (Registrant) Date: March 5, 1996 By: /s/ Kevin E. Mallory -------------------------------- Kevin E. Mallory, Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Earle F. Jones Chairman of the Board of March 5, 1996 - ----------------------- Earle F. Jones Directors and Director /s/ Kevin E. Mallory Executive Vice President March 5, 1996 - ----------------------- (Principal Executive Officer) Kevin E. Mallory /s/ Alan M. Schnaid Director of Accounting March 5, 1996 - ----------------------- (Principal Accounting Officer) Alan M. Schnaid /s/ Bruce M. Ford Director March 5, 1996 - ----------------------- Bruce M. Ford /s/ Graeme W. Henderson Director March 5, 1996 - ----------------------- Graeme W. Henderson
79 83 STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AS OF DECEMBER 31, 1995 AND 1994 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 INDEPENDENT AUDITORS' REPORT F-1, F-2 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION: Combined Balance Sheets F-3 Combined Statements of Operations F-4 Combined Statements of Cash Flows F-5 Combined Statements of Shareholders' Equity F-6 STARWOOD LODGING TRUST: Balance Sheets F-7 Statements of Operations F-8 Statements of Cash Flows F-9 Statements of Shareholders' Equity F-10 STARWOOD LODGING CORPORATION: Balance Sheets F-11 Statements of Operations F-12 Statements of Cash Flows F-13 Statements of Shareholders' Deficit F-14 NOTES TO FINANCIAL STATEMENTS F-15 SCHEDULES: Schedule III- Real Estate and Accumulated Depreciation F-36 Schedule -IV Mortgage Loans on Real Estate F-41
84 INDEPENDENT AUDITORS' REPORT To the Boards of Trustees and Directors and Shareholders of Starwood Lodging Trust and Starwood Lodging Corporation: We have audited the accompanying separate and combined financial statements of Starwood Lodging Trust (a Maryland real estate investment trust) (the "Trust") and Starwood Lodging Corporation (a Maryland corporation) and its subsidiaries (the "Corporation"), collectively the "Companies", as of December 31, 1995, and for the year then ended, listed in the foregoing index to financial statements and financial statement schedules. Our audit also included the financial statement schedules listed in the foregoing index to financial statements and financial statement schedules. These financial statements and financial statement schedules are the responsibility of the Trust's, the Corporation's and the Companies' managements. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such separate and combined financial statements present fairly, in all material respects, the financial position of the Companies and the financial position of the Trust and the Corporation at December 31, 1995, and the respective results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. COOPERS & LYBRAND L.L.P. Los Angeles, California January 31, 1996 F-1 85 INDEPENDENT AUDITORS' REPORT To The Board Of Trustees And Directors And Shareholders of Starwood Lodging Trust and Starwood Lodging Corporation: We have audited the accompanying separate and combined financial statements of Starwood Lodging Trust (a Maryland real estate investment trust) (the "Trust") and Starwood Lodging Corporation (a Maryland corporation) and its subsidiaries (the "Corporation"), collectively the "Companies", as of December 31, 1994, and for each of the two years in the period ended December 31, 1994, listed in the foregoing index to financial statements and financial statement schedules. Our audits also included the financial statements schedules listed in the foregoing index to financial statements and financial statement schedules. These financial statements and financial statement schedules are the responsibility of the Trust's, the Corporation's and the Companies' managements. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material missatement. 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, such separate and combined financial statements present fairly, in all material respects, the financial position of the Companies and the financial position of the Trust and the Corporation at December 31, 1994, and the respective results of their operations and their cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Los Angeles, California March 24, 1995 F-2 86 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED BALANCE SHEETS
December 31, December 31, 1995 1994 ------------------- ------------------- ASSETS Hotel assets held for sale - net................................. $ 21,063,000 $ 8,585,000 Hotel assets - net............................................... 315,895,000 142,600,000 ------------------- ------------------- 336,958,000 151,185,000 Mortgage notes receivable, net................................... 79,261,000 14,049,000 Investments...................................................... 2,858,000 262,000 ------------------- ------------------- Total real estate investments............................... 419,077,000 165,496,000 Cash and cash equivalents........................................ 9,332,000 5,065,000 Accounts and interest receivable................................. 9,595,000 4,040,000 Notes receivable, net............................................ 1,796,000 1,627,000 Inventories, prepaid expenses and other assets................... 20,194,000 7,727,000 ------------------- ------------------- $459,994,000 $183,955,000 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Collateralized notes payable and revolving line of credit........ $119,100,000 $113,896,000 Mortgage and other notes payable................................. 4,385,000 46,586,000 Accounts payable and other liabilities........................... 19,022,000 14,765,000 Dividends/Distributions payable.................................. 9,284,000 ------------------- ------------------- 151,791,000 175,247,000 ------------------- ------------------- Commitments and contingencies MINORITY INTEREST................................................ 92,735,000 ------------------- ------------------- SHAREHOLDERS' EQUITY Trust shares of beneficial interest at December 31, 1995 and 1994 $.01 and $6.00 par value, respectively; authorized 30,000,000 shares; outstanding 13,825,000 shares and 2,022,158 shares, respectively.................................................. 138,000 12,133,000 Corporation common stock at December 31, 1995 and 1994, $.01 and $.60 par value, respectively; authorized 30,000,000 shares; outstanding 13,825,000 and 2,022,158 shares, respectively..... 138,000 1,213,000 Additional paid-in capital....................................... 434,107,000 210,251,000 Distributions in excess of earnings.............................. (218,915,000) (214,889,000) ------------------- ------------------- 215,468,000 8,708,000 ------------------- ------------------- $459,994,000 $183,955,000 =================== ===================
See accompanying notes to financial statements. F-3 87 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------------------------------ 1995 1994 1993 -------------- --------------- --------------- REVENUE Hotel............................................. $121,250,000 $82,668,000 $86,903,000 Gaming............................................ 26,929,000 27,981,000 27,505,000 Interest from mortgage and other notes............ 10,905,000 1,554,000 1,412,000 Management fees and other income.................. 1,966,000 411,000 475,000 Rents from leased hotel properties and income from investments....................... 791,000 927,000 839,000 Gain (loss) on sales of hotel assets.............. (125,000) 456,000 21,000 -------------- --------------- --------------- 161,716,000 113,997,000 117,155,000 -------------- --------------- --------------- EXPENSES Hotel operations.................................. 85,017,000 60,829,000 68,132,000 Gaming operations................................. 24,242,000 24,454,000 24,055,000 Interest.......................................... 13,138,000 17,606,000 15,187,000 Depreciation and amortization..................... 15,469,000 8,161,000 9,232,000 Administrative and operating...................... 5,712,000 4,203,000 4,729,000 Shareholder litigation............................ 2,648,000 483,000 Provision for losses.............................. 759,000 2,369,000 -------------- --------------- --------------- 143,578,000 118,660,000 124,187,000 -------------- --------------- --------------- Income (loss) before extraordinary items and minority interest................................. 18,138,000 (4,663,000) (7,032,000) Minority interest................................. 7,013,000 -------------- --------------- --------------- Income (loss) before extraordinary items.......... 11,125,000 (4,663,000) (7,032,000) Extraordinary items due to early extinguishment of debt (net of $163,000 minority interest)....... (2,155,000) -------------- --------------- --------------- NET INCOME (LOSS) $8,970,000 $ (4,663,000) $(7,032,000) ============== =============== =============== EARNINGS PER PAIRED SHARE Income (loss) before extraordinary items.......... $1.43 $(2.31) $(3.48) Extraordinary items............................... (0.28) -------------- --------------- --------------- NET INCOME (LOSS) PER PAIRED SHARE $1.15 $(2.31) $(3.48) ============== =============== =============== Weighted Average Number of Paired Shares 7,771,000 2,022,158 2,022,158 ============== =============== ===============
See accompanying notes to financial statements. F-4 88 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, --------------------------------------------- 1995 1994 1993 ------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).......................................... $8,970,000 $(4,663,000) $(7,032,000) Extraordinary items due to early extinguishment of debt.... 2,155,000 Adjustments to reconcile net income (loss ) to net cash provided by operating activities: Minority interest....................................... 7,013,000 Depreciation and amortization........................... 15,469,000 8,161,000 9,232,000 Accretion of discount................................... (3,285,000) Deferred interest....................................... 649,000 3,610,000 3,287,000 (Gain) loss on sales of real estate investments......... 125,000 (456,000) (21,000) Provision for losses.................................... 759,000 2,369,000 Changes in assets and liabilities: Accounts receivable, inventories and prepaid expenses.................................... (21,335,000) (86,000) 2,118,000 Accounts payable and other liabilities.................. 6,650,000 1,568,000 (4,421,000) ------------- -------------- -------------- Net cash provided by operating activities........... 16,411,000 8,893,000 5,532,000 ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets.................................. (166,211,000) (2,941,000) (6,577,000) Net proceeds from sales of hotel assets.................... 12,536,000 6,130,000 Purchase of mortgage notes receivable...................... (19,795,000) (6,270,000) (1,985,000) Principal received on notes receivable..................... 6,825,000 2,451,000 409,000 Reorganization costs....................................... (2,814,000) (1,287,000) Increase in other assets................................... (47,000) Acquisition of minority interest/hotels.................... (1,575,000) Net cash provided by (used in) investing activities. (181,995,000) 4,489,000 (3,645,000) ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable..................................... (104,722,000) (1,498,000) (1,666,000) Borrowing under lines of credit............................ 119,100,000 Borrowings under mortgage and other notes.................. 9,637,000 6,000,000 632,000 Principal (payments) borrowings on secured notes payable and revolving line of credit; net....................... (102,899,000) (18,516,000) (5,695,000) Proceeds from offering..................................... 245,701,000 Purchase of warrants....................................... (1,300,000) Capital contributions...................................... 13,599,000 Dividends/Distributions paid............................... (9,265,000) Payments to minority shareholders.......................... (28,000) Principal received on share purchase notes................. 45,000 5,000 Net cash provided by (used in) financing activities. 169,851,000 (13,969,000) (6,752,000) ------------- -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 4,267,000 (587,000) (4,865,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 5,065,000 5,652,000 10,517,000 ------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......................................... $9,332,000 $5,065,000 $5,652,000 ============= ============== ==============
See accompanying notes to financial statements. F-5 89 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
Trust Shares of Corporation Additional Share Total Beneficial Common Paid - in Purchase Accumulated Shareholders' Interest Stock Capital Notes Deficit Equity ------------ ----------- ------------ ---------- -------------- ------------- Balance January 1, 1993.............. $ 12,133,000 $1,213,000 $210,673,000 $(474,000) $(203,194,000) $20,351,000 Principal payments and reductions of share purchase notes......... (176,000) 183,000 7,000 Net loss.......................... (7,032,000) (7,032,000) ------------ ----------- ------------ ---------- ------------- ------------ Balance December 31, 1993............ 12,133,000 1,213,000 210,497,000 (291,000) (210,226,000) 13,326,000 Principal payments and reductions of share purchase notes......... (246,000) 291,000 45,000 Net loss.......................... (4,663,000) (4,663,000) ------------ ----------- ------------ ---------- ------------- ------------ Balance December 31, 1994............ 12,133,000 1,213,000 210,251,000 (214,889,000) $8,708,000 Decrease in par value to $0.01.... (12,012,000) (1,092,000) 13,104,000 One for six reverse stock split... (101,000) (101,000) 202,000 Contributed Capital............... 59,120,000 59,120,000 Public Offering................... 118,000 118,000 245,465,000 245,701,000 Minority Interest................. (92,735,000) (92,735,000) Net Income........................ 8,970,000 8,970,000 Dividends/Distributions........... (12,996,000) (12,996,000) Warrant Purchase.................. (1,300,000) (1,300,000) ------------ ----------- ------------ ---------- -------------- ------------ Balance December 31, 1995............ $138,000 $138,000 $434,107,000 $ $(218,915,000) $215,468,000 ============ =========== ============ ========== ============== ============
See accompanying notes to financial statements. F-6 90 STARWOOD LODGING TRUST BALANCE SHEETS
December 31, December 31, 1995 1994 ------------- ------------- ASSETS Hotel assets held for sale - net.......................... $ 20,547,000 $ 8,281,000 Hotel assets - net........................................ 221,063,000 108,428,000 ------------- ------------- 241,610,000 116,709,000 Mortgage notes receivable - net........................... 79,261,000 14,049,000 Mortgage notes receivable - Corporation................... 68,486,000 16,916,000 Investments............................................... 2,841,000 240,000 ------------- ------------- Total real estate investments........................ 392,198,000 147,914,000 Cash and cash equivalents................................. 710,000 255,000 Rent and interest receivable............................. 1,841,000 698,000 Notes receivable - net.................................... 1,232,000 1,004,000 Notes receivable - Corporation............................ 17,978,000 10,000,000 Prepaid expenses and other assets......................... 11,778,000 2,374,000 ------------- ------------- $ 425,737,000 $ 162,245,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Collateralized notes payable and revolving line of credit. $ 119,100,000 $ 113,896,000 Mortgage and other notes payable.......................... 100,000 32,838,000 Accounts payable and other liabilities.................... 4,412,000 5,061,000 Dividends/Distributions payable........................... 9,284,000 ------------- ------------- 132,896,000 151,795,000 ------------- ------------- Commitments and contingencies MINORITY INTEREST......................................... 88,113,000 ------------- ------------- SHAREHOLDERS' EQUITY Trust shares of beneficial interest at December 31, 1995 and 1994, $.01 and $6.00 par value, respectively; authorized 30,000,000 shares; outstanding 13,825,000 and 2,022,158 shares, respectively 138,000 12,133,000 Additional paid-in capital................................ 354,619,000 146,059,000 Distributions in excess of earnings....................... (150,029,000) (147,742,000) ------------- ------------- 204,728,000 10,450,000 ------------- ------------- $ 425,737,000 $ 162,245,000 ============= =============
See accompanying notes to financial statements. F-7 91 STARWOOD LODGING TRUST STATEMENTS OF OPERATIONS
Years Ended December 31, -------------------------------------------- 1995 1994 1993 -------------- ------------- ------------- REVENUE Rents from Corporation...................... $26,730,000 $16,906,000 $16,481,000 Interest from Corporation................... 4,761,000 1,730,000 1,534,000 Interest from mortgage and other notes...... 10,792,000 1,512,000 1,288,000 Rents from other leased hotel properties and income from joint ventures........... 791,000 927,000 839,000 Other income................................ 1,074,000 164,000 253,000 Gain (loss) on sales of hotel assets........ (125,000) 432,000 (53,000) -------------- ------------- ------------- 44,023,000 21,671,000 20,342,000 -------------- ------------- ------------- EXPENSES Interest.................................... 12,429,000 16,265,000 14,020,000 Depreciation and amortization............... 8,977,000 5,205,000 5,630,000 Administrative and operating................ 2,439,000 1,583,000 1,948,000 Shareholder litigation...................... 1,324,000 264,000 Provision for losses........................ 759,000 2,369,000 -------------- ------------- ------------- 23,845,000 25,136,000 24,231,000 -------------- ------------- ------------- Income (loss) before extraordinary items and minority interest........................ 20,178,000 (3,465,000) (3,889,000) Minority interest........................... 7,314,000 -------------- ------------- ------------- Income (loss) before extraordinary items.... 12,864,000 (3,465,000) (3,889,000) Extraordinary items due to early extinguishment of debt (net of $163,000 minority interest)....................... (2,155,000) -------------- ------------- ------------- NET INCOME (LOSS) $10,709,000 $(3,465,000) $(3,889,000) ============== ============= ============= EARNINGS PER PAIRED SHARE Income (loss) before extraordinary items.... $1.66 $(1.72) $(1.92) Extraordinary items......................... (0.28) NET INCOME (LOSS) PER SHARE $1.38 $(1.72) $(1.92) ============== ============= =============
See accompanying notes to financial statements. F-8 92 STARWOOD LODGING TRUST STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------- 1995 1994 1993 ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).......................................... $10,709,000 $(3,465,000) $(3,889,000) Extraordinary items due to early extinguishment of debt.... 2,155,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest....................................... 7,314,000 Depreciation and amortization........................... 8,977,000 5,205,000 5,630,000 Accretion of discount................................... (3,285,000) Deferred interest....................................... 649,000 3,610,000 2,243,000 (Gain) loss on sales of real estate investments......... 125,000 (432,000) 53,000 Provision for losses.................................... 759,000 2,369,000 Changes in operating assets and liabilities: Rent and interest receivable - Corporation.............. (3,012,000) (1,730,000) (1,519,000) Accounts receivable and prepaid expenses................ (14,044,000) (54,000) 1,037,000 Accounts payable and other liabilities.................. 1,679,000 562,000 (2,788,000) ------------- ------------ ------------ Net cash provided by operating activities............ 11,267,000 4,455,000 3,136,000 ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets.................................. (123,556,000) (2,270,000) (1,372,000) Net proceeds from sales of hotel assets.................... 11,719,000 5,360,000 Purchase of mortgage notes receivable...................... (19,795,000) (6,270,000) (1,985,000) Principal received on mortgage and other notes receivable.. 6,766,000 2,382,000 353,000 Reorganization costs....................................... (1,407,000) (1,287,000) Net change in notes receivable - Corporation............... (37,514,000) 3,965,000 1,693,000 Acquisition of minority interest........................... (1,575,000) ------------- ------------ ------------ Net cash provided by (used in) investing activities.. (175,506,000) 8,239,000 2,474,000 ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable..... (95,259,000) (886,000) (1,594,000) Borrowing under lines of credit............................ 119,100,000 Borrowings under mortgage and other notes payable.......... 9,637,000 6,000,000 Principal (payments) borrowings on secured notes payable, net............................................ (102,899,000) (18,516,000) (5,695,000) Proceeds from offering..................................... 233,418,000 Purchase of warrants....................................... (1,235,000) Capital contributions...................................... 11,197,000 Dividends/Distributions paid............................... (9,265,000) Payments to minority shareholders.......................... (18,000) Principal received on share purchase notes................. 45,000 ------------- ------------ ------------ Net cash provided by (used in) financing activities.. 164,694,000 (13,357,000) (7,307,000) ------------- ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 455,000 (663,000) (1,697,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 255,000 918,000 2,615,000 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR.......................................... $ 710,000 $ 255,000 $ 918,000 ============= ============ ============
See accompanying notes to financial statements. F-9 93 STARWOOD LODGING TRUST STATEMENTS OF SHAREHOLDERS' EQUITY
Shares of Additional Share Total Beneficial Paid - in Purchase Accumulated Shareholders' Interest Capital Notes Deficit Equity ------------ ------------ ---------- -------------- ------------- Balance January 1, 1993............... $12,133,000 $204,816,000 $(190,000) $(140,388,000) $ 76,371,000 Principal payments, reductions and transfer of share purchase notes from the Corporation-net........ (176,000) (101,000) (277,000) Net loss.............................. (3,889,000) (3,889,000) ------------ ------------ --------- ------------- ------------ Balance December 31, 1993.......... 12,133,000 204,640,000 (291,000) (144,277,000) 72,205,000 Forgiveness of intercompany debt... (58,335,000) (58,335,000) Principal payments and reductions of share purchase notes......... (246,000) 291,000 45,000 Net loss.............................. (3,465,000) (3,465,000) ------------ ------------ --------- ------------- ------------ Balance December 31, 1994............. 12,133,000 146,059,000 (147,742,000) 10,450,000 Decrease in par value to $0.01..... (12,012,000) 12,012,000 One for six reverse stock split.... (101,000) 101,000 Contributed Capital................ 52,495,000 52,495,000 Public Offering.................... 118,000 233,300,000 233,418,000 Minority Interest.................. (88,113,000) (88,113,000) Net Income......................... 10,709,000 10,709,000 Dividends/Distributions............ (12,996,000) (12,996,000) Warrant Purchase................... (1,235,000) (1,235,000) ------------ ------------ --------- ------------- ------------ Balance December 31, 1995............. $ 138,000 $354,619,000 $ $(150,029,000) $204,728,000 ============ ============ ========= ============= ============
See accompanying notes to financial statements. F-10 94 STARWOOD LODGING CORPORATION BALANCE SHEETS
December 31, December 31, 1995 1994 ----------------- ------------------ ASSETS Hotel assets held for sale - net............... $ 516,000 $ 304,000 Hotel assets - net............................. 94,832,000 34,172,000 ----------------- ------------------ 95,348,000 34,476,000 Investments.................................... 17,000 22,000 ----------------- ------------------ Total real estate investments................ 95,365,000 34,498,000 Cash and cash equivalents...................... 8,622,000 4,810,000 Accounts receivable............................ 7,754,000 3,342,000 Notes receivable............................... 564,000 623,000 Inventories, prepaid expenses and other assets. 8,416,000 5,353,000 ----------------- ------------------ $ 120,721,000 $48,626,000 ================= ================== LIABILITIES AND SHAREHOLDERS' DEFICIT LIABILITIES Mortgage and other notes payable............... $ 4,285,000 $13,748,000 Mortgage notes payable - Trust................. 68,486,000 16,916,000 Notes payable - Trust.......................... 17,978,000 10,000,000 Accounts payable and other liabilities......... 14,610,000 9,704,000 ----------------- ------------------ 105,359,000 50,368,000 ----------------- ------------------ Commitments and contingencies MINORITY INTEREST.............................. 4,622,000 ----------------- SHAREHOLDERS' EQUITY (DEFICIT) Corporation common stock at December 31, 1995 and 1994, $.01 and $.60 par value, respectively; authorized 30,000,000 shares; outstanding 13,825,000 and 2,022,158 shares, respectively................................. 138,000 1,213,000 Additional paid-in capital..................... 79,488,000 64,192,000 Distributions in excess of earnings............ (68,886,000) (67,147,000) ----------------- ------------------ 10,740,000 (1,742,000) ----------------- ------------------ $ 120,721,000 $48,626,000 ================= ==================
See accompanying notes to financial statements. F-11 95 STARWOOD LODGING CORPORATION STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------------------------------------- 1995 1994 1993 ----------------- ----------------- ----------------- REVENUE Hotel............................ $121,250,000 $ 82,668,000 $ 86,903,000 Gaming........................... 26,929,000 27,981,000 27,505,000 Interest from notes receivable... 113,000 42,000 124,000 Management fees and other income. 892,000 247,000 222,000 Gain on sales of hotel assets.... 24,000 74,000 ----------------- ----------------- ----------------- 149,184,000 110,962,000 114,828,000 ----------------- ----------------- ----------------- EXPENSES Hotel operations................. 85,017,000 60,829,000 68,132,000 Gaming operations................ 24,242,000 24,454,000 24,055,000 Rent - Trust..................... 26,730,000 16,906,000 16,481,000 Interest - Trust................. 4,761,000 1,730,000 1,534,000 Interest - other................. 709,000 1,341,000 1,167,000 Depreciation and amortization.... 6,492,000 2,956,000 3,602,000 Administrative and operating..... 3,273,000 2,620,000 2,781,000 Shareholder litigation........... 1,324,000 219,000 ----------------- ----------------- ----------------- 151,224,000 112,160,000 117,971,000 ----------------- ----------------- ----------------- Loss before minority interest.... (2,040,000) (1,198,000) (3,143,000) Minority interest................ 301,000 ----------------- ----------------- ----------------- NET LOSS $ (1,739,000) $ (1,198,000) $ (3,143,000) ================= ================= ================= NET LOSS PER SHARE $ (0.22) $ (0.59) $ (1.56) ================= ================= =================
See accompanying notes to financial statements. F-12 96
STARWOOD LODGING CORPORATION STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $ (1,739,000) $(1,198,000) $(3,143,000) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest....................................... (301,000) Depreciation and amortization........................... 6,492,000 2,956,000 3,602,000 Deferred Interest....................................... 1,044,000 Gain on sales of real estate investments................ (24,000) (74,000) Changes in operating assets and liabilities: Accounts receivable, inventories and prepaid expenses.................................. (7,291,000) (32,000) 1,081,000 Rent and interest payable - Trust...................... 3,012,000 1,730,000 1,519,000 Accounts payable and other liabilities.................. 4,971,000 1,006,000 (1,633,000) ------------- ------------- ------------- Net cash provided by operating activities............. 5,144,000 4,438,000 2,396,000 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to hotel assets................................. (42,655,000) (671,000) (5,205,000) Net proceeds from sales of hotel assets................... 817,000 770,000 Increase in other assets.................................. (47,000) Principal received on notes receivable.................... 59,000 69,000 56,000 Reorganization costs...................................... (1,407,000) ------------- ------------- ------------- Net cash provided by (used in) investing activities... (44,003,000) 215,000 (4,426,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgage and other notes payable.... (9,463,000) (612,000) (72,000) Borrowings under mortgage and other notes................. 632,000 Net change in notes payable - Trust....................... 37,514,000 (3,965,000) (1,693,000) Proceeds from offering.................................... 12,283,000 Purchase of warrants...................................... (65,000) Capital contributions..................................... 2,402,000 Payments to minority shareholders......................... (10,000) Principal received on share purchase notes................ 5,000 ------------- ------------- ------------- Net cash provided by (used in) financing activities... 42,671,000 (4,577,000) (1,138,000) ------------- ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 3,812,000 76,000 (3,168,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 4,810,000 4,734,000 7,902,000 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......................................... $8,622,000 $4,810,000 $4,734,000 ============= ============= =============
See accompanying notes to financial statements. F-13 97 STARWOOD LODGING CORPORATION STATEMENTS OF SHAREHOLDERS' DEFICIT
Additional Share Total Common Paid - in Purchase Accumulated Shareholders' Stock Capital Notes Deficit Deficit ----------- ----------- --------- ------------- ------------- Balance January 1, 1993.............. $1,213,000 $ 5,857,000 $(16,000) $(62,806,000) $(55,752,000) Principal payments, reductions and transfer of share purchase notes to the Trust..................... 16,000 16,000 Net loss........................... (3,143,000) (3,143,000) =========== =========== ======== ============ =========== Balance December 31, 1993............ 1,213,000 5,857,000 (65,949,000) (58,879,000) Forgiveness of intercompany debt... 58,335,000 58,335,000 Net loss........................... (1,198,000) (1,198,000) ----------- ----------- -------- ------------ ----------- Balance December 31, 1994............ 1,213,000 64,192,000 (67,147,000) (1,742,000) Decrease in par value to $0.01..... (1,092,000) 1,092,000 One for six reverse stock split.... (101,000) 101,000 Contributed Capital................ 6,625,000 6,625,000 Public Offering.................... 118,000 12,165,000 12,283,000 Minority Interest.................. (4,622,000) (4,622,000) Net Loss........................... (1,739,000) (1,739,000) Dividends/Distributions Payable.... Warrant Purchase................... (65,000) (65,000) ----------- ----------- -------- ------------ ----------- Balance December 31, 1995............ $ 138,000 $79,488,000 $ $(68,886,000) $10,740,000 =========== =========== ======== ============ ===========
See accompanying notes to financial statements. F-14 98 STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies. General The accompanying financial statements include the accounts of Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation and their subsidiaries (the "Corporation"). The Trust was formed as a real estate investment trust ("REIT") under the Internal Revenue Code in 1969. In 1980, the Trust formed the Corporation and made a distribution to the Trust's shareholders of one share of common stock of the Corporation for each share of beneficial interest of the Trust. The shares of the Trust and the shares of the Corporation are paired on a one-for-one basis, and can only be transferred in units ("Paired Shares") consisting of the same number of shares of the Trust and of the Corporation. The combined financial statements include the accounts of the Trust and the Corporation (the "Companies"). All material intercompany balances and transactions have been eliminated in the combined and separate consolidated financial statements. The intercompany balances and transactions which have been eliminated in arriving at the combined balance sheets and combined statements of operations include the elimination of notes receivable from the Corporation recorded on the Trust's balance sheets, and the related notes payable to the Trust recorded on the Corporation's balance sheets. Rent and interest income recorded on the Trust's statements of operations are eliminated against the related rent and interest expense on the Corporation's statements of operations. The Companies own and operate hotels located throughout the United States and two hotel/casinos in Las Vegas, Nevada. The hotels range in size from 90 to 960 rooms and offer services to both business and leisure travelers. Reorganization Effective January 1, 1995 (the "Closing Date"), the Trust and the Corporation consummated a reorganization (the "Reorganization") with Starwood Capital Group, L.P. ("Starwood Capital") and certain affiliates of Starwood Capital (the "Starwood Partners"). The Reorganization involved a number of related transactions that occurred simultaneously on the Closing Date. Such transactions included (i) the contribution by the Trust to SLT Realty Limited Partnership (the "Realty Partnership") of substantially all of the properties and assets of the Trust, at book values, subject to substantially all of the liabilities of the Trust (including the Senior Debt of the Trust ), in exchange for an approximate 28.3% interest as a general partner in the Realty Partnership, (ii) the contribution by the Starwood Partners to the Realty Partnership of approximately $12,600,000 in cash and certain hotel properties and first mortgage notes, at book values in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Realty Partnership, (iii) the contribution by the Corporation and its subsidiaries to SLC Operating Limited Partnership (the "Operating Partnership", and together with the Realty Partnership, the "Partnerships") of all of their properties and operating assets (except for their gaming assets, which are to be contributed upon approval by Nevada gaming authorities), subject to substantially all of their liabilities, in exchange for an approximate 28.3% interest as a general partner in the Operating Partnership, and (iv) the contribution by the Starwood Partners to the Operating Partnership of approximately $1,400,000 in cash and furniture, fixtures and equipment of the hotel properties, at book values, in exchange for limited partnership units representing the remaining approximate 71.7% interest in the Operating Partnership. Immediately following the Reorganization, the Trust and the Corporation accounted for their respective investment in the Realty Partnership and the Operating Partnership under the equity method of accounting, in accordance with generally accepted accounting principles. For accounting purposes, neither the Trust nor Starwood F-15 99 Capital unilaterally controlled the Starwood Lodging Realty Partnership and neither the Corporation nor Starwood Capital unilaterally controlled the Starwood Lodging Operating Partnership. In addition on March 24, 1995, a Starwood Partner exchanged $12 million of Senior Debt for additional limited partnership units of the Realty Partnership and the Operating Partnership. After giving effect to the Reorganization and this exchange of Senior Debt, the Trust had an approximate 25.4% interest in the Realty Partnership, the Corporation had an approximate 25.4% interest in the Operating Partnership, and the Starwood Partners held limited partnership interests representing the remaining approximate 74.6% interest in each of the Realty Partnership and the Operating Partnership. The Offering On July 6, 1995, Starwood Lodging completed a public offering (the "Offering") of 11,787,500 Paired Shares at a price of $23.00 per Paired Share. Net proceeds of the Offering of approximately $245.7 million in aggregate were contributed by the Trust and the Corporation to the Realty Partnership and the Operating Partnership, respectively, thereby increasing the general partnership interest of the Trust and the Corporation to approximately 69.9% of each of the Realty Partnership and Operating Partnership with the Starwood Partners' limited partnership interests representing the remaining approximate 30.1% interest in each of the Realty Partnership and Operating Partnership. From the completion of the Offering, the Companies have consolidated the results of the respective Partnerships. The 30.1% limited partnership interests of the Realty Partnership and the Operating Partnership is reflected in the Financial Statements as Minority Interest. The total number of operating units outstanding in the Partnership was 19,768,000 at December 31, 1995. Hotel assets Hotel assets are stated at the lower of cost or the amounts described below and are depreciated using straight-line and declining-balance methods over estimated useful lives of five to thirty-five years for buildings and improvements and three to twelve years for furniture, fixtures and equipment. Amounts allocated to leasehold interests are amortized using the straight-line method over lease terms of eight to forty-three years. The Trust and the Corporation estimate the fair values of each of their hotel assets on a quarterly basis. For each hotel asset not held for sale, fair value is estimated as the expected undiscounted future cash flows of the asset (generally over a five-year period), which is compared to the net book values of the asset. If the expected undiscounted future cash flows are less than the net book value of the asset, the excess of the net book value over the estimated fair value is charged to current earnings. When it is the opinion of management that the fair value of a hotel asset which has been identified for sale is less than the net book value of the asset, a reserve for losses is established. Fair value is determined based upon discounted cash flows of the hotel assets at rates (11.0% to 21.0%) deemed reasonable for the type of property and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. A gain or loss is recorded to the extent the amounts ultimately received differ from the adjusted book values of the hotel assets. Gains on sales of hotel assets are recognized at the time the hotel assets are sold provided there is reasonable assurance of the collectability of the sales price and any future activities to be performed by the Companies relating to the hotel assets sold are insignificant. Mortgage notes receivable If a loan becomes delinquent or upon the occurrence of other events it becomes known that the collectability of a specific loan is uncertain, interest income is no longer accrued and an allowance for loss is established based upon an analysis of the net realizable value of the underlying property collateralizing the loan. F-16 100 Provision for losses Provision for losses for the years ended December 31, 1994 and 1993 for the Trust are as follows:
1994 1993 --------- ----------- Hotel assets $439,000 $2,369,000 Mortgage notes receivable 320,000 -------- --------- $759,000 $2,369,000 ======== ==========
There were no provisions for losses for the year ended December 31, 1995. Cash and cash equivalents Cash and cash equivalents are defined as cash on hand and in banks plus all short-term investments with a maturity, at the date of purchase, of three months or less. Inventories Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis. Organization Costs Organization costs related to the formation of each of the Partnerships in the amount of $2,891,000 and $1,672,000 for the Trust and $2,891,000 and $1,672,000 for the Corporation are included in inventories, prepaid expenses and other assets at December 31, 1995 and 1994, respectively. The costs are amortized over a five-year period beginning in January 1995. Both the Trust and the Corporation amortized $650,000 during the year ended December 31, 1995. Hotel Revenue Revenue is recognized as earned. Earned is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel's services. Ongoing credit evaluations are performed and potential credit losses are expensed at the time the account receivable is estimated to be uncollectible. Historically, credit losses have not been material to the hotels' results of operations. The Companies have recorded an allowance for doubtful accounts totalling $60,000 and $100,000 at December 31, 1995 and 1994, respectively. Gaming revenue Gaming revenue relates to the two hotel/casinos and includes the net win from gaming activities, as well as room, food and beverage and other revenues, net of promotional allowances. Fair value of financial instruments and concentration of credit risk The following disclosure of estimated fair value was determined by available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, accounts receivable and accounts payable and other liabilities are carried at amounts which reasonably approximate their fair value. Investments of $2,841,000 for the Trust at December 31, 1995 had a fair value of $2,674,000. F-17 101 At December 31, 1995, fixed rate mortgage notes receivable of $29,016,000 approximate their fair value. The Companies believe that the fair value of mortgage notes receivable of $50,245,000 is at least $62,000,000. Fixed rate mortgage notes receivable of $14,049,000 for the Trust at December 31, 1994 had a fair value of $13,488,000 as estimated based upon debt with similar terms and maturities. The carrying value of the secured notes payable, fixed rate notes payable, and revolving line of credit approximate fair value at December 31, 1995 and 1994, as the related interest rates are either variable or in line with market rates. Fixed rate notes payable with carrying values of $32,838,000 and $13,748,000 for the Trust and Corporation, respectively, at December 31, 1994 had a fair value of $34,442,000 and $11,648,000 as estimated based on debt with similar terms and maturities At December 31, 1995, the Company had significant amounts in banks that was in excess of the federally insured amounts. Net income (loss) per share Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during the year which is on a Paired Share basis for purposes of the combined financial statements. Outstanding options and warrants are included as common equivalent shares using the treasury stock method when the effect is dilutive. The weighted average number of shares and Paired Shares used in determining net income (loss) per share and per Paired Share was 7,771,000 for the year ended December 31, 1995 and 2,022,158 for the years ended December 31, 1994 and 1993. The weighted average number of shares and Paired Shares were determined as if the six for one reverse stock split that occurred June 19, 1995 was effective January 1, 1993. Historical per share information has been revised accordingly. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to conform with the 1995 financial statement presentation. Impact of recently issued accounting standards In March and October 1995, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of" and No. 123 "Accounting for Stock-Based Compensation", respectively. These statements shall be effective for financial statements for fiscal years beginning after December 15, 1995. Management believes that adoption of Standard No. 121 will not have a material effect on its financial position or results of operations. Management intends to adopt the disclosure method of Standard No. 123 and, accordingly, there will be no impact on the Company's financial position or results of operations. 2. Income Taxes. The Trust will elect to be treated as a REIT under the provisions of the Internal Revenue Code beginning with the 1995 year. As a result, the Trust will not be subject to Federal income tax on its taxable income at corporate rates to the extent it distributes annually at 95% of its taxable income to its shareholders and complies F-18 102 with certain other requirements. The Trust is subject to state income and franchise taxes in certain states which it operates. Therefore, a tax provision has been reflected for these income and franchise tax amounts. Components of deferred income taxes as of December 31, 1995 and 1994 are as follows:
1995 1994 ------------------------- --------------------------------- Trust Corporation Trust Corporation ------------ ----------- ------------- ------------- Deferred income tax assets: Operating loss carryforwards $ 28,084,000 $ 804,000 $ 28,910,000 Losses from investments in partnerships 2,583,000 2,133,000 Property and equipment 850,000 512,000 3,041,000 6,586,000 Other 172,000 372,000 476,000 492,000 Total deferred income tax assets 29,106,000 4,271,000 32,427,000 2,625,000 ------------ ----------- ------------- ----------- Valuation allowance (29,106,000) (4,271,000) (32,427,000) (2,625,000) ------------ ----------- ------------- ----------- Net deferred income tax $ --- $ --- $ --- $ --- ============ =========== ============ ===========
As of December 31, 1995, the Trust and Corporation had net operating loss carry forwards for federal income tax purposes of approximately $83,000,000 and $3,400,000 respectively. The NOL's expire in various years beginning in 2,006 through 2,009 for the Trust, and 2,006 through 2,010 for the Corporation. The utilization of each entities' NOL will be limited by the provisions of IRC Section 382, and in the case of the Trust the use of approximately $50 million of the NOL will be predicated on the recognition of gain from the sale of certain of the assets of the Trust within 5 years of the ownership change date which occured in July 1995. A valuation allowance is provided for the full amount of the NOL's as the realization of tax benefits from such NOL's is not assured. 3. Extraordinary Items. Under the terms of a Credit Agreement dated January 28, 1993 (the "1993 Credit Agreement") the Trust restructured its debt existing at such time. Management concluded that that restructuring represented a "troubled debt restructuring" as defined under generally accepted accounting principles, and accordingly, upon execution of the 1993 Credit Agreement, accrued all known current or future identifiable debt restructuring costs as of December 31, 1992. Upon execution of an Amended and Restated Credit Agreement dated March 24, 1995 (the "Prior Credit Agreement"), the Realty Partnership recognized extraordinary income of $1,284,000 relating to the extinguishment of debt under the terms of the 1993 Credit Agreement, representing the remaining amount of the accrual at March 24, 1995. Additionally, in July 1995 subsequent to the Offering, the Realty Partnership repaid existing indebtedness borrowed under the Prior Credit Agreement and recorded an extraordinary charge to net income of $3,602,000 relating to the extinguishment of such debt. 4. Loan Restructuring Costs. All restructuring costs in relation to the "troubled debt restructuring" referred to in Note 3 have been expensed as incurred. In 1993, upon execution of the definitive debt restructuring agreement, $700,000 was paid by the Trust to the certain institutional lenders and $4,032,000 was added to the loan balance under the terms of a credit agreement for restructuring costs due the institutional lenders for legal and other experts. Previously accrued restructuring costs of $611,000, $778,000 and $3,152,000 were paid during the years ended December 31, 1995, 1994 and 1993, respectively. As noted above, an additional $1,284,000 of previously accrued restructuring costs was recognized as extraordinary income during 1995. At December 31, 1995, there are no accrued loan restructuring costs included in accounts payable and other liabilities. 5. Supplemental Cash Flow Disclosure. Interest paid in cash by the Trust in the years ended December 31, 1995, 1994, and 1993 was $15,235,000 $12,736,000 and $13,205,000, respectively. F-19 103 Interest paid in cash by the Corporation in the years ended December 31, 1995, 1994, and 1993 was $1,345,000, $1,342,000 and $140,000, respectively. The Corporation deferred interest of $3,012,000, $1,730,000 and $1,519,000 on its intercompany debt with the Trust in the years ended December 31, 1995, 1994, and 1993 respectively. In December 1993, the Corporation transferred $278,000 of share purchase loans to the Trust and reduced notes payable - Trust. During 1993, $4,032,000 of accrued loan restructuring costs were added to the loan balance of the secured notes payable and revolving line of credit. During 1994, a charge of $246,000 to additional paid-in capital was made relating to the cancellation of share purchase notes. Paired Shares which secured the portion of the principal canceled on the original notes were returned to the Companies. In December 1994, the Trust forgave $58,335,000 of notes payable to the Trust by the Corporation and its subsidiaries. Because of the common ownership of the Trust and the Corporation, the Trust charged, and the Corporation credited, the amount of debt forgiven to additional paid-in capital of the Trust and Corporation, respectively. In connection with the Reorganization, the Starwood Partners contributed $30.2 million (net of $474,000 of depreciation) in land and buildings, $49.2 million (net of discounts of $24.9 million and allowances of $2.9 million) in mortgage notes receivable, and $52.9 million (net of $6.0 million of debt forgiven by the Starwood Partners) in long term debt obligations for partnership units in the Realty Partnership. In addition, the Starwood Partners contributed $3.7 million (net of $757,000 of depreciation) of furniture, fixtures and equipment for partnership units of the Operating Partnership. During 1995, a Starwood Partner exchanged $12 million of Senior Debt for partnership units of the Realty Partnership and the Operating Partnership. During 1995, the Trust transferred approximately $7.2 million (net of accumulated depreciation) in furniture, fixtures and equipment to the Corporation and increased the intercompany receivable by the same amount. In December 1995, the Companies declared approximately $9.3 million in dividends to be paid in January 1996. 6. Senior Notes Payable and Revolving Line of Credit. Effective March 24, 1995 the Realty Partnership and the Trust entered into the Prior Credit Agreement pursuant to which the Realty Partnership borrowed approximately $131.7 million which was used primarily to refinance the outstanding Senior Debt of $113,896,000 at December 31, 1994 (after the exchange by a Starwood Partner of $12 million of Senior Debt for units of the Realty Partnership and the Operating Partnership) and approximately $27 million of first mortgage debt. The Senior Debt carried an interest rate of LIBOR plus 3.00% and at December 31, 1994, the Senior Debt balance of $113,896,000 had an interest rate of 8.69%. The Prior Credit Agreement contained a clause which stated that upon the payment to a Starwood Partner of a $786,000 cancellation fee, the remaining Lender Warrants issued in connection with the 1993 Credit Agreement, would be canceled. Effective March 31, 1995 the Realty Partnership settled the cancellation fee by issuing an unsecured note payable to the Starwood Partner and the remaining Lender Warrants were canceled. On July 25, 1995, the Realty Partnership entered into a Mortgage Loan Funding Facility Agreement (the "Repo Facility") providing for advances up to $71 million for a period of 18 months ending January 25, 1997. Advances under the Repo Facility bear interest at a rate based on one month LIBOR plus 1.5% for the period ending July 25, 1996 and one month LIBOR plus 1.75% thereafter and are secured by certain mortgage notes receivable and other collateral of the Realty Partnership. F-20 104 On October 25, 1995, the Realty Partnership entered into a Credit Agreement (the "Acquisition Facility") providing for advances of up to $135 million for a period expiring on October 1, 1998. The Acquisition Facility superseded and replaced the Prior Credit Agreement. Advances under the Acquisition Facility bear interest at a rate based upon one, two or three-month LIBOR plus 1.625 percent and are collateralized by liens on 29 of the hotel equity interests of the Realty Partnership and may be collateralized by other properties, all on a cross-collateralized basis. As of December 31, 1995, borrowings under the Repo Facility and the Acquisition Facility (together, the "Facilities") totaled $119.1 million with interest rates ranging from 7.4% to 7.6%. The Acquisition Facility provides for an annual fee of 0.25% of the average daily unfunded portion of the Facility Amount. The Facilities require the Companies to maintain a specified minimum adjusted net worth, a specified minimum ratio of actual consolidated EBITDA to debt service plus fixed charges and a restriction against total debt exceeding a specified maximum percent of net book value. In addition, the Facilities place restrictions on distributions and require the Trust to maintain its REIT status, maintain a minimum borrowing base (defined as Net Operating Income per Facility Agreement divided by stated interest rates) and maintain minimum replacement reserves. As of December 31, 1995, the Companies were in compliance with their covenants. The Companies intend to finance the acquisition of additional hotel properties, hotel renovations and capital improvements and provide for general corporate purposes through the Facilities and when market conditions warrant, to issue additional equity or debt securities. 7. Hotel Sales and Reserve for Losses. During the year ended December 31, 1993, the Companies sold their interests in four hotel assets, the Best Western located in Smyrna, Georgia, the Vantage Hotel located in Tucker, Georgia, the Best Western Motor Hotel in Santa Maria, California, and the Ramada Inn-Westport in St. Louis, Missouri. The Smyrna property was sold for an all cash price of $1,600,000. The Tucker property was sold for $2,485,000, consisting of approximately $500,000 in cash and a $1,985,000 promissory note collateralized by the hotel. The Tucker note bears interest at 9% per annum with accrued interest and principal due monthly based upon a 25-year amortization schedule, with all unpaid principal and interest due in June 1998. The Santa Maria property was sold for an all cash price of $140,000. The St. Louis property was sold for an all cash price of $2,500,000. For the year ended December 31, 1993, the Trust recognized a loss of $53,000 and the Corporation recognized a gain of $74,000 on sales of hotel assets. In 1993, the Trust recorded a provision for investment losses of $2,369,000 primarily as a result of the acceptance of offers for the sale of hotels at amounts lower than net book value. During the year ended December 31, 1994, the Companies sold their interests in five hotel assets, the Best Western South located in Austin, Texas, the Sheraton Hotel located in New Port Richey, Florida, the Holiday Inn in Brunswick, Georgia, the Holiday Inn in Jacksonville, Florida and the Ramada Inn in Fayetteville, North Carolina. The Austin property was sold pursuant to eminent domain proceedings for the purpose of highway construction to an agency of the State of Texas for an all cash price of $3,594,000. The New Port Richey and Brunswick properties were sold together for $4,306,000, consisting of approximately $1,236,000 in cash and a $3,070,000 promissory note collateralized by the hotels. The New Port Richey/Brunswick note bears interest at 8% per annum for the first twelve months and 9.25% thereafter, with accrued interest and principal due monthly based upon a 25-year amortization schedule, with all unpaid principal and interest due in August 2001. The Jacksonville property was sold for $3,200,000, consisting of approximately $900,000 in cash and a $2,300,000 promissory note collateralized by the hotel. The Jacksonville note bears interest at 9% per annum with accrued interest and principal due monthly based upon a 30-year amortization schedule, with all unpaid principal and interest due in December 2001. The Fayetteville property was sold for $1,000,000, consisting of approximately $200,000 in cash and a $800,000 promissory note collateralized by the hotel. The Fayetteville note bears interest at 9% per annum with accrued interest and principal due monthly based upon a 12-year amortization schedule, with all unpaid principal and interest due in December 2006. In connection with the Reorganization (see Note 1), the Holiday Inn located in Albany, Georgia was sold to the Starwood Partners for an all cash purchase price of $6,000,000. The transaction F-21 105 was accounted for as a financing activity and the Starwood Partners subsequently contributed the property to the Partnerships . No gain or loss was recorded on the sale. For the year ended December 31, 1994, the Trust recognized a gain of $224,000 and the Corporation recognized a gain of $24,000 on sales of hotel assets, including a $55,000 discount recorded by the Trust resulting from the early payoff in 1994 of the mortgage note receivable related to the Spartanburg, South Carolina property sold in 1992. In 1994, the Trust recorded a provision for investment losses of $439,000 primarily as a result of the acceptance of offers for the sale of hotels at amounts lower than net book value. During the year ended December 31, 1995, the Companies did not sell any of their hotel assets. 8. Mortgage Notes Receivable. In 1992, the Trust sold a hotel asset in Merrimack, New Hampshire and received as partial consideration a promissory note in an original principal amount of $1,440,000, collateralized by a first mortgage on the property. In September 1994, the Trust initiated foreclosure proceedings and recorded a provision for investment losses of $320,000, resulting in a net book value of $983,000. The property was subsequently sold to a third party in December 1994 for net proceeds of $1,191,000 and the Trust recorded a gain on sale of $208,000. At December 31, 1995, in addition to the MHLP notes discussed in Note 9, the Trust held eighteen promissory notes collateralized by mortgages. Eleven notes ($78,996,000 carrying amount at December 31, 1995), representing 12 hotels, are collateralized by first mortgages, and seven notes ($365,000 carrying amount at December 31, 1995) are collateralized by second, third and fourth mortgages. Ten of the notes have fixed interest rates ranging from 7% to 10% per annum, and five of the notes have variable interest rates that range from 7.16% to 9.75% per annum at December 31, 1995. Two of the notes (representing two properties) provide for contingent interest based on a percentage of gross revenues of the properties securing such notes. Three of the notes are principal only. The maturity dates of the notes range from 1996 to 2017. Aggregate principal payments under the mortgage notes receivable due within one year of December 31, 1995 are $3,266,000. As of December 31, 1995 and 1994, the reserve for investment losses for the mortgage notes receivable amounted to $100,000 in both years. 9. Milwaukee Marriott Hotel. In December 1985, the Trust sold its interest in the Milwaukee Marriott Hotel to Milwaukee Brookfield Limited Partnership ("Brookfield"). In connection with the sale, the Trust received a second mortgage note (the "Original Trust Note") from Brookfield. In July 1991, ownership and operation of the Milwaukee Marriott was reorganized and ownership of the hotel was transferred from Brookfield to Moorland Hotel Limited Partnership, ("MHLP"), a limited partnership in which the Corporation has a 51% interest and is the sole general partner and Brookfield is the sole limited partner. The operations of MHLP are consolidated into the Corporation's financial statements from the date of reorganization and, accordingly, the Trust has recorded the note receivable from MHLP as a note receivable from the Corporation. The Corporation and MHLP entered into an agreement for the Corporation to manage the property. In addition, MHLP entered into an assignment and forbearance agreement with Marriott Corporation ("Marriott"), the franchisor. This agreement, among other things, required MHLP to renovate the hotel to Marriott standards. The renovation was completed in January 1994. During 1992, MHLP, Aetna Life Insurance Company ("Aetna"), the holder of the first mortgage on the Milwaukee Marriott (the "Aetna Note"), Marriott, the Trust, the Corporation, and Brookfield and various partners of Brookfield reached agreements arranging financing for the renovation of the Milwaukee Marriott and restructuring of debt for MHLP. Effective December 1, 1992, Aetna agreed to defer for the period December 1, 1992 through November 30, 1993, the monthly principal and interest payments on the Aetna Note, which accrues interest at 11.25% per annum, with the deferred interest added to principal monthly. Beginning December 1, 1993, the loan amortizes in equal monthly installments over a period of 17 years at 10% interest per annum until January 1, 1996, at which time all F-22 106 unpaid interest and principal are due, including appreciation interest ("Appreciation Interest"). The due date of the unpaid interest and principal was extended to June 30, 1996 by an amendment executed on December 31, 1995. Appreciation Interest is defined as 50% of the aggregate principal reduction in the Aetna Note from December 1, 1993 until the loan is due in full as provided in the agreement. On July 31, 1995, the Trust purchased the Aetna Note from Aetna. The amount of the Aetna Note outstanding totaled $9,899,000 at December 31, 1994. In 1993, Marriott agreed to loan MHLP $750,000 collateralized by a second deed of trust on the hotel (the "Marriott Note") for the purchase of equipment from a Marriott subsidiary. The Marriott Note bore interest at 9% per annum, payable monthly beginning May 31, 1993 through April 30, 1994, at which time fixed monthly payments of principal and interest of approximately $49,000 became due until December 31, 1994, at which time all unpaid interest and principal were due. In 1994, Marriott agreed to extend the Marriott Note with interest at 10% per annum beginning January 1, 1995 at which time fixed monthly payments of principal and interest of approximately $31,000 become due until June 30, 1995. All unpaid interest and principal was paid on June 30, 1995. In 1993, the Trust agreed to loan MHLP $1,000,000 to be used to complete the renovation of the Milwaukee Marriott. The loan is collateralized by a third deed of trust on the hotel (the "Renovation Note") and bears interest at 10.5% per annum, payable monthly. Under certain circumstances, interest is deferred and added to the principal of the Renovation Note monthly. The amounts outstanding under the Renovation Note totaled $1,000,000 and $1,225,000 as of December 31, 1995 and 1994, respectively. The Trust may declare due and payable the principal balance and any unpaid accrued interest thereon at any time through the maturity date of the Renovation Note on January 1, 1996. The due date of the unpaid interest and principal was extended to June 30, 1996 by an amendment executed on December 31, 1995. The Renovation Note became a second mortgage following repayment of the Marriott Note in 1995. The Original Trust Note held by the Trust of $11,000,000 was modified as of December 31, 1992 by adding deferred and previously unpaid interest of $1,667,000 to principal due under the note and converting the note to a fourth mortgage note. Further, $1,790,000 and $1,607,000 of interest at 10.5% per annum for the years ended December 31, 1995 and 1994, respectively, was deferred monthly and added to principal due under the loan. The fourth mortgage note outstanding totaled $17,481,000 and $15,691,000 as of December 31, 1995 and 1994, respectively. Interest is payable monthly unless deferred under the provisions of the loan agreement until January 1, 1996, at which time all remaining unpaid interest and principal are due. The due date of the unpaid interest and principal was extended to June 30, 1996 by an amendment executed on December 31, 1995. The Original Trust Note became a third mortgage following repayment of the Marriott Note in 1995. The Corporation agreed to defer and convert to a note up to $250,000 of management fees due under its management agreement with MHLP for a period of up to twelve months commencing with base management fees due after January 1, 1993. The deferred fees bear interest at 9% per annum, which were added to the principal balance of the note through December 1, 1993. Thereafter, the note is due in twelve equal monthly installments of principal and interest commencing on January 1, 1994 at 12% interest per annum. All unpaid interest and principal was due and paid December 1, 1994. The $600,000 original loan (the "GSI Fourth Note")made by GSI Acquisition Company, L.P., a limited partner of Brookfield, ("GSI"), was modified as of December 31, 1992, by converting deferred and previously unpaid interest of approximately $86,000 to principal. For the years ending December 31, 1995 and 1994 interest at 10.5% per annum was deferred monthly and added to the principal balance, which balance totals $946,000 and $849,000 at December 31, 1995 and 1994, respectively. Thereafter, interest is payable monthly unless deferred under the provisions of the agreement until January 1, 1996, at which time all remaining unpaid interest and principal are due. On December 31, 1995, the due date for the unpaid interest and principal was extended to June 30, 1996. The GSI Fourth Note became a fourth mortgage following repayment of the Marriott Note in 1995, however it ranks pari passu with the Original Trust Note. As of December 31, 1992, MHLP also agreed to pay GSI $2,000,000 pursuant to a note (the "GSI Fifth Note") bearing non-accruing interest at 12% payable out of available monthly cash flow (as defined in the GSI Fifth F-23 107 Note). The principal balance outstanding is $2,000,000 at December 31, 1995 and 1994. The GSI Fifth Note became a fifth mortgage following repayment of the Marriott Note in 1995. Of the five notes outstanding at December 31, 1995, the Trust held three - the Aetna Note, the Renovation Note, and the Original Trust Note. The Trust evaluates the collectability of the notes receivable collateralized by the Milwaukee Marriott Hotel at the end of each quarter. Factors considered by the Trust in performing the evaluations include the discounted estimated future cash flow (at 11.0%) over a five-year period. The Corporation evaluates the recoverability of the net book value of the property at the end of each quarter. Factors considered by the Corporation in performing the evaluation included the undiscounted estimated future cash flow of the property over a five-year period. Based upon the evaluations no provision for losses was required. 10. Hotel Properties. A summary of hotel assets at December 31, 1995 and 1994 is as follows (in thousands):
Trust Corporation -------------------- ------------------- 1995 1994 1995 1994 -------- -------- -------- -------- Land and leasehold interests in land $ 65,629 $ 41,184 $13,797 $13,796 Buildings and improvements.......... 231,174 122,300 56,349 22,315 Furniture, fixtures and equipment... 8,834 25,124 64,576 15,630 Accumulated depreciation and amortization...................... (40,827) (48,699) (38,986) (16,877) Reserve for losses.................. (23,200) (23,200) (388) (388) -------- -------- ------- ------- Hotel assets - net................ $241,610 $116,709 $95,348 $34,476 ======== ======== ======= =======
11. Real Estate Investments and Intercompany Transactions. At December 31, 1995, the Trust owned equity interests in thirty-five hotels, including two hotel/casinos. Of that number, thirty properties were owned in fee, four were held pursuant to long-term leases and one was owned through a 5% general partnership interest in a joint venture that owns the Omaha Marriott Hotel. Thirty-one of the Trust's hotels (including the two hotel/casinos) are leased to the Corporation or its subsidiaries. Three hotels have been leased to and are operated by Imperial Hotels Corporation, formerly Vagabond Inns, Inc. The Omaha Marriott Hotel has been leased to an affiliate of the Corporation, and is managed by Marriott pursuant to a long-term management agreement. As of December 31, 1995, three of the hotels leased by the Corporation from the Trust are being managed by third-party operators. Two of the third-party management agreements are for three-year terms expiring in 1998, and one of the management agreements is a five-year term expiring in 1999. The management agreements are subject to certain cancellation provisions. Base management fees range from 2% to 2-1/2% of gross revenues with incentive management fees based upon hotel profitability. The leases are generally long-term and generally provide for annual base, or minimum rents, plus contingent, or percentage rents based on the gross revenues of the properties and are accounted for as operating leases. The leases are "triple-net" in that the lessee is generally responsible for paying all operating expenses of the properties, including maintenance, insurance and real property taxes. Total rental expense paid by the Corporation to the Trust under such leases was $26,730,000, $16,906,000 and $16,481,000 for the years ended December 31, 1995, 1994 and 1993, respectively, of which $5,443,000, $2,456,000 and $1,939,000 were contingent. The lessee is also generally responsible for any payments required pursuant to underlying ground leases. Most leases provide for cancellation by the Trust in the event that the Trust does not earn a specified rent, or by the lessee (including the Corporation) in the event the lessee does not earn a specified net operating profit. As of December 31, 1995 and 1994, the Corporation was indebted to the Trust for an aggregate of $86,464,000 and $26,916,000, respectively, (including the MHLP mortgage notes of $28,236,000 and $16,916,000 as of December 31, 1995 and December 31, 1994, respectively - see Note 5 and the Doral lease obligation of F-24 108 $40,250,000-see discussion below). The Corporation borrowings were non-interest bearing for the years ended December 31, 1994 and 1993. In December 1994, the Trust forgave $58,335,000 of notes receivable payable to the Trust by the Corporation and its subsidiaries. Effective January 1, 1995, the remaining notes bear interest at prime plus 2% with interest payable monthly and are due on January 1, 2000. On September 20, 1995, the Realty Partnership purchased land for $3 million and mortgage notes receivable collateralized by the Doral Inn for $40.3 million. The note bears interest at 9.5% and matures on October 1, 2006. The Realty Partnership also entered into a long-term lease agreement with SBK Delaware Realty Holdings, L.L.C. ("SBK"), the owners of the Doral Inn, to lease SBK the land for $240,000 per year. Simultaneously, the Operating Partnership entered into a long-term lease agreement with SBK to lease the land and the building for $240,000 per year, plus the debt service on the mortgage held by the Realty Partnership. The Operating Partnership lease agreement includes a clause under which SBK is paid a management fee of 0.5% of gross revenues. The Realty Partnership has the option of acquiring the building for the value of the mortgage note plus $400,000 after ten years. It is management's intention to exercise that option. The Operating Partnership has recorded the transaction as a capitalized lease with an intercompany obligation to the Realty Partnership. Rents accrued by the Trust from leased hotel properties are summarized as follows (in thousands):
Years Ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Corporation: Minimum - $14,373 $14,184 Contingent - 2,533 2,297 -------- -------- -------- - 16,906 16,481 -------- -------- -------- Other: Minimum 437 437 437 Contingent 354 490 402 -------- -------- -------- 791 927 839 -------- -------- -------- Total $791 $17,833 $17,320 ======== ======== ========
The Trust's minimum future rents at December 31, 1995 due under non-cancelable operating leases for the years ending December 31 are as follows (in thousands):
1996 1997 1998 1999 2000 Thereafter ------- ------- ------- ------- ------ ----------- Corporation $33,220 $33,220 $33,220 $33,220 $7,335 $30,315 Other ..... 437 437 437 300 300 1,150 ------- ------- ------- ------- ------ ------- Total ..... $33,657 $33,657 $33,657 $33,520 $7,635 $31,465 ======= ======= ======= ======= ====== =======
The Corporation's future rents at December 31, 1995 payable under noncancelable operating leases for the years ended December 31 are as follows:
1996 1997 1998 1999 2000 Thereafter ------- ------- ------- ------- ------ ----------- Trust .. $33,220 $33,220 $33,220 $33,220 $7,335 $30,315 Other .. 918 755 616 243 187 2,846 ------- ------- ------- ------- ------ ------- Total .. $34,138 $33,975 $33,836 $33,463 $7,522 $33,161 ======= ======= ======= ======= ====== =======
The Corporation is committed under its leases with the Trust to pay the rents payable with respect to four ground leases which expire in 1997 through 2029, including renewal options. The leases generally provide for a minimum rent plus a percentage of gross revenues of the properties in excess of the minimum rent. Future minimum lease payments under the leases are included in "other" rents payable in the table above. The Trust is the primary obligor under the leases; however, the Corporation as lessee/operator of the hotels makes payments under F-25 109 these leases directly to the lessors. Rent expense incurred by the Corporation as a lessee/operator under these ground leases was $549,000, $879,000 and $854,000, in the years ended December 31, 1995, 1994 and 1993, respectively. 12. Mortgage and Other Notes Payable. At December 31, 1994, the Trust had outstanding six mortgage notes payable which were collateralized by seven of the Trust's hotels, with a net book value at December 31, 1994 of $55,027,000. At December 31, 1995 and 1994, the Trust had the following outstanding debt obligations (exclusive of Senior Debt and Lines of Credit - See Note 6):
December 31, December 31, 1995 1994 ------------ ------------ Mortgage Notes: 11.75% first mortgage note, due in 2015, callable by lender in 1995, 2000, 2005, or 2010 $ 6,349,000 12.875% first mortgage note, due in 1997 9,173,000 12.625% first mortgage note, due in 1995 4,075,000 9.25% first mortgage note, due in 1995 1,854,000 10.25% first mortgage note, due in 2001 5,148,000 9.0% first mortgage note, due in 1997 139,000 ----------- Total mortgage notes payable 26,738,000 Advance from the Starwood Partners 6,000,000 Other $100,000 100,000 ----------- Total mortgage and other notes payable $100,000 $32,838,000 ======== ===========
As described in Note 7, in August 1994 Starwood Partners acquired the Trust's Albany, Georgia property for $6,000,000. Interest expense of $313,000 in 1994 related to the advance was the greater of the net cash flow of the property or 10% until the property was contributed to the Partnerships. At December 31, 1995 and 1994, the Corporation had the following outstanding debt obligations (exclusive of Notes Payable to Trust):
December 31, December 31, 1995 1994 ------------ ------------ Collateralized by Milwaukee Marriott Hotel: 10.0% first mortgage note, due 1996 $ 9,899,000 9.0% second mortgage note, due 1995 358,000 10.5% fifth mortgage note, interest only, due 1996 $ 946,000 849,000 12.0% sixth mortgage note, interest only (to the extent of available cash flow), due 1996 2,000,000 2,000,000 9-10% notes payable, due 1995-1996 164,000 2,946,000 13,270,000 Other: 9.75% first mortgage note, due 1997 372,000 403,000 Obligations under capital leases 967,000 75,000 Total mortgage and other notes payable $4,285,000 $13,748,000 ========== ===========
At December 31, 1995, the Milwaukee Marriott Hotel had a net book value of $22,150,000. F-26 110 Minimum lease and principal payments on the Corporation's indebtedness for the years ending December 31 are due as follows:
Minimum Future Principal Payments Year Lease Payments Due Under Notes ---- -------------- ------------------ 1996 $ 166,000 $2,994,000 1997 166,000 324,000 1998 166,000 1999 166,000 2000 166,000 Thereafter 600,000 Total 1,430,000 $3,318,000 ========== Amount representing interest 463,000 Future minimum lease payments $ 967,000 ==========
At December 31, 1995 and 1994 the Corporation had $845,000 and $175,000, respectively, in assets (less $127,000, and $117,000, respectively, in accumulated amortization) recorded under capital leases. Such amounts are included in furniture, fixtures and equipment. 13. Shareholders' Equity. Warrants to purchase Paired Shares At December 31, 1995 and 1994, there were outstanding 276,662 warrants to purchase Paired Shares at an exercise price of $101.70 per Paired Share (as adjusted for the one for six reverse stock split in June 1995) through September 15, 1996. At the expiration date, each 600 warrants are convertible into one Paired Share of stock. In lieu of fractional shares, holders will be paid an amount equal to the same fraction of the current market value of a single share. Share option plans The Trust and the Corporation each adopted Incentive and Non-Qualified Share Option Plans in 1986 which provided for the purchase of up to an aggregate of 116,667 Paired Shares (as adjusted for the one for six reverse stock split in June 1995) by Trustees, Directors, officers and employees pursuant to option grants. During the year ended December 31, 1995, the Trust and the Corporation granted options to purchase 56,892 Paired Shares at excercise prices ranging from $16.50 to $21.75 per Paired Share. During the year ended December 31, 1994, the Trust and the Corporation granted options to purchase 16,500 Paired Shares at an exercise price of $16.50 per Paired Share. During the year ended December 31, 1993, the Trust and the Corporation granted options to purchase 3,333 Paired Shares at an exercise price of $15.75 per Paired Share. Such options, which are granted at fair market value on the date of grant, vest over three years. As of December 31, 1995, 10,860 options have been exercised. During 1995, the Trust and the Corporation each also adopted a 1995 Share Option Plan which provides for the purchase of Paired Shares by Trustees, Directors, officers, employees, consultants and advisors, pursuant to option grants. The aggregate number of Paired Shares subject to options which may be granted under the Plans is 1,573,000 plus 8% of any additional partnership units or Paired Shares issued subsequent to August 17, 1995 (other than Paired Shares issued in exchange for partnership units, Paired Shares issued pursuant to employee benefit plans or Paired Shares that were previously issued and re-acquired by the Trust or the Corporation). During the year ended December 31, 1995, the Trust and the Corporation granted options under the 1995 Plans to purchase 926,750 Paired Shares to Trustees, Directors, officers and employees, at exercise prices ranging from $23.00 to $29.00 per Paired Share. At December 31, 1995, outstanding options granted under all plans of the Trust and Corporation (including options granted to officers and directors of a company previously acquired by the Trust) aggregated 1,004,640 Paired Shares. At December 31, 1995, options for 130,112 Paired Shares are fully vested with exercise prices ranging from $4.50 to $120.00 per Paired Share. F-27 111 Share purchase plans Prior to December 1989, the Trust and the Corporation each had a Share Purchase Plan, whereby an aggregate of 33,333 Paired Shares (as adjusted for the one for six reverse stock split in June 1995) were available to be purchased by Trustees, Directors, officers and employees at their fair market value on the date of sale with monies borrowed from the Trust or Corporation. In December 1989, the Trust's Board of Trustees and the Corporation's Board of Directors voted to terminate the Share Purchase Plans for purposes of prospective eligibility, and to irrevocably waive the right of the Trust and the Corporation to accelerate the payment of a note executed by a participating Trustee or Director upon termination of such participant's relationship with the Companies. In January 1991, the Companies entered into agreements with certain Trustees and Directors who had agreements outstanding pursuant to the Share Purchase Plans to which each such Board member agreed to stand for re-election as a Trustee or Director at the next annual shareholders' meeting if requested to do so by their respective Boards, or if the Boards did not so request, to act, for a period of up to two years and at mutually agreed upon times and places, as an advisor to the Trust or the Corporation on matters within such Board member's experience and expertise, and the Trust or the Corporation agreed that any outstanding promissory note executed by such Board member in partial payment for Paired Shares purchased under the Share Purchase Plans would be amended to cause such promissory note to be without recourse to the maker. In March 1992, certain of the aforementioned notes were restructured to bear an annual interest rate of 8% as of February 2, 1992, with such notes to accrue interest only from February 2, 1992 until February 15, 1995, at which time the principal and accrued interest would become payable in equal monthly installments over a ten-year period. The share purchase agreement between a former officer and director and the Corporation was terminated in connection with his December 31, 1992 resignation as an officer of the Corporation, and the 1,667 Paired Shares (as adjusted for the one for six reverse split in June 1995) acquired pursuant to that agreement were assigned by him to the Corporation. The share purchase note in the amount of $112,500, was written off at December 31, 1993. The share purchase notes of other former officers, directors and employees aggregating $63,500 were also written off at December 31, 1993. During 1994, the parties agreed to cancel the remaining outstanding share purchase notes of $246,000 and during 1995 such notes were canceled and the unpaid Paired Shares were forfeited by the purchasers. Preferred shares The Corporation has 10,000,000 authorized preferred shares, $0.01 par value, none of which are issued or outstanding. 14. Commitments and Contingencies. Litigation In late 1991 and early 1992 three complaints were filed against the Trust and the Corporation and certain other related persons (the "Shareholder Actions"). As amended, two of the complaints allege that the Trust and the Corporation, a Director and officer of the Corporation and a former officer/Trustee of the Trust violated the Racketeer Influenced and Corrupt Organizations Act and Federal and California securities laws and acted fraudulently in connection with the Trust's and the Corporation's public disclosures with respect to the Trust's purchase of its two hotel/casinos and the Ramada Inn in Indian Wells, California. Both of these complaints sought class action certification. The third complaint was filed purportedly on behalf of the Trust and the Corporation and alleged that certain former and present Trustees and Directors breached their fiduciary duties in connection with the purchase of the Ramada Inn in Indian Wells and the two hotel/casinos F-28 112 On July 20, 1994, the United States District Court for the Southern District of California entered a Final Judgment of Dismissal With Prejudice (the "Final Judgment") of the two purported class actions filed in that Court. Pursuant to the Final Judgment, the District Court, among other things, approved the settlement set forth in stipulations of settlement (the "Stipulation") entered into among the plaintiffs and defendants in the Shareholder Actions, as well as the insurance company that issued the Companies' directors and officers policy applicable to the period to which Shareholder Actions relate. Under the Final Judgment, all claims that were or might have been made in the Shareholder Actions were deemed released as of the Effective Date (as defined in the Stipulation), and a $3,250,000 cash settlement fund was established which, after the deduction of fees and costs to plaintiffs' counsel, was to be distributed to qualified members of the certified plaintiff classes according to an allocation formula that includes a calculation based on certain shares that opted out of the settlement. Of the settlement fund, $2,500,000 was paid by the insurance company, $400,000 was paid by the Companies, and $350,000 was paid by former officers of the Companies. Upon completion of the claims administration process, any funds remaining, up to a limit of $325,000, was to be returned to the parties who contributed to the settlement fund on a pro rata basis. The parties contributing to the settlement fund have previously established a separate $45,000 fund to be used for purposes of notifying the classes and otherwise administering the settlement. Legal fees and other costs incurred by the defendants in the Shareholder Actions prior to October 12, 1993 were paid by the Companies; subsequent defense costs were paid by the insurance company. Holders of approximately 198,398 Paired Shares (as adjusted for the one for six reverse stock split in June 1995) opted out of the settlement. All amounts relating to the Shareholder Actions paid or expected to be paid, had been accrued and expensed as of December 31, 1994. Pursuant to the Final Judgment, notice was given to the class plaintiffs to submit claims and claims were received. Final distribution of the Net Settlement Fund and payment of costs and expenses was ordered by the Court on December 15, 1995. The Stipulation also requires that the Trust's Board of Trustees and the Corporation's Board of Directors establish a joint transaction committee of independent Trustees and Directors to make recommendations to those Boards with respect to any transaction proposed in the future by management and having a fair market value of $20 million or more. In connection with the settlement of the Shareholder Actions, Messrs. Young and Rothman and certain of their affiliated partnerships terminated the management agreements (the "Management Contracts") that existed between those partnerships and the Corporation's subsidiary, Western Host, Inc., ("Western Host). Western Host agreed to forbear from disputing such action and withdrew as a general partner of two additional affiliated partnerships. Messrs. Young and Rothman paid $800,000 to Starwood Lodging in satisfaction of any damages resulting from the termination of the management contracts. They also agreed to be responsible for a percentage of any retroactive adjustments in worker's compensation insurance premiums. Starwood Lodging has paid $167,041 for retroactive worker's compensation insurance premiums and have sought reimbursement from Messrs. Young and Rothman of their share of that amount (an aggregate approximately $56,000). The Corporation has commenced litigation against Messrs. Young and Rothman to collect such amounts (Starwood Lodging Corp. v. Ronald A. Young, et al., San Diego Superior Court Case No. 693822) Ross Settlement Agreement Subsequent to the settlement of the Shareholder Actions, Leonard M. Ross and his affiliates ("Ross"), who held 198,398 Paired Shares (as adjusted for the one for six reverse split in June 1995) and opted out of the settlement, threatened litigation against the Trust and the Corporation. In October 1994, Starwood Capital entered into an agreement with Ross to settle the threatened litigation in which Starwood Capital agreed to purchase Ross' Paired Shares, at Ross' election, in a 60-day period beginning on the earlier of the first anniversary of the closing of the Reorganization or December 15, 1995 at a price of $33.75 subject to certain adjustments. Starwood Capital also had the right to elect to purchase such Paired Shares at the same time and on the same terms. The Trust and Corporation severally agreed that under certain circumstances they would indemnify Starwood Capital with respect to Starwood Capital's obligations to Ross, up to a maximum of F-29 113 $1.8 million, upon receipt of a full release from Starwood Capital of all of the claims assigned by Ross. At December 31, 1995, the Companies had accrued $1.8 million in respect of this potential liability. Ross elected to sell his Paired Shares, and in January 1996 those Paired Shares were sold to a third party through the New York Stock Exchange. The Paired Shares were sold at $29.625 per Paired Share; the Trust and the Corporation paid $1,375,743 in aggregate pursuant to their indemnity obligations, and Starwood Capital released the Trust and the Corporation from all claims assigned by Ross. Environmental matters In the latter part of 1995, in connection with either the Acquisition Facility or the purchase of the relevant hotel, preliminary or "Phase I" environmental site assessments were prepared with respect to 35 of the Trust's fee interest and ground leasehold properties. The results of those Phase I assessments and subsequent Phase II assessments performed at six of the properties revealed that the overall potential for environmental impairment was assessed as low. A 1991 Phase I environmental assessment and a tank leak test performed in 1992 at the Bourbon Street Hotel and Casino and a Phase I environmental assessment prepared for the Milwaukee Marriott in 1991 revealed no material impairments. Neither the Trust, the Corporation, the Realty Partnership nor the Operating Partnership has been identified by the U.S. Environmental Protection Agency as a responsible or potentially responsible party for, nor have they been the subject of any governmental proceeding with respect to, any hazardous waste contamination. If the Trust, the Corporation, the Realty Partnership or the Operating Partnership were to be identified as a responsible party, they would in most circumstances be strictly liable, jointly and severally with other responsible parties, for environmental investigation and clean-up costs incurred by the government and, to a more limited extent, by private persons. Based upon the environmental reports described above, the Trust believes that a substantial number of its hotels incorporate potentially asbestos-containing materials. Under applicable current Federal, state and local laws, asbestos need not be removed from or encapsulated in a hotel unless and until the hotel is renovated or remodeled. In that context, upon the performance of a material renovation, the appropriate measures will need to be taken. Meanwhile, the Trust has placed in effect an asbestos operation and maintenance plan for all those properties testing positive for asbestos. Based upon the above-described environmental reports and testing and facts known to the managements of the Trust and the Corporation, future remediation costs are not expected to have a material adverse effect on the results of operations, financial position or cash flows of the Trust or the Corporation and compliance with environmental laws has not had and is not expected to have a material effect on the capital expenditures, earnings or competitive position of the Trust or the Corporation. Performance bonds and restricted cash The Corporation is required to post performance bonds or cash collateral as security for certain obligations. At December 31, 1995 and 1994, the Corporation had posted performance bonds totaling approximately $756,000 and $747,000, respectively, to cover such obligations; however, no amounts had been drawn against such bonds. In addition, at December 31, 1995, the Corporation has a $250,000 letter of credit with First Interstate Bank included in cash and cash equivalents, which was restricted as to use. At December 31, 1995, inventories, prepaid expenses and other assets include $756,000 for the Corporation which was restricted as to use. At December 31, 1994, inventories, prepaid expenses and other assets include $246,000 and $1,606,000 for the Trust and the Corporation, respectively, which were restricted as to use. Other than the performance bonds, the restricted cash of the Corporation primarily is the cash of MHLP (see Note 9). F-30 114 15. Related Party Transactions. At December 31, 1995 and 1994, the Trust holds an $800,000 uncollateralized note receivable from John Rothman, the former President and Chief Executive Officer of the Trust. The principal amount of the note receivable is due in 1999 and bears interest due annually at 10%. The Companies incurred legal fees from law firms in which a Trustee and officer of the Trust was or currently is a partner during the years ended December 31, 1995, 1994 and 1993 totaling $1,728,000, $940,000, and $235,000, respectively. The Companies and Starwood Capital have agreed that, subject to approval by the Independent Trustees or Directors, as appropriate, Starwood Capital will be reimbursed for out-of-pocket costs and expenses for any services provided to the Company. Starwood Capital will also be reimbursed for its internal costs (including allocation of overhead) for services provided to the Company, provided that, where such costs are currently expensed by the Company, such reimbursement will not exceed $250,000 in the year ending June 30, 1996. The Companies have not reimbursed Starwood Capital for any of these costs since July 1, 1995, and accordingly have included an accrual of $250,000 in accounts payable and other liabilities at December 31, 1995. During 1995, the Trust reimbursed Starwood Capital approximately $1,649,000, the majority of which represented a deposit on the Boston Park Plaza. Aside from Starwood Capital's internal cost, during 1995 Starwood Capital incurred approximately $1,198,000 of costs paid directly by the Company to third party vendors for services provided to the Company, representing costs associated with the Reorganization, the Offering and hotel acquisitions. During 1995, the Trust loaned an officer of the Trust $250,000. The loan has a term of 10 years, bears interest, to be paid quarterly, at the lowest applicable rate prescribed by section 1274(d) of the Internal Revenue Code. At December 31, 1995, the loan had an applicable rate of 6.6% and was current. F-31 115 16. Industry Segment Information. The Corporation operates in two segments of the hospitality industry, hotel and gaming. The hotel segment consists of room, food and beverage and other revenues recognized in connection with the operation of hotels owned by the Corporation or under lease from the Trust, and income from management contracts. The gaming segment consists of net win from casino operations, as well as room, food and beverage and other revenues recognized in connection with the operation of the two hotel/casinos under lease from the Trust. The following information summarizes revenue and operating results by industry segment:
Years Ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- HOTEL: Revenue: Room................................. $ 87,270,000 $56,387,000 $58,917,000 Food and beverage.................... 26,609,000 21,603,000 23,337,000 Other................................ 7,371,000 4,678,000 4,649,000 ------------ ----------- ----------- Hotel revenue........................ 121,250,000 82,668,000 86,903,000 Management fees...................... 373,000 247,000 90,000 ------------ ----------- ----------- Total revenue........................ 121,623,000 82,915,000 86,993,000 ------------ ----------- ----------- Expenses: Rooms................................ 37,121,000 25,177,000 27,633,000 Food and beverage.................... 19,520,000 16,364,000 15,116,000 Other (including undistributed operating expenses and fixed charges)............................. 28,376,000 19,288,000 25,383,000 Rent to Trust........................ 24,330,000 14,506,000 14,081,000 Depreciation and amortization........ 5,126,000 2,072,000 3,060,000 Allocated Corporate overhead......... 1,731,000 1,001,000 950,000 ------------ ----------- ----------- Total expenses....................... 116,204,000 78,408,000 86,223,000 ------------ ----------- ----------- Operating income..................... $ 5,419,000 $ 4,507,000 $ 770,000 ============ =========== =========== GAMING: Revenue: Casino............................... 14,009,000 $15,137,000 $14,861,000 Room................................. 4,682,000 4,516,000 4,305,000 Food and beverage.................... 5,155,000 5,166,000 5,226,000 Other................................ 5,313,000 5,506,000 5,370,000 Less promotional allowances.......... (2,230,000) (2,344,000) (2,257,000) ------------ ----------- ----------- Gaming revenues...................... 26,929,000 27,981,000 27,505,000 ------------ ----------- ----------- Expenses: Casino............................... 6,156,000 6,308,000 6,019,000 Rooms................................ 2,220,000 2,156,000 2,042,000 Food and beverage.................... 4,896,000 4,514,000 4,564,000 Other (including undistributed operating expenses and fixed charges)............................. 10,970,000 11,476,000 11,430,000 ------------ ----------- ----------- Expenses of gaming operations........ 24,242,000 24,454,000 24,055,000 Rent to Trust........................ 2,400,000 2,400,000 2,400,000 Depreciation and amortization........ 205,000 382,000 477,000 ------------ ----------- ----------- Total expenses....................... 26,847,000 27,236,000 26,932,000 ------------ ----------- ----------- Operating income..................... $ 82,000 $ 745,000 $ 573,000 ============ =========== ===========
F-32 116 A reconciliation of the combined segment operating income to the net loss of the Corporation is as follows:
Years Ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Combined operating income ....... $ 5,501,000 $ 5,252,000 $ 1,343,000 Interest and other income ....... 632,000 66,000 330,000 Interest expense ................ (5,470,000) (3,071,000) (2,701,000) Corporate expenses .............. (2,703,000) (3,445,000) (2,115,000) ------------ ------------ ------------ Loss before minority interest .. $(2,040,000) $(1,198,000) $(3,143,000) ============ ============ ============
Additional financial data by industry segment for the Corporation is as follows:
December 31, ---------------------------------------- 1995 1994 1993 -------------- ----------- ----------- IDENTIFIABLE ASSETS: Hotel.................... $103,304,000 $40,357,000 $41,712,000 Gaming................... 5,058,000 3,710,000 3,743,000 Corporate and other...... 12,359,000 4,559,000 4,538,000 Total.................... $120,721,000 $48,626,000 $49,993,000 ============ =========== =========== CAPITAL EXPENDITURES: Hotel.................... $ 42,392,000 $ 421,000 $ 4,859,000 Gaming................... 191,000 221,000 220,000 Corporate and other...... 72,000 29,000 126,000 Total.................... $ 42,655,000 $ 671,000 $ 5,205,000 ============ =========== =========== DEPRECIATION AND AMORTIZATION: Hotel.................... $ 5,126,000 $ 2,072,000 $ 3,060,000 Gaming................... 205,000 389,000 477,000 Corporate and other...... 1,161,000 495,000 65,000 Total.................... $ 6,492,000 $ 2,956,000 $ 3,602,000 ============ =========== ===========
The Trust is an owner/lessor of real property and does not "operate" in different segments, and is therefore not subject to disclosure by segment. The Trust's net investment (initial cost less accumulated depreciation and provision for loss) in the two Las Vegas hotel/casinos was $20,547,000, and $21,306,000 at December 31, 1995 and 1994, respectively. F-33 117 17. Selected Quarterly Financial Information (Unaudited)
Combined Trust Corporation ------------------------------ ---------------------------- -------------------------------- 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- First Quarter Revenue $32,138,000 $28,338,000 $8,576,000 $5,243,000 $29,492,000 $27,823,000 Net income (loss) 348,000 (335,000) 652,000 (154,000) (304,000) (181,000) Net income (loss) per share 0.17 (0.17) 0.32 (0.08) (0.15) (0.09) Second Quarter Revenue $37,630,000 $29,994,000 $9,448,000 $5,953,000 $34,789,000 $28,610,000 Net income (loss) 978,000 933,000 560,000 288,000 418,000 645,000 Net income (loss) per share 0.49 0.46 0.28 0.14 0.21 0.32 Third Quarter Revenue $42,379,000 $29,666,000 $11,751,000 $5,737,000 $39,007,000 $28,809,000 Net income (loss) 3,469,000(2) (2,715,000) 3,479,000(3) (2,313,000) (10,000) (402,000) Net income (loss) per share 0.58 (1.34) 0.58 (1.14) (0.00) (0.20) Fourth Quarter Revenue $49,569,000 $25,999,000 $14,248,000 $4,738,000 $45,896,000 $25,720,000 Net income (loss) 4,175,000 (2,546,000) 6,018,000 (1,286,000) (1,843,000)(1) (1,260,000)(1) Net income (loss) per share 0.54 (1.26) 0.77 (0.64) (0.23) (0.62)
- ----------------------- (1) During the quarter ended March 31, 1995, the Trust recorded an extraordinary gain of $363,000 (net of minority interest of $921,000) relating to extinguishment of debt (see Note 3). (2) During the quarter ended September 30, 1995, the Trust recorded an extraordinary loss of $2,518,000 (net of minority interest of $1,084,000) related to the extinguishment of debt under the 1995 Credit Agreement which was terminated during the year (see Note 3). (3) During the quarter ended September 30, 1994, the Trust recorded a provision for investment losses of $759,000 (see Note 1) and the Trust and the Corporation each recorded a provision of $1,324,000 for expenses related to the settlement of shareholder litigation (see Note 13). F-34 118 18. Pro Forma Financial Information Due to the impact of the Reorganization of the Companies and other transactions in 1995, the following pro forma statements of operations are presented to supplement the historical statements of operations. These pro forma statements reflect the Reorganization, the Offering and certain property acquisitions, including the acquisition of the Doral Inn in New York, the Terrace Garden Inn and Lenox Inn in Atlanta, Georgia, and the Holiday Inn in Beltsville, Maryland as if they occurred on January 1, 1994:
Year Ended December 31, 1995 ---------------------------------------- Trust Corporation Combined ----------- ------------ ------------- Revenues $57,578,000 $193,502,000 $206,034,000 Net income (loss) $24,753,000 $ (4,836,000) $ 19,917,000 Net income (loss) per share $1.79 $(0.35) $1.44
Year End December 31, 1994 ---------------------------------------- Trust Corporation Combined ----------- ------------ ------------- Revenues $50,203,000 $190,522,000 $202,053,000 Net income (loss) $19,277,000 $ (4,694,000) $ 14,583,000 Net income (loss) per share $1.40 $(0.34) $1.06
19. Subsequent events On January 4, 1996, the Companies completed the purchase of the Grand Hotel, a 263-room luxury hotel, located in Washington, D.C., for an additional $13.5 million. The Company had purchased the mortgage interest in September 1995 for $19.5 million. On January 17, 1996, the Trust had entered into interest rate hedging agreements known as Treasury locks, which have the effect of fixing the base rate for the Trust to issue debt until October 1996 with a principal amount of $100 million and a term to maturity of seven years. The effect of these agreements is to fix the base rate at 5.7 percent and thus eliminate exposure to fluctuations in seven-year interest rates. On January 24, 1996, the Companies completed the acquisition of the 960-room Boston Park Plaza Hotel Complex in Boston, Massachusetts. The Companies formed the Starwood Saunders Partnership (the "Partnership") with Donald L. Saunders of Saunders Real Estate Corporation. The Trust contributed approximately $41.6 million in exchange for a 58 percent interest in the Partnership, while Mr. Saunders contributed his existing interest in the asset for the remaining 42 percent interest in the Partnership. On February 26, 1996, the Companies acquired a debt interest for $21 million and entered into an agreement to purchase the equity interest in the 251-room Doubletree Guest Suites Hotel and the 175-room Days Inn, both located at the Philadelphia Airport in Philadelphia, PA. F-35 119 SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995
Costs Subsequent to Initial Cost to Company Acquisition ----------------------------- ------------------------------ STARWOOD LODGING TRUST (1) Building and Building and Description Land Improvements Land Improvements - --------------------------------------- ----------- ------------ --------- ------------ HOTEL ASSETS: Embassy Suites - Phoenix, AZ $2,889,000 $11,658,000 $610,000 Embassy Suites - Tempe, AZ 1,000,000 14,458,000 Plaza Hotel - Tucson, AZ (2) 898,000 3,809,000 105,000 Doubletree Hotel - Rancho Bernardo, CA 1,256,000 6,275,000 Vagabond Inn - Rosemead, CA 700,000 2,100,000 Vagabond Inn - Sacramento, CA 700,000 3,200,000 Vagabond Inn - Woodland Hills, CA 1,200,000 3,200,000 Hilton Inn - Gainesville, FL 1,002,000 3,759,000 1,624,000 Holiday Inn - Albany, GA 796,000 4,980,000 189,000 Lenox Hill Inn - Atlanta, GA 4,383,000 4,197,000 Sheraton Colony Square Hotel - Atlanta, GA 2,000,000 25,285,000 Terrace Garden Inn - Atlanta, GA 5,875,000 19,944,000 (1,000) Best Western Riverfront Inn - Savannah, GA 431,000 3,745,000 237,000 Harvey Wichita - Wichita, KS 341,000 3,571,000 French Quarter Suites - Lexington, KY 1,237,000 10,176,000 Calverton Holiday Inn - Beltsville, MD 1,636,000 8,489,000 Bay Valley Hotel - Bay City, MI 2,500,000 5,472,000 1,000 1,212,000 Omni Chapel Hill Hotel - Chapel Hill, NC 500,000 8,920,000 Bourbon Street Hotel and Casino - Las Vegas, NV 8,435,000 8,668,000 5,548,000 King 8 Hotel and Casino - Las Vegas, NV 5,396,000 13,579,000 1,957,000 Best Western Airport Inn - Albuquerque, NM (3) 285,000 4,880,000 25,000 Best Western Mesilla Valley Inn - Las Cruces, NM 1,150,000 3,295,000 (290,000) 44,000 Doral Inn - New York, NY 3,112,000 Columbus Best Western - Columbus, OH 854,000 2,300,000 120,000 Days Inn - Portland, OR 1,900,000 3,768,000 120,000 302,000 Riverside Inn - Portland, OR 1,300,000 3,375,000 120,000 236,000 Park Central - Dallas, TX 3,814,000 8,018,000 1,829,000 621,000 Best Western Airport Inn - El Paso, TX 1,400,000 3,409,000 108,000 Residence Inn - Tysons Corner, VA 1,418,000 4,119,000 457,000 Days Inn Town Center - Seattle, WA 250,000 1,483,000 41,000 Meany Tower Hotel - Seattle, WA (3) 1,700,000 6,270,000 120,000 244,000 Sixth Avenue Inn - Seattle, WA 1,150,000 1,570,000 40,000 Tyee Inn - Tumwater, WA (3) 1,008,000 1,562,000 (63,000) 1,053,000 Capitol Hill Suites - Washington, D.C. 1,276,000 6,868,000 ----------- ------------ --------- ----------- $63,792,000 $216,402,000 1,837,000 $14,772,000 ----------- ------------ --------- -----------
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995
Gross Amount Book Value at December 31, 1995 (4) ------------------------------ STARWOOD LODGING TRUST (1) Accumulated Building and Depreciation & Year of Date Description Land Improvement Amortization Construction Acquired Life - --------------------------------------- ---------- ------------ -------------- ------------ -------- ---- HOTEL ASSETS: Embassy Suites - Phoenix, AZ $2,889,000 $12,268,000 $4,040,000 1981 12/13/83 35 Embassy Suites - Tempe, AZ 1,000,000 14,458,000 409,000 1984 07/25/95 35 Plaza Hotel - Tucson, AZ (2) 898,000 3,914,000 1,023,000 1971 09/16/86 35 Doubletree Hotel - Rancho Bernardo, CA 1,256,000 6,275,000 443,000 1988 01/01/95 35 Vagabond Inn - Rosemead, CA 700,000 2,100,000 555,000 1974 09/16/86 35 Vagabond Inn - Sacramento, CA 700,000 3,200,000 797,000 1975 09/16/86 35 Vagabond Inn - Woodland Hills, CA 1,200,000 3,200,000 797,000 1973 09/16/86 35 Hilton Inn - Gainesville, FL 1,002,000 5,383,000 1,311,000 1974 11/24/86 35 Holiday Inn - Albany, GA 796,000 5,169,000 957,000 1989 06/08/89 35 Lenox Hill Inn - Atlanta, GA 4,383,000 4,197,000 35,000 1965 10/31/95 35 Sheraton Colony Square Hotel - Atlanta, GA 2,000,000 25,285,000 913,000 1973 07/18/95 35 Terrace Garden Inn - Atlanta, GA 5,875,000 19,943,000 168,000 1975 10/31/95 35 Best Western Riverfront Inn - Savannah, GA 431,000 3,982,000 1,802,000 1971 12/11/86 35 Harvey Wichita - Wichita, KS 341,000 3,571,000 233,000 1974 01/01/95 35 French Quarter Suites - Lexington, KY 1,237,000 10,176,000 652,000 1989 01/01/95 35 Calverton Holiday Inn - Beltsville, MD 1,636,000 8,489,000 1987 11/30/95 35 Bay Valley Hotel - Bay City, MI 2,501,000 6,684,000 2,195,000 1973 05/10/84 35 Omni Chapel Hill Hotel - Chapel Hill, NC 500,000 8,920,000 475,000 1981 04/07/95 35 Bourbon Street Hotel and Casino - Las Vegas, NV 8,435,000 14,216,000 14,057,000 1964/1975 02/01/88 35 King 8 Hotel and Casino - Las Vegas, NV 5,396,000 15,536,000 8,480,000 1974/1979 02/01/88 35 Best Western Airport Inn - Albuquerque, NM (3) 285,000 4,905,000 1,296,000 1980 09/16/86 35 Best Western Mesilla Valley Inn - Las Cruces, NM 860,000 3,339,000 927,000 1974 09/16/86 35 Doral Inn - New York, NY 3,112,000 1927 09/20/95 35 Columbus Best Western - Columbus, OH 854,000 2,420,000 264,000 1971 01/24/92 35 Days Inn - Portland, OR 2,020,000 4,070,000 1,015,000 1962 09/16/86 35 Riverside Inn - Portland, OR 1,420,000 3,611,000 913,000 1964 09/16/86 35 Park Central - Dallas, TX 5,643,000 8,639,000 4,076,000 1972 09/09/88 35 Best Western Airport Inn - El Paso, TX 1,400,000 3,517,000 915,000 1974 09/16/86 35 Residence Inn - Tysons Corner, VA 1,418,000 4,576,000 1,458,000 1984 07/01/84 35 Days Inn Town Center - Seattle, WA 250,000 1,524,000 1,353,000 1957 09/16/86 13 Meany Tower Hotel - Seattle, WA (3) 1,820,000 6,514,000 1,676,000 1932 09/16/86 35 Sixth Avenue Inn - Seattle, WA 1,150,000 1,610,000 1,283,000 1959 09/16/86 13 Tyee Inn - Tumwater, WA (3) 945,000 2,615,000 602,000 1961 02/17/87 35 Capitol Hill Suites - Washington, D.C. 1,276,000 6,868,000 392,000 1955 01/01/95 35 ----------- ------------ ----------- $65,629,000 $231,174,000 $55,512,000 ----------- Land 65,629,000 1,864,000 Furniture, Fixtures & Equipment 8,834,000 6,651,000 ------------ ----------- Total hotels and land under lease $305,637,000 $64,027,000 ============ ===========
(Continued) F-36 120 (1) As of December 31, 1995, real estate and furniture, fixtures and equipment have a cost for federal income tax purposes which reasonably approximates their carrying value. (2) Land cost includes costs allocated to leasehold interest in land of $548,000 at the Tucson property. (3) Land costs represent costs allocated to leasehold interest in land. (4) Includes reserve for losses discussed in Notes 1 and 3 of Notes to the Financial Statements. F-37 121 SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION - TRUST A reconciliation of the Trust's investment in real estate, furniture and fixtures and related accumulated depreciation is as follows:
Year Ended December 31, 1995 1994 1993 ------------ ------------ ------------ REAL ESTATE AND FURNITURE, FIXTURES AND EQUIPMENT Balance at beginning of period $188,608,000 $224,170,000 $246,356,000 Additions during period: Acquisitions 100,749,000 Contributed properties 30,642,000 Improvements 4,660,000 2,270,000 1,372,000 Step-up in Basis 899,000 Deductions during period: Sales of properties (37,832,000) (24,457,000) Transfer of property to the Operating Partnership (19,022,000) ============ ============ ============ Balance at end of period 305,637,000 188,608,000 224,170,000 ============ ============ ============ ACCUMULATED DEPRECIATION: Balance at beginning of period $71,899,000 $94,252,000 $105,338,000 Additions during period: Depreciation expense 7,674,000 5,205,000 5,630,000 Contributed properties 890,000 Deductions during period: Sale of properties (27,997,000) (19,085,000) Transfer of properties (16,436,000) Provision for investment losses: St. Louis, MO 858,000(1)(2) Dallas, TX 459,000(2) Jacksonville, FL 389,000(2) 272,000(2) Savannah, GA 300,000(2) New Port Richey, FL 200,000(1)(2) Brunswick, GA 150,000(1)(2) Fayetteville, NC 50,000(2) 100,000(1)(2) Rosemead, CA 30,000(2) ------------ ------------ ------------ 439,000 2,369,000 ------------ ------------ ------------ Balance at end of period $ 64,027,000 $ 71,899,000 $ 94,252,000 ============ ============ ============
(1) Provision for loss was recorded primarily as a result of all cash offers to sell hotels, previously identified for sale, at amounts lower than their current net book values. (2) Provision for loss was recorded as a result of the difference between NBV of properties which had been identified for sale and their estimated fair value. (Continued) F-38 122 SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION - CORPORATION DECEMBER 31, 1995
Costs Subsequent to Initial Cost to Company Acquisition ----------------------------- ------------------------ STARWOOD LODGING CORPORATION Building and Building and Description Land Improvements Land Improvements - ------------------------------------------- ---------- ------------ ------- ------------- HOTEL ASSETS: Embassy Suites - Phoenix, AZ $ 45,000 Plaza Hotel - Tucson, AZ (3) 595,000 383,000 Hilton Inn - Gainesville, FL 39,000 Holiday Inn - Albany, GA 64,000 Best Western Riverfront - Savannah, GA 47,000 Bay Valley Hotel - Bay City, MI 179,000 Best Western Airport Inn - Albuquerque, NM (3) 325,000 47,000 Best Western Mesilla Valley Inn - Las Cruces, NM 252,000 Doral Inn - New York, NY 33,948,000 Columbus Best Western - Columbus, OH 5,000 61,000 Days Inn - Portland, OR (3) 2,185,000 78,000 Riverside Inn - Portland, OR (3) 2,123,000 87,000 1,000 25,000 Best Western Airport Inn - El Paso, TX 18,000 Residence Inn - Tysons Corner, VA 33,000 Days Inn Town Center - Seattle, WA (3) 429,000 4,000 204,000 Meany Tower Hotel - Seattle, WA (3) 3,437,000 302,000 66,000 Sixth Avenue Inn - Seattle, WA (3) 1,515,000 24,000 118,000 Marriott Hotel - Milwaukee, WI (3) 2,500,000 17,422,000 3,585,000 ---------- ---------- ------- --------- 13,109,000 51,787,000 688,000 4,562,000 ---------- ---------- ------- --------- - --------------------------------------------------------------------------------------------------------------------------------
Gross Amount Book Value at December 31, 1995 --------------------------- (2) STARWOOD LODGING CORPORATION (1) (1) Accumulated Building and Depreciation & Year of Date Description Land Improvements Amortization Construction Acquired Life - -------------------------------------------- ---------- ------------- -------------- ------------ -------- ---- HOTEL ASSETS: Embassy Suites - Phoenix, AZ $ 45,000 9,000 1981 12/13/83 35 Plaza Hotel - Tucson, AZ (3) 978,000 214,000 1971 09/16/86 35 Hilton Inn - Gainesville, FL 39,000 14,000 1974 09/16/86 35 Holiday Inn - Albany, GA 64,000 8,000 1989 06/08/89 35 Best Western Riverfront - Savannah, GA 47,000 3,000 1971 12/11/86 35 Bay Valley Hotel - Bay City, MI 179,000 30,000 1973 05/10/84 35 Best Western Airport Inn - Albuquerque, NM (3) 372,000 92,000 1980 09/16/86 35 Best Western Mesilla Valley Inn - Las Cruces, NM 252,000 33,000 1974 09/16/86 35 Doral Inn - New York, NY 33,948,000 1927 09/20/95 35 Columbus Best Western - Columbus, OH 5,000 61,000 6,000 1971 01/24/92 35 Days Inn - Portland, OR (3) 2,185,000 78,000 17,000 1962 09/16/86 35 Riverside Inn - Portland, OR (3) 2,124,000 112,000 36,000 1964 09/16/86 35 Best Western Airport Inn - El Paso, TX 18,000 3,000 1974 09/16/86 35 Residence Inn - Tysons Corner, VA 33,000 10,000 1984 07/01/84 35 Days Inn Town Center - Seattle, WA (3) 429,000 208,000 45,000 1957 09/16/86 13 Meany Tower Hotel - Seattle, WA (3) 3,437,000 368,000 108,000 1932 09/16/86 35 Sixth Avenue Inn - Seattle, WA (3) 1,515,000 142,000 31,000 1959 09/16/86 13 Marriott Hotel - Milwaukee, WI (3) 2,500,000 21,007,000 2,795,000 1972 ---------- ---------- --------- 13,797,000 56,349,000 3,454,000 ---------- ----------
Land 13,797,000 Furniture, Fixtures & Equipment 64,576,000 35,920,000 ------------ ----------- $134,722,000 $39,374,000 ============ ===========
(1) As of December 31, 1995, real estate and furniture, fixtures, and equipment have a cost for federal income tax purposes which reasonably approximates their carrying value. (2) Includes reserve for losses discussed in Notes 1 and 3 of Notes to the Financial Statements. (3) Land costs represent costs allocated to leasehold interest in land. (Continued) F-39 123 SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION - CORPORATION A reconciliation of the Corporation's investment in real estate, furniture and fixtures and related accumulated depreciation is as follows:
Year Ended December 31, 1995 1994 1993 ------------ ----------- ----------- REAL ESTATE AND FURNITURE AND FIXTURES: Balance at beginning of period $51,741,000 $54,790,000 $51,972,000 Additions during period: Acquisitions 38,396,000 Contributed properties 4,459,000 Improvements 21,104,000 671,000 5,205,000 Transfers 19,022,000 Deductions during period: Reclassification 388,000 Sales of properties (3,720,000) (2,775,000) ------------ ----------- ----------- Balance at end of year $134,722,000 $51,741,000 $54,790,000 ============ =========== =========== ACCUMULATED DEPRECIATION: Balance at beginning of year $17,266,000 $17,459,000 $15,413,000 Additions - Depreciation expense 5,269,000 2,956,000 3,602,000 Transfers 16,436,000 Contributed properties 403,000 Deductions - Sales of properties (3,149,000) (1,842,000) Reclassifications 286,000 ------------ ----------- ----------- Balance at end of period 39,374,000 17,266,000 17,459,000 ============ =========== ===========
(Concluded) F-40 124 SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1995
Principal amount of loans subject to STARWOOD LODGING TRUST Face Carrying delinquent Interest Final Periodic Prior Amount of Amount of principal or Description Rate Maturity Payment Liens Mortgages Mortgages(1) interest - ---------------------------- -------- -------- --------------------- ----- --------- ------------ ------------- First Mortgages: Vagabond Inns - Modesto, CA 10.00% 1996 (2) no $1,995,000 $1,161,000 Vantage Hotel - Tucker, GA 9.00% 1998 16,700 (3) no 1,985,000 1,928,000 Sheraton - New Port Richey, FL and Holiday Inn - Brunswick, GA 9.25% 2001 26,200 (4) no 3,070,000 3,022,000 Ramada Inn - Fayetteville, NC 9.00% 2006 9,100 (5) no 800,000 761,000 Holiday Inn - Jacksonville, FL 9.00% 2001 18,500 (6) no 2,300,000 2,284,000 Ramada Suites - Secaucus, NJ (21) 1999 Adjustable (8) no 13,813,000 8,630,000 Bristol Suites - Dallas, TX 8.00% 2002 517,800 (9)(18) no 18,000,000 11,713,000 Harvey DFW Airport Hotel - Dallas, TX 8.00% 2002 805,500 (9)(19) no 28,000,000 18,218,000 Harvey Hotel, Addison - Dallas, TX 8.00% 2002 431,500 (9)(20)(22) no 15,000,000 7,331,000 Quality Inn - Atlantic City, NJ 80% of prime 2010 Adjustable (10) no 10,000,000 4,179,000 The Grand - Washington, D.C. (11) 2000 Adjustable (11) no 22,930,000 19,769,000 Second Mortgages: Viscount Hotel - Dallas, TX 8.72% 2017 2,800 (7) yes 264,000 231,000 Bristol Suites - Dallas, TX Prin. Only 2002 4,800 (12)(23) yes 190,000 Harvey DFW Airport Hotel - Dallas, TX Prin. Only 2002 1,800 (13)(23) yes 73,000 Harvey Hotel, Addison - Dallas, TX Prin. Only 2002 1,900 (14)(23) yes 100,000 Quality Inn - Atlantic City, NJ (SCA Loan) 7.00% 1996 6,700 (15) yes 1,350,000 134,000 Third Mortgages: Quality Inn - Atlantic City, NJ (Guerra Loan) 1% + Prime 1996 Adjustable (16) yes 1,335,000 Fourth Mortgages: Quality Inn - Atlantic City, NJ (Marshall Loan) 1% + Prime 1997 Adjustable (17) yes 225,000 Allowance for loan losses (100,000) ------------ ----------- $121,430,000 $79,261,000 ============ =========== Intercompany Mortgage Loans - --------------------------- First Mortgages: Milwaukee Marriott - Milwaukee, WI (Aetna) 10.5% 1996 (24) no $10,000,000 $9,495,000 Milwaukee Marriott - Milwaukee, WI (Aetna Addition) 1996 (24) yes 260,000 Doral Inn - New York, NY 9.5% 2006 (25) no 40,250,000 40,250,000 Third Mortgages: Milwaukee Marriott - Milwaukee, WI 10.5% 1996 (24) yes 1,000,000 1,000,000 Fourth Mortgages: Milwaukee Marriott - Milwaukee, WI 10.5% 1996 (24) yes 12,667,000 17,481,000 ------------ ----------- $ 63,917,000 $68,486,000 ============ ===========
(Continued) F-41 125 (1) As of December 31, 1995 the aggregate cost (before allowance for loan losses) for federal income tax purposes is not significantly different from that used for book purposes. (2) The note provides for monthly payments of interest plus additional annual payments based on a percentage of the hotel's sales, a portion of which is applied to principal. (3) Principal and interest due monthly based on a 25-year amortization schedule with unpaid principal of $1,857,000 due in June 1998. (4) Principal and interest due monthly based on a 25-year amortization schedule with unpaid principal of $2,761,000 due in August 2001. (5) Principal and interest due monthly based on a 12-year amortization schedule with unpaid principal of $9,000 due in December 2006. (6) Principal and interest due monthly based on a 30-year amortization schedule with unpaid principal of $2,156,000 due in December 2001. (7) Principal and Interest, plus contingent interest of 4% of hotel room sales, due monthly based on a 40 year amortization schedule. Note fully amortized. (8) Principal and interest due monthly. Principal amount adjusts annually based on note schedule. Note carry amount net of $3,698,000 discount. (9) Principal and interest due quarterly based on note schedule. (10) Principal and interest due monthly based on note schedule. Note carrying amount net of $4,254,000 discount. (11) Step rate note. Rate increases based on note schedule. At December 31, 1995, the rate was 4%. Note carrying amount net of $3,160,000 discount. (12) Forty equal principal payments of $237,500 each of which the Realty Partnership has a 2% interest. Note carrying amount net of $152,000 allowance. (13) Forty equal principal payments of $90,000 each of which the Realty Partnership has a 2% interest. Note carrying amount net of $58,000 allowance. (14) Forty equal principal payments of $125,125 each of which the Realty Partnership has a 2% interest. Note carrying amount net of $70,000 allowance. (15) Interest only, payable monthly. Note carrying amount net of $975,000 allowance. (16) Interest only, payable monthly. Note carrying amount net of $1,444,000 allowance. (17) Principal and interest payable monthly based on note schedule. Note carrying amount net of $213,000 allowance. (18) Note carrying amount net of $4,349,000 discount. (19) Note carrying amount net of $6,783,000 discount. (20) Note carrying amount net of $2,710,000 discount. (21) Libor plus 1.25% or prime at borrower's option. (22) A 25% participation on both the first and second mortgages has been sold to a third party. (23) The face amount represents the Realty Partnership's 2% interest in the mortgage loan. The remaining payment amounts are passed through to participants. (24) Principal and interest due June 30, 1996. (25) One hundred thirty-two equal installments of interest only. Principal and all accrued and unpaid interest due October 1, 2006. (Continued) F-42 126 SCHEDULE IV (Continued) RECONCILIATION OF MORTGAGE LOANS
Year Ended December 31, 1995 1994 1993 ----------- ----------- ----------- Balance at beginning of period $14,049,000 $11,642,000 $10,010,000 Additions - New mortgage loans 71,779,000 6,270,000 1,985,000 Amortization of discount 3,285,000 Deductions - Principal repayments (6,940,000) (2,382,000) (353,000) Allowance for loan loss (2,912,000) (320,000) Discount for pre-payment (55,000)(1) Proceeds from foreclosure sale (1,106,000)(2) ----------- ----------- ----------- Balance at end of period $79,261,000 $14,049,000 $11,642,000 =========== =========== ===========
Intercompany Mortgage Loans - ---------------------------
Year Ended December 31, 1995 1994 1993 ----------- ----------- ----------- Balance at beginning of period $16,916,000 $15,185,000 $12,667,000 Additions - New mortgage loans 50,073,000 1,000,000 Amortization of discount Other - accrued interest (3) 2,010,000 1,731,000 1,518,000 Deductions - Principal repayments $ (513,000) Allowance for loan loss Discount for pre-payment Proceeds from foreclosure sale ----------- ----------- ----------- Balance at end of period $68,486,000 $16,916,000 $15,185,000 =========== =========== ===========
- ------------------ (1) In 1994, the Trust discounted the note on the Spartanburg, South Carolina property as consideration for the early payoff of the note. (2) In 1994, the Trust foreclosed on the Merrimack, New Hampshire property. (3) Per mortgage loan agreement, the borrower is not required to pay monthly interest if the cash flows are insufficient. Thus, the Trust has accrued interest on the notes. (Concluded) F-43 127 EXHIBIT INDEX
Exhibit No. Description of Exhibit Page 3.1 Amended and Restated Declaration of Trust of the Trust dated June 6, 1988, as amended (incorporated by reference to Exhibit 3A to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995) ......................................................................................... 3.2 Amendment and Restatement of Articles of Incorporation of the Corporation (incorporated by reference to Exhibit 3B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995) .. 3.3 Trustees' Regulations of the Trust, as amended (incorporated by reference to Exhibit 3.3 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")) ................................................................................... 3.4 By-laws of the Corporation, as amended (incorporated by reference to Exhibit 3.4 to the 1994 Form 10-K) ... 4.1 Pairing Agreement dated June 25, 1986, between the Trust and the Corporation, as amended (incorporated by reference to Exhibit 4.1 to the 1994 Form 10-K) ........................................................ 4.2 Amendment No. 1 to the Pairing Agreement dated as of February 1, 1995 between the Trust and the Corporation ........................................................................................... 4.3 Form of Warrant Agreement dated as of September 16, 1986, between the Trust and City National Bank ("CNB") (incorporated by reference to Exhibit 4.3 to the Trust's and the Corporation's Registration Statement on Form S-4 (the "S-4 Registration Statement") filed with the Securities and Exchange Commission (the "SEC") on August 1, 1986 (Registration No. 33-7694)) ............................................................. 4.4 Form of Warrant Agreement dated as of September 16, 1986, between the Corporation and CNB (incorporated by reference to Exhibit 4.3A to the S-4 Registration Statement) .............................................. 10.1 Incentive and Non-Qualified Share Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.8 to the Trust and the Corporation's Joint Annual Report on Form 10-K for the year ended August 31, 1986 (the "1986 Form 10-K")).3 ................................................................. 10.2 Corporation Stock Non-Qualified Stock Option Plan (1986) of the Trust (incorporated by reference to Exhibit 10.9 to the 1986 Form 10-K).2 ..................................................................... 10.3 Stock Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.10 to the 1986 Form 10-K).2 ......................................................................................... 10.4 Trust Shares Option Plan (1986) of the Corporation (incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K).2 .................................................................................. 10.5 1995 Share Option Plan of the Corporation.2 ............................................................... 10.6 1995 Share Option Plan of the Trust.2 ..................................................................... 10.7 Form of Indemnification Agreement and Amendment No. 1 to Indemnification Agreement between the Trust and each of Messrs. Barry S. Sternlicht, Jeffrey C. Lapin, Jonathan Eilian, Michael W. Mooney, Bruce M. Ford, Madison F. Grose, Bruce W. Duncan, Steven R. Quazzo, William E. Simms, Daniel H. Stern and Ronald C. Brown.2 ..................................................................... 10.8 Form of Indemnification Agreement and Amendment No. 1 to Indemnification Agreement between the Corporation and each of Messrs. Earle F. Jones, Kevin E. Mallory, Bruce M. Ford, Steven R. Goldman, Graeme W. Henderson, Barry S. Sternlicht, Jean-Marc Chapus, Jonathan Eilian, Michael A. Leven, Daniel W. Yih and Alan M. Schnaid.2 ...................................................................... 10.9 Form of Indemnification Agreement dated as of February 3, 1992, between the Corporation and each of Messrs. Ronald A. Young, Graeme W. Henderson, Bruce M. Ford, Earle M. Jones and William H. Ling (incorporated by reference to Exhibit 10.30 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1991).2 ...........................................................................
__________________________________ 2 Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. 128 EXHIBIT INDEX
Exhibit No. Description of Exhibit Page 10.10 Executive Employment Agreement dated as of January 31, 1995, between the Trust and Jeffrey C. Lapin (incorporated by reference to Exhibit 10.12 to the 1994 Form 10-K).2 ..................................... 10.11 Form of Amended and Restated Lease Agreement entered into as of January 1, 1993, between the Trust as Lessor and the Corporation (or a subsidiary) as Lessee (incorporated by reference to Exhibit 10.19 to the Trust's and the Corporation's Joint Annual Report on Form 10-K for the year ended December 31, 1992)........................................................................................ 10.12 Exchange Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation, the Realty Partnership, the Operating Partnership and the Starwood Partners (incorporated by reference to Exhibit 2B to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995).. 10.13 Registration Rights Agreement dated as of January 1, 1995 among the Trust, the Corporation and Starwood Capital (incorporated by reference to Exhibit 2C to the Trust's and the Corporation's Joint Current Report on Form 8-K dated January 31, 1995)................................................................ 10.14 Amended and Restated Limited Partnership Agreement for the Realty Partnership among the Trust and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 10.21 to the Trust's and the Corporation's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (Registration Nos. 33-59155 and 33-59155-01) (the "S-2 Registration Statement")) ............................................................................................. 10.15 Amended and Restated Limited Partnership Agreement for the Operating Partnership among the Corporation and the Starwood Partners dated as of December 15, 1994 (incorporated by reference to Exhibit 10.22 to the S-2 Registration Statement) ....................................................................... 10.16 Mortgage Loan Funding Facility Agreement, dated as of July 25, 1995, among the Realty Partnership and SLT Realty Company, LLC, as the borrower, and Lehman Commercial Paper, Inc., as lender, together with Amendment No. 1 thereto, dated as of October 30, 1995 ............................................... 10.17 Collateral Substitution Agreement, dated as of January 4, 1996, between the Realty Partnership and SLT Realty Company, LLC, as borrower, and Lehman Commercial Paper, Inc., as lender ....................... 10.18 Amended and Restated Line of Credit Agreement, dated as of October 25, 1995, among the Trust and the Realty Partnership, as borrower, and Bankers Trust Company, as collateral agent, and Lehman Brothers Holdings, Inc., d/b/a Lehman Capital, a division of Lehman Brothers Holdings, Inc., individually and as agent, together with First Amendment thereto, dated as of January 3, 1996 and effective as of October 25, 1995 ..................................................................... 10.19 Form of Amendment No. 1 to Formation Agreement among the Trust, the Corporation and the Starwood Partners (incorporated by reference to Exhibit 10.23 to the S-2 Registration Statement) ........................... 10.20 Form of Westin/HOT Agreement among W&S Hotel L.L.C., W&S Hotel Holding Corp., Westin Hotel Company, the Realty Partnership, the Operating Partnership, WHWE L.L.C. and Woodstar Limited Partnership (incorporated by reference to Exhibit 10.24 to the S-2 Registration Statement) ........................... 21. Subsidiaries of the Corporation. SLC Operating Limited Partnership Hotel Investors of Arizona, Inc. Hotel Investors of Nebraska, Inc. Hotel Investors of Michigan, Inc. Hotel Investors of Missouri, Inc. Hotel Investors Corporation of Nevada Hotel Investors of Virginia, Inc. Columbus Operators, Inc. Lyntex Properties, Inc. Western Host, Inc. Subsidiaries of the Trust. SLT Realty Limited Partnership Starlex Company LLC SLT Realty Company LLC 23. Consent of Independent Accountants. 27.1 Financial Data Schedule for Starwood Lodging Corporation. 27.2 Financial Data Schedule for Starwood Lodging Trust.
__________________________________ 2 Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K. EX-4.2 2 AMENDMENT NO. 1 TO PAIRING AGREEMENT 1 EXHIBIT 4.2 AMENDMENT NO. 1 TO PAIRING AGREEMENT Amendment dated as of February 1, 1995 (this "Amendment") to the Pairing Agreement dated as of June 25, 1980 (the "Pairing Agreement") between Starwood Lodging Trust (formerly Hotel Investors Trust), a Maryland real estate investment trust (the "Trust"), and Starwood Lodging Corporation (formerly Hotel Investors Corporation), a Maryland corporation (the "Company"). WHEREAS, on the date hereof (a) the Trust is, among other things, amending the Declaration of Trust of the Trust to (i) change the name of the Trust to "Starwood Lodging Trust", (ii) change the par value of the shares of beneficial interest of the Trust to $.01 per share and (iii) authorize a new class of Excess Trust Shares, par value $.01 per share, of the Trust and a new class of Excess Preferred Shares, par value $.01 per share, of the Trust and (b) the Company is, among other things, amending and restating the Articles of Incorporation of the Company to (i) change the name of the Company to "Starwood Lodging Corporation", change the par value of the shares of common stock of the Company to $.01 per share and (iii) authorize a new class of Excess Common Stock, par value $.01 per share, of the Company and a new class of Excess Preferred Stock, par value $.01 per share, of the Company; and WHEREAS, pursuant to and in compliance with Section 11 of the Pairing Agreement, the Trust and the Company desire to amend the Pairing Agreement as set forth in this Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein and in the Pairing Agreement, the parties hereto agree as follows: SECTION 1. AMENDMENT OF PAIRING AGREEMENT. The Pairing Agreement is hereby amended by adding thereto a new Section 12, which new Section 12 shall read in its entirety as follows: 12. (a) In the event that (x) the Trust issues Excess Trust Shares, par value $.01 per share, of the Trust ("Excess Trust Shares") or the Company issues shares of Excess Common Stock, par value $.01 per share, of the Company ("Excess Common Shares"), and (y) the Shares and the shares of common stock of the Company which were converted into such Excess Trust Shares and such Excess Common Shares, respectively, were paired pursuant to this Agreement, then in addition to, and not in any respect in limitation of, the 2 provisions of the Declaration of Trust of the Trust and the Amended and Restated Articles of Incorporation of the Company (as each may be amended from time to time): (i) such Excess Trust Shares and such Excess Common Shares shall not be transferable, and shall not be transferred on the respective books of either the Trust or the Company, unless in connection with a transfer the transferor transfers and the transferee acquires the same number of Excess Trust Shares and Excess Common Shares; (ii) neither the Trust nor the Company shall issue or transfer or agree to issue or transfer any Excess Trust Shares or Excess Common Shares unless effective provision is made for the issuance or transfer to the same person of the same number of Excess Trust Shares and Excess Common Shares; and (iii) each certificate evidencing Excess Trust Shares shall have printed on its reverse side a certificate evidencing the same number of Excess Common Shares. A legend shall be placed on the face or reverse side of each certificate evidencing ownership of Excess Trust Shares and Excess Common Shares referring to the restrictions on transfer of the Excess Trust Shares and Excess Common Shares. (b) In the event that (x) the Trust issues Excess Preferred Shares, par value $.01 per share, of the Trust ("Excess Preferred Shares") or the Company issues shares of Excess Preferred Stock, par value $.01 per shares, of the Company ("Excess Preferred Stock"), and (y) the shares of beneficial interest of the Trust and the shares of preferred stock of the Company which were converted into such Excess Preferred Shares and such Excess Preferred Stock, respectively, were paired pursuant to this Agreement, then in addition to, and not in any respect in limitation of, the provisions of the Declaration of Trust of the Trust and the Amended and Restated Articles of Incorporation of the Company (as each may be amended from time to time): (i) such Excess Preferred Shares and such Excess Preferred Stock shall not be transferable, and shall not be transferred on the respective books of either the Trust or the Company, unless in connection with a transfer the transferor transfers and the transferee acquires the same number of Excess Preferred Shares and Excess Preferred Stock; (ii) neither the Trust nor the Company shall issue or transfer or agree to issue or transfer any Excess Preferred Shares or Excess Preferred Stock unless -2- 3 effective provision is made for the issuance or transfer to the same person of the same number of Excess Preferred Shares and Excess Preferred Stock; and (iii) each certificate evidencing Excess Preferred Shares shall have printed on its reverse side a certificate evidencing the same number of Excess Preferred Stock. A legend shall be placed on the face or reverse side of each certificate evidencing ownership of Excess Preferred Shares and Excess Preferred Stock referring to the restrictions on transfer of the Excess Preferred Shares and Excess Preferred Stock. SECTION 3. REFERENCES TO SHARES. The definition of "Shares" contained in the second recital of the Pairing Agreement is hereby amended to refer to shares of beneficial interest of the Trust with a par value of $.01 per share. SECTION 4. EFFECT OF AMENDMENT. Except as expressly set forth herein, this Amendment shall not by implication alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Pairing Agreement, all of which shall continue in full force and effect. SECTION 5. PARTIAL INVALIDITY. In case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein. -3- 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. STARWOOD LODGING TRUST By:________________________________ Name: Title: STARWOOD LODGING CORPORATION By:________________________________ Name: Title: -4- EX-10.5 3 1995 SHARE OPTION PLAN OF THE CORPORATION 1 EXHIBIT 10.5 STARWOOD LODGING CORPORATION 1995 SHARE OPTION PLAN (AMENDED AND RESTATED AS OF AUGUST 17, 1995) I. INTRODUCTION 1.1 PURPOSES AND GENERAL. The purposes of the 1995 Share Option Plan (the "Plan") of Starwood Lodging Corporation (the "Corporation") are to align the interests of the Corporation's shareholders and the recipients of options under this Plan by increasing the proprietary interest of such recipients in the Corporation's growth and success and to advance the interests of the Corporation by attracting and retaining officers, key employees, consultants and advisers, as well as qualified persons for service as directors of the Corporation ("Directors"). For purposes of this Plan, references to employment by or service as a consultant, adviser or director of the Corporation shall also mean employment by or service as a consultant, advisor or director of a subsidiary of the Corporation. This Plan seeks to accomplish the foregoing purposes by providing a means whereby options to purchase from the Corporation shares of common stock, par value $.01 per share, of the Corporation ("Corporation Shares") and options to purchase from the Corporation shares of beneficial interest, par value $.01 per share, of Starwood Lodging Trust ("Trust Shares") may be granted in accordance with Section II to eligible persons and shall be granted, in accordance with Section III, to Directors. Pursuant to an Agreement dated June 25, 1980, as amended, between the Corporation and Starwood Lodging Trust (the "Trust"), all outstanding Corporation Shares and Trust Shares are paired on a one-for-one basis and trade as units consisting of one Corporation Share and one Trust Share ("Paired Shares"). Accordingly, each option to purchase Corporation Shares (a "Corporation Share Option") shall be paired with an option to purchase an equal number of Trust Shares (a "Trust Share Option" and each such paired Corporation Share Option and Trust Share Option is herein referred to as a "Paired Option"). Each Paired Option may be exercised, terminated, cancelled, forfeited, transferred or otherwise disposed of only in units consisting of Paired Shares. Accordingly, a Corporation Share Option, or portion thereof, may be exercised, terminated, cancelled, forfeited, transferred or otherwise disposed of only in connection with, and to the same extent as, the exercise, termination, cancellation, forfeiture, transfer or other disposition of a Trust Share Option. Each Corporation Share Option constituting part of a Paired Option may be either an incentive share option or a non-qualified share option. An incentive share option shall mean a Corporation Share Option that meets the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor 2 provision, which is intended by the Committee (as defined below) to constitute an incentive share option. Each Trust Share Option constituting part of a Paired Option shall be a non-qualified share option. 1.2 ADMINISTRATION. This Plan shall be administered by a committee (the "Committee") designated by the Board of Directors of the Corporation (the "Board") consisting of two or more members of the Board, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside director" within the meaning of Section 162(m) of the Code, subject to any transition rules applicable to the definition of outside director. The Committee may, subject to the terms of this Plan, select eligible persons to be granted Paired Options in accordance with Section II and shall determine the number of Paired Shares subject to each such Paired Option. The Committee shall, subject to the terms of this Plan, determine the exercise price of each Paired Option granted hereunder, including the portion of the exercise price of such Paired Option which is attributable to the Corporation Share Option and the Trust Share Option, respectively, the time and conditions of exercise of such Paired Option and all other terms and conditions of such Paired Option, including, without limitation, the form of the Agreement representing such Paired Option. The Committee may, in its sole discretion and for any reason at any time, accelerate the exercisability of any Paired Option. The Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of this Plan and may impose, incidental to the grant of a Paired Option, conditions with respect to the grant, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions shall be conclusive and binding on all parties. Each Paired Option shall be evidenced by a written Agreement (an "Agreement") between the Corporation and the optionee setting forth the terms and conditions applicable to such Paired Option. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or Chief Operating Officer or other executive officer of the Corporation as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the grant of a Paired Option to any person who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period a Paired Option granted to such employee would be outstanding or (ii) the selection for participation in this Plan of an officer or other person subject -2- 3 to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of a grant of a Paired Option to such an officer or other person. A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 1.3 ELIGIBILITY. Participants in this Plan shall consist of such officers, key employees, consultants, advisers and Directors of the Corporation and its subsidiaries as the Committee in its sole discretion may select from time to time. The Committee's selection of a person to participate in this Plan at any time shall not require the Committee to select such person to participate in this Plan at any other time. Directors shall be also eligible to participate in this Plan in accordance with Section III. 1.4 SHARES AVAILABLE. The number of Paired Shares available for grants of Paired Options under this Plan, other than a Paired Option that includes a Corporation Share Option that is designated as an incentive share option, shall be 1,573,000 (subject to adjustment as provided in Section 4.7) plus eight percent (8%) of the sum of (i) the number of Paired Shares which may be issued upon the exchange of limited partnership units ("Units") in SLT Realty Limited Partnership, a Delaware limited partnership, and SLC Operating Limited Partnership, a Delaware limited partnership to the extent such Units first become outstanding after August 17, 1995 (without reduction for subsequent repurchases, redemptions or similar events involving the Units), plus (ii) the number of Paired Shares which first become outstanding (without reduction for subsequent repurchases, redemptions or similar events involving Paired Shares) after August 17, 1995 (other than by reason of (A) such exchange of Units, (B) the issuance or delivery of Paired Shares pursuant to any employee benefit plan of the Corporation or the Trust or (C) the issuance of Paired Shares which were acquired and held by the Corporation or the Trust prior to their issuance), reduced by (iii) the aggregate number of Paired Shares which become subject to (A) outstanding Paired Options under this Plan, including each Paired Option that includes a Corporation Share Option that is designated as an incentive share option, or (B) outstanding options to purchase Paired Shares under the Trust's 1995 Share Option Plan (the "Trust Plan"). Subject to adjustment as provided in Section 4.7, the number of Paired Shares available for grants of Paired Options that include Corporation Share Options that are designated as incentive share options shall be 1,573,000, reduced by the aggregate number of Paired Shares which become subject to (X) outstanding Paired Options under this Plan, including each Paired Option that does not include a Corporation -3- 4 Share Option that is designated as an incentive share option, or (Y) outstanding options to purchase Paired Shares under the Trust Plan. To the extent that Paired Shares subject to an outstanding Paired Option or an outstanding option to purchase Paired Shares under the Trust Plan are not issued or delivered by reason of the termination, cancellation or forfeiture of any such option or by reason of the delivery of Paired Shares to pay all or a portion of the exercise price of any such option, or to satisfy all or a portion of the tax withholding obligations relating to any such option, then such Paired Shares shall again be available under this Plan. Paired Shares to be delivered under this Plan shall be made available (i) (A) by the Corporation from authorized and unissued Corporation Shares issued by the Corporation directly to the optionee and (B) by the Trust from authorized and unissued Trust Shares issued by the Trust directly to the Corporation for delivery to the optionee, (ii) from authorized and issued Paired Shares acquired and held by the Corporation or (iii) a combination thereof. To the extent required by Section 162(m) of the Code and the rules and regulations thereunder, the maximum number of Paired Shares with respect to which Paired Options may be granted during any calendar year to any person shall be 500,000, subject to adjustment as provided in Section 4.7. II. PAIRED OPTIONS 2.1 GRANTS OF PAIRED OPTIONS. The Committee may, in its discretion, grant Paired Options to such eligible persons as may be selected by the Committee. Each Corporation Share Option, or portion thereof, that is not an incentive share option, shall be a non-qualified share option. Each Paired Option that includes a Corporation Share Option that is designated as an incentive share option shall be granted within ten years of the effective date of this Plan. To the extent that the aggregate fair market value (determined as of the date of grant) of Corporation Shares with respect to which Corporation Share Options designated as incentive share options are exercisable for the first time by a participant during any calendar year (under this Plan or any other plan of the Corporation, or any parent or subsidiary) exceeds the amount (currently $100,000) established by the Code, such Corporation Share Options shall constitute non-qualified share options. The "fair market value" of a Corporation Share shall be that portion of the fair market value of a Paired Share which the Committee determines to be attributable to the Corporation Share by applying in good faith a method of valuation permissible under Section 422 of the Code. The "fair market value" of a Paired Share shall mean the closing transaction price of a Paired Share as reported in the New York Stock Exchange -4- 5 Composite Transactions on the date as of which such value is being determined or, if there shall be no reported transaction on such date, on the next preceding date for which a transaction was reported; provided that if the fair market value of a Paired Share for any date cannot be determined as above provided, fair market value of a Paired Share shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. 2.2 TERMS OF PAIRED OPTIONS. Paired Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of Paired Shares and Purchase Price. The number of Paired Shares subject to a Paired Option and the purchase price per Paired Share purchasable upon exercise of the Paired Option, including the portions of the purchase price of a Paired Share which are attributable to a Corporation Share and a Trust Share, respectively, shall be determined by the Committee; provided, however, that (i) the purchase price per Paired Share shall not be less than 100% of the fair market value of a Paired Share on the date of grant of such Paired Option, (ii) the portion of the purchase price of a Paired Share which the Committee determines to be attributable to a Corporation Share shall not be less than 100% of the fair market value of a Corporation Share on the date of grant of such Paired Option and (iii) the portion of the purchase price of a Paired Share which the Committee determines to be attributable to a Trust Share shall not be less than 100% of the fair market value of a Trust Share on the date of grant of such Paired Option; provided further, that if a Corporation Share Option designated as an incentive share option shall be granted to any person who, at the time such incentive share option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Corporation (or of any parent or subsidiary) (a "Ten Percent Holder"), the purchase price per Corporation Share shall be the price (currently 110% of fair market value of a Corporation Share) required by the Code in order to constitute an incentive share option. The "fair market value" of a Trust Share shall be that portion of the fair market value of a Paired Share which the Committee determines to be attributable to the Trust Share. (b) Option Period and Exercisability. The period during which a Paired Option may be exercised shall be determined by the Committee; provided, however, that no Paired Option which includes a Corporation Share Option designated as an incentive share option shall be exercised later than ten years after its date of grant; provided further, that if a Paired Option which includes a Corporation Share Option designated as an incentive -5- 6 share option shall be granted to a Ten Percent Holder, such Paired Option shall not be exercised later than five years after its date of grant. The Committee shall determine whether a Paired Option shall become exercisable in cumulative or non-cumulative installments and in part or in full at any time. An exercisable Paired Option, or portion thereof, may be exercised only with respect to whole Paired Shares. (c) Method of Exercise. A Paired Option may be exercised (i) by giving written notice to the Corporation specifying the number of whole Paired Shares to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Corporation's satisfaction) either (A) in cash, (B) by delivery of previously owned whole Paired Shares (which the optionee has held for at least six months prior to the delivery of such Paired Shares or which the optionee purchased on the open market and for which the optionee has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Corporation to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the Paired Option and (ii) by executing such documents as the Corporation may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to either clause (B) or (C) and in the case of an optionee who is subject to Section 16 of the Exchange Act, the Corporation may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a Paired Share which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing a Paired Share shall be delivered until the full purchase price therefor has been paid. 2.3 TERMINATION OF EMPLOYMENT OR SERVICE. (a) Disability and Death. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee's employment with the Corporation or service as a consultant, adviser or Director terminates by reason of Disability or death, each Paired Option held by such optionee shall be fully exercisable and may thereafter be exercised by such optionee (or such optionee's executor, administrator, legal representative, beneficiary or similar person, as the case may be) until and including the earliest to occur of (i) the date which is one year (or such other period as set forth in the Agreement relating to such Paired Option) after the effective date of such optionee's termination of employment or service or date of death, as the case may be, and (ii) the expiration date of the term of such Paired Option. For purposes -6- 7 of this Plan, "Disability" shall mean the inability of an optionee substantially to perform such optionee's duties and responsibilities for a continuous period of at least six months. (b) Termination for Cause. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee's employment with the Corporation or service as a consultant, adviser or Director terminates for Cause, each Paired Option held by such optionee, whether or not then exercisable, shall terminate automatically on the effective date of such optionee's termination of employment or service. For purposes of this Plan, "Cause" shall mean embezzlement or misappropriation of funds or other assets, other act of dishonesty, significant activities harmful to the reputation of the Corporation or the Trust, willful refusal to perform or substantial disregard of the duties properly assigned to the optionee (other than as a result of Disability), significant violation of any statutory or common law duty of loyalty to the Corporation or the Trust or a material breach by the optionee of the optionee's employment Agreement with the Corporation, if any. (c) Other Termination. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee's employment with the Corporation or service as a consultant, adviser or Director terminates for any reason other than Disability, death or Cause, each Paired Option held by such optionee shall be exercisable only to the extent that such Paired Option is exercisable on the effective date of such optionee's termination of employment or service and may thereafter be exercised by such optionee (or such optionee's legal representative or similar person) until and including the earliest to occur of (i) the date which is three months (or such other period as set forth in the Agreement relating to such Paired Option) after the effective date of such optionee's termination of employment or service and (ii) the expiration date of the term of such Paired Option. (d) Death Following Termination of Employment or Service. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee dies during the one-year period following termination of employment or service by reason of Disability, or if an optionee dies during the three-month period following termination of employment or service for any other reason other than Disability or Cause (or, in each case, such other period as the Committee may specify in the Agreement relating to a Paired Option), each Paired Option held by such optionee shall be exercisable only to the extent that such Paired Option is exercisable on the date of such optionee's death and may thereafter be exercised by such optionee's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until and including the earliest to occur of (i) the date which is three -7- 8 months (or such other period as set forth in the Agreement relating to such Paired Option) after the date of death and (ii) the expiration date of the term of such Paired Option. (e) Termination of Employment - Incentive Share Options. Unless otherwise specified in the Agreement relating to a Paired Option which includes a Corporation Share Option designated as an incentive share option, if the employment with the Corporation of a holder of such a Paired Option terminates by reason of Permanent and Total Disability (as defined in Section 22(e)(3) of the Code) or death, each such Paired Option shall be fully exercisable and may thereafter be exercised by such optionee (or such optionee's executor, administrator, legal representative, beneficiary or similar person, as the case may be) until and including the earliest to occur of (i) the date which is one year (or such shorter period as set forth in the Agreement relating to such Paired Option) after the effective date of such optionee's termination of employment by reason of Permanent and Total Disability or date of death, as the case may be, and (ii) the expiration date of the term of such Paired Option. Unless otherwise specified in the Agreement relating to a Paired Option which includes a Corporation Share Option designated as an incentive share option, if the employment with the Corporation of a holder of such a Paired Option terminates for Cause, each such Paired Option, whether or not then exercisable, shall terminate automatically on the effective date of such optionee's termination of employment. If the employment with the Corporation of a holder of a Paired Option which includes a Corporation Share Option designated as an incentive share option terminates for any reason other than Permanent and Total Disability, death or Cause, each such Paired Option shall be exercisable only to the extent such Paired Option is exercisable on the effective date of such optionee's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until and including the earliest to occur of (i) the date which is three months after the effective date of such optionee's termination of employment and (ii) the expiration date of the term of such Paired Option. If the holder of a Paired Option which includes a Corporation Share Option designated as an incentive share option dies during the one-year period following termination of employment by reason of Permanent and Total Disability (or such shorter period as set forth in the Agreement relating to such Paired Option), or if the holder of such a Paired Option dies during the three-month period following termination of employment for any reason other than Permanent and Total Disability or Cause, each such Paired Option held by such optionee shall be exercisable only to the extent such Paired Option is exercisable -8- 9 on the date of the optionee's death and may thereafter be exercised by the optionee's executor, administrator, legal representative, beneficiary or similar person until and including the earliest to occur of (i) the date which is three months after the date of death and (ii) the expiration date of the term of such Paired Option. III. CERTAIN PROVISIONS RELATING TO DIRECTORS 3.1 ELIGIBILITY. Each Director shall be granted Paired Options in accordance with this Section III. All Corporation Share Options and Trust Share Options included in the Paired Options granted under this Section III shall constitute non-qualified share options. 3.2 GRANTS OF PAIRED OPTIONS. Each Director shall be granted Paired Options as follows: (a) Time of Grant. On the date of the effectiveness of the Corporation's first public offering of Corporation Shares which occurs subsequent to the adoption of this Plan by the Board and prior to June 30, 1996, and on June 30 of each calendar year beginning in 1996 (or, if later, on the date on which a person is first elected to serve as a Director), each person who is a Director on such date, including each person who has been elected a Director as of such date but who will not begin to serve as a Director until a later date, shall be granted a Paired Option to purchase 6,000 Paired Shares (which amount shall be pro-rated if such person is first elected to serve as a Director on a date other than such effective date or June 30 of a calendar year, as the case may be) at a purchase price per Paired Share equal to 100% of the fair market value of a Paired Share on the date of grant of such Paired Option; provided, however, that the portion of the purchase price of a Paired Share which is attributable to a Corporation Share shall be 100% of the fair market value of a Corporation Share on the date of grant of such Paired Option and the portion of the purchase price of a Paired Share which is attributable to a Trust Share shall be 100% of the fair market value of a Trust Share on the date of grant of such Paired Option. (b) Option Period and Exercisability. Each Paired Option granted under this Article III shall be fully exercisable on and after its date of grant, shall expire ten years after its date of grant (notwithstanding termination of service as a Director for any reason prior to such ten-year anniversary date) and may be exercised in whole or in part only with respect to whole Paired Shares. Paired Options granted under this Article III shall be exercisable in accordance with Section 2.2(c). -9- 10 (c) Death. If a Director dies while a Paired Option is outstanding, such Paired Option may thereafter be exercised by such Director's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until and including the expiration date of the term of such Paired Option. IV. GENERAL 4.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the shareholders of the Corporation for approval within one year after the date of approval by the Board and, if approved by a majority of all the votes cast at a meeting of shareholders at which a quorum is present, shall become effective as of the date of approval by the Board. No Paired Option may be exercised prior to the date of such shareholder approval. This Plan shall terminate ten years after its effective date unless terminated earlier by the Board. Termination of this Plan shall not affect the terms or conditions of any Paired Option granted prior to termination. Paired Options may be granted hereunder at any time prior to the termination of this Plan, provided that no Paired Option may be granted later than ten years after the effective date of this Plan. In the event that this Plan is not approved by the shareholders of the Corporation within one year after the date of approval by the Board, this Plan and any Paired Options granted hereunder shall be null and void. 4.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable, subject to any requirement of shareholder approval required by applicable law, rule or regulation including Rule 16b-3 under the Exchange Act and Sections 162(m) and 422 of the Code; provided, however, that the number of Paired Shares subject to a Paired Option granted to Directors pursuant to Article III, the purchase price therefor, the date of grant of any such Paired Option, and the category of persons eligible to be granted such Paired Options shall not be amended more than once every six months, other than to comply with changes in the Code and the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder; and provided further, that any amendment with respect to the persons eligible to participate in this Plan or the number of Paired Shares available for grants of Paired Options under this Plan shall not be effective without shareholder approval of such amendment within 12 months before or after the date such amendment is approved by the Board. No amendment may impair the rights of a holder of an outstanding Paired Option without the consent of such holder. 4.3 AGREEMENT. No Paired Option may be exercised until an Agreement is executed by the Corporation and the optionee and, upon execution by the Corporation and the optionee and delivery -10- 11 of the Agreement to the Corporation, such Paired Option shall be effective as of the effective date set forth in the Agreement. 4.4 NON-TRANSFERABILITY. No Paired Option hereunder shall be transferable other than (i) by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Corporation or (ii) in the case of a Paired Option which does not include a Corporation Share Option designated as an incentive share option, as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the Agreement relating to such Paired Option. Except to the extent permitted by the foregoing sentence, each Paired Option may be exercised during the optionee's lifetime only by the optionee or the optionee's legal representative or similar person. Except as permitted by the second preceding sentence, no Paired Option shall be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any Paired Option such Paired Option and all rights thereunder shall immediately become null and void. 4.5 TAX WITHHOLDING. The Corporation shall have the right to require, prior to the delivery of any Paired Shares, payment by the optionee of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with a Paired Option hereunder. An Agreement may provide that the optionee may satisfy any such obligation by any of the following means: (A) a cash payment to the Corporation, (B) delivery to the Corporation of previously owned whole Paired Shares (which the optionee has held for at least six months prior to the delivery of such Paired Shares or which the optionee purchased on the open market and for which the optionee has good title, free and clear of all liens and encumbrances) having an aggregate fair market value, determined as of the date the obligation to withhold or pay taxes arises in connection with the Paired Option (the "Tax Date"), equal to the amount necessary to satisfy any such obligation, (C) a cash payment by a broker-dealer acceptable to the Corporation to whom the optionee has submitted an irrevocable notice of exercise or (D) any combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the Paired Option; provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D) and that in the case of an optionee who is subject to Section 16 of the Exchange Act, the Corporation may require that the method of satisfying any such obligation be in compliance with Section 16 and the rules and regulations thereunder. An Agreement may provide for Paired Shares to be delivered having a fair market value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the optionee's maximum marginal -11- 12 tax rate. Any fraction of a Paired Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the optionee. 4.6 RESTRICTIONS ON PAIRED SHARES. Each Paired Option hereunder shall be subject to the requirement that if at any time the Corporation determines that the listing, registration or qualification of the Paired Shares subject to such Paired Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of Paired Shares thereunder, such Paired Shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Corporation. The Corporation may require that certificates evidencing Paired Shares delivered pursuant to any Paired Option bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. Notwithstanding any other provision hereunder, no Paired Option hereunder shall be exercisable if, as a result of either the ability to exercise or the exercise of such Paired Option, the Trust would not satisfy the REIT Requirements in any respect. For purposes of the preceding sentence, "REIT Requirements" shall mean the requirements for the Trust to (i) qualify as a real estate investment trust under the Code and the rules and regulations promulgated thereunder, (ii) retain its status as grandfathered pursuant to Section 132(c)(3) of the Deficit Reduction Act of 1984 and (iii) retain the benefits of that certain private letter ruling issued by the Internal Revenue Service to the Trust dated as of January 4, 1980. 4.7 ADJUSTMENT. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Paired Shares other than a regular cash dividend, the number and class of securities available under this Plan, the number and class of securities subject to each outstanding Paired Option, the purchase price per security, and the number of securities subject to each Paired Option to be granted to Directors pursuant to Article III shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding Paired Options without an increase in the aggregate purchase price. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any adjustment would result in a fractional security being (i) available under this Plan, such fractional security shall be disregarded, or (ii) subject to a Paired Option -12- 13 under this Plan, the Company shall pay the optionee, in connection with the first exercise of the Paired Option in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (A) the fraction of such security (rounded to the nearest hundredth) by (B) the excess, if any, of (x) the fair market value of a Paired Share on the exercise date over (y) the exercise price of the Paired Option. With respect to any optionee who is subject to Section 16 of the Exchange Act and notwithstanding the exercise periods set forth in paragraphs (a), (c) and (d) of Section 2.3, paragraph (b) of Section 3.2 or as set forth pursuant to such paragraphs in any Agreement to which such optionee is a party (or as may be set forth in any Agreement pursuant to paragraph (b) of Section 2.3), in the event (i) the Corporation is involved in a business combination which is intended to be treated as a pooling of interests for financial accounting purposes (a "Pooling Transaction") or pursuant to which such optionee receives a substitute option to purchase securities of any entity, including an entity directly or indirectly acquiring the Corporation, and (ii) such optionee's employment with the Corporation or service as a Director is terminated during the nine-month period beginning three months prior to the consummation of such business combination, then each Paired Option (or option in substitution thereof) held by such optionee shall be exercisable to the extent set forth in such paragraphs until and including the latest of (x) the date set forth pursuant to the then applicable paragraph of Section 2.3 or 3.2, as the case may be, (y) the date which is six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such optionee may not dispose of a security issued in the Pooling Transaction in order for the Pooling Transaction to be accounted for as a pooling of interests. 4.8 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right to participate in this Plan. Neither this Plan nor any Paired Option granted hereunder shall confer upon any person any right to continued employment by the Corporation, any subsidiary or any affiliate of the Corporation or affect in any manner the right of the Corporation, any subsidiary or any affiliate of the Corporation to terminate the employment of any person at any time without liability hereunder. 4.9 RIGHTS AS SHAREHOLDER. No person shall have any rights as a shareholder of the Corporation with respect to any Corporation Shares or Trust Shares which are subject to a Paired Option hereunder until such person becomes a shareholder of record with respect to such Corporation Shares and Trust Shares. 4.10 DESIGNATION OF BENEFICIARY. If permitted by the Corporation, an optionee may file with the Committee a written -13- 14 designation of one or more persons as such optionee's beneficiary or beneficiaries (both primary and contingent) in the event of the optionee's death. To the extent an outstanding Paired Option granted hereunder is exercisable, such beneficiary or beneficiaries shall be entitled to exercise such Paired Option. Each beneficiary designation shall become effective only when filed in writing with the Committee during the optionee's lifetime on a form prescribed by the Committee. The spouse of a married optionee domiciled in a community property jurisdiction shall join in any designation of a beneficiary other than such spouse. The filing with the Committee of a new beneficiary designation shall cancel all previously filed beneficiary designations. If an optionee fails to designate a beneficiary, or if all designated beneficiaries of an optionee predecease the optionee, then each outstanding Paired Option hereunder held by such optionee, to the extent exercisable, may be exercised by such optionee's executor, administrator, legal representative or similar person. 4.11 GOVERNING LAW. This Plan, each Paired Option hereunder and the related Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of California and construed in accordance therewith without giving effect to principles of conflicts of laws. 4.12 TERMINATION OF PAIRING AGREEMENT. Notwithstanding anything in this Plan to the contrary, if at any time the Agreement dated June 25, 1980, by and between the Corporation and the Trust, pursuant to which Corporation Shares and Trust Shares are paired on a share-for-share basis, is terminated for any reason and as a result of such termination Corporation Shares and Trust Shares no longer are required to be transferred together, then concurrently with such termination (i) Paired Options will no longer be granted hereunder; (ii) only Corporation Share Options may thereafter be granted hereunder; (iii) each then outstanding Paired Option shall constitute a wholly separate and independent Corporation Share Option and Trust Share Option and the Corporation, in its discretion, may require that each Agreement evidencing a Paired Option be returned to the Corporation for cancellation in exchange for separate agreements evidencing the Corporation Share Option and Trust Share Option subject to such Paired Option; (iv) Corporation Share Options and Trust Share Options shall no longer be required to be exercised, terminated, cancelled, forfeited, transferred or otherwise disposed of together; and (v) the "fair market value" and the "closing price" of the Corporation Shares and Trust Shares as used herein shall thereafter be deemed to refer, respectively, to -14- 15 the fair market value and the closing price of a Corporation Share and a Trust Share. -15- EX-10.6 4 1995 SHARE OPTION PLAN OF THE TRUST 1 EXHIBIT 10.6 STARWOOD LODGING TRUST 1995 SHARE OPTION PLAN (AMENDED AND RESTATED AS OF AUGUST 17, 1995) I. INTRODUCTION 1.1 PURPOSES AND GENERAL. The purposes of the 1995 Share Option Plan (the "Plan") of Starwood Lodging Trust (the "Trust") are to align the interests of the Trust's shareholders and the recipients of options under this Plan by increasing the proprietary interest of such recipients in the Trust's growth and success and to advance the interests of the Trust by attracting and retaining officers, key employees, consultants and advisers, as well as qualified persons for service as trustees of the Trust ("Trustees"). For purposes of this Plan, references to employment by or service as a consultant, adviser or Trustee of the Trust shall also mean employment by or service as a consultant, adviser or Trustee of a subsidiary of the Trust. This Plan seeks to accomplish the foregoing purposes by providing a means whereby options to purchase from the Trust shares of beneficial interest, par value $.01 per share, of the Trust ("Trust Shares") and options to purchase from the Trust shares of the common stock, par value $.01 per share, of Starwood Lodging Corporation ("Corporation Shares") may be granted, in accordance with Section II, to eligible persons and shall be granted, in accordance with Section III, to Trustees. Pursuant to an Agreement dated June 25, 1980, as amended, between the Trust and Starwood Lodging Corporation (the "Corporation"), all outstanding Trust Shares and Corporation Shares are paired on a one-for-one basis and trade as units consisting of one Trust Share and one Corporation Share ("Paired Shares"). Accordingly, each option to purchase Trust Shares (a "Trust Share Option") shall be paired with an option to purchase an equal number of Corporation Shares (a "Corporation Share Option" and each such paired Trust Share Option and Corporation Share Option is herein referred to as a "Paired Option"). Each Paired Option may be exercised, terminated, cancelled, forfeited, transferred or otherwise disposed of only in units consisting of Paired Shares. Accordingly, a Trust Share Option, or portion thereof, may be exercised, terminated, cancelled, forfeited, transferred or otherwise disposed of only in connection with, and to the same extent as, the exercise, termination, cancellation, forfeiture, transfer or other disposition of a Corporation Share Option. Each Trust Share Option constituting part of a Paired Option may be either an incentive share option or a non-qualified share option. An incentive share option shall mean a Trust Share Option that meets the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision, which 2 is intended by the Committee (as defined below) to constitute an incentive share option. Each Corporation Share Option constituting part of a Paired Option shall be a non-qualified share option. 1.2 ADMINISTRATION. This Plan shall be administered by a committee (the "Committee") designated by the Board of Trustees of the Trust (the "Board") consisting of two or more members of the Board, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside director" within the meaning of Section 162(m) of the Code, subject to any transition rules applicable to the definition of outside director. The Committee may, subject to the terms of this Plan, select eligible persons to be granted Paired Options in accordance with Section II and shall determine the number of Paired Shares subject to each such Paired Option. The Committee shall, subject to the terms of this Plan, determine the exercise price of each Paired Option granted hereunder, including the portion of the exercise price of such Paired Option which is attributable to the Trust Share Option and the Corporation Share Option, respectively, the time and conditions of exercise of such Paired Option and all other terms and conditions of such Paired Option, including, without limitation, the form of the Agreement representing such Paired Option. The Committee may, in its sole discretion and for any reason at any time, accelerate the exercisability of any Paired Option. The Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of this Plan and may impose, incidental to the grant of a Paired Option, conditions with respect to the grant, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions shall be conclusive and binding on all parties. Each Paired Option shall be evidenced by a written Agreement (an "Agreement") between the Trust and the optionee setting forth the terms and conditions applicable to such Paired Option. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or Chief Operating Officer or other executive officer of the Trust as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the grant of a Paired Option to any person who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period a Paired Option granted to such employee would be outstanding or (ii) the selection for participation in this Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the -2- 3 timing, pricing or amount of a grant of a Paired Option to such an officer or other person. A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 1.3 ELIGIBILITY. Participants in this Plan shall consist of such officers, key employees, consultants, advisers and Trustees of the Trust and its subsidiaries as the Committee in its sole discretion may select from time to time. The Committee's selection of a person to participate in this Plan at any time shall not require the Committee to select such person to participate in this Plan at any other time. Trustees shall also be eligible to participate in this Plan in accordance with Section III. 1.4 SHARES AVAILABLE. The number of Paired Shares available for grants of Paired Options under this Plan, other than a Paired Option that includes a Trust Share Option that is designated as an incentive share option, shall be 1,573,000 (subject to adjustment as provided in Section 4.7) plus eight percent (8%) of the sum of (i) the number of Paired Shares which may be issued upon the exchange of limited partnership units ("Units") in SLT Realty Limited Partnership, a Delaware limited partnership, and SLC Operating Limited Partnership, a Delaware limited partnership to the extent such Units first become outstanding after August 17, 1995 (without reduction for subsequent repurchases, redemptions or similar events involving the Units), plus (ii) the number of Paired Shares which first become outstanding (without reduction for subsequent repurchases, redemptions or similar events involving Paired Shares) after August 17, 1995 (other than by reason of (A) such exchange of Units, (B) the issuance or delivery of Paired Shares pursuant to any employee benefit plan of the Trust or the Corporation or (C) the issuance of Paired Shares which were acquired and held by the Trust or the Corporation prior to their issuance), reduced by (iii) the aggregate number of Paired Shares which become subject to (A) outstanding Paired Options under this Plan, including each Paired Option that includes a Trust Share Option that is designated as an incentive share option, or (B) outstanding options to purchase Paired Shares under the Corporation's 1995 Share Option Plan (the "Corporation Plan"). Subject to adjustment as provided in Section 4.7, the number of Paired Shares available for grants of Paired Options that include Trust Share Options that are designated as incentive share options shall be 1,573,000, reduced by the aggregate number of Paired Shares which become subject to (X) outstanding Paired Options under this Plan, including each Paired Option that does not include a Trust Share Option that is designated as an incentive share option, or (Y) outstanding options to purchase Paired Shares under the Corporation Plan. To the extent that Paired Shares subject to an outstanding Paired -3- 4 Option or an outstanding option to purchase Paired Shares under the Corporation Plan are not issued or delivered by reason of the termination, cancellation or forfeiture of any such option or by reason of the delivery of Paired Shares to pay all or a portion of the exercise price of any such option, or to satisfy all or a portion of the tax withholding obligations relating to any such option, then such Paired Shares shall again be available under this Plan. Paired Shares to be delivered under this Plan shall be made available (i) (A) by the Trust from authorized and unissued Trust Shares issued by the Trust directly to the optionee and (B) by the Corporation from authorized and unissued Corporation Shares issued by the Corporation directly to the Trust for delivery to the optionee, (ii) from authorized and issued Paired Shares acquired and held by the Trust or (iii) a combination thereof. To the extent required by Section 162(m) of the Code and the rules and regulations thereunder, the maximum number of Paired Shares with respect to which Paired Options may be granted during any calendar year to any person shall be 500,000, subject to adjustment as provided in Section 4.7. II. PAIRED OPTIONS 2.1 GRANTS OF PAIRED OPTIONS. The Committee may, in its discretion, grant Paired Options to such eligible persons as may be selected by the Committee. Each Trust Share Option, or portion thereof, that is not an incentive share option, shall be a non- qualified share option. Each Paired Option that includes a Trust Share Option that is designated as an incentive share option shall be granted within ten years of the effective date of this Plan. To the extent that the aggregate fair market value (determined as of the date of grant) of Trust Shares with respect to which Trust Share Options designated as incentive share options are exercisable for the first time by a participant during any calendar year (under this Plan or any other plan of the Trust, or any parent or subsidiary) exceeds the amount (currently $100,000) established by the Code, such Trust Share Options shall constitute non-qualified share options. The "fair market value" of a Trust Share shall be that portion of the fair market value of a Paired Share which the Committee determines to be attributable to the Trust Share by applying in good faith a method of valuation permissible under Section 422 of the Code. The "fair market value" of a Paired Share shall mean the closing transaction price of a Paired Share as reported in the New York Stock Exchange Composite Transactions on the date as of which such value is being determined or, if there shall be no reported transaction on such date, on the next preceding date for which a transaction was reported; provided that if the fair market value of a Paired Share for any date cannot be determined as above provided, fair market value of a Paired Share shall be determined by the Committee by whatever means or method as the Committee, in -4- 5 the good faith exercise of its discretion, shall at such time deem appropriate. 2.2 TERMS OF PAIRED OPTIONS. Paired Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of Paired Shares and Purchase Price. The number of Paired Shares subject to a Paired Option and the purchase price per Paired Share purchasable upon exercise of the Paired Option, including the portions of the purchase price of a Paired Share which are attributable to a Trust Share and a Corporation Share, respectively, shall be determined by the Committee; provided, however, that (i) the purchase price per Paired Share shall not be less than 100% of the fair market value of a Paired Share on the date of grant of such Paired Option, (ii) the portion of the purchase price of a Paired Share which the Committee determines to be attributable to a Trust Share shall not be less than 100% of the fair market value of a Trust Share on the date of grant of such Paired Option and (iii) the portion of the purchase price of a Paired Share which the Committee determines to be attributable to a Corporation Share shall not be less than 100% of the fair market value of a Corporation Share on the date of grant of such Paired Option; provided further, that if a Trust Share Option designated as an incentive share option shall be granted to any person who, at the time such incentive share option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Trust (or of any parent or subsidiary) (a "Ten Percent Holder"), the purchase price per Trust Share shall be the price (currently 110% of fair market value of a Trust Share) required by the Code in order to constitute an incentive share option. The "fair market value" of a Corporation Share shall be that portion of the fair market value of a Paired Share which the Committee determines to be attributable to the Corporation Share. (b) Option Period and Exercisability. The period during which a Paired Option may be exercised shall be determined by the Committee; provided, however, that no Paired Option which includes a Trust Share Option designated as an incentive share option shall be exercised later than ten years after its date of grant; provided further, that if a Paired Option which includes a Trust Share Option designated as an incentive share option shall be granted to a Ten Percent Holder, such Paired Option shall not be exercised later than five years after its date of grant. The Committee shall determine whether a Paired Option shall become exercisable in cumulative or non-cumulative installments and in part or in full at any time. An exercisable Paired Option, or portion thereof, may be exercised only with respect to whole Paired Shares. -5- 6 (c) Method of Exercise. A Paired Option may be exercised (i) by giving written notice to the Trust specifying the number of whole Paired Shares to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Trust's satisfaction) either (A) in cash, (B) by delivery of previously owned whole Paired Shares (which the optionee has held for at least six months prior to the delivery of such Paired Shares or which the optionee purchased on the open market and for which the optionee has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Trust to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the Paired Option and (ii) by executing such documents as the Trust may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to either clause (B) or (C) and in the case of an optionee who is subject to Section 16 of the Exchange Act, the Trust may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a Paired Share which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing a Paired Share shall be delivered until the full purchase price therefor has been paid. 2.3 TERMINATION OF EMPLOYMENT OR SERVICE. (a) Disability and Death. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee's employment with the Trust or service as a consultant, adviser or Trustee terminates by reason of Disability or death, each Paired Option held by such optionee shall be fully exercisable and may thereafter be exercised by such optionee (or such optionee's executor, administrator, legal representative, beneficiary or similar person, as the case may be) until and including the earliest to occur of (i) the date which is one year (or such other period as set forth in the Agreement relating to such Paired Option) after the effective date of such optionee's termination of employment or service or date of death, as the case may be, and (ii) the expiration date of the term of such Paired Option. For purposes of this Plan, "Disability" shall mean the inability of an optionee substantially to perform such optionee's duties and responsibilities for a continuous period of at least six months. (b) Termination for Cause. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee's employment with the Trust or service as a consultant, adviser or Trustee terminates for Cause, each Paired Option held by such optionee, whether or not then exercisable, shall terminate automatically on the effective date -6- 7 of such optionee's termination of employment or service. For purposes of this Plan, "Cause" shall mean embezzlement or misappropriation of funds or other assets, other act of dishonesty, significant activities harmful to the reputation of the Trust or the Corporation, willful refusal to perform or substantial disregard of the duties properly assigned to the optionee (other than as a result of Disability), significant violation of any statutory or common law duty of loyalty to the Trust or the Corporation or a material breach by the optionee of the optionee's employment Agreement with the Trust, if any. (c) Other Termination. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee's employment with the Trust or service as a consultant, adviser or Trustee terminates for any reason other than Disability, death or Cause, each Paired Option held by such optionee shall be exercisable only to the extent that such Paired Option is exercisable on the effective date of such optionee's termination of employment or service and may thereafter be exercised by such optionee (or such optionee's legal representative or similar person) until and including the earliest to occur of (i) the date which is three months (or such other period as set forth in the Agreement relating to such Paired Option) after the effective date of such optionee's termination of employment or service and (ii) the expiration date of the term of such Paired Option. (d) Death Following Termination of Employment or Service. Subject to paragraph (e) below and unless otherwise specified in the Agreement relating to a Paired Option, if an optionee dies during the one-year period following termination of employment or service by reason of Disability, or if an optionee dies during the three-month period following termination of employment or service for any other reason other than Disability or Cause (or, in each case, such other period as the Committee may specify in the Agreement relating to a Paired Option), each Paired Option held by such optionee shall be exercisable only to the extent that such Paired Option is exercisable on the date of such optionee's death and may thereafter be exercised by such optionee's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until and including the earliest to occur of (i) the date which is three months (or such other period as set forth in the Agreement relating to such Paired Option) after the date of death and (ii) the expiration date of the term of such Paired Option. (e) Termination of Employment - Incentive Share Options. Unless otherwise specified in the Agreement relating to a Paired Option which includes a Trust Share Option designated as an incentive share option, if the employment with the Trust of a holder of such a Paired Option terminates by reason of Permanent and Total Disability (as defined in Section 22(e)(3) of the Code) or death, each such Paired Option shall be fully exercisable and may thereafter be exercised by such optionee (or such optionee's -7- 8 executor, administrator, legal representative, beneficiary or similar person, as the case may be) until and including the earliest to occur of (i) the date which is one year (or such shorter period as set forth in the Agreement relating to such Paired Option) after the effective date of such optionee's termination of employment by reason of Permanent and Total Disability or date of death, as the case may be, and (ii) the expiration date of the term of such Paired Option. Unless otherwise specified in the Agreement relating to a Paired Option which includes a Trust Share Option designated as an incentive share option, if the employment with the Trust of a holder of such a Paired Option terminates for Cause, each such Paired Option, whether or not then exercisable, shall terminate automatically on the effective date of such optionee's termination of employment. If the employment with the Trust of a holder of a Paired Option which includes a Trust Share Option designated as an incentive share option terminates for any reason other than Permanent and Total Disability, death or Cause, each such Paired Option shall be exercisable only to the extent such Paired Option is exercisable on the effective date of such optionee's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until and including the earliest to occur of (i) the date which is three months after the effective date of such optionee's termination of employment and (ii) the expiration date of the term of such Paired Option. If the holder of a Paired Option which includes a Trust Share Option designated as an incentive share option dies during the one-year period following termination of employment by reason of Permanent and Total Disability (or such shorter period as set forth in the Agreement relating to such Paired Option), or if the holder of such a Paired Option dies during the three-month period following termination of employment for any reason other than Permanent and Total Disability or Cause, each such Paired Option held by such optionee shall be exercisable only to the extent such Paired Option is exercisable on the date of the optionee's death and may thereafter be exercised by the optionee's executor, administrator, legal representative, beneficiary or similar person until and including the earliest to occur of (i) the date which is three months after the date of death and (ii) the expiration date of the term of such Paired Option. III. CERTAIN PROVISIONS RELATING TO TRUSTEES 3.1 ELIGIBILITY. Each Trustee shall be granted Paired Options in accordance with this Section III. All Trust Share Options and Corporation Share Options included in the Paired Options granted under this Section III shall constitute non-qualified share options. -8- 9 3.2 GRANTS OF PAIRED OPTIONS. Each Trustee shall be granted Paired Options as follows: (a) Time of Grant. On the date of the effectiveness of the Trust's first public offering of Trust Shares which occurs subsequent to the adoption of this Plan by the Board and prior to June 30, 1996, and on June 30 of each calendar year beginning in 1996 (or, if later, on the date on which a person is first elected to serve as a Trustee), each person who is a Trustee on such date, including each person who has been elected a Trustee as of such date but who will not begin to serve as a Trustee until a later date, shall be granted a Paired Option to purchase 6,000 Paired Shares (which amount shall be pro-rated if such person is first elected to serve as a Trustee on a date other than such effective date or June 30 of a calendar year, as the case may be) at a purchase price per Paired Share equal to 100% of the fair market value of a Paired Share on the date of grant of such Paired Option; provided, however, that the portion of the purchase price of a Paired Share which is attributable to a Trust Share shall be 100% of the fair market value of a Trust Share on the date of grant of such Paired Option and the portion of the purchase price of a Paired Share which is attributable to a Corporation Share shall be 100% of the fair market value of a Corporation Share on the date of grant of such Paired Option. (b) Option Period and Exercisability. Each Paired Option granted under this Article III shall be fully exercisable on and after its date of grant, shall expire ten years after its date of grant (notwithstanding termination of service as a Trustee for any reason prior to such ten-year anniversary date) and may be exercised in whole or in part only with respect to whole Paired Shares. Paired Options granted under this Article III shall be exercisable in accordance with Section 2.2(c). (c) Death. If a Trustee dies while a Paired Option is outstanding, such Paired Option may thereafter be exercised by such Trustee's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until and including the expiration date of the term of such Paired Option. IV. GENERAL 4.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the shareholders of the Trust for approval within one year after the date of approval by the Board and, if approved by a majority of all the votes cast at a meeting of shareholders at which a quorum is present, shall become effective as of the date of approval by the Board. No Paired Option may be exercised prior to the date of such shareholder approval. This Plan shall terminate ten years after its effective date unless terminated earlier by the Board. Termination of this Plan shall not affect the terms or conditions of any Paired Option granted prior to termination. -9- 10 Paired Options may be granted hereunder at any time prior to the termination of this Plan, provided that no Paired Option may be granted later than ten years after the effective date of this Plan. In the event that this Plan is not approved by the shareholders of the Trust within one year after the date of approval by the Board, this Plan and any Paired Options granted hereunder shall be null and void. 4.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable, subject to any requirement of shareholder approval required by applicable law, rule or regulation including Rule 16b-3 under the Exchange Act and Sections 162(m) and 422 of the Code; provided, however, that the number of Paired Shares subject to a Paired Option granted to Trustees pursuant to Article III, the purchase price therefor, the date of grant of any such Paired Option and the category of persons eligible to be granted such Paired Options shall not be amended more than once every six months, other than to comply with changes in the Code and the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder; and provided further, that any amendment with respect to the persons eligible to participate in this Plan or the number of Paired Shares available for grants of Paired Options under this Plan shall not be effective without shareholder approval of such amendment within 12 months before or after the date such amendment is approved by the Board. No amendment may impair the rights of a holder of an outstanding Paired Option without the consent of such holder. 4.3 AGREEMENT. No Paired Option may be exercised until an Agreement is executed by the Trust and the optionee and, upon execution by the Trust and the optionee and delivery of the Agreement to the Trust, such Paired Option shall be effective as of the effective date set forth in the Agreement. 4.4 NON-TRANSFERABILITY. No Paired Option hereunder shall be transferable other than (i) by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Trust or (ii) in the case of a Paired Option which does not include a Trust Share Option designated as an incentive share option, as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the Agreement relating to such Paired Option. Except to the extent permitted by the foregoing sentence, each Paired Option may be exercised during the optionee's lifetime only by the optionee or the optionee's legal representative or similar person. Except as permitted by the second preceding sentence, no Paired Option shall be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any Paired Option such Paired Option and all rights thereunder shall immediately become null and void. -10- 11 4.5 TAX WITHHOLDING. The Trust shall have the right to require, prior to the delivery of any Paired Shares, payment by the optionee of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with a Paired Option hereunder. An Agreement may provide that the optionee may satisfy any such obligation by any of the following means: (A) a cash payment to the Trust, (B) delivery to the Trust of previously owned whole Paired Shares (which the optionee has held for at least six months prior to the delivery of such Paired Shares or which the optionee purchased on the open market and for which the optionee has good title, free and clear of all liens and encumbrances) having an aggregate fair market value, determined as of the date the obligation to withhold or pay taxes arises in connection with the Paired Option (the "Tax Date"), equal to the amount necessary to satisfy any such obligation, (C) a cash payment by a broker-dealer acceptable to the Trust to whom the optionee has submitted an irrevocable notice of exercise or (D) any combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the Paired Option; provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D) and that in the case of an optionee who is subject to Section 16 of the Exchange Act, the Trust may require that the method of satisfying any such obligation be in compliance with Section 16 and the rules and regulations thereunder. An Agreement may provide for Paired Shares to be delivered having a fair market value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the optionee's maximum marginal tax rate. Any fraction of a Paired Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the optionee. 4.6 RESTRICTIONS ON PAIRED SHARES. Each Paired Option hereunder shall be subject to the requirement that if at any time the Trust determines that the listing, registration or qualification of the Paired Shares subject to such Paired Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of Paired Shares thereunder, such Paired Shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Trust. The Trust may require that certificates evidencing Paired Shares delivered pursuant to any Paired Option bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. Notwithstanding any other provision hereunder, no Paired Option hereunder shall be exercisable if, as a result of either the ability to exercise or the exercise of such Paired Option, -11- 12 the Trust would not satisfy the REIT Requirements in any respect. For purposes of the preceding sentence, "REIT Requirements" shall mean the requirements for the Trust to (i) qualify as a real estate investment trust under the Code and the rules and regulations promulgated thereunder, (ii) retain its status as grandfathered pursuant to Section 132(c)(3) of the Deficit Reduction Act of 1984 and (iii) retain the benefits of that certain private letter ruling issued by the Internal Revenue Service to the Trust dated as of January 4, 1980. 4.7 ADJUSTMENT. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Paired Shares other than a regular cash dividend, the number and class of securities available under this Plan, the number and class of securities subject to each outstanding Paired Option, the purchase price per security, and the number of securities subject to each Paired Option to be granted to Trustees pursuant to Article III shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding Paired Options without an increase in the aggregate purchase price. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any adjustment would result in a fractional security being (i) available under this Plan, such fractional security shall be disregarded, or (ii) subject to a Paired Option under this Plan, the Company shall pay the optionee, in connection with the first exercise of the Paired Option in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (A) the fraction of such security (rounded to the nearest hundredth) by (B) the excess, if any, of (x) the fair market value of a Paired Share on the exercise date over (y) the exercise price of the Paired Option. With respect to any optionee who is subject to Section 16 of the Exchange Act and notwithstanding the exercise periods set forth in paragraphs (a), (c) and (d) of Section 2.3, paragraph (b) of Section 3.2 or as set forth pursuant to such paragraphs in any Agreement to which such optionee is a party (or as may be set forth pursuant to paragraph (b) of Section 2.3), in the event (i) the Trust is involved in a business combination which is intended to be treated as a pooling of interests for financial accounting purposes (a "Pooling Transaction") or pursuant to which such optionee receives a substitute option to purchase securities of any entity, including any entity directly or indirectly acquiring the Trust, and (ii) such optionee's employment with the Trust or service as a Trustee is terminated during the nine-month period beginning three months prior to the consummation of such business combination, then each Paired Option (or option in substitution thereof) held by such optionee shall be exercisable to the extent set forth in such paragraphs until and including the latest of (x) the date set forth pursuant to the then applicable paragraph of Section 2.3 or 3.2, as the case may be, (y) the date which is -12- 13 six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such optionee may not dispose of a security issued in the Pooling Transaction in order for the Pooling Transaction to be accounted for as a pooling of interests. 4.8 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right to participate in this Plan. Neither this Plan nor any Paired Option granted hereunder shall confer upon any person any right to continued employment by the Trust, any subsidiary or any affiliate of the Trust or affect in any manner the right of the Trust, any subsidiary or any affiliate of the Trust to terminate the employment of any person at any time without liability hereunder. 4.9 RIGHTS AS SHAREHOLDER. No person shall have any rights as a shareholder of the Trust with respect to any Trust Shares or Corporation Shares which are subject to a Paired Option hereunder until such person becomes a shareholder of record with respect to such Trust Shares and Corporation Shares. 4.10 DESIGNATION OF BENEFICIARY. If permitted by the Trust, an optionee may file with the Committee a written designation of one or more persons as such optionee's beneficiary or beneficiaries (both primary and contingent) in the event of the optionee's death. To the extent an outstanding Paired Option granted hereunder is exercisable, such beneficiary or beneficiaries shall be entitled to exercise such Paired Option. Each beneficiary designation shall become effective only when filed in writing with the Committee during the optionee's lifetime on a form prescribed by the Committee. The spouse of a married optionee domiciled in a community property jurisdiction shall join in any designation of a beneficiary other than such spouse. The filing with the Committee of a new beneficiary designation shall cancel all previously filed beneficiary designations. If an optionee fails to designate a beneficiary, or if all designated beneficiaries of an optionee predecease the optionee, then each outstanding Paired Option hereunder held by such optionee, to the extent exercisable, may be exercised by such optionee's executor, administrator, legal representative or similar person. 4.11 GOVERNING LAW. This Plan, each Paired Option hereunder and the related Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of California and construed in accordance therewith without giving effect to principles of conflicts of laws. -13- 14 4.12 TERMINATION OF PAIRING AGREEMENT. Notwithstanding anything in this Plan to the contrary, if at any time the Agreement dated June 25, 1980, by and between the Trust and the Corporation, pursuant to which Trust Shares and Corporation Shares are paired on a share-for-share basis, is terminated for any reason and as a result of such termination Trust Shares and Corporation Shares no longer are required to be transferred together, then concurrently with such termination (i) Paired Options will no longer be granted hereunder; (ii) only Trust Share Options may thereafter be granted hereunder; (iii) each then outstanding Paired Option shall constitute a wholly separate and independent Trust Share Option and Corporation Share Option and the Trust, in its discretion, may require that each Agreement evidencing a Paired Option be returned to the Trust for cancellation in exchange for separate agreements evidencing the Trust Share Option and Corporation Share Option subject to such Paired Option; (iv) Trust Share Options and Corporation Share Options shall no longer be required to be exercised, terminated, cancelled, forfeited, transferred or otherwise disposed of together; and (v) the "fair market value" and the "closing price" of the Trust Shares and Corporation Shares as used herein shall thereafter be deemed to refer, respectively, to the fair market value and the closing price of a Trust Share and a Corporation Share. -14- EX-10.7 5 TRUST INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.7 INDEMNIFICATION AGREEMENT This Indemnification Agreement (this "Agreement") is made as of the _____ day of __________, 1995, between Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust"), and ____________________ ("Indemnitee"), with reference to the following facts and objectives: A. Indemnitee is currently serving as a Trustee or officer of the Trust or has been elected or appointed a Trustee or officer of the Trust to take effect on a later date; the Trust conducts its business as general partner of SLT Realty Limited Partnership, a Delaware limited partnership. B. Section 7.4 of the Amended and Restated Declaration of Trust dated as of June 6, 1988, as amended February 1, 1995, of the Trust (the "Trust Declaration") and Section 8-301 (15) of the Maryland General Corporation Law (the "MGCL") provide that the provisions of Section 2-418 of the MGCL shall be fully applicable to the Trust and its Trustees (the "Trustees"), officers, employees and other agents, and Section 7.4 of the Trust Declaration obligates the Trust to indemnify its Trustees and officers to the fullest extent permitted by the aforesaid Section 2-418 or other applicable law. C. Each of Section 2-418 of the MGCL and Section 7.4 of the Trust Declaration specifically provides that the indemnification provided for therein is not exclusive, and each such Section thereby contemplates that agreements or other financial arrangements may be entered into between the Trust, on the one hand, and the Trustees or the Trust's officers, on the other hand, with respect to the indemnification of and advancement of expenses to such persons. D. In recognition of Indemnitee's need for substantial protection against personal liability in order to maintain Indemnitee's continued service to the Trust in an effective manner and Indemnitee's reliance on the Trust Declaration, and in part to provide Indemnitee with specific contractual assurance that the protection promised by the Trust Declaration will be available to Indemnitee (regardless of, among other things, any limitation or other amendment or revocation of Section 7.4 of the Trust Declaration or any change in the composition of the Trust's Board of Trustees (the "Board of Trustees")), the Trust desires to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law, as set forth in this Agreement, and, to the extent trustees' and officers' insurance is maintained by the Trust, for the continued coverage of Indemnitee under such policy or policies. NOW, THEREFORE, in consideration of the premises and of Indemnitee's continuing to serve the Trust directly or, at its request, another enterprise, the Trust and Indemnitee hereby agree as follows: 1. D&O Liability Insurance. (a) Subject only to the provisions of Section 1(b) hereof, so long as Indemnitee shall continue to serve as a Trustee and/or officer of the Trust (or shall continue at the request of the Trust to serve as a trustee, director, officer, partner, employee or agent 2 of another business trust, corporation, partnership, joint venture or other enterprise or an employee benefit plan), and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Indemnitee was a Trustee and/or officer of the Trust or served in any of said other capacities, the Trust shall purchase and maintain in effect, including through the obtaining or exercise of appropriate "tail" coverage, one or more valid, binding and enforceable insurance policies issued by a reputable insurer or insurers protecting Trustees and Trust officers (subject to customary limitations and exceptions) against losses, costs and expenses arising out of any such claim, action, suit or proceeding ("D&O Insurance"), which D&O Insurance shall provide coverage in all respects at least comparable to that presently provided, and shall cause Indemnitee to be covered by such policy or policies. The Trust shall not be required to maintain in effect the policy or policies of D&O Insurance contemplated by the first paragraph of this Section 1(a) at any time at which (i) said insurance is not generally available, or (ii) in the reasonable business judgment of the persons then constituting the Board of Trustees, either (I) the premium cost for such insurance is substantially disproportionate to the amount of coverage afforded, or (II) the coverage provided by such insurance is so limited and/or subject to such exclusions that there is insufficient benefit to the Trust from such insurance; provided, however, that to the extent that the Trust maintains any D&O Insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Trustee or Trust officer under such policy or policies, and, further, that in the event the Trust does not purchase and maintain in effect the policy or policies of D&O Insurance contemplated by this Section 1(a), the Trust shall indemnify Indemnitee to the full extent of the coverage that would otherwise have been provided for the benefit of Indemnitee pursuant to such D&O Insurance. (b) The Trust's obligation under this Article 1 shall terminate as of the fifth anniversary of the date on which Indemnitee ceases to render any service or to act in any capacity specified in Article 3 hereof. 2. Basic Indemnity. The Trust hereby indemnifies Indemnitee, whether or not he is then an officer, to the fullest extent permitted by the provisions of Section 2-418 of the MGCL or any amendment thereof or by any other statute permitting such indemnification that is adopted after the date hereof. 3. Additional Indemnity. Subject only to the limitations and exclusions set forth in Article 5 hereof, and without limiting the provisions of the foregoing Article 2, the Trust hereby also expressly agrees that in the event Indemnitee is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any action, suit or proceeding, whether pending, threatened or completed, whether civil, criminal or administrative, and whether instituted by or in the name of the Trust or any other party, or any investigation or inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, by reason of (or arising in part out of) the fact that Indemnitee is or was a Trustee, officer, employee or agent of the Trust, or is or was serving at the request of the Trust as a trustee, -2- 3 director, officer, partner, employee, agent or fiduciary of another business trust, corporation, partnership, joint venture or other enterprise or an employee benefit plan, or by reason of anything done or not done by Indemnitee in any such capacity (any such threatened, pending or completed action, suit or proceeding, or any such inquiry or investigation, a "Claim"), the Trust shall indemnify Indemnitee against any and all judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement), and any and all reasonable expenses, actually paid or incurred by Indemnitee in connection with or in respect of such Claim. 4. Advancing of Expenses. If so requested by Indemnitee, and subject only to the limitations and exclusions of Article 5 hereof, the Trust shall pay to Indemnitee or reimburse Indemnitee for any and all expenses actually and reasonably incurred by Indemnitee in connection with or in respect of any Claim (an "Expense Advance") in advance of the final determination thereof, in the manner provided in Section 11(a) hereof. For purposes of this Agreement, "expenses" shall include attorneys' fees and all other costs, charges and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including an appeal), or preparing to defend, be a witness in or participate in, any Claim. 5. Limitation on Additional Indemnity and Advance Payment of Expense Advances. No indemnity pursuant to Article 3 hereof shall be paid by the Trust, nor shall the Trust be required to make Expense Advances under Article 4 hereof: (a) For which and to the extent that payment or reimbursement of such amount is made to Indemnitee under any D&O Insurance; (b) For which and to the extent that Indemnitee is indemnified, receives a recovery or is reimbursed other than pursuant to a policy of insurance or this Agreement; (c) On account of any action, suit or proceeding for which and to the extent that judgment is rendered against Indemnitee (i) for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Trust pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar provisions of any Federal, state or local statutory law, or (ii) for a violation of any provision of the Securities Act of 1933, as amended, in connection with the offer or sale of securities of the Trust pursuant to a registration statement under said statute, unless either (I) in the opinion of counsel for the Trust, Indemnitee is entitled to such indemnification by controlling precedent, or (ii) a final adjudication by a court of competent jurisdiction holds that such indemnification is not against public policy as expressed in such statute; (d) On account of any action, suit or proceeding in which a court of competent jurisdiction shall enter a final judgment that: -3- 4 (i) The act or omission of Indemnitee was material to the matter giving rise to the proceeding and (I) was committed in bad faith; or (II) was that result of active and deliberate dishonesty; or (ii) Indemnitee actually received an improper personal benefit in money, property or services; or (iii) In the case of any criminal proceeding, Indemnitee had reasonable cause to believe that the act or omission was unlawful; (e) On account of any action, suit or proceeding in which a court of competent jurisdiction shall enter a final judgment in a proceeding by or in the right of the Trust that Indemnitee is liable to the Trust; or (f) If such payment by the Trust under this Agreement is not otherwise permitted by applicable law. In addition, if Maryland law in effect at the time so requires, (i) the obligations of the Trust under Articles 3 and 4 hereof shall be subject to the condition that any "Determining Party" (as hereinafter defined) shall not have determined (in a written opinion in any case in which the "Independent Legal Counsel" (as defined in Article 6 hereof) is involved) that indemnification of Indemnitee is not permitted under applicable law or the expenses as to which Indemnitee requests payment or reimbursement are not reasonable, and (ii) the obligation of the Trust to make an Expense Advance pursuant to Article 4 hereof shall be subject to the condition that if, when and to the extent that any Determining Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, Indemnitee shall reimburse the Trust for all expenses paid; provided, however, that if as of the time any determination is made by the Determining Party that Indemnitee is under certain circumstances not permitted to be indemnified and/or that certain expenses are not reasonable, Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a final determination that Indemnitee should or may be indemnified under applicable law and/or that any expenses are not reasonable shall not be binding, and Indemnitee shall not be required to reimburse the Trust for any such expense until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has not been a Change in Control (as hereinafter defined), or if such Change in Control was approved by a majority of the Board of Trustees who were Trustees immediately prior to such Change in Control, the "Determining Party" shall be such members of the Board of Trustees, such Independent Legal Counsel (other than with respect to the reasonableness of expenses), or such other person or persons as MGCL Section 2-418 (or any successor provisions) shall require. If, on the other hand, there has been a Change in Control not approved by such majority of the Board, the Determining Party shall be (i) as to whether indemnification is permitted under applicable law, the Independent Legal Counsel referred to in Article 6 hereof, and (ii) as to the reasonableness of expenses, such members -4- 5 of the Board of Trustees or such other person(s) as MGCL Section 2-418 (or any successor provision) shall require. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Trust or another business trust or corporation owned directly or indirectly by the shareholders of the Trust in substantially in the same proportions as their ownership shares of beneficial interest of the Trust, becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13(d)-3 under the Securities Exchange Act) of securities of the Trust evidencing 8% or more of the total voting power evidenced by the Trusts's then outstanding securities that vote generally in the election of trustees ("Voting Securities"), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Trustees and any new Trustee whose election by the Board of Trustees or nomination for election by the Trust's shareholders was approved by the vote of at least two-thirds of the Trustees then still in office who were either Trustees at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board of Trustees, or (iii) the shareholders of the Trust approve a merger or consolidation of the Trust with any other business trust, corporation or other entity, other than a merger or consolidation that would result in the holders of Voting Securities outstanding immediately prior to such merger or consolidation continuing to have (by virtue of such Voting Securities either remaining outstanding or being converted into securities entitled to vote generally in the election of trustees or directors of the surviving entity) at least 80% of the total voting power evidenced by the Voting Securities or the voting securities of such surviving entity outstanding immediately after such merger or consolidation, or (iv) the shareholders of the Trust approve a plan of complete liquidation of the Trust or an agreement for the sale or disposition by the Trust of (in one transaction or a series of affiliated transactions) all or substantially all of the Trust's assets. If within 15 business days after Indemnitee submits a request for indemnification or for a payment or reimbursement of expenses hereunder, there has been no determination by the Determining Party, or if the Determining Party determines that Indemnitee is not permitted to be indemnified in whole or in part under applicable law and/or that the expenses as to which payment or reimbursement has been requested are not reasonable, Indemnitee shall have the right to commence litigation in any court in the States of Maryland or California having subject matter jurisdiction thereof and in which venue is proper, seeking an initial determination by the court or challenging any such determination by the Determining Party or any aspect thereof, including the legal or factual bases therefor, and the Trust hereby consents to service of process and to appear in any such proceeding. 6. Independent Legal Counsel. In the event that there is a Change in Control (other than a Change in Control that has been approved by a majority of the Board of Trustees immediately prior to such Change in Control), the Trust shall seek legal advice with respect to any and all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and payment or reimbursement of expenses under this Agreement or any other agreement or financial arrangement or the Declaration of Trust as now or hereafter in -5- 6 effect only from an attorney or firm of attorneys (the "Independent Legal Counsel") proposed by Indemnitee and selected by the Board of Trustees (or a committee thereof), or such other person(s) as MGCL Section 2-418 (or any successor provision) may require. Such Independent Legal Counsel, among other things, shall render its written opinion to the Trust and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Trust shall pay the reasonable fees and expenses of the Independent Legal Counsel and shall fully indemnify such counsel against all expenses, claims, liabilities, losses and damages arising out of or relating to this Agreement or such counsel's engagement pursuant hereto. 7. Indemnification for Additional Expenses. To the full extent permitted by law, the Trust shall indemnify Indemnitee against any and all expenses and, if requested by Indemnitee, shall (within 10 business days of such request) advance such expenses to Indemnitee, that are incurred by Indemnitee in connection with any Claim asserted against or action, suit or proceeding brought by Indemnitee for (i) indemnification or payment or reimbursement of expenses by the Trust and this Agreement, or any other agreement or the Trust Declaration each as now or hereafter in effect, relating to claims for indemnification or advancement of expenses, and/or (ii) recovery under any D&O Insurance policy or policies maintained by the Trust, if Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 8. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Trust for some or a portion of the expenses, judgments, fines, penalties and amounts paid in settlement or incurred by Indemnitee in respect of a Claim, but not, however, for all of such amount, the Trust nevertheless shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful in the merits or otherwise in defense of any Claim, issue or matter, including dismissal without prejudice, Indemnitee shall be indemnified against all expenses incurred in connection with such defense. 9. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any action, suit or proceeding by judgment, order or settlement (with or without court approval) shall not, of itself, create a presumption that Indemnitee's conduct was such that indemnity is not available pursuant to Article 3 hereof; provided, however, that the termination of any action, suit or proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, shall create a rebuttable such presumption, and that the termination of any action, suit or proceeding by a settlement entered into by the Indemnitee at the request of the Trust shall create a rebuttable presumption that Indemnitee is entitled to indemnity hereunder. Except as provided by the immediately preceding sentence, in connection with any determination by the Determining Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Trust to establish that Indemnitee is not so entitled. In addition, any attorneys' fees as to which Indemnitee requests indemnification or advancement shall be rebuttably presumed reasonable if and to -6- 7 the extent that such fees, if charged at an hourly rate, do not exceed the hourly rates then regularly charged by such attorney or attorneys. 10. Notification and Defense of Claims. Promptly after receipt by Indemnitee of notice of the commencement of any Claim, Indemnitee shall notify the Trust of the commencement thereof; provided, however, that the failure so to notify the Trust shall relieve the Trust from any obligation or liability that the Trust may have to Indemnitee under this Agreement only if and to the extent that the Trust's rights hereunder are prejudiced by such omission. If at the time the Trust receives such notice, the Trust has D&O Insurance in effect, the Trust shall give prompt notice of the commencement of Claim to the insurer(s) in accordance with the procedures set forth in the policy or policies in favor of Indemnitee. The Trust thereafter shall take all necessary or desirable action to cause such insurer(s) to pay, or advance, to or on behalf of Indemnitee, all losses, costs and expenses payable as a result of such Claim in accordance with the terms of such policy or policies. The provisions of this Agreement shall in no way relieve or modify any obligation(s) or liability or liabilities of any insurer under any D&O Insurance or other applicable insurance policy. With respect to any Claim as to which Indemnitee notifies the Trust of the commencement thereof: (a) The Trust shall be entitled to participate therein at its own expense. (b) Except to the extent such Claim is brought by or in the right of the Trust and/or as otherwise provided below, to the extent that it may wish, the Trust, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense of Indemnitee in respect of such Claim, at the Trust's own expense, with counsel approved by Indemnitee, whose approval shall not be unreasonably withheld. After notice from the Trust to Indemnitee of the Trust's election so to assume such defense, the Trust shall not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof, other than as expressly provided to the contrary below. Indemnitee shall have the right to employ his own counsel in connection with such Claim, but the fees and expenses of such counsel incurred after notice from the Trust of its assumption of the defense thereof shall be at the expense of Indemnitee unless: (i) Such retention (or continued retention) of counsel by Indemnitee has been authorized or consented to by Trust; (ii) Counsel employed by Indemnitee shall have concluded that there is or may be a conflict of interest between Indemnitee and the Trust with respect to such action, in which event counsel employed by Indemnitee also shall be entitled to participate in the defense of Indemnitee in connection with such Claim; -7- 8 (iii) The counsel retained by the Trust to assume the defense of Indemnitee in such proceeding shall also be representing in such action the Trust and/or one or more other parties; such counsel shall have concluded that there is an actual conflict of interest between Indemnitee and the one or more of such other parties (including, if applicable, the Trust); and within 10 business days after the Trust is notified of such conflict, separate counsel shall have been retained by the Trust to represent either the party or parties with whom there is such conflict of interest or Indemnitee (in which case such counsel shall be selected by Indemnitee and approved by the Trust, whose approval shall not be unreasonably withheld); or (iv) The Trust shall not in fact have retained counsel to assume the defense of Indemnitee in connection with such action. In each of the above cases, the fees and expenses of counsel employed by Indemnitee shall be at the expense of the Trust. (c) The Trust shall not be required to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Claim effected without the Trust's written consent. The Trust shall not settle any Claim in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Trust nor Indemnitee shall unreasonably withhold consent to any such proposed such settlement. 11. Indemnification and Expense Advancement Requests. (a) Advancement of Expenses. (i) Indemnitee shall, in order to request payment or reimbursement of expenses pursuant to Article 4 hereof, submit to the Board of Trustees a statement or request for advancement of expenses substantially in the form of Exhibits 1 or 1A attached hereto and made a part hereof (the "Expense Advancement Request"). (ii) Within 10 business days after receipt of a properly completed Expense Advancement Request and an invoice or other statement of the expenses to be advanced, the President, the Chief Executive Officer, a Vice President or General Counsel of the Trust shall authorize the Trust's payment or reimbursement of said expenses, whereupon such payment(s) or reimbursement(s) shall immediately be made. No security shall be required in connection with any Expense Advancement Request, and it shall be accepted without reference to Indemnitee's financial ability to make repayment. (b) Indemnification. (i) Indemnitee, in order to request indemnification pursuant to Article 3 hereof, shall submit to the Board of Trustees a statement of -8- 9 request for indemnification substantially in the form of Exhibit 2 attached hereto and made a party hereof (the "Indemnification Request"). (ii) Any and all payments on account of the Trust's indemnification obligations under Article 3 hereof shall be made within 10 business days of the Trust's receipt of a duly completed Indemnification Request with respect thereto. 12. Continuation of Indemnity; Indemnity Not Exclusive. All agreements and obligations of the Trust contained herein shall continue during the period Indemnitee is a Trustee and/or officer of the Trust (or serves at the request of the Trust as a trustee, director, officer, partner, employee or agent of another business trust, corporation, partnership, joint venture or other enterprise or an employee benefit plan) and shall continue thereafter so long as Indemnitee shall be subject to any possible Claim. The rights and benefits of Indemnitee and the obligations of the Trust under this Agreement shall be in addition to, and shall not supersede, limit or be in lieu of, the provisions, if any, relating to the indemnification of Indemnitee by the Trust in the Trust Declaration, the Trustee's Regulations of the Trust, any resolution or resolutions of the Board of Trustees, any other agreement or financing arrangement, the provisions of policies of insurance of the Trust, or other applicable law. 13. Subrogation. In the event of payment or reimbursement by the Trust under this Agreement, the Trust shall be subrogated to the extent of such payment or reimbursement to any and all rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of any and all such documents as may be necessary to enable the Trust effectively to enforce such rights. 14. Notice. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom such notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which so mailed: If to Indemnitee, to: ____________________________________ ____________________________________ ____________________________________ If to the Trust, to: Starwood Lodging Trust 11845 W. Olympic Boulevard Suite 550 Los Angeles, California 90064 Attention: President -9- 10 or to such other address as may have been furnished to Indemnitee by the Trust or to the Trust by Indemnitee, as the case may be. 15. Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance is held by a court of competent jurisdiction invalid, void or otherwise unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected, and the provision so held to be invalid, void or otherwise unenforceable shall be reformed to the extent (and only to that extent) necessary to make it enforceable. 16. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one document. 17. Captions. The captions of the Articles to this Agreement have been included herein for convenience of reference only, and this Agreement shall not be construed by reference thereto. 18. Governing Law; Binding Effect; Amendment and Termination. (a) This Agreement is made and entered into pursuant to Section 2-418 of the MGCL, and this Agreement shall be governed by and its provisions interpreted and enforced in accordance with the laws of the State of Maryland applicable to contracts made and to be performed in such State without giving effect to the principles of conflicts of laws. (b) This Agreement shall be binding upon and inure to the benefit of (i) the Trust and its successors and permitted assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Trust), and (ii) Indemnitee, his or her spouse, heirs, executors, personal and legal representatives and other successors and permitted assigns. Neither this Agreement nor any right or obligation hereunder may be assigned, delegated or otherwise transferred by Indemnitee voluntarily during his lifetime or by the Trust, except that the Trust shall require and cause any successor to expressly assume and agree (by a writing in form and substance satisfactory to Indemnitee, whose approval shall not be unreasonably withheld) to perform this Agreement in the same manner and to the same extent that the Trust would have been required to perform if no such succession had taken place. (c) No amendment, supplement or other modification, termination of this Agreement shall be effective unless executed in writing by both of the parties hereto. No waiver of any provision or provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision or provisions hereof (whether or not similar), nor shall any such waiver constitute a continuing waiver. 19. Other Indemnification Agreements. -10- 11 (a) This Agreement supersedes and replaces any prior Indemnification Agreement between the Trust and Indemnitee which covers similar rights and obligations between Indemnitee and the Trust; provided however that Indemnitee and the Trust shall retain any and all rights and obligations under any such prior agreement which may have accrued or be applicable to any period prior to the date of this Agreement. (b) If Indemnitee has entered into, or in the future enters into, an Indemnification Agreement with Starwood Lodging Corporation, a Maryland corporation, similar to this Agreement, then if and to the extent that Indemnitee is entitled to indemnification against and/or advancement of any judgement(s), fine(s), penalty(ies), amount(s) paid in settlement, cost(s) and/or expense(s) both under this Agreement and such other Indemnification Agreement, Indemnitee shall be entitled to seek such indemnification and/or reimbursement under either or both said agreements, as Indemnitee may elect, but any and all such requests for indemnification and/or advancement or expenses shall be subject to the provisions of paragraph (b) of Section 5 of this Agreement. 20. Disclaimer. The name "Starwood Lodging Trust" is a designation of a Maryland real estate investment trust and its trustees (as trustees but not personally) under an Amended and Restated Declaration of Trust dated as of June 6, 1988, as amended, and all persons dealing with such trust must look solely to such trust property for enforcement of any claims against such trust, the trustees, officers, agents and security holders of such trust assume no personal liability for obligations entered into on behalf of such trust and the respective property shall not be subject to the claims of any person relating to any such obligations. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. STARWOOD LODGING TRUST By:________________________________ Its:_______________________________ ___________________________________ ____________________, Indemnitee -11- 12 Exhibit 1 Expense Advancement Request I, _______________________, do hereby affirm, undertake and agree as follows: 1. This Expense Advancement Request is submitted pursuant to the Indemnification Agreement dated as of ___________________, 1995 (the "Indemnification Agreement"), between Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust"), and the undersigned. 2. I am requesting that the Trust pay or reimburse to me certain expenses that I have incurred in connection with the following civil, criminal, administrative or investigative action, suit or proceeding to which I am a party (the "Claim"): _______________________________________________________________ _______________________________________________________________ 3. The expenses payment or reimbursement of which is requested are itemized below: _______________________________________________________________ _______________________________________________________________ 4. It is my good faith belief that in connection with the matters that are the subject of the Claim, I have met the standard of conduct necessary for indemnification by the Trust pursuant to Section 2-418 of the Maryland General Corporation Law (a copy of which has been provided to me). 5. If it shall be ultimately determined that in connection with the matters that are the subject of the Claim, I have not met such standard of conduct, I will repay to the Trust the amounts paid or reimbursed by the Trust pursuant hereto. ___________________________________ 13 Exhibit 1A EXPENSE ADVANCEMENT REQUEST I, ______________________, do hereby affirm, undertake and agree as follows: 1. This Expense Advancement Request is submitted pursuant to the Indemnification Agreement dated as of ____________________, 1995 (the "Indemnification Agreement"), between Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust"), and the undersigned. 2. I hereby request that the Trust pay directly the fees, expenses and other charges of my legal counsel, ____________________, in connection with the following civil or criminal, administrative or investigative action, suit or proceeding to which I am a party (the "Claim"): _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ 3. It is my good faith belief that in connection with the matters that are the subject of the Claim, I have met the standard of conduct necessary for indemnification by the Trust pursuant to Section 2-418 of the Maryland General Corporation Law (a copy of which statute has been provided to me). 4. If it shall be ultimately determined that in connection with the matters that are the subject of the Claim, I have not met such standard of conduct, I will repay to the Trust the amounts paid by the Trust pursuant hereto. ___________________________________ 14 Exhibit 2 Indemnification Request I, _________________________, do hereby affirm, undertake and agree as follows: 1. This Indemnification Request is submitted pursuant to the Indemnification Agreement dated as of __________________, 1995 (the "Indemnification Agreement"), between Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust"), and the undersigned. 2. I am requesting indemnification against the following expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement, paid or incurred by me in connection with suit, action, investigation, inquiry or other proceeding also described below: _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ 3. With respect to all matters related to such proceeding, I am entitled to be indemnified pursuant to the aforesaid Indemnification Agreement. ___________________________________ 15 AMENDMENT NO. 1 TO INDEMNIFICATION AGREEMENT _______________ Starwood Lodging Trust 11835 West Olympic Boulevard Suite 695 Los Angeles, CA 90064 Re: Indemnification Agreement Gentlemen: Please refer to the Indemnification Agreement (the "Agreement") dated as of ____________________, between Starwood Lodging Trust, a Maryland real estate investment trust (the "Trust") and the undersigned ("Indemnitee"). Defined terms used herein have the same meaning as in the Agreement. This confirms our understanding that nothing contained in the Agreement is intended to, nor shall be deemed as, an agreement to indemnify or to advance expenses to the Indemnitee to the extent that the Indemnitee brings any action, suit or proceeding or causes any such action, suit or proceeding to be brought, against the Trust or any of the Trustees of the Trust other than an action, suit or proceeding against the Trust for the Trust's alleged breach of the Agreement. Yours very truly, AGREED TO: Starwood Lodging Trust, a Maryland real estate investment trust By:____________________ Its:___________________ EX-10.8 6 CORPORATION INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.8 INDEMNIFICATION AGREEMENT This Indemnification Agreement (this "Agreement") is made as of the _____ day of __________, 1995, between Starwood Lodging Corporation, a Maryland corporation (the "Corporation"), and ____________________ ("Indemnitee"), with reference to the following facts and objectives: A. Indemnitee is a Director or officer of the Corporation or one or more of its subsidiaries or has been elected or appointed a Director or officer of the Corporation or one or more of its subsidiaries effective at a later date; and in the case of a person elected or appointed as a Director of the Corporation effective at a later date is, or pending such later date is to become, a member of the Management Committee of SLC Operating Limited Partnership, a Delaware limited partnership (of which the Corporation is the managing general partner) and as such is acting at the request of the Corporation as an agent of the Corporation and an agent of SLC Operating Limited Partnership. B. Article Tenth of the Amended and Restated Articles of Incorporation of the Corporation (the "Corporation Articles") provides for the indemnification of directors ("Directors"), officers, employees and other agents of the Corporation to the fullest extent required or permitted under of the Maryland General Corporation Law (the "MGCL"). C. Each of the MGCL and Article Tenth of the Corporation Articles specifically provides that the indemnification provided for therein is not exclusive, thereby contemplate that agreements or other financial arrangements may be entered into between the Corporation, on the one hand, and the Corporation's Directors and officers, on the other hand, with respect to the indemnification of and advancement of expenses to such persons. D. In recognition of Indemnitee's need for substantial protection against personal liability in order to maintain Indemnitee's continued service to the Corporation in an effective manner and Indemnitee's reliance on the Corporation Articles, and in part to provide Indemnitee with specific contractual assurance that the protection promised by the Corporation Articles will be available to Indemnitee (regardless of, among other things, any limitation or other amendment or revocation of Article Tenth of the Corporation Articles or any change in the composition of the Corporation's Board of Directors (the "Board of Directors")), the Corporation desires to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law, as set forth in this Agreement, and, to the extent directors' and officers' insurance is maintained by the Corporation, for the continued coverage of Indemnitee under such policy or policies. NOW, THEREFORE, in consideration of the premises and of Indemnitee's continuing to serve the Corporation directly or, at its request, another enterprise, the Corporation and Indemnitee hereby agree as follows: 1. D&O Liability Insurance. (a) Subject only to the provisions of Section 1(b) hereof, so long as Indemnitee shall continue to serve as a Director and/or officer of the Corporation (or 2 shall continue at the request of the Corporation to serve as a director, trustee, officer, partner, employee or agent of another corporation, business trust, partnership, joint venture or other enterprise or an employee benefit plan), and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Indemnitee was a Director and/or officer of the Corporation or served in any of said other capacities, the Corporation shall purchase and maintain in effect, including through the obtaining or exercise of appropriate "tail" coverage, one or more valid, binding and enforceable insurance policies issued by a reputable insurer or insurers protecting Directors and Corporation officers (subject to customary limitations and exceptions) against losses, costs and expenses arising out of any such claim, action, suit or proceeding ("D&O Insurance"), which D&O Insurance shall provide coverage in all respects at least comparable to that presently provided, and shall cause Indemnitee to be covered by such policy or policies. The Corporation shall not be required to maintain in effect the policy or policies of D&O Insurance contemplated by the first paragraph of this Section 1(a) at any time at which (i) said insurance is not generally available, or (ii) in the reasonable business judgment of the persons then constituting the Board of Directors, either (I) the premium cost for such insurance is substantially disproportionate to the amount of coverage afforded, or (II) the coverage provided by such insurance is so limited and/or subject to such exclusions that there is insufficient benefit to the Corporation from such insurance; provided, however, that to the extent that the Corporation maintains any D&O Insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Director or Corporation officer under such policy or policies, and, further, that in the event the Corporation does not purchase and maintain in effect the policy or policies of D&O Insurance contemplated by this Section 1(a), the Corporation shall indemnify Indemnitee to the full extent of the coverage that would otherwise have been provided for the benefit of Indemnitee pursuant to such D&O Insurance. (b) The Corporation's obligations under this Article 1 shall terminate as of the fifth anniversary of the date on which Indemnitee ceases to render any service or to act in any capacity specified in Article 3 hereof. 2. Basic Indemnity. The Corporation hereby indemnifies Indemnitee, whether or not he is then in office, to the fullest extent permitted by the provisions of Section 2-418 of the MGCL or any amendment thereof or by any other statute permitting such indemnification that is adopted after the date hereof. 3. Additional Indemnity. Subject only to the limitations and exclusions set forth in Article 5 hereof, and without limiting the provisions of the foregoing Article 2, the Corporation hereby also expressly agrees that in the event Indemnitee is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any action, suit or proceeding, whether pending, threatened or completed, whether civil, criminal or administrative, and whether instituted by or in the -2- 3 name of the Corporation or any other party, or any investigation or inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, by reason of (or arising in part out of) the fact that Indemnitee is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, partner, employee, agent or fiduciary of another corporation, business trust, partnership, joint venture or other enterprise or an employee benefit plan, or by reason of anything done or not done by Indemnitee in any such capacity (any such threatened, pending or completed action, suit or proceeding, or any such inquiry or investigation, a "Claim"), the Corporation shall indemnify Indemnitee against any and all judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement), and any and all reasonable expenses, actually paid or incurred by Indemnitee in connection with or in respect of such Claim. 4. Advancing of Expenses. If so requested by Indemnitee, and subject only to the limitations and exclusions of Article 5 hereof, the Corporation shall pay to Indemnitee or reimburse Indemnitee for any and all expenses actually and reasonably incurred by Indemnitee in connection with or in respect of any Claim (an "Expense Advance") in advance of the final determination thereof, in the manner provided in Section 11(a) hereof. For purposes of this Agreement, "expenses" shall include attorneys' fees and all other costs, charges and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including an appeal), or preparing to defend, be a witness in or participate in, any Claim. 5. Limitation on Additional Indemnity and Advance Payment of Expense Advances. No indemnity pursuant to Article 3 hereof shall be paid by the Corporation, nor shall the Corporation be required to make any Expense Advance under Article 4 hereof: (a) For which and to the extent that payment or reimbursement of such amount is made to Indemnitee under any D&O Insurance; (b) For which and to the extent that Indemnitee is indemnified, receives a recovery or is reimbursed other than pursuant to a policy of insurance or this Agreement; (c) On account of any action, suit or proceeding for which and to the extent that judgment is rendered against Indemnitee (i) for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar provision of any Federal, state or local statutory law, or (ii) for a violation of any provision of the Securities Act of 1933, as amended, in connection with the offer or sale of securities of the Corporation pursuant to a registration statement under said statute, unless either (I) in the opinion of counsel for the Corporation, Indemnitee is entitled to such indemnification by controlling -3- 4 precedent, or (II) a final adjudication by a court of competent jurisdiction holds that such indemnification is not against public policy as expressed in such statute; (d) On account of any action, suit or proceeding in which a court of competent jurisdiction shall enter a final judgment that: (i) The act or omissions of Indemnitee was material to the matter giving rise to the proceeding and (I) was committed in bad faith; or (II) was the result of active and deliberate dishonesty; or (ii) Indemnitee actually received an improper personal benefit in money, property or services; or (iii) In the case of any criminal proceeding, Indemnitee had reasonable cause to believe that the act or omission was unlawful; (e) On account of any action, suit or proceeding in which a court of competent jurisdiction shall enter a final judgment in a proceeding by or in the right of the Corporation that Indemnitee is liable to the Corporation; or (f) If such payment by the Corporation under this Agreement is not otherwise permitted by applicable law. In addition, if Maryland law in effect at the time so requires, (i) the obligations of the Corporation under Articles 3 and 4 hereof shall be subject to the condition that any "Determining Party" (as hereinafter defined) shall not have determined (in a written opinion in any case in which the "Independent Legal Counsel" (as defined in Article 6 hereof) is involved) that indemnification of Indemnitee is not permitted under applicable law or the expenses as to which Indemnitee requests payment or reimbursement are not reasonable, and (ii) the obligation of the Corporation to make an Expense Advance pursuant to Article 4 hereof shall be subject to the condition that if, when and to the extent that any Determining Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, Indemnitee shall reimburse the Corporation for all expenses paid; provided, however, that if as of the time any determination is made by the Determining Party that Indemnitee is under certain circumstances not permitted to be indemnified and/or that certain expenses are not reasonable, Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a final determination that Indemnitee should or may be indemnified under applicable law and/or that such expenses are reasonable, any determination made by the Determining Party that Indemnitee would not be permitted to be indemnified under applicable law and/or that any expenses are not reasonable shall not be binding, and Indemnitee shall not be required to reimburse the Corporation for any such expense until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has not been a Change in Control (as hereinafter defined), or if such Change in Control was approved by a majority of the Board of Directors who were Directors -4- 5 immediately prior to such Change in Control, the "Determining Party" shall be such members of the Board of Directors, such Independent Legal Counsel (other than with respect to the reasonableness of expenses), or such other person or persons as MGCL Section 2-418 (or any successor provision) shall require. If, on the other hand, there has been a Change in Control not approved by such majority of the Board, the Determining Party shall be (i) as to whether indemnification is permitted under applicable law, the Independent Legal Counsel referred to in Article 6 hereof, and (ii) as to the reasonableness of expenses, such members of the Board of Directors or such other person(s) as MGCL Section 2-418 (or any successor provision) shall require. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or another corporation or business trust owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of shares of stock of the corporation, becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13(d)-3 under the Securities Exchange Act) of securities of the Corporation evidencing 8% or more of the total voting power evidenced by the Corporation's then outstanding securities that vote generally in the election of Directors ("Voting Securities"), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors and any new Director whose election by the Board of Directors or nomination for election by the Corporation's stockholders was approved by the vote of at least two-thirds of the Directors then still in office who were either Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board of Directors, or (iii) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, business trust or other entity, other than a merger or consolidation that would result in the holders of Voting Securities outstanding immediately prior to such merger or consolidation continuing to have (by virtue of such Voting Securities either remaining outstanding or being converted into securities entitled to vote generally in the election of directors or trustees of the surviving entity) at least 80% of the total voting power evidenced by the Voting Securities or the voting securities of such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of (in one transaction or a series of affiliated transactions) all or substantially all of the Corporation's assets. If within 15 business days after Indemnitee submits a request for indemnification or for a payment or reimbursement of expenses hereunder, there has been no determination by the Determining Party, or if the Determining Party determines that Indemnitee is not permitted to be indemnified in whole or in part under applicable law and/or that the expenses as to which payment or reimbursement has been requested are not reasonable, Indemnitee shall have the right to commence litigation in any court in the States of Maryland or California having subject matter jurisdiction thereof and in which venue is proper, seeking an initial determination by the court or challenging any such determination -5- 6 by the Determining Party or any aspect thereof, including the legal or factual bases therefor, and the Corporation hereby consents to service of process and to appear in any such proceeding. 6. Independent Legal Counsel. In the event that there is a Change in Control (other than a Change in Control that has been approved by a majority of the Board of Directors immediately prior to such Change in Control), the Corporation shall seek legal advice with respect to any and all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and payment or reimbursement of expenses under this Agreement or any other agreement or financial arrangement or the Corporation Articles as now or hereafter in effect only from an attorney or firm of attorneys selected in accordance with the provisions of this Article, which attorney or firm (the "Independent Legal Counsel") proposed by Indemnitee and selected by the board of Directors (or a committee thereof), or such other person(s) as MGCL Section 2-418 (or any successor provision) may require. Such Independent Legal Counsel, among other things, shall render its written opinion to the Corporation and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Corporation shall pay the reasonable fees and expenses of the Independent Legal Counsel and shall fully indemnify such counsel against all expenses, claims, liabilities, losses and damages arising out of or relating to this Agreement or such counsel's engagement pursuant hereto. 7. Indemnification for Additional Expenses. To the full extent permitted by law, the Corporation shall indemnify Indemnitee against any and all expenses and, if requested by Indemnitee, shall (within 10 business days of such request) advance such expenses to Indemnitee, that are incurred by Indemnitee in connection with any Claim asserted against or action, suit or proceeding brought by Indemnitee for (i) indemnification or payment or reimbursement of expenses by the Corporation under this Agreement or any other agreement or the Corporation Articles each as now or hereafter in effect, relating to claims for indemnification or advancement of expenses, and/or (ii) recovery under any D&O Insurance policy or policies maintained by the Corporation, if Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 8. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the expenses, judgments, fines, penalties and amounts paid in settlement or incurred by Indemnitee in respect of a Claim, but not, however, for all of such amount, the Corporation nevertheless shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful in the merits or otherwise in defense of any Claim, issue or matter, including dismissal without prejudice, Indemnitee shall be indemnified against all expenses incurred in connection with such defense. 9. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any action, suit or proceeding by judgment, order or settlement (with or without court approval) shall not, of itself, create a presumption that Indemnitee's conduct -6- 7 was such that indemnity is not available pursuant to Article 3 hereof; provided, however, that the termination of any action, suit or proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, shall create a rebuttable such presumption, and that the termination of any action, suit or proceeding by a settlement entered into by Indemnitee at the request of the Corporation shall create a rebuttable presumption that Indemnitee is entitled to indemnity hereunder. Except as provided by the immediately preceding sentence, in connection with any determination by the Determining Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Corporation to establish that Indemnitee is not so entitled. In addition, any attorneys' fees as to which Indemnitee requests indemnification or advancement shall be rebuttably presumed reasonable if and to the extent that such fees, if charged at an hourly rate, do not exceed the hourly rates then regularly charged by such attorney or attorneys. 10. Notification and Defense of Claims. Promptly after receipt by Indemnitee of notice of the commencement of any Claim, Indemnitee shall notify the Corporation of the commencement thereof; provided, however, that the failure so to notify the Corporation shall relieve the Corporation from any obligation or liability that the Corporation may have to Indemnitee under this Agreement only if and to the extent that the Corporation's rights hereunder are prejudiced by such omission. If at the time the Corporation receives such notice, the Corporation has D&O Insurance in effect, the Corporation shall give prompt notice of the commencement of Claim to the insurer(s) in accordance with the procedures set forth in the policy or policies in favor of Indemnitee. The Corporation thereafter shall take all necessary or desirable action to cause such insurer(s) to pay, or advance, to or on behalf of Indemnitee, all losses, costs and expenses payable as a result of such Claim in accordance with the terms of such policy or policies. The provisions of this agreement shall in no way relieve or modify any obligation(s) or liability or liabilities of any insurer under any D&O Insurance or other applicable insurance policy. With respect to any Claim as to which Indemnitee notifies the Corporation of the commencement thereof: (a) The Corporation shall be entitled to participate therein at its own expense. (b) Except to the extent such Claim is brought by or in the right of the Corporation and/or as otherwise provided below, to the extent that it may wish, the Corporation jointly with any other indemnifying party similarly notified shall be entitled to assume the defense of Indemnitee in respect of such Claim, at the Corporation's own expense, with counsel approved by Indemnitee, whose approval shall not be unreasonably withheld. After notice from the Corporation to Indemnitee of the Corporation's election so to assume such defense, the Corporation shall not be liable to Indemnitee under this agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof, other than as expressly -7- 8 provided to the contrary below. Indemnitee shall have the right to employ his own counsel in connection with such Claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless: (i) Such retention (or continued retention) of counsel by Indemnitee has been authorized or consented to by the Corporation; (ii) Counsel employed by Indemnitee shall have concluded that there is or may be a conflict of interest between Indemnitee and the Corporation with respect to such action, in which event counsel employed by Indemnitee also shall be entitled to participate in the defense of Indemnitee in connection with such Claim; (iii) The counsel retained by the Corporation to assume the defense of Indemnitee in such proceeding shall also be representing in such action the Corporation and/or one or more other parties; such counsel shall have concluded that there is an actual conflict of interest between Indemnitee and the one or more of such other parties (including, if applicable, the Corporation); and within 10 business days after the Corporation is notified of such conflict, separate counsel shall not have been retained by the Corporation to represent either the party or parties with whom there is such conflict of interest or Indemnitee (in which case such counsel shall be selected by Indemnitee and approved by the Corporation, whose approval shall not be unreasonably withheld); or (iv) The Corporation shall not in fact have retained counsel to assume the defense of Indemnitee in connection with such action. In each of the above cases, the fees and expenses of counsel employed by Indemnitee shall be at the expense of the Corporation. (c) The Corporation shall not be required to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Claim effected without the Corporation's written consent. The Corporation shall not settle any Claim in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Corporation nor Indemnitee shall unreasonably withhold consent to any such proposed settlement. 11. Indemnification and Expense Advancement Requests. (a) Advancement of Expenses. (i) Indemnitee shall, in order to request payment or reimbursement of expenses pursuant to Article 4 hereof, submit to the Board of Directors a statement of request for advancement of expenses substantially -8- 9 in the form of Exhibits 1 or 1A attached hereto and made a part hereof (the "Expense Advancement Request"). (ii) Within 10 business days after receipt of a properly completed Expense Advancement Request and an invoice or other statement of the expenses to be advanced, the President, the Chief Executive Officer or a Vice President of the Corporation shall authorize the Corporation's payment or reimbursement of said expenses, whereupon such payment(s) or reimbursement(s) shall immediately be made. No security shall be required in connection with any Expense Advancement Request, and it shall be accepted without reference to Indemnitee's financial ability to make repayment. (b) Indemnification. (i) Indemnitee, in order to request indemnification pursuant to Article 3 hereof, shall submit to the Board of Directors a statement of request for indemnification substantially in the form of Exhibit 2 attached hereto and made a part hereof (the "Indemnification Request"). (ii) Any and all payments on account of the Corporation's indemnification obligations under Article 3 hereof shall be made within 10 business days of the Corporation's receipt of a duly completed Indemnification Request with respect thereto. 12. Continuation of Indemnity; Indemnity Not Exclusive. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a Director and/or officer of the Corporation (or serves at the request of the Corporation as a director, trustee, officer, partner, employee or agent of another corporation, business trust, partnership, joint venture or other enterprise or an employee benefit plan) and shall continue thereafter so long as Indemnitee shall be subject to any possible Claim. The rights and benefits of Indemnitee and the obligations of the Corporation under this Agreement shall be in addition to, and shall not supersede, limit or be in lieu of, the provisions, if any, relating to the indemnification of Indemnitee by the Corporation in the Corporation Articles, the Bylaws of the Corporation, any resolution or resolutions of the Board of Directors, any other agreement or financing arrangement, the provisions of policies of insurance of the Corporation, or other applicable law. 13. Subrogation. In the event of payment or reimbursement by the Corporation under this Agreement, the Corporation shall be subrogated to the extent of such payment or reimbursement to any and all rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of any and all such documents as may be necessary to enable the Corporation effectively to enforce such rights. 14. Notice. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted -9- 10 for by the party to whom such notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which so mailed: If to Indemnitee, to: ____________________________________ ____________________________________ ____________________________________ If to the Corporation, to: Starwood Lodging Corporation 11845 W. Olympic Blvd. Suite 550 Los Angeles, CA 90064 Attention: Executive Vice President or to such other address as may have been furnished to Indemnitee by the Corporation or to the Corporation by Indemnitee, as the case may be. 15. Severability. If any provision of this Agreement or the application of such provision to any person or circumstance is held by a court of competent jurisdiction invalid, void or otherwise unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected, and the provision so held to be invalid, void or otherwise unenforceable shall be reformed to the extent (and only to that extent) necessary to make it enforceable. 16. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one document. 17. Captions. The captions of the Articles to this Agreement have been included herein for convenience of reference only, and this Agreement shall not be construed by reference thereto. 18. Governing Law; Binding Effect; Amendment and Termination. (a) This Agreement is made and entered into pursuant to Section 2-418 of the MGCL, and this Agreement shall be governed by and its provisions interpreted and enforced in accordance with the laws of the State of Maryland applicable to contracts made and to be performed in such State without giving effect to the principles of conflicts of laws. (b) This Agreement shall be binding upon and inure to the benefit of (i) the Corporation and its successors and permitted assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation), and (ii) Indemnitee, his or her spouse, heirs, executors, personal and legal representatives and other successors and permitted assigns. Neither this Agreement nor any right or obligation hereunder may be assigned, delegated or otherwise transferred by Indemnitee voluntarily during his lifetime or by the Corporation, except that the Corporation shall -10- 11 require and cause any successor to expressly assume and agree (by a writing in form and substance satisfactory to Indemnitee, whose approval shall not be unreasonably withheld) to perform this Agreement in the same manner and to the same extent that the Corporation would have been required to perform if no such succession had taken place. (c) No amendment, supplement or other modification, termination of this Agreement shall be effective unless executed in writing by both of the parties hereto. No waiver of any provision or provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision or provisions hereof (whether or not similar), nor shall any such waiver constitute a continuing waiver. 19. Other Indemnification Agreements. (a) This Agreement supersedes and replaces any prior Indemnification Agreement between the Corporation and Indemnitee which covers similar rights and obligations between Indemnitee and the Corporation; provided however that Indemnitee and the Corporation shall retain any and all rights and obligations under any such prior agreement which may have accrued or be applicable to any period prior to the date of this Agreement. (b) If Indemnitee has entered into, or in the future enters into, an Indemnification Agreement with Starwood Lodging Trust, a Maryland real estate investment trust, similar to this Agreement, then if and to the extent that Indemnitee is entitled to indemnification against and/or advancement of any judgement(s), fine(s), penalty(ies), amount(s) paid in settlement, cost(s) and/or expense(s) both under this Agreement and such other Indemnification Agreement, Indemnitee shall be entitled to seek such indemnification and/or reimbursement under either or both of said agreements, as Indemnitee may elect, but any and all such requests for indemnification and/or advancement of expenses shall be subject to the provisions of paragraph (b) of Section 5 of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. STARWOOD LODGING CORPORATION, a Maryland Corporation By_______________________________________________ Its_________________________________________ _________________________________________________ _________________________, Indemnitee -11- 12 Exhibit 1 Expense Advancement Request I, _______________________________________, do hereby affirm, undertake and agree as follows: 1. This Expense Advancement Request is submitted pursuant to the Indemnification Agreement dated as of ______________, 1995 (the "Indemnification Agreement"), between Starwood Lodging Corporation, a Maryland corporation (the "Corporation"), and the undersigned. 2. I am requesting that the Corporation pay or reimburse to me certain expenses that I have incurred in connection with the following civil, criminal, administrative or investigative action, suit or proceeding to which I am a party (the "Claim"): _______________________________________________________ _______________________________________________________ _______________________________________________________ 3. The expenses payment or reimbursement of which is requested are itemized below: _______________________________________________________ _______________________________________________________ _______________________________________________________ 4. It is my good faith belief that in connection with the matters that are the subject of the Claim, I have met the standard of conduct necessary for indemnification by the Corporation pursuant to Section 2-418 of the Maryland General Corporation Law (a copy of which has been provided to me). 5. If it shall be ultimately determined that in connection with the matters that are the subject of the Claim, I have not met such standard of conduct, I will repay to the Corporation the amounts paid or reimbursed pursuant hereto. ______________________________________ -12- 13 Exhibit 1A Expense Advancement Request I, _______________________________________, do hereby affirm, undertake and agree as follows: 1. This Expense Advancement Request is submitted pursuant to the Indemnification Agreement dated as of ______________, 1995 (the "Indemnification Agreement"), between Starwood Lodging Corporation, a Maryland corporation (the "Corporation"), and the undersigned. 2. I am requesting that the Corporation pay directly the fees, expenses and other charges of my legal counsel, _________________________, in connection with the following civil, criminal, administrative or investigative action, suit or proceeding to which I am a party (the "Claim"): _______________________________________________________ _______________________________________________________ _______________________________________________________ 3. It is my good faith belief that in connection with the matters that are the subject of the Claim, I have met the standard of conduct necessary for indemnification by the Corporation pursuant to Section 2-418 of the Maryland General Corporation Law (a copy of which has been provided to me). 4. If it shall be ultimately determined that in connection with the matters that are the subject of the Claim, I have not met such standard of conduct, I will repay to the Corporation the amounts paid by the Corporation pursuant hereto. ______________________________________ -13- 14 Exhibit 2 Indemnification Request I, _______________________________________, do hereby affirm, undertake and agree as follows: 1. This Indemnification Request is submitted pursuant to the Indemnification Agreement dated as of _________________, 1995 (the "Indemnification Agreement"), between Starwood Lodging Corporation, a Maryland corporation (the "Corporation"), and the undersigned. 2. I am requesting indemnification against the following expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement, paid or incurred by me in connection with suit, action, investigation, inquiry or other proceeding also described below: _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ 3. With respect to all matters related to such proceeding, I am entitled to be indemnified pursuant to the aforesaid Indemnification Agreement. ______________________________________ -14- 15 AMENDMENT NO. 1 TO INDEMNIFICATION AGREEMENT _______________ Starwood Lodging Corporation 11835 West Olympic Boulevard Suite 675 Los Angeles, CA 90064 Re: Indemnification Agreement Gentlemen: Please refer to the Indemnification Agreement (the "Agreement") dated as of ____________________, between Starwood Lodging Corporation, a Maryland corporation (the "Corporation") and the undersigned ("Indemnitee"). Defined terms used herein have the same meaning as in the Agreement. This confirms our understanding that nothing contained in the Agreement is intended to, nor shall be deemed as, an agreement to indemnify or to advance expenses to the Indemnitee to the extent that the Indemnitee brings any action, suit or proceeding or causes any such action, suit or proceeding to be brought, against the Corporation or any of the Directors of the Corporation other than an action, suit or proceeding against the Corporation for the Corporation's alleged breach of the Agreement. Yours very truly, AGREED TO: Starwood Lodging Corporation, a Maryland corporation By:____________________ Its:___________________ EX-10.16 7 MORTGAGE LOAN FUNDING FACILITY 1 EXHIBIT 10.16 MORTGAGE LOAN FUNDING FACILITY Dated: July 25, 1995 SLT Realty Limited Partnership and SLT Realty Company, L.L.C. 11845 West Olympic Boulevard, Suite 550 Los Angeles, California 90064 Attention: Barry S. Sternlicht, Chairman, Trustee and Chief Executive Officer of Starwood Lodging Trust (the general partner of SLT Realty Limited Partnership and 0.28% member of SLT Realty Company, L.L.C.) Gentlemen: Lehman Commercial Paper Inc. ("Lehman") hereby agrees to make available to SLT Realty Limited Partnership ("SLTLP") and SLT Realty Company, L.L.C. ("SLTLLC", together with SLTLP collectively, the "Customers") a loan facility (this "Facility") secured by mortgage loans and a participation interest on the terms set forth in this Mortgage Loan Funding Facility (this "Facility Agreement"). Capitalized terms not defined herein shall have the respective meanings given such terms in the Pledge Agreement, dated the date hereof, between the Customers and Lehman (the "Pledge Agreement"). 1. The Advances. Lehman agrees to make advances from time to time (each an "Advance" and collectively with any Subsequent Advances, the "Advances") to Customers and to Reset such Advances (subject to the requirements of the Relevant Agreements) in an aggregate principal amount not to exceed at any one time outstanding $44,600,000 (the "Maximum Credit"). The minimum amount of each Advance or Subsequent Advance shall be one million dollars ($1,000,000) with additional increments of one hundred thousand dollars ($100,000) thereafter. This Facility is a commitment to lend and sets forth the procedures to be used in connection with periodic Advances. The parties acknowledge that in the absence of an Event of Default and upon satisfaction of all of the covenants and conditions precedent in the Relevant Agreements, Lehman shall make any Advance requested pursuant to this Facility. All Advances made by Lehman hereunder shall be evidenced by the Promissory Note. Although the Promissory Note shall be dated the date of issue, interest in respect thereof shall be payable only for the periods during which the Advances evidenced thereby are outstanding, and although the stated amount of the Promissory Note shall be equal to the Maximum Credit, the Promissory Note shall be enforceable only to the extent of the unpaid aggregate principal amount of the Advances then outstanding plus any other amounts due thereunder. Within the limits of the Maximum Credit, Customers may borrow, repay pursuant to Sections 3 and 4 hereof and reborrow pursuant to Section 2 hereof. Lehman shall note and endorse on its internal records each Advance and payment thereon, provided, however, failure to do so shall not prejudice Lehman's rights under the Relevant Agreements. 2 2. Making the Advances and Resetting of the Interest Rate. (a) On any day no later than 2:00 P.M. (New York City time) two (2) Business Days prior to the date on which Customers desire to borrow funds from Lehman under this Facility or two (2) Business Days prior to the Reset Date (as defined below) of an outstanding Advance, if the Customers desire a term until the next Reset Date with respect to such Advance (each such term, the "Reset Term") to be other than one month, Customers shall notify Lehman by telephone or telecopy that Customers wish to borrow money on a specified date in a specified principal amount and for a specified term or notify Lehman of the desired Reset Term, if other than one month, as the case may be. (b) Each such request by Customers shall be evidenced by a notice (each, a "Notice of Borrowing") substantially in the form attached hereto, with the blanks appropriately completed and duly executed, which Notice of Borrowing shall be received no later than 4:00 PM (New York City time) two (2) Business Days prior to the Reset Date or the date of the requested Advance, as applicable. On the date of such Subsequent Advance, as so agreed by Customers and Lehman, Lehman will make its Advance to Customers upon the satisfaction of the conditions precedent to such Advance set forth in Section 6 hereof. On the Reset Date, the Interest Rate for the requested Reset Term shall be quoted by Lehman in accordance with Section 2(c) hereof. Promptly after the Reset Date or the date of any Subsequent Advance, as applicable, Lehman will send to Customers' a written confirmation of such Subsequent Advance or Reset Term (each, a "Confirmation"), and Customers' acceptance of the related proceeds, if applicable, or failure to object in writing within one Business Day of receipt thereof, shall constitute Customers' agreement to the terms thereof. (c) The Reset Term for each Advance shall be one month (or, in the case of the initial Reset Term related to an Advance or Subsequent Advance, such shorter period of time from the date of such Advance or Subsequent Advance to the immediately succeeding Reset Date), unless otherwise requested in the Notice of Borrowing and confirmed by Lehman in the Confirmation. In the event the Reset Term of an Advance or Subsequent Advance is one month or less and the Reset Date or the date on which the Advance or Subsequent Advance is made, as applicable, is (i) within the first twelve (12) months from the date hereof, the interest rate with respect to such Advance or Subsequent Advance shall be the LIBOR Rate, as determined by Lehman, plus one hundred fifty (150) basis points, or (ii) after the first twelve (12) months from the date hereof, the interest rate with respect to such Advance or Subsequent Advance shall be the LIBOR Rate, plus one hundred seventy-five (175) basis points (either such rate, the "Interest Rate"). In the event that One-Month LIBOR is no longer publicly available, the Interest Rate shall be the Prime Rate plus fifty (50) basis points. In the event that the Customers request a Reset Term for an Advance or a Subsequent Advance which is longer than one month, such request shall be specified on the Notice of Borrowing, and the Interest Rate shall be the rate quoted by Lehman and agreed to by Customers (and as specified in the Confirmation). Notwithstanding the foregoing, Lehman shall be under no obligation to provide Customers with a quoted rate for a Reset Term in excess of one month and, if such quoted rate is not mutually agreeable among the Customers and Lehman or if no Notice of Borrowing is delivered prior to the then applicable Reset Date, the Reset Term in connection with the related Advances shall be one month. All computations -2- 3 of interest based on the LIBOR Rate or the rate quoted by Lehman at the Customers' request shall be made by Lehman on the basis of a year of 360 days for the actual number of days elapsed during the applicable Interest Period (including the first day and the last day of the Interest Period). All computations of interest based on the Prime Rate shall be made by Lehman on the basis of a year of 360 days and twelve 30-day months for the actual number of days elapsed during the applicable Interest Period (including the first day and the last day of the Interest Period). In the event that the principal and/or interest due relating to any Collateral remains due and unpaid for more than 59 days (the "Delinquent Collateral"), then the Interest Rate with respect to the amount of the outstanding Advances or portion thereof which are secured by such Delinquent Collateral shall be increased by one hundred fifty (150) basis points retroactively to the date such Delinquent Collateral became 59 days delinquent, until the Collateral is no longer Delinquent Collateral. Notwithstanding the above, Advances shall be deemed secured first by Collateral which is not Delinquent Collateral and second by Delinquent Collateral, to the fullest extent possible. Lehman shall notify the Customers in writing within 30 days following Lehman's actual notice that such Collateral has become Delinquent Collateral of the revised Collateral Value (including the Delinquent Collateral) and the amount of outstanding Advances which are secured by such Delinquent Collateral, as determined in accordance with the Relevant Agreements. Any payment to be made hereunder on a day other than a Business Day shall be made on the applicable Business Day determined in accordance with the provisions of the term "Interest Period" set forth herein and such extension or reduction of time shall in such case be included in the computation of payment of interest. (d) The Interest Rate for each Advance and Subsequent Advance shall Reset on each Reset Date in accordance with the terms of this Section 2 and in accordance with the provisions of the term "Interest Period" set forth herein. On each Reset Date, unless the Customers' have delivered the Notice of Borrowing in accordance with Sections 2(a) and (b), Customers shall be deemed to have elected to reset the Advance or Subsequent Advance for the Reset Term of one month at the Interest Rate applicable to such Reset Term in effect on the Reset Date (or if at such time One Month LIBOR is no longer publicly available, Customers shall be deemed to have elected to convert such Advance or Subsequent Advance into an Advance bearing interest at the Prime Rate plus fifty (50) basis points, effective as of the Reset Date). Lehman shall send a Confirmation to the Customers after each Reset Date specifying the new Interest Rate with respect to the related Advances or Subsequent Advances. (e) Customers agree to indemnify Lehman and to hold Lehman harmless from any loss or expense which Lehman may actually sustain or actually incur as a consequence of (i) default by the Customers in payment when due of the principal amount of or interest on any Advance, (ii) default by the Customers in making a borrowing after the Customers have delivered a Notice of Borrowing to Lehman in accordance with Section 2 hereof or (iii) prepayments of an Advance prior to a Reset Date or the Facility Termination Date by Customers. Lehman may fund any Advance in any manner that it in its sole discretion chooses. This Section 2(e) shall survive termination of this Facility and payment of all amounts outstanding under the Relevant Agreements. -3- 4 (f)(1) In the event that, from and after the date hereof, any change in any Requirement of Law or in the interpretation or application thereof or compliance by Lehman with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject Lehman to any tax of any kind whatsoever with respect to this Facility, any Advances made by it, or change to the basis of taxation of payments to Lehman in respect thereof (except for changes in the rate of tax on the overall net income of Lehman); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of Lehman which are not otherwise included in the determination of the LIBOR Rate or the quoted rate; or (iii) shall impose on Lehman any other condition; and the result of any of the foregoing is to increase the cost to Lehman, by any amount which Lehman deems to be material, of making or maintaining Advances or to reduce any amount receivable hereunder in respect thereof then, in any such case, the Customers shall promptly pay Lehman, within ten (10) days following demand therefor, any additional amounts necessary to compensate Lehman for such additional cost or reduced amount receivable. If Lehman becomes entitled to claim any additional amounts pursuant to this Section 2(f), it shall promptly notify the Customers of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Lehman to the Customers shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Facility and payment of the amounts outstanding under the Relevant Agreements. (2) In the event that Lehman shall have determined that any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by Lehman or any corporation controlling Lehman with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on Lehman's or such corporation's capital as a consequence of its obligations hereunder to a level below that which Lehman or such corporation could have achieved but for such change or compliance (taking into consideration Lehman's or such corporation's policies with respect to capital adequacy) by an amount deemed by Lehman to be material, then from time to time, after submission by Lehman to the Customers of a written request therefor (including calculations of any such additional amounts in reasonable detail), the Customers shall pay to Lehman such additional amount or amounts as will compensate Lehman for such reduction. (g) All payments made by the Customers under this Facility and the Relevant Agreements shall be made free and clear of, and without deduction or withholding -4- 5 for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on Lehman as a result of a present or former connection between the jurisdiction of the government or taxing authority imposing such tax and Lehman (excluding a connection arising solely from Lehman having executed, delivered or performed its obligations or received a payment under, or enforced, this Facility or the Relevant Agreements) or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, duties, charges, fee, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to Lehman hereunder or under the Relevant Agreements, the amounts so payable to Lehman shall be increased to the extent necessary to yield to Lehman (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Facility and the Relevant Agreements. Whenever any Taxes are payable by the Customers, as promptly as possible thereafter the Customers shall send to Lehman for its own account a certified copy of an original official receipt received by the Customers showing payment thereof. If the Customers fail to pay any Taxes when due to the appropriate taxing authority or fail to remit to Lehman the required receipts or other required documentary evidence, the Customers shall indemnify Lehman for any incremental taxes, interest or penalties that may become payable by Lehman as a result of any such failure. The agreements in this Section shall survive the termination of this Facility and the payment of the Promissory Note and all other amounts payable under the Relevant Agreements. The Customers agree that each transferee or assignee of Lehman or participant who purchases a participation in this Facility (collectively, the "Transferees") shall be entitled to the benefits of this Section 2(g) with respect to its interest in this Facility and the Advances outstanding from time to time as if it were "Lehman", provided that the Transferees shall not be entitled to receive any greater amount pursuant to this Section 2(g) than Lehman would have been entitled to receive in respect of the amount of the interest transferred by Lehman to such Transferees had no such transfer occurred. The Customers shall not be required to indemnify Lehman (or a Transferee), pursuant to this Section 2(g) to the extent that the Taxes are a result of the transfer of this Facility, to an office of Lehman (or such Transferee) in another jurisdiction, after the date Lehman (or such Transferee) obtains its interest hereunder. (h) The following terms have the meanings indicated when used herein: "Interest Period" means with respect to any Advance or Subsequent Advance: (a) initially the period commencing on the date such Advance is made and ending on the date immediately preceding the Reset Date set forth in the related Notice of Borrowing; (b) thereafter, each period commencing on the next preceding Reset Date applicable to such Advance and ending one month thereafter on the date immediately -5- 6 preceding the next Reset Date or the date specified in the related Notice of Borrowing, as applicable; provided that,: any Interest Period or Reset Date that would otherwise extend beyond the Facility Termination Date shall end on the Facility Termination Date or such date of final payment, as the case may be. "Interest Rate" means the rate of interest determined in accordance with Section 2(c) hereof. "LIBOR Rate" means with respect to each day during each Interest Period pertaining to an Advance, a rate per annum determined for such Interest Period in accordance with the following formula (rounded upwards to the nearest 1/100th of one percent): One-Month LIBOR __________________________________ 1.00 - LIBOR Reserve Requirements "LIBOR Reserve Requirements" means, with respect to Lehman or any Transferee, for any day, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day applicable to Lehman or such Transferee (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. "One-Month LIBOR" shall mean, with respect to each day during an Interest Period pertaining to an Advance or Subsequent Advance with a Reset Term of one month or less, a rate per annum equal to (a) in the case of an Advance or Subsequent Advance made on a date other than a Reset Date, the interpolated rate per annum based on such rates appearing at page 314 of the Telerate Screen on the first day of such initial Interest Period and with durations most closely approximating the number of days from such date to the next succeeding Reset Date, and (b) in the case of an Advance or Subsequent Advance made on a Reset Date or reset on a Reset Date, the rate appearing at page 3750 of the Telerate Screen as one-month LIBOR on the first day of such Interest Period, in each case determined at or about 11:00 a.m. (London, England time). If either such rate shall not be so quoted, the One-Month LIBOR shall be the rate per annum at which deposits in Dollars are offered by a prime bank in the London interbank market designated by Lehman at approximately 11:00 a.m. (London, England time) on such date and in an amount comparable to the amount of the Advance to be outstanding during such Interest Period. "Reset Date" shall mean the first day of a calendar month on which commercial banks are not required to be closed in New York, New York and/or in which dealings in U.S. dollar deposits are carried on in the London interbank market. -6- 7 "Telerate Screen" shall mean the screens broadcast by the Dow Jones Telerate Service, its successors and assigns. 3. Payment of Principal and Interest. Customers shall repay, and shall pay interest on, each Advance in accordance with the terms hereof and of the Promissory Note, it being understood that upon each disbursement of funds as set forth in Section 2 above Customers shall have effected a borrowing from Lehman hereunder and shall be indebted to Lehman for the principal amount thereof, plus interest thereon, in accordance with the terms hereof and of the Promissory Note. Interest accrued on an Advance shall be payable in arrears on the first Business Day of each month which such Advance is outstanding and upon the payment or prepayment in full thereof, except that interest payable on any amount not paid in full when due shall be payable from time to time on demand. Customers shall have the right to prepay any principal amount of any Advance without the prior written consent of Lehman on any Reset Date and Customers may prepay an Advance prior to the Reset Date of such Advance if Customers pay to Lehman on the date of such prepayment (the "Prepayment Date") the principal of such Advance together with the related interest on such Advance from the date of such Advance through and including the Prepayment Date plus the amounts due to Lehman pursuant to Section 2(e) hereof. 4. Procedures for Payments. Customers may, at their option repay each Advance made to Customers, but in any event shall pay the interest on each Advance, not later than 2:00 P.M. (New York City time) each Reset Date with respect to such Advance as specified in the related Confirmation, in United States Dollars and in same day funds, provided, however, no Reset Date for any Advance shall occur later than the date which is eighteen (18) months from the date hereof (the "Facility Termination Date"). Notwithstanding the foregoing, in the event that the Reset Term of an Advance is longer than one month, Customer shall pay to Lehman no later than 2:00 P.M. (New York City time) the accrued interest, on the first Business Day of each month during such Reset Term while such Advance is outstanding, based upon the applicable Interest Rate. 5. Representations, Warranties and Covenants. As of the date hereof, and as of the date of the initial Advance and each Subsequent Advance SLTLP and SLTLLC each hereby represents, warrants and covenants as follows: (a) SLTLP and SLTLLC are respectively, a limited partnership and limited liability company, are each duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and each is qualified to do business in its state of formation and is, to the extent required by applicable law, qualified to do business in its respective principal place of business. SLTLP is a 99% member of SLTLLC. (b) SLTLP's and SLTLLC's execution, delivery and performance of the Relevant Agreements are within SLTLP's and SLTLLC's organizational documents and organizational powers, have been duly authorized by all necessary organizational action, and do not contravene (i) SLTLP's and SLTLLC's organizational or operating documents or (ii) any regulation, law or contractual restriction binding on or affecting SLTLP and SLTLLC or -7- 8 SLTLP's or SLTLLC's Property. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for SLTLP's or SLTLLC's due execution, delivery and performance of the Relevant Agreements. (d) The Relevant Agreements are SLTLP's or SLTLLC's legal, valid and binding obligations enforceable against SLTLP and SLTLLC in accordance with their respective terms. (e) The available audited and unaudited consolidated balance sheets, statements of income and changes in financial condition of Starwood Lodging Trust (the "Guarantor") and its consolidated Subsidiaries (and in any case, SLTLP and SLTLLC) as of Guarantor's most recently completed fiscal year and quarter, are true, correct and fairly present Guarantor's and its consolidated Subsidiaries (and in any case, SLTLP and SLTLLC) financial condition and results of operations for the period then ended and are in accordance with generally accepted accounting principles consistently applied, and copies of such statements, together with the most recent opinion with respect to such audited statements of an independent public accounting firm, have been provided to Lehman, and since such date there has been no material adverse change in such financial condition, operations or business prospects. (f) There is no pending or, to the best of SLTLP's and SLTLLC's knowledge, threatened action or proceeding affecting SLTLP, SLTLLC or Guarantor before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition, operations or business prospects of SLTLP, SLTLLC or Guarantor. (g) SLTLP and SLTLLC are each duly licensed and qualified in every state where each transacts business to the extent required by applicable law. (h) The Relevant Agreements are not entered into in contemplation of insolvency or with intent to hinder, delay or defraud any of SLTLP's or SLTLLC's creditors. (i) The consummation of the transactions contemplated by the Relevant Agreements are in the ordinary course of business of SLTLP and SLTLLC. (j) Neither the execution and delivery of the Relevant Agreements, the servicing responsibilities by the Servicer or the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this or any of the Relevant Agreements, will in any material respect conflict with or result in a breach of any of the terms, conditions or provisions of the SLTLP's or SLTLLC's organizational or operating documents or any legal restriction or any agreement or instrument to which SLTLP or SLTLLC is now a party or by which they are bound, or constitute a default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which SLTLP and/or SLTLLC or its property is subject, or impair the ability of the -8- 9 Servicer to service the Mortgage Loans, or impair the value of the Mortgage Loans and the Participation Interest. (k) SLTLP and SLTLLC do not believe, nor do they have any reason or cause to believe, that they cannot perform each and every covenant contained in the Relevant Agreements. (l) There has occurred no Material Adverse Effect. (m) Customers are not in default with respect to any order, writ, injunction or decree of any Governmental Authority or, in violation of any law, statute, rule or regulation to which Customers or their Property are subject. (n) The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of Customers in connection with the negotiation, preparation or delivery of this Facility and the Relevant Agreements or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made at the time they were made, not misleading. All written information furnished after the date hereof by Customers to Lehman in connection with this Facility and the Relevant Agreements and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to either SLTLP or SLTLLC that, after due inquiry, could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the Relevant Agreements or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to Lehman for use in connection with the transactions contemplated hereby or thereby. (o) All of the covenants set forth in this Facility and in the Relevant Agreements required to be complied with as of the date hereof have been complied with. (p) No condition which would cause an Event of Default (as defined in the Promissory Note) exists. (q) The Guarantor is the sole general partner of SLTLP and is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and its principal place of business, and is substantially in compliance with applicable law and the Guarantor's execution, delivery and performance of the Relevant Agreements are within the Guarantor's organizational documents and organizational powers, have been duly authorized by all necessary organizational action, and do not contravene (i) the Guarantor's organizational or operating documents or (ii) any regulation, law or contractual restriction binding on or affecting the Guarantor or its Property. -9- 10 (r) The Guarantor is listed and in good standing on the New York Stock Exchange, is qualified as a REIT and currently is in compliance in all material respects with all provisions of the Code applicable to the qualification of the Guarantor as a REIT. (s) The Unfunded Liabilities of all Single Employer Plans do not in the aggregate have a Material Adverse Effect. Neither the Guarantor nor any other member of the Controlled Group has incurred, or is reasonably expected to incur, any withdrawal liability to Multiemployer Plans which in the aggregate have a Material Adverse Effect. The extent to which any Plan fails to comply with all applicable requirements of law and regulations does not have a Material Adverse Effect. Neither the Guarantor nor any other members of the Controlled Group has withdrawn from any Plan or any multiemployer plan as defined in Section 3(37) of ERISA or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan, which withdrawal, reorganization or termination would have a Material Adverse Effect. 6. Conditions Precedent. (a) Initial Advance. As conditions precedent to the making of the initial Advance (1) Customers shall reimburse Lehman for all of its costs and expenses in connection with the closing of this Facility on the date hereof; (2) Lehman shall have completed its due diligence review, (including without limitation, review of the Mortgage Loan documents and pay histories, and review of mortgagor, operating statements, appraisals, environmental and engineering reports with respect to the Collateral); (3) all of the representations, and warranties contained in the Relevant Agreements shall be accurate, true and correct in all material respects and there shall exist no Event of Default thereunder; and (4) subject to the Post Closing Agreement Lehman shall have received on or before the day of such Advance the following, in form and substance reasonably satisfactory to Lehman and duly executed by Customers, or the relevant Person as applicable: (i) The Facility Documents; (ii) Evidence that all other actions necessary or, in the reasonable opinion of Lehman, desirable to perfect and protect the security interests created by the Pledge Agreement have been taken including, but not limited to, state and county Uniform Commercial Code financing statement searches of SLTLP and SLTLLC and the Guarantor in the state of their formation; (iii) With respect to each Facility Document to which SLTLP, SLTLLC and the Guarantor is a party, a certified copy of resolutions of SLTLP, SLTLLC and Guarantor, as applicable, approving the Facility Documents and borrowings thereunder (either specifically or by general resolution approving borrowings of the type described in the Facility Documents), and all documents evidencing other necessary corporate action or governmental approvals as may be reasonably required in connection with the Relevant Agreements; (iv) A certificate of SLTLP's, SLTLLC's and Guarantor's secretary certifying the names, true signatures and titles of SLTLP's, SLTLLC's and Guarantor's officers duly authorized to request Advances and sign the Facility Documents and the other documents to be delivered thereunder; -10- 11 (v) An opinion letter, dated the date hereof, of counsel to Customers, reasonably satisfactory to Lehman; (vi) evidence in form and substance reasonably satisfactory to Lehman that the Guarantor and Starwood have completed the issuance of equity which yielded a minimum of two hundred million dollars ($200,000,000) of net proceeds; (vii) A certified copy of the organizational documents of SLTLP, SLTLLC and the Guarantor and satisfactory evidence of their due organization, existence and good standing certificates issued by their respective states of organization and in the states where required to conduct business; (viii) The most recent consolidated quarterly unaudited and annual audited financial statements of the Guarantor and its consolidated Subsidiaries, and, in any case, SLTLP and SLTLLC, which annual audited consolidated financial statements shall be certified without qualification by independent certified public accountants of recognized national standing pursuant to an audit conducted in accordance with generally accepted auditing standards; (ix) A Comfort Letter; (x) Customers have delivered the original certificates and copies of policies of insurance for the Mortgagors, Customers, and Servicer as required by and reasonably satisfactory to Lehman under the terms and conditions of the Relevant Agreements; (xi) Evidence, including, without limitation, the results of a search of the records of state and local recording offices responsible for the retention of filed financing statements in the state in which SLTLP and SLTLLC were organized, that all filings, registrations and recordings required to be filed under this Facility Agreement in order to create, in favor of Lehman, a perfected first-priority security interest in the Collateral hereunder with respect to which a security interest may be perfected by filing under the Uniform Commercial Code as then in effect in any applicable jurisdiction have been made; (xii) An executed amended and restated Intercreditor Agreement, dated as of March 23, 1995, by and between SLTLP and Starwood-Nomura Hotel Investors, L.P.; (xiii) A consent of the Minority Interest to the transfer of the Participation Interest to Lehman; (xiv) Title endorsements in favor of Lehman with respect to each Mortgage Loan; and -11- 12 (xv) Such other documents, instruments, opinions and assurances in form and substance reasonably satisfactory to Lehman and Lehman's counsel, as Lehman may reasonably require in connection herewith. By execution of this Facility Agreement Lehman confirms that conditions (1), (2) and (4) have been satisfied subject to the Post Closing Agreement. (b) Each Advance. As conditions precedent to making the Advance and each Subsequent Advance: (i) Customers shall reimburse Lehman for all of its reasonable out-of-pocket costs and expenses in connection with such Advance; (ii) Lehman shall have received on or before the day of such Advance, in form and substance reasonably satisfactory to Lehman and duly executed: (A) A Notice of Borrowing and the related additional Collateral Submission Summary; (B) If the additional Collateral, if any, being delivered in connection with such Advance is subject to a lien immediately prior to the Advance, a letter from such lienholder releasing the additional Collateral from such lien upon receipt of a stated sum which is less than or equal to the related Advance; and (C) Such other documents as Lehman may reasonably request; (iii) The Collateral satisfies in all material respects all of the representations and warranties set forth in Exhibit A and Exhibit B to the Pledge Agreement, as applicable; (iv) Lehman has completed its due diligence review, (including without limitation, review of the Mortgage Loan documents and pay histories, and review of mortgagor, operating statements, appraisals, environmental and engineering reports with respect to any additional Collateral) and has approved such additional Collateral; (v) No Event of Default shall have occurred and be continuing under any Facility Document; and (vi) The representations and warranties made by the Customers in Section 5 hereof, and by the Customers and the Guarantor in each of the other Relevant Agreements shall be true and correct in every material respect on and as of the date of the making of such Advance with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). -12- 13 7. Lehman Entitled to Rely. Lehman shall incur no liability to Customers in acting upon any request or other communication which Lehman believes to have been given or made by a person authorized to borrow on Customers' behalf, whether or not such person is listed on the certificate delivered pursuant to Section 6(a)(4)(iv) hereof. 8. Termination. This Facility shall remain in effect until the Facility Termination Date; but no such termination shall affect the Customers' obligations with respect to the Advances hereunder outstanding at the time of such termination. The Customers' obligation to indemnify Lehman pursuant to this Facility shall survive the termination hereof. 9. Assignment; Amendments, Etc. The Relevant Documents are not assignable by the Customers. The Relevant Agreements are assignable by Lehman in accordance with Section 13 hereof, provided, however, notwithstanding such assignment Lehman shall remain liable to Customers for all of Lehman's obligations in accordance with the terms of the Relevant Agreement. No amendment or waiver of any provision of this Facility or the Promissory Note nor consent to any departure by Customers therefrom, shall in any event be effective unless the same shall be in writing and signed by Lehman, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The Facility Documents supersede all previous letters of intent and other agreements between the parties that deal with the same subject matter. 10. Indemnification. Customers shall indemnify Lehman for all reasonable losses, costs and expenses which Lehman may sustain in connection with the enforcement of Lehman's rights under or the exercise of Lehman's remedies under the Relevant Agreements or any other instrument or document delivered in connection therewith. 11. Notices. All written communications hereunder shall be mailed, telecopied or delivered at the respective addresses as listed in the Custody Agreement or at such other address as shall be designated by a party in a written notice to the other parties. All such notices and communications shall be effective when delivered to the party to which such notice is to be given. 12. GOVERNING LAW; CONSENT TO JURISDICTION. THIS FACILITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. CUSTOMERS AND LEHMAN WAIVE TRIAL BY JURY. CUSTOMERS HEREBY IRREVOCABLY CONSENT TO THE NONEXCLUSIVE JURISDICTION OF ANY COURT OF THE STATE OF NEW YORK, OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, ARISING OUT OF OR RELATING TO THE RELEVANT AGREEMENTS IN ANY ACTION OR PROCEEDING. CUSTOMERS HEREBY SUBMIT TO PERSONAL JURISDICTION AND VENUE, IN THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, OVER ANY DISPUTES ARISING OUT OF OR RELATING TO THE RELEVANT AGREEMENTS. 13. Hypothecation or Pledge of Mortgage Loans and the Participation Interest. Nothing in the Facility Documents shall preclude Lehman from engaging in repurchase transactions with respect to the Mortgage Loans and Participation Interest or -13- 14 otherwise pledging, repledging, hypothecating, or rehypothecating the Mortgage Loans and/or Participation Interest, provided, however, notwithstanding such pledging, repledging, hypothecating, or rehypothecating the Mortgage Loans and/or Participation Interest Lehman shall remain liable to customers for all of Lehman's obligations in accordance with the terms of the Relevant Agreements. Nothing contained in this Facility shall obligate Lehman to segregate any Mortgage Loans or Participation Interest delivered to Lehman. Lehman agrees to indemnify Customers and hold Customers harmless from any loss or expense which Customers may actually sustain or actually incur (including without limitation reasonable and necessary legal fees and disbursements) in connection with any matters arising from misrepresentations or omissions by Lehman in connection with Lehman's participation of the Facility pursuant to this Section 13. 14. Commitment Fee. In the event both (i) the weighted average aggregate amount of all Advances outstanding during the first twelve months from the date hereof is less than thirty-five million dollars ($35,000,000) for a period of not less than four months and (ii) Lehman and the Customers fail to enter into the Line of Credit within twelve months of the date hereof, the Customers shall promptly pay Lehman a commitment fee (the "Commitment Fee") in the amount of one quarter of one percent (0.25%) of the Maximum Credit within five (5) Business Days of the expiration of such twelve month period. The provision in this Facility and the Relevant Agreements in connection with the Line of Credit are merely an expression of interest on the part of Lehman and nothing set forth herein and in the Relevant Agreements shall be deemed to be a commitment on the part of Lehman to provide such Line of Credit, or any obligation on the part of Customers to close the Line of Credit. 15. Purpose of Facility. Advances borrowed under this Facility may be utilized by the Customers to acquire hospitality properties, complete renovations and capital improvements to existing hotels, and for general corporate purposes, including, without limitation Distributions. 16. Concerning the Customers and the Guarantor. SLTLP and SLTLLC shall be jointly and severally liable for the obligations of the Customers hereunder and under the Relevant Agreements. The Guarantor's name of "Starwood Lodging Trust" is a designation of the Guarantor and its trustees (as trustees but not personally) under a Declaration of Trust dated August 15, 1969, as amended and restated as of June 6, 1988, as further amended on February 1, 1995, as further amended on June 19, 1995 and as the same may be further amended from time to time, and all persons dealing with the Guarantor shall look solely to the Guarantor's assets for the enforcement of any claims against the Guarantor, as the trustees, officers, agents and security holders of the Guarantor assume no personal liability for obligations entered into on behalf of the Guarantor, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. The foregoing shall govern all direct and indirect obligations of the Guarantor under this Facility Agreement. -14- 15 17. Counterparts. For the purpose of facilitating the execution of this Facility Agreement as herein provided and for other purposes, this Facility Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute and be one and the same instrument. -15- 16 If the terms of this Facility Agreement are satisfactory to Customers, please indicate Customers' agreement and acceptance thereof by signing this Facility Agreement and returning it to us whereupon this Facility Agreement shall become an agreement between us as of the date of this Facility Agreement. Very truly yours, Lehman Commercial Paper Inc. By:____________________________________ Name:_________________________________ Title:_________________________________ AGREED AND ACCEPTED: Customers: SLT REALTY LIMITED PARTNERSHIP By: STARWOOD LODGING TRUST its general partner By: ______________________________ Name: Jeffrey C. Lapin Title: President SLT REALTY COMPANY, L.L.C. By: SLT REALTY LIMITED PARTNERSHIP its 99% member By: STARWOOD LODGING TRUST its general partner By: ______________________________ Name: Jeffrey C. Lapin Title: President Telephone #: (310) 575-3900 Facsimile #: (310) 575-9143 -16- 17 NOTICE OF BORROWING NO. _______ Lehman Commercial Paper Inc. 3 World Financial Center 200 Vesey Street, 9th Floor New York, New York 10285 Attention: Mr. Frank Gilhool Facsimile (212) 528-8986 cc: Mr. John Regan [Date] Pursuant to the Mortgage Loan Funding Facility dated July 25, 1995 (as amended from time to time, the "Facility Agreement") between you and the undersigned, the undersigned hereby gives notice of its election to borrow from you an Advance and, in connection therewith, sets forth below the following information (all capitalized terms used herein shall have the meaning specified therefor in the Facility Agreement): 1. The principal amount of this Advance is $ _________. 2. The Interest Rate for this Advance shall equal the rate determined in accordance with Section 2(c) of the Facility Agreement. 3. The beginning Business Day of this Advance is _______, 199_. 4. The aggregate balance of all outstanding Advances (including this Advance) is $___________. 5. The [initial] Reset Date of this Advance is __________, 199_ and the next Reset Date thereafter is ________, 199__]. [6. This is a request for a different Reset Term relating to the prior Advance requested pursuant to Notice of Borrowing No. _______.] The undersigned hereby certifies that the following statements are true and correct on the date hereof and shall be true and correct on the date of the Advance requested herein, before and after giving effect thereto: A. Each of the representations and warranties contained in the Facility Agreement and the Pledge Agreement are true and correct in all material respects; B. Each of the covenants contained in the Facility Agreement and the Pledge Agreement have been complied with in all material respects. -17- 18 C. No Event of Default (as defined in the Promissory Note) has occurred and is continuing; and D. Customers have either satisfied all of the conditions precedent as specified in Section 6 of the Facility Agreement or the same have been waived by Lehman in writing. The Advance made pursuant hereto shall be made in connection with the items of Collateral (as defined in the Pledge Agreement) described in the undersigned's Collateral Submission Summary (as defined in the Pledge Agreement) No. ____ dated ___ _________, 199_. The Guarantor's name of "Starwood Lodging Trust" is a designation of the Guarantor and its trustees (as trustees but not personally) under a Declaration of Trust dated August 15, 1969, as amended and restated as of June 6, 1988, as further amended on February 1, 1995, as further amended on June 19, 1995 and as the same may be further amended from time to time, and all persons dealing with the Guarantor shall look solely to the Guarantor's assets for the enforcement of any claims against the Guarantor, as the trustees, officers, agents and security holders of the Guarantor assume no personal liability for obligations entered into on behalf of the Guarantor, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. The foregoing shall govern all direct and indirect obligations of the Guarantor under this Notice of Borrowing. Customers: SLT REALTY LIMITED PARTNERSHIP By: STARWOOD LODGING TRUST its general partner By: ______________________________ Name: Title: SLT REALTY COMPANY, L.L.C. By: SLT REALTY LIMITED PARTNERSHIP its 99% member By: STARWOOD LODGING TRUST its general partner By: ______________________________ Name: Title: Telephone #: ________________________ Facsimile #: _________________________ -18- 19 EXHIBIT 10.16 AMENDMENT NO. 1 TO THE MORTGAGE LOAN FUNDING FACILITY This is Amendment No. 1 ("Amendment No. 1"), dated as of October 31, 1995, by and between SLT Realty Limited Partnership ("SLTLP"), SLT Realty Company, L.L.C. ("SLTLLC," together with SLTLP, the "Customers") and Lehman Commercial Paper Inc. ("Lehman") to that certain Mortgage Loan Funding Facility, dated July 25, 1995, between the Customers and Lehman ("Facility Agreement"). W I T N E S S E T H WHEREAS, heretofore Lehman entered into that certain loan facility secured by certain mortgage loans and a participation interest ("Assets") subject to the Facility Agreement; WHEREAS, Lehman and the Customers wish to amend the Facility Agreement to increase the Maximum Credit thereunder as more particularly described herein. NOW THEREFORE, in consideration of the mutual premises and mutual obligations set forth herein, Lehman and the Customers agree as follows: 1. All capitalized terms not defined herein shall have the meaning assigned to them in the Facility Agreement. 2. The Facility Agreement shall be amended as follows: a) The Maximum Credit shall be increased from $44,600,000 to $71,000,000; b) In consideration for the commitment to increase the Maximum Credit under the Facility, Customers shall pay Lehman a one-time fee (the "Modification Fee") in the amount of 0.50% of $26,400,000 upon execution of this Amendment No. 1. 3. All other terms, conditions, and provisions of the Facility Agreement, as amended, are hereby affirmed and shall remain in full force and effect as written. 4. THIS AMENDMENT NO. 1 SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. 20 5. This Amendment No. 1 may be executed in one or more counterparts and by different parties hereto on separate counterparts, each of which, when so executed, shall constitute one and the same agreement. 6. This Amendment No. 1 shall inure to the benefit of and be binding upon Lehman and the Customers, and their respective successors and permitted assigns under the Facility Agreement. [Signatures Commence on Following Page] -2- 21 \ IN WITNESS WHEREOF, the parties have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. LEHMAN COMMERCIAL PAPER INC. By:__________________________________ Name:________________________________ Title:_______________________________ Customers: SLT REALTY LIMITED PARTNERSHIP By: STARWOOD LODGING TRUST its general partner By: _________________________________ Name: ___________________________ Title: __________________________ SLT REALTY COMPANY, L.L.C. By: SLT REALTY LIMITED PARTNERSHIP its 99% member By: STARWOOD LODGING TRUST its general partner By: _________________________________ Name: ___________________________ Title: __________________________ Telephone #: (310) 575-3900 Facsimile #: (310) 575-9143 -3- EX-10.17 8 COLLATERAL SUBSTITUTION AGREEMENT 1 EXHIBIT 10.17 COLLATERAL SUBSTITUTION AGREEMENT THIS COLLATERAL SUBSTITUTION AGREEMENT (this "Agreement"), dated as January 4, 1996, by and among Lehman Commercial Paper Inc. ("Lehman"), SLT Realty Limited Partnership ("SLTLP"), and SLT Realty Company, L.L.C. ("SLTLLC," together with SLTLP, the "Customers"). W I T N E S S E T H: WHEREAS, Lehman has extended to the Customers that certain mortgage loan funding facility secured by certain mortgage loans and a participation interest ("Assets") pursuant to that certain Mortgage Loan Funding Facility, dated as of July 25, 1995, between the Customers and Lehman, as amended by that certain Amendment No. 1 to the Mortgage Loan Funding Facility, dated as of October 31, 1995, between the Customers and Lehman (the "Facility Agreement") and that certain Pledge Agreement, dated as of July 25, 1995, between the Customers and Lehman, as amended by that certain Amendment No. 1 to the Pledge Agreement, dated as of October 31, 1995, between the Customers and Lehman (the "Pledge Agreement"); WHEREAS, in connection with the Facility Agreement and the Pledge Agreement, the Customers, Lehman and State Street Bank and Trust Company of California, N.A. (the "Custodian") entered into that certain Mortgage Loan Funding Program Tri-Party Custody Agreement, dated July 25, 1995, among the Customers, Lehman and the Custodian, as amended by that certain Amendment No. 1 to Tri-Party Custody Agreement, dated as of October 31, 1995, among the Customers, Lehman and the Custodian, as further amended on the date hereof by that certain Amendment No. 2 to Tri-Party Custody Agreement, dated as of the date hereof, among the Customers, Lehman and the Custodian (the "Custody Agreement") pursuant to which the Custodian is holding certain documents in custody for the benefit of Lehman; WHEREAS, all Advances (as defined in the Pledge Agreement) made by Lehman pursuant to the Facility Agreement are evidenced by that certain Promissory Note, dated July 25, 1995, in the original principal amount of $44,600,000, as increased, amended and restated by that certain Amended and Restated Promissory Note, dated as of October 31, 1995, in the amount of $71,000,000 (as amended and restated, the "Promissory Note") WHEREAS, on the date hereof the Customers intend to restructure the ownership and debt structure on the Mortgaged Property commonly known as The Grand Hotel in Washington D.C. (the "Grand Hotel"), by having SLTLP purchase the Grand Hotel and release the mortgages presently encumbering the Grand Hotel which have been previously assigned to Lehman (the "Old Mortgages"). SLTLP shall then mortgage the Grand Hotel to Lehman to serve as security for all present and future Advances made by Lehman to the Customers evidenced by the Promissory Note up to an amount of $29,360,000 (the "New Mortgage"). The New Mortgage is also referred to herein as the "Deed of Trust"); 2 WHEREAS, in connection with the acquisition of the Grand Hotel by SLTLP, SLC Operating Limited Partnership ("SLC"), an affiliate of the Customers, shall purchase the furniture, fixtures and equipment relating to the Grand Hotel and operate and manage the Grand Hotel on behalf of SLTLP pursuant to an operating lease agreement, dated December 28, 1995 (including all amendments, modifications, supplements, restatements and renewals thereto, the "Operating Agreement"). In connection with the purchase of the furniture, fixtures and equipment of the Grand Hotel by SLC, SLC executed and delivered to SLTLP a secured demand promissory note, dated January 4, 1996 in the amount of $3,640,000 (the "SLC Note") and a leasehold deed of trust (the "Leasehold Deed of Trust") to secure the SLC Note, and SLTLP shall pledge to Lehman the Operating Agreement, Leasehold Deed of Trust and SLC Note as additional security for all present and future Advances made by Lehman to the Customers evidenced by the Promissory Note up to an amount of $3,640,000; and WHEREAS, Lehman and the Customers wish to substitute the New Mortgage and the pledge of the Operating Agreement, the Leasehold Deed of Trust and SLC Note for the Old Mortgages and have the Customers restate the representations and warranties contained in the Facility Agreement and the Pledge Agreement. NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Customers and Lehman agree as follows: 1. All capitalized terms not otherwise defined herein shall have the meaning set forth in the Pledge Agreement. 2. This Agreement shall be deemed an amendment to the Facility Agreement and the Pledge Agreement, as applicable, in accordance with the terms and provisions set forth herein. 3. The Customers and Lehman acknowledge and agree that the documents listed on the "Checklist for Custodian (The Grand Hotel - Washington, D.C.)" attached to the Initial Certification from the Custodian, dated October 27, 1995 (the "Old Grand Hotel Documents") shall no longer serve as security for any Advance made by Lehman to the Customers which was secured in part by the Grand Hotel and evidenced by the Promissory Note (the "Grand Hotel Advance"). 4. The Customers and Lehman acknowledge and agree that the New Mortgage, from SLTLP for the benefit of Lehman, dated as of the date hereof, the Leasehold Deed of Trust, the Operating Agreement and the SLC Note shall serve as security for the Grand Hotel Advance and replace the Old Mortgages and the Old Grand Hotel Documents as security for the Grand Hotel Advance. The Customers and Lehman also acknowledge and agree that in addition to the New Mortgage, the Operating Agreement, the Leasehold Deed of Trust and the SLC Note, SLTLP has executed with Lehman an Assignment of Leases and Rents, UCC-1 financing statements, and such other documents as listed on Exhibit A attached hereto as Lehman deemed necessary as replacement security for the Old Mortgages and the Old Grand Hotel Documents and SLTLP has obtained a Mortgagee's title insurance policy in -2- 3 an amount equal to the amount of the New Mortgage (the documents referred to in this Paragraph 4 are hereinafter collectively referred to as, the "New Grand Hotel Documents"). 5. Notwithstanding anything to the contrary set forth in the Pledge Agreement, on the date hereof Lehman has instructed the Custodian to release to the Customers the Old Grand Hotel Documents and Lehman, the Customers and the Custodian have amended the Custody Agreement to provide for the New Grand Hotel Documents to be held by the Custodian under the Custody Agreement. 6. The Facility Agreement is hereby amended by adding the following sentence immediately following the first sentence of Section 1 of the Facility Agreement: "The aggregate principal amount of Advances with respect to the Grand Hotel shall not exceed $12,750,000 at any one time." 7. The Facility Agreement is hereby amended by adding the following paragraph immediately following Section 6(b)(vi) of the Facility Agreement: "(vii) In the event that at the time of any Advance, the outstanding Advances are less than $33,000,000, then, if required by Lehman in its sole discretion, Lehman shall have received an endorsement to the title policy obtained in connection with the New Mortgage and the Leasehold Deed of Trust on the Grand Hotel that, as of the date of the Advance, there are no Liens on the Grand Hotel other than the Liens existing on the date hereof and listed on the respective title policy issued on the date hereof. Notwithstanding the foregoing, in the event that at the time of any Advance, the outstanding Advances are less than $33,000,000, Lehman may elect, in its sole discretion, in lieu of the foregoing, to perform searches of title (a "Title Search") to the Grand Hotel on a quarterly basis at Customers' sole cost and expense, provided that at the time of each Title Search the amount of outstanding Advances are less than $33,000,000. The results of all such Title Searches shall be satisfactory to Lehman in its reasonable discretion and all Title Searches shall be conducted by search firms designed by Lehman." 8. For purposes of the definition of "Collateral Value" and "Market Value" set forth in the Pledge Agreement, the term "Collateral" as used in such definitions shall apply only to Mortgage Loans and Participation Interest. 9. The Pledge Agreement is hereby amended by deleting the definition of "Facility Documents" in its entirety and substituting the following definition in lieu thereof: ""Facility Documents" means the Facility Agreement; this Pledge Agreement; the Promissory Note; the Guaranty; the Reaffirmation of Guaranty dated as of October 31, 1995 by the Guarantor in favor of Lehman; the Reaffirmation of Guaranty dated as of January 4, 1996 by the Guarantor in favor of Lehman; the Letter Agreement; the Custody Agreement; the Post-Closing Agreement; the Post-Closing Agreement dated as of October 31, 1995 among Lehman and the Customers; the Post-Closing Agreement dated as of January 4, 1996 among Lehman and the Customers; the Collateral Substitution Agreement; Deed of Trust and Security -3- 4 Agreement from SLTLP for the benefit of Lehman dated January 4, 1996; Security Agreement dated January 4, 1996 by and between SLTLP and Lehman; Leasehold Deed of Trust and Security Agreement from SLC Partnership to SLTLP dated January 4, 1996; Assignment of Leases and Rents from SLTLP for the benefit of Lehman dated January 4, 1996; Lease Agreement dated as of December 28, 1995 between SLTLP and SLC Partnership; Assignment of Franchise Agreements, Management Agreements, Agreements, Permits and Contracts dated January 4, 1996 by and between SLTLP and Lehman; Environmental Indemnity Agreement dated as of January 4, 1996 by SLTLP and the Guarantor to Lehman; Consent to Assignment of Rents, Subordination, Estoppel and Attornment Agreement dated January 4, 1996 by and between SLC Partnership and Lehman; Assignment of Leases and Rents from SLC Partnership to SLTLP dated January 4, 1996; Secured Demand Promissory Note dated January 4, 1996 in the amount of $3,640,000 from SLC Partnership, as borrower, to SLTLP, as lender; Security Agreement dated January 4, 1996 between SLC Partnership and SLTLP; Assignment of Franchise Agreements, Management Agreements, Agreements, Permits and Contracts dated January 4, 1996 by and between SLC Partnership and SLTLP; UCC financing statements; title insurance policy with respect to the Grand Hotel in an amount equal to the amount of the New Mortgage." 10. The Pledge Agreement is hereby amended by adding the following paragraph to Section 2.1 of the Pledge Agreement immediately following the end of Section 2.1 thereof: ""Collateral" shall also mean all right, title and interest of Customers in and to the mortgaged property commonly known as The Grand Hotel in Washington, D.C., as further described in the New Mortgage (the "Grand Hotel"), the New Grand Hotel Documents and all of the Customers' right, title and interest in, under and to the items listed in Section 2.1 (a)-(f) related thereto." 11. The Pledge Agreement is hereby amended by deleting Section 2.2 of the Pledge Agreement in its entirety and substituting the following paragraph in lieu thereof: "2.2 Release of Collateral. Upon the full satisfaction of all outstanding principal, accrued interest on, and all other Obligations owing with respect to any Advance and so long as no Event of Default has occurred and is continuing, but subject to the rights of any holder of a lien on the items of Collateral of which Lehman has notice, Lehman shall, and shall direct Custodian to, release the Collateral related to such Advance. Upon receipt of a written request from the Customers, and provided no Event of Default has occurred and is continuing Lehman shall direct the Custodian to release Mortgage Loans, Participation Interest and/or the New Grand Hotel Documents, as the case may be, identified in such request prior to the Facility Termination Date or Reset Date of an Advance provided that (a) upon release of such Collateral, the aggregate outstanding Advances shall not exceed the sum of (i) 85% of Collateral Value with respect to the Mortgage Loans and Participation Interest and (ii), with respect to the Grand Hotel, 50% of the most recent appraised value of the Grand Hotel according to Lehman's internal valuation most recently delivered or prepared (the "Loan-to-Value Ratio") (the amount calculated in Section 2.2 (a)(ii) is hereinafter referred to as the -4- 5 "Grand Hotel Advance Limit") and (b) the sum of 85% of the aggregate Collateral Value and the Grand Hotel Advance Limit remaining is at least $10,000,000 (unless the Facility is paid in full). So long as an Event of Default has occurred and is continuing, neither Lehman nor the Custodian shall be required to release any Collateral unless and until either, (i) the entire outstanding balance of the related Mortgage Loan or Participation Interest, or the aggregate principal amount of the SLC Note and the New Mortgage on the Grand Hotel, as the case may be, requested to be released is paid in full and the requirements of Section 2.2(a) and (b) continue to be met notwithstanding the foregoing or (ii) all outstanding principal, accrued interest on, and all other Obligations owing with respect to any outstanding Advances has been fully satisfied. Notwithstanding anything to the contrary set forth herein, Lehman shall not, and shall not direct the Custodian to, release the SLC Note until the Customers have fully complied with the provisions of this Section 2.2 and the terms of Sections 3 and 4 of the Facility Agreement." 12. The Pledge Agreement is hereby amended by adding the following paragraph at the end of Section 4.12(c) of the Pledge Agreement : "With respect to the Grand Hotel, SLTLP shall also provide Lehman with quarterly and annual operating statements for the Grand Hotel, separately disclosing the amounts paid under the Operating Agreement with respect to the Grand Hotel and including a comparison and reconciliation with the most recent Annual Operating Budget (as defined below), within 45 days following the end of each calendar quarter, certified by SLTLP." 13. The Pledge Agreement is hereby amended by adding the following section to Section 4.12 of the Pledge Agreement immediately following Section 4.12(e) thereof: "(f) an annual operating and capital budget for the Grand Hotel (the "Annual Operating Budget"), including cash flow projections for the upcoming year, presented on a monthly basis consistent with the quarterly and annual operating statement referred to in clause (c) above at least 15 days prior to the start of each calendar year." 14. The Pledge Agreement is hereby amended by deleting the first sentence of the first paragraph of Section 4.19 of the Pledge Agreement in its entirety and substituting the following sentence in lieu thereof: "At any time any Advance is made or shall be outstanding, Customers shall at all times maintain the aggregate amount of all Advances in an amount not to exceed the sum of (i) 85% of Collateral Value with respect to the Mortgage Loans and Participation Interest and (ii), with respect to the Grand Hotel, the Grand Hotel Advance Limit (such amount, the "Advance Threshold")." 15. The Pledge Agreement is hereby amended by deleting the third sentence of the first paragraph of Section 4.19 of the Pledge Agreement in its entirety and substituting the following sentence in lieu thereof: -5- 6 "In the event the outstanding Advances exceed the Advance Threshold, the Customers shall cure such excess within five (5) Business Days from receipt of written notice by Customers from Lehman by delivering to Lehman additional Collateral acceptable to Lehman or cash." 16. The Pledge Agreement is hereby amended by adding the following section to Article 4 of the Pledge Agreement "4.20 Replacement Reserve. The Customers shall spend, or cause to have spent, a minimum spending amount (the "Minimum Spending Requirement") for the Grand Hotel equal to 4% of the annual Gross Revenues (as defined below) from the Grand Hotel per annum on repair, replacement and maintenance of the Grand Hotel during the applicable calendar year, which Minimum Spending Requirement for calendar year 1996 shall be expended to complete the work recommended by Oldham & Seltz in the Architecture and Engineering Report, dated as of December 1, 1995, prepared by Oldham & Seltz, a copy of which is attached hereto as Exhibit B. The Minimum Spending Requirement for each calendar year shall be determined annually by Lehman, and shall be based on Gross Revenues for the immediately preceding calendar year. In the event the Customers have spent more than the Minimum Spending Requirement in any calendar year, Customers may apply such excess, up to an amount equal to 2% of the annual Gross Revenues from the Grand Hotel to reduce the amount of the Minimum Spending Requirement that must be spent in the immediately succeeding calendar year. The Customers shall deliver evidence reasonably satisfactory to Lehman no more frequently than monthly, but at least quarterly, of the portion of the Minimum Spending Requirement that has been spent; such evidence shall include copies of paid invoices or other receipts for work done or materials provided and such other information as reasonably requested by Lehman. For purposes of this Section 4.20, Gross Revenues shall mean all income, rents, room rates, additional rents, revenues, issues and profits and other items including without limitation, all revenues and credit card receipts collected from guest rooms, restaurants, meeting rooms, bars, mini-bars, banquet rooms, recreation facilities, vending machines and concessions derived from the customary operation of the Grand Hotel." 17. As of the date hereof, the Customers hereby confirm, ratify and restate in their entirety the representations and warranties contained in Section 5 of the Facility Agreement and in Article 3 of the Pledge Agreement. 18. The Customers acknowledge and agree that the Facility Documents are the valid and binding obligation of the Customers, enforceable in accordance with their respective terms and the Customers agree to be bound by all covenants and agreements contained in the Facility Documents, as modified or amended hereby. 19. The Customers acknowledge and agree that a default hereunder shall constitute an Event of Default (as defined in the Promissory Note) under the Facility Documents. 20. The Customers acknowledge and agree that an Event of Default under the Facility Documents shall constitute a default hereunder. -6- 7 21. All other terms, conditions, and provisions of the Facility Agreement and the Pledge Agreement not modified or amended herein are hereby affirmed and shall remain in full force and effect as written. 22. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. 23. This Agreement may be executed in one or more counterparts and by different parties hereto on separate counterparts, each of which, when so executed, shall constitute one and the same agreement. 24. This Agreement shall inure to the benefit of and be binding upon Lehman and the Customers, and their respective successors and permitted assigns under the Facility Agreement and the Pledge Agreement. 25. No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement or the New Grand Hotel Documents, nor consent to any departure by the Customers 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 the Customers, shall entitle the Customers to any other or future notice or demand in the same, similar or other circumstances. 26. Neither any failure nor any delay on the part of Lehman in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, or under the New Grand Hotel Documents, 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. 27. SLTLP and SLTLLC shall be jointly and severally liable for the obligations of the Customers hereunder. 28. The Guarantor's name of "Starwood Lodging Trust" is a designation of Starwood Lodging Trust and its trustees (as trustees but not personally) under a Declaration of Trust dated August 15, 1969, as amended and restated as of June 6, 1988, as further amended on February 1, 1995, as further amended on June 19, 1995 and as the same may be further amended from time to time, and all persons dealing with the Guarantor shall look solely to the Guarantor's assets for the enforcement of any claims against the Guarantor, as the trustees, officers, agents and security holders of the Guarantor assume no personal liability for obligations entered into on behalf of the Guarantor, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. The foregoing shall govern all direct and indirect obligations of the Guarantor under this Agreement. [Signatures commence on following page] -7- 8 IN WITNESS WHEREOF, the parties have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. LEHMAN COMMERCIAL PAPER INC. By:________________________________________________ Name:______________________________________________ Title:_____________________________________________ Customers: SLT REALTY LIMITED PARTNERSHIP By: STARWOOD LODGING TRUST its general partner By: ___________________________________________ Name: _____________________________________ Title: ____________________________________ SLT REALTY COMPANY, L.L.C. By: SLT REALTY LIMITED PARTNERSHIP its 99% member By: STARWOOD LODGING TRUST its general partner By: ___________________________________________ Name: _____________________________________ Title: ____________________________________ Telephone #: (310) 575-3900 Facsimile #: (310) 575-9143 -8- 9 EXHIBIT A Deed of Trust and Security Agreement, from SLT Realty Limited Partnership for the benefit of Lehman Commercial Paper Inc., dated January 4, 1996 Security Agreement, dated January 4, 1996, by and between SLT Realty Limited Partnership and Lehman Commercial Paper Inc. Assignment of Leases and Rents, from SLT Realty Limited Partnership for the benefit of Lehman Commercial Paper Inc. Assignment of Franchise Agreements, Management Agreements, Agreements, Permits and Contracts, dated January 4, 1996, by and between SLT Realty Limited Partnership and Lehman Commercial Paper Inc. Environmental Indemnity Agreement, dated as of January 4, 1996, by SLT Realty Limited Partnership and Starwood Lodging Trust to Lehman Commercial Paper Inc. Consent to Assignment of Rents, Subordination, Estoppel and Attornment Agreement, dated January 4, 1996, by and between SLC Operating Limited Partnership and Lehman Commercial Paper Inc. Leasehold Deed of Trust and Security Agreement, from SLC Operating Limited Partnership to SLT Realty Limited Partnership, dated January 4, 1996 Assignment of Leases and Rents, from SLC Operating Limited Partnership to SLT Realty Limited Partnership Secured Demand Promissory Note, dated January 4, 1996, in the amount of $3,640,000. Security Agreement, dated January 4, 1996, between SLC Operating Limited Partnership and SLT Realty Limited Partnership Assignment of Franchise Agreements, Management Agreements, Agreements, Permits and Contracts, dated January 4, 1996, by and between SLC Operating Limited Partnership and SLT Realty Limited Partnership Lease Agreement, dated as of December 28, 1995, between SLT Realty Limited Partnership and SLC Operating Limited Partnership UCC financing statements Title insurance policy -9- 10 EXHIBIT B Architecture and Engineering Report Dated December 1, 1995 prepared by Oldham & Seltz -10- EX-10.18 9 AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.18 ================================================================================ AMENDED AND RESTATED LINE OF CREDIT AGREEMENT between SLT REALTY LIMITED PARTNERSHIP and STARWOOD LODGING TRUST and BANKERS TRUST COMPANY, AS COLLATERAL AGENT FOR THE BENEFIT OF THE SENIOR LENDERS, and LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., INDIVIDUALLY AND AS AGENT FOR ONE OR MORE CO-LENDERS Dated as of October __, 1995 Initial Facility Amount of $75,000,000.00 Maximum Facility Amount of $135,000,000.00 ================================================================================ 2 TABLE OF CONTENTS
SECTION 1. DEFINITIONS.......................................................... 2 Section 1.1 Definitions...................................................... 2 SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT FACILITY........................ 26 Section 2.1 Advances....................................................... 26 Section 2.2 Notice of Borrowing............................................ 27 Section 2.3 Disbursement of Funds.......................................... 28 Section 2.4 The Note....................................................... 29 Section 2.5 Interest....................................................... 30 Section 2.6 Interest Periods............................................... 31 Section 2.7 Minimum Amount of Eurodollar Portions.......................... 32 Section 2.8 Conversion or Continuation..................................... 32 Section 2.9 Voluntary Reduction of Maximum Facility Amount; Termination of Maximum Facility Amount..................................... 33 Section 2.10 Swing Line Advances............................................ 34 Section 2.11 Voluntary Prepayments.......................................... 35 Section 2.12 Mandatory Prepayments.......................................... 36 Section 2.13 Application of Payments and Prepayments........................ 36 Section 2.14 Method and Place of Payment.................................... 36 Section 2.15 Fees........................................................... 37 Section 2.16 Interest Rate Unascertainable, Increased Costs, Illegality..... 37 Section 2.17 Funding Losses................................................. 39 Section 2.18 Increased Capital.............................................. 40 Section 2.19 Taxes.......................................................... 40 Section 2.20 Use of Proceeds................................................ 42 Section 2.21 Release and Substitution of Collateral......................... 42 Section 2.22 Increasing Available Facility Amount........................... 50 Section 2.23 Breach of Available Borrowing Base Covenant or Loan to Value Ratio Covenant................................................. 51 Section 2.24 Adjustment of Allocated Loan Amounts upon Addition of New Property....................................................... 52 Section 2.25 Maximum Number of Transactions................................. 52 Section 2.26 Increasing Allocable Loan Amounts.............................. 52 SECTION 3. CONDITIONS PRECEDENT................................................. 53 Section 3.1 Conditions Precedent to the Initial Advance.................... 53 Section 3.2 Conditions Precedent to All Advances of the Loan............... 61 Section 3.3 Acceptance of Borrowings....................................... 63 Section 3.4 Sufficient Counterparts........................................ 63
3 -ii- SECTION 4. REPRESENTATIONS AND WARRANTIES....................................... 64 Section 4.1 Corporate/Partnership Status................................... 64 Section 4.2 Corporate/Partnership Power and Authority...................... 64 Section 4.3 No Violation................................................... 64 Section 4.4 Litigation..................................................... 65 Section 4.5 Financial Statements: Financial Condition; etc................. 65 Section 4.6 Solvency....................................................... 65 Section 4.7 Material Adverse Change........................................ 65 Section 4.8 Use of Proceeds; Margin Regulations............................ 66 Section 4.9 Governmental Approvals......................................... 66 Section 4.10 Security Interests and Liens................................... 66 Section 4.11 Tax Returns and Payments....................................... 66 Section 4.12 ERISA.......................................................... 66 Section 4.13 Intentionally Omitted.......................................... 67 Section 4.14 Representations and Warranties in Loan Documents............... 68 Section 4.15 True and Complete Disclosure................................... 68 Section 4.16 Ownership of Real Property; Existing Security Instruments...... 68 Section 4.17 No Default..................................................... 68 Section 4.18 Licenses, etc.................................................. 68 Section 4.19 Compliance With Law............................................ 69 Section 4.20 Brokers........................................................ 69 Section 4.21 Judgments...................................................... 69 Section 4.22 Property Manager............................................... 69 Section 4.23 Assets of the REIT............................................. 70 Section 4.24 REIT Status.................................................... 70 Section 4.25 The Partnership................................................ 70 Section 4.26 HIC............................................................ 70 Section 4.27 Intercompany Debt.............................................. 70 Section 4.28 Personal Property.............................................. 70 Section 4.29 Operations..................................................... 70 Section 4.30 Stock.......................................................... 70 Section 4.31 Ground Leases.................................................. 70 Section 4.32 Survival....................................................... 71 SECTION 5. AFFIRMATIVE COVENANTS................................................ 71 Section 5.1 Financial Reports.............................................. 71 Section 5.2 Books, Records and Inspections................................. 74 Section 5.3 Maintenance of Insurance....................................... 74 Section 5.4 Taxes.......................................................... 74 Section 5.5 Corporate Franchises; Conduct of Business...................... 75
4 -iii- Section 5.6 Compliance with Law............................................ 75 Section 5.7 Performance of Obligations..................................... 75 Section 5.8 Stock.......................................................... 76 Section 5.9 Maintenance of Personal Property............................... 76 Section 5.10 Maintenance of Properties...................................... 76 Section 5.11 Compliance with ERISA.......................................... 76 Section 5.12 Settlement/Judgment Notice..................................... 77 Section 5.13 Acceleration Notice............................................ 78 Section 5.14 Lien Searches; Title Searches.................................. 78 Section 5.15 Available Borrowing Base Covenant.............................. 78 Section 5.16 Minimum Net Worth.............................................. 79 Section 5.17 Total Indebtedness............................................. 80 Section 5.18 Coverage Ratios................................................ 80 Section 5.19 Replacement Reserve and Deferred Maintenance Reserve........... 80 Section 5.20 Loan to Value Ratio............................................ 82 Section 5.21 Manager........................................................ 84 Section 5.22 Further Assurances............................................. 84 Section 5.23 REIT Status.................................................... 85 Section 5.24 Mortgage Covenants............................................. 85 Section 5.25 Appraisals..................................................... 85 Section 5.26 Maintenance of Control......................................... 86 Section 5.27 Maintenance of Intercompany Debt............................... 86 Section 5.28 Transfer of Licenses........................................... 86 SECTION 6. NEGATIVE COVENANTS................................................... 87 Section 6.1 INTENTIONALLY DELETED.......................................... 87 Section 6.2 INTENTIONALLY DELETED.......................................... 87 Section 6.3 Liens.......................................................... 87 Section 6.4 Restriction on Fundamental Changes............................. 88 Section 6.5 Transactions with Affiliates................................... 88 Section 6.6 Plans.......................................................... 88 Section 6.7 Payout Ratios.................................................. 88 Section 6.8 Operating Leases............................................... 89 Section 6.9 Borrower's Partnership Agreement............................... 89 SECTION 7. EVENTS OF DEFAULT.................................................... 89 Section 7.1 Events of Default.............................................. 89 Section 7.2 Rights and Remedies............................................ 93 SECTION 8. INTENTIONALLY DELETED................................................ 94
5 -iv- SECTION 9. MISCELLANEOUS........................................................ 94 Section 9.1 Payment of Lender's, Collateral Agent's and Co-Lender's Expenses, Indemnity, etc....................................... 94 Section 9.2 Notices........................................................ 96 Section 9.3 Successors and Assigns; Participations; Assignments............ 98 Section 9.4 Amendments and Waivers......................................... 98 Section 9.5 No Waiver; Remedies Cumulative................................. 99 Section 9.6 Governing Law; Submission to Jurisdiction...................... 99 Section 9.7 Confidentiality; Disclosure of Information..................... 99 Section 9.8 Recourse....................................................... 100 Section 9.9 Sale of Loan, Co-Lenders, Participations and Servicing......... 101 Section 9.10 Borrower's and REIT's Assignment............................... 105 Section 9.11 Counterparts................................................... 105 Section 9.12 Effectiveness.................................................. 106 Section 9.13 Headings Descriptive........................................... 106 Section 9.14 Marshaling; Recapture.......................................... 106 Section 9.15 Severability................................................... 106 Section 9.16 Survival....................................................... 106 Section 9.17 Domicile of Loan Portions...................................... 106 Section 9.18 Intentionally Omitted.......................................... 106 Section 9.19 Calculations; Computations..................................... 106 Section 9.20 WAIVER OF TRIAL BY JURY........................................ 107 Section 9.21 No Joint Venture............................................... 107 Section 9.22 Estoppel Certificates.......................................... 107 Section 9.23 No Other Agreements............................................ 107 Section 9.24 Controlling Document........................................... 108 Section 9.25 No Benefit to Third Parties.................................... 108 Section 9.26 Joint and Several.............................................. 108
6 -v- SCHEDULES Schedule 1 Allocated Loan Amounts Schedule 2 Real Property Assets Schedule 2A Pool 1 Real Property Assets Schedule 2B Pool 2 Real Property Assets (California) Schedule 2C Pool 3 Real Property Assets (Washington) Schedule 2D Pool 4 Real Property Assets (Nevada) Schedule 3 Franchise Agreements Schedule 4 Required Estoppel Certificates Schedule 5 Litigation Schedule 6 Employee Benefit Plans Schedule 7 Liens Schedule 8 Ground Leases Schedule 9 Intercompany Debt Schedule 10 Operating Leases (including Vagabond Leases) Schedule 11 Permitted Financing per Real Property Asset Schedule 11A Lodge Net licensing agreements Schedule 12 Management Agreements Schedule 13 REIT Business Operations Schedule 13A Corporation Business Operations Schedule 14 Management Fees and Franchise Fees Schedule 15 Certified Copies of Leases Schedule 16 Initial Minimum Spending Requirement and Minimum Spending Requirement Schedule 17 Deferred Maintenance Spending Requirement and Deferred Maintenance Reserve Schedule 18 Liquor Licenses EXHIBITS Exhibit A-1 Notice of Borrowing Exhibit A-2 Notice of Swing Line Advance Exhibit B-1 Form of Note Exhibit B-2 Form of Florida Note Exhibit B-3 Form of Swing Line Note Exhibit C-1 Notice Requesting Short Interest Period Exhibit C-2 Notice of Conversion or Continuation Exhibit D Notice of Voluntary Reduction of Maximum Facility Amount Exhibit E Notice of Voluntary Prepayment Exhibit F Request For Additional Collateral Exhibit G Form of Security Instrument 7 -vi- Exhibit H Form of Assignment of Leases and Rents Exhibit I Form of Environmental Indemnity Exhibit J Form of Swing Line Participation Certificate Exhibit K Form of Ground Lease Estoppel Exhibit L Form of Assignment of Franchise Agreement, Agreements, Permits and Contracts Exhibit M Form of Franchisor Estoppel and Recognition Letter Exhibit N Form of Security Agreement Exhibit O Form of Tenant Estoppel Certificate Exhibit P Form of Subordination, Attornment and Non-Disturbance Agreement Exhibit Q Form of Intercompany Debt Subordination Agreement Exhibit R Form of Partnership [HIC] Guaranty Exhibit S Form of Partnership [HIC] Mortgage Exhibit T Form of Partnership [HIC] Guaranty Security Agreement Exhibit U Form of Partnership [HIC] Assignment of Leases and Rents Exhibit V Form of Consent to Assignment, Subordination and Attornment Agreement Exhibit W Form of Vagabond Subordination and Non-Disturbance Agreement Exhibit X Form of HIC Guaranty Exhibit Y Form of Assignment and Assumption 8 THIS AMENDED AND RESTATED LINE OF CREDIT AGREEMENT, dated as of _______________, 1995, is made among SLT REALTY LIMITED PARTNERSHIP, a Delaware limited partnership ("Borrower"), STARWOOD LODGING TRUST, a Maryland real estate investment trust (the "REIT"), BANKERS TRUST COMPANY, a New York banking organization, having an address at Three Park Plaza, 16th Floor, Irvine, California 92714, as collateral agent (the "Collateral Agent") and LEHMAN BROTHERS HOLDINGS INC., D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, individually and as Agent for one or more Co-Lenders and successors ("Lender"). PRELIMINARY STATEMENT The REIT, Merrill Lynch Mortgage Capital Inc. ("Merrill") and the Collateral Agent (each by way of its predecessor in interest) entered into a certain Credit Agreement dated as of January 28, 1993 (the "Prior Credit Agreement") pursuant to which certain loans were made to the REIT (the "Merrill Facility"). On January 1, 1995, the REIT, the Corporation and Starwood Capital Group, L.P. ("Group") consummated a transaction pursuant to which substantially all of the assets and liabilities of the REIT and Corporation, and certain assets and liabilities of the Group, were transferred to Borrower and Partnership in exchange for ownership interests in the Borrower and Partnership. Borrower, the REIT, Merrill and Collateral Agent entered into a certain Amended and Restated Credit Agreement dated as of March 24, 1995 (the "Amended Credit Agreement") which amended and restated the Prior Credit Agreement in its entirety to provide for, among other things, an additional advance to the Borrower, the pledge of additional assets as additional security for the Merrill Facility, and an additional acquisition credit facility. Lender is the current owner and holder of the Amended Credit Agreement and the Merrill Facility, as amended by that certain First Amendment to the Amended and Restated Credit Agreement dated September 27, 1995 between Lender, Borrower, the REIT and the Collateral Agent (the Amended Credit Agreement, as amended, the "Credit Agreement"). Borrower, the REIT, the Collateral Agent and Lender hereby desire to amend and restate in its entirety the Credit Agreement pursuant to which the Borrower, the REIT, the Collateral Agent and Lender agree to restructure the terms of the Credit Agreement and the Merrill Facility and the obligations of Borrower and the REIT under the Credit Agreement and Lender agrees to extend additional credit facilities to Borrower, all subject to and upon the terms and conditions of this Agreement. 9 -2- NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and in and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: A. Neither this Agreement nor anything contained herein shall be construed as a substitution or novation of the indebtedness evidenced hereby or of the Credit Agreement, which shall remain in full force and effect, as supplemented, increased, amended and restated, as provided herein. B. All of the terms, provisions and obligations contained in the Credit Agreement are hereby supplemented, amended and restated in their entirety to read as follows: SECTION 1. DEFINITIONS. Section 1.1 Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural number the singular. "Accounts Receivable" shall mean all income and revenues or rights to receive all income and revenues arising from the operation of the Real Property Assets and all payments for goods or property sold or leased or for services rendered, whether or not yet earned by performance, and not evidenced by an instrument or chattel paper, including, without limiting the generality of the foregoing, (i) all accounts, contract rights, book debts, and notes arising from the operation of a hotel on the Real Property Assets or arising from the sale, lease or exchange of goods or other property and/or the performance of services, (ii) Borrower's rights to payment from any consumer credit/charge card organization or entity (such as, or similar to, the organizations or entities which sponsor and administer the American Express Card, the Visa Card, the Bankamericard, the Carte Blanche Card, or the Mastercard) arising with respect to the Real Property Assets, (iii) Borrower's rights in, to and under all purchase orders for goods, services or other property arising with respect to the Real Property Assets, (iv) Borrower's rights to any goods, services or other property represented by any of the foregoing, (v) monies due to or to become due to Borrower under all contracts for the sale, lease or exchange of goods or other property and/or the performance of services including the right to payment of any interest or finance charges in respect thereto (whether or not yet earned by performance on the part of Borrower) arising with respect to the Real Property Assets and (vi) all collateral security and guaranties of any kind given by any person or entity with respect to any of the foregoing. Accounts Receivable shall include those now existing or hereafter created, substitutions therefor, proceeds (whether cash or non-cash, movable or immovable, tangible or intangible) received upon the sale, exchange, transfer, collection or other disposition or substitution thereof and any and all of the foregoing and proceeds therefrom. 10 -3- "Adjusted Operating Lease Payments" shall mean, with respect to all Operating Leases other than the Vagabond Leases, the sum of Base Rent (as defined in the related Operating Lease) and Percentage Rent (as defined in the related Operating Lease) that would be due and payable under the Operating Leases if Gross Receipts and Gross Sales (as each term is defined in the Operating Leases) were each reduced by 50% and calculated in accordance with the provisions of this Agreement relating to Property Net Cash Flow. "Advance" shall mean each advance and readvance of the principal balance of the Loan, including any Swing Line Advance. "Affiliate" shall mean, with reference to a specified Person, any Person that directly or indirectly through one or more intermediaries Controls or is Controlled by or is under common Control with the specified Person and any Subsidiaries of such specified Person. "Agent" shall have the meaning provided in Section 9.9(e). "Aggregate Available Facility Amount" shall mean the sum of the Available Facility Amounts for Note A, Note B, Note C and Note D; in no event shall the Aggregate Available Facility Amount exceed the Maximum Facility Amount. "Agreement" shall mean this Amended and Restated Line of Credit Agreement as the same may from time to time hereafter be modified, supplemented or amended. "Allocated Loan Amount" shall mean the portions of the Available Facility Amount allocated to each Real Property Asset as set forth on Schedule 1, as the same may be adjusted in accordance with this Agreement. "Annual Operating Budget" shall have the meaning provided in Section 5.1. "Applicable Laws" shall mean all existing and future federal, state and local laws, statutes, orders, ordinances, rules, and regulations or orders, writs, injunctions or decrees of any court affecting Borrower or any Real Property Asset, or the use thereof including, but not limited to, all zoning, fire safety and building codes, the Americans with Disabilities Act, and all Environmental Laws (as defined in the Environmental Indemnity). "Appraisal" shall mean an appraisal prepared in accordance with the requirements of FIRREA, prepared by an independent third party appraiser holding an MAI designation, who is state licensed or state certified if required under the laws of the state where the applicable Real Property Asset is located, who meets the requirements of FIRREA and who has at least ten (10) years real estate experience appraising properties of a similar nature and type as the applicable Real Property Asset and who is otherwise satisfactory to Lender. 11 -4- "Assignment and Assumption" shall have the meaning provided in Section 9.9(a). "Assignment of Contracts" shall have the meaning provided in Section 3.1(a)(viii). "Assignment of Leases and Rents" shall have meaning provided in Section 3.1(a)(iv). "Available Borrowing Base" shall mean, with respect to each Note, for the period for which it is to be determined, the quotient obtained by dividing (A) the aggregate Net Operating Income for all of the Real Property Assets securing the related Note by (B) the product of (i) 2.0 times (ii) the Contract Rate of interest for the related Note applicable hereunder for such period, provided, however, that if such Contract Rate is less than the Treasury Rate on the last day of such period, then the applicable Contract Rate shall be deemed to be the Treasury Rate on the last day of such period, for purposes of this calculation only. "Available Borrowing Base Covenant" shall have the meaning provided in Section 5.15. "Available Facility Amount" shall mean, individually, U.S. $70,110,000.00 with respect to Note A (of which $3,400,000.00 is with respect to the Florida Note and $66,710,000.00 is with respect to Note A-1), U.S. $4,890,000.00 with respect to Note B, and U.S. $0.00 with respect to Note C and U.S. $0.00 with respect to Note D; or, if the Syndication has occurred pursuant to Section 9.9(k) or the Lehman Additional Commitment has been provided pursuant to the terms of the Syndication Letter, up to U.S. $107,354,000.00 with respect to Note A (of which $3,400,000.00 is with respect to the Florida Note and $103,954,000.00 is with respect to Note A-1), U.S. $8,753,000.00 with respect to Note B, U.S. $13,235,000.00 with respect to Note C and U.S. $5,658,000.00 with respect to Note D, as each may be reduced pursuant to Sections 2.9, 2.12, 2.21, 5.15, or 5.20, or otherwise pursuant to the terms of this Agreement, or increased pursuant to Section 2.22. "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. "Base Period" shall have the meaning provided in Section 5.18(a). "Base Rate" shall mean, at any particular date, a rate per annum equal to the rate of interest published in The Wall Street Journal as the "prime rate", as in effect on such day, 12 -5- with any change in the prime rate resulting from a change in said prime rate to be effective as of the date of the relevant change in said prime rate; provided, however, that if more than one prime rate is published in The Wall Street Journal for a day, the average of the Prime Rates shall be used; provided, further, however, that the Prime Rate (or the average of the prime rates) will be rounded to the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, to the next higher 1/16 of 1%. In the event that The Wall Street Journal should cease or temporarily interrupt publication, then the Prime Rate shall mean the daily average prime rate published in another business newspaper, or business section of a newspaper, of national standing chosen by Lender. If The Wall Street Journal resumes publication, the substitute index will immediately be replaced by the prime rate published in The Wall Street Journal. In the event that a prime rate is no longer generally published or is limited, regulated or administered by a governmental or quasi-governmental body, then Lender shall select a comparable interest rate index which is readily available to Borrower and verifiable by Borrower but is beyond the control of Lender. Lender shall give Borrower prompt written notice of its choice of a substitute index and when the change became effective. Such substitute index will also be rounded to the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, to the next higher 1/16 of 1%. The determination of the Base Rate by Lender shall be conclusive absent manifest error. "Base Rate Margin" shall mean 0.625% per annum. "Base Rate Portions" shall mean each portion of the Loan made and/or being maintained at a rate of interest based upon the Base Rate, including any Swing Line Advances. "Borrower" shall have the meaning provided in the first paragraph of this Agreement and any successor Borrower expressly permitted hereunder. "Borrower's Partnership Agreement" means that certain Amended and Restated Limited Partnership Agreement of SLT Realty Limited Partnership dated _________(sic), 1995, and an Amended and Restated Certificate of Limited Partnership of SLT Realty Limited Partnership dated July 5, 1995. "Borrowing" shall mean a borrowing of one Type of Advance from Lender and any Co-Lender or Swing Line Lender on a given date (or resulting from conversions or 13 -6- continuations on a given date), having in the case of Eurodollar Portions the same Interest Period. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in New York City a legal holiday or a day on which Lender, any Co-Lender or banking institutions are authorized or required by law or other government actions to close, and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Portions, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks for U.S. dollar deposits in the relevant interbank Eurodollar market. "Capitalized Lease" as to any Person shall mean (i) any lease of property, real or personal, the obligations under which are capitalized on the consolidated balance sheet of such Person and its Subsidiaries, and (ii) any other such lease to the extent that the then present value of the minimum rental commitment thereunder should, in accordance with GAAP, be capitalized on a balance sheet of the lessee. "Capitalized Lease Obligations" as to any Person shall mean all obligations of such Person and its Subsidiaries under or in respect of Capitalized Leases. "Change in Law" shall have the meaning provided in Section 2.19(c). "Closing Date" shall mean the date of this Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, together with all rules and regulations from time to time promulgated thereunder. "Co-Lender" shall have the meaning provided in Section 9.9. "Collateral" shall mean all property and interests in property now owned or hereafter acquired in or upon which a Lien has been or is purported or intended to have been granted under any of the Security Instruments or any of the other Loan Documents, including, without limitation, all Operating Leases (other than the Vagabond Leases), and all New Properties and Substitute Properties but excluding Release Properties. "Collateral Agent" shall have the meaning provided in the first paragraph of this Agreement and any successor thereto. 14 -7- "Collateral Agent Fees" shall mean the Custodial Fees and Collateral Agent Fees, each as defined in the Custodial Agreement, to which the Collateral Agent is entitled pursuant to the Custodial Agreement. "Consent to Assignment, Subordination, Estoppel and Attornment Agreement" shall have the meaning provided in Section 3.1(a)(xx). "Consolidated Interest Expense" means with respect to any Person for any period, interest accrued or payable by such Person and its Subsidiaries during such period in respect of Total Debt determined on a consolidated basis in accordance with GAAP. "Contingent Obligation" as to any Person shall mean any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases (including Capitalized Leases), dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor,(ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth, solvency or other financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof: provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any accrued or accruable Contingent Obligation shall be determined in accordance with GAAP. "Contract Rate" shall mean the rate or rates of interest (which rate shall include the applicable margin added thereto pursuant to the terms of this Agreement) per annum provided for in this Agreement which are applicable to the Loan from time to time so long as no Event of Default has occurred and in continuing. If more than one rate of interest is applicable to the Loan, then, unless the context indicates that the Contract Rate is to be determined for each Loan Portion, the Contract Rate shall be the average of such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%) with such average to be weighted according to the relative size of the Loan Portions to which such different rates are applicable. The determination of the Contract Rate by Lender, if made in good faith, shall be conclusive absent manifest error. "Control" shall mean in (a) in the case of a corporation, ownership, directly or through ownership of other entities, of at least ten percent (10%) of all the voting stock (exclusive of stock which is voting only as required by applicable law or in the event of nonpayment of dividends and pays dividends only on a nonparticipating basis at a fixed or floating rate), 15 -8- and (b) in the case of any other entity, ownership, directly or through ownership of other entities, of at least ten percent (10%) of all of the beneficial equity interests therein (calculated by a method that excludes from equity interests, ownership interests that are nonvoting (except as required by applicable law or in the event of nonpayment of dividends or distributions) and pay dividends or distributions only on a non-participating basis at a fixed or floating rate) or, in any case, (c) the power directly or indirectly, to direct or control, or cause the direction of, the management policies of another Person, whether through the ownership of voting securities, general partnership interests, common directors, trustees, officers by contract or otherwise. The terms "controlled" and "controlling" shall have meanings correlative to the foregoing definition of "Control." "Corporation" shall mean Starwood Lodging Corporation, a Maryland corporation. "Corrective Action Plan" shall have the meaning provided in Section 5.19(c). "Custodial Agreement" shall have the meaning provided in Section 9.9(e). "Debt Service" means with respect to any Person for any period, the sum (without duplication) of (a) Consolidated Interest Expense of such Person for such period plus (b) scheduled principal amortization of Total Debt (other than the final balloon payments in connection with Indebtedness of such Person, unless past due) of such Person for such period (whether or not such payments are made). "Default" shall mean any event, act or condition which, with the giving of notice or lapse of time, or both, would constitute an Event of Default. "Default Rate" shall mean for each Loan Portion the lesser of (a) the Maximum Legal Rate or (b) with respect to all then outstanding Eurodollar Portions, (i) the rate per annum determined by adding 2% to the Contract Rate applicable to the Loan immediately prior to an Event of Default until the expiration of the applicable Interest Periods and thereafter the rate per annum determined by adding 2% to the Base Rate, as from time to time is in effect; or (c) with respect to all then outstanding Base Rate Portions, the rate per annum determined by adding 2% to the Base Rate as from time to time in effect. "Deferred Maintenance Reserve" shall have the meaning provided in Section 5.19(b). "Deferred Maintenance Spending Requirement" shall have the meaning provided in Section 5.19(b). 16 -9- "Distribution" shall mean any dividends (other than dividends payable solely in common stock),distributions, return of capital to any stockholders, general or limited partners or members, other payments, distributions or delivery of property or cash to stockholders, general or limited partners or members, or any redemption, retirement, purchase or other acquisition, directly or indirectly, of any shares of any class of capital stock now or hereafter outstanding (or any options or warrants issued with respect to capital stock), any general or limited partnership interest, or the setting aside of any funds for the foregoing. "Dollars" and the symbol "$" each mean the lawful money of the United States of America. "Domestic Lending Office" shall mean the office set forth in Section 9.2 for Lender, or such other office as may be designated from time to time by written notice to Borrower. "Draw Period" shall mean the period commencing on the date hereof and expiring on the Termination Date. "EBITDA" shall mean with respect to any Person for any period, earnings (or losses) before interest and taxes of such Person and its Subsidiaries for such period plus, to the extent deducted in computing such earnings (or losses) before interest and taxes, depreciation and amortization expense, all as determined on a consolidated basis with respect to such Person and its Subsidiaries in accordance with GAAP; provided, however, EBITDA shall exclude earnings or losses resulting from (i) cumulative changes in accounting practices, (ii) discontinued operations, (iii) extraordinary items, (iv) net income of any entity acquired in a pooling of interest transaction for the period prior to the acquisition, (v) net income of a Subsidiary that is unavailable to the Borrower, (vi) net income not readily convertible into Dollars or remittable to the United States, (vii) net income from corporations, partnerships, associations, joint ventures or other entities in which the Borrower or a Subsidiary has a minority interest and in which Borrower does not have Control, except to the extent actually received. "Employee Benefit Plan" shall mean an employee benefit plan within the meaning of Section 3(3) of ERISA (i) that is maintained by Borrower or any other Loan Party or (ii) with respect to which any such person has any obligation or liability, whether direct or indirect; provided, however, that "Employee Benefit Plan" shall not include any "multiemployer plan" as defined in section 4001(a)(3) of ERISA. "Engineering Reports" shall have the meaning provided in Section 3.1(o). "Environmental Indemnity" shall have the meaning provided in Section 3.1(a)(v). 17 -10- "Environmental Reports" shall mean the written environmental site assessments, prepared by independent qualified environmental professionals acceptable to Lender in its reasonable discretion, prepared in accordance with Lender's then current guidelines, of each of the Real Property Assets, each of which assessments shall be in form and substance reasonably satisfactory to Lender and contain the information set forth in Section 3.1(k). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute, together with all rules and regulations promulgated thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any provisions of ERISA substituted therefor. "ERISA Controlled Group" means any corporation or entity or trade or business or person that is a member of any group described in Section 414(b), (c), (m) or (o) of the Code of which Borrower, the REIT, the Partnership, the Corporation, HIC or any other Loan Party is a member. "ERISA Indemnitee" shall have the meaning provided in Section 9.9(l). "Estoppel Certificate" shall have the meaning provided in 3.1(e). "Eurocurrency Reserve Requirements" shall mean, with respect to each day during an Interest Period for Eurodollar Portions, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Federal Reserve Board or other governmental authority or agency having jurisdiction with respect thereto for determining the maximum reserves (including, without limitation, basic, supplemental, marginal and emergency reserves) for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D) maintained by a member bank of the Federal Reserve System. The parties acknowledge that the Eurocurrency Reserve Requirements as of the Closing Date are -0-%. "Eurodollar Base Rate" shall mean, (a) for any Interest Period other than a Short Interest Period, the rate per annum (rounded upwards, if necessary, to the next higher one hundred-thousandth of a percentage point) which appears on the Telerate Page 3750 as of 11:00 a.m. (London, England time) two (2) Business Days prior to the first day of such Interest Period for deposits in U.S. Dollars for a period equal to such Interest Period, and (b) for any Short Interest Period an interpolated rate per annum based on the closest comparable Interest Periods, which appear on the Telerate Page 314 as of 11:00 a.m. (London, England time) two (2) Business Days prior to the first day of such Short Interest Period. The determination of the Eurodollar Base Rate by Lender shall be conclusive absent manifest error. 18 -11- "Eurodollar Lending Office" shall mean the office of Lender (or any Participant or Co-Lender) designated as such by Lender from time to time by written notice to Borrower. "Eurodollar Portions" shall mean each portion of the Loan made and/or being maintained at a rate of interest calculated by reference to the Eurodollar Rate. "Eurodollar Rate" shall mean with respect to each day during an Interest Period for Eurodollar Portions, a rate per annum equal to the Eurodollar Base Rate, or, if any Co-Lender is subject to Eurocurrency Reserve Requirements, whether or not such reserves are actually incurred or maintained, the average of the Eurodollar Base Rate and the Adjusted Eurodollar Base Rate, with such average to be weighted according to the percentage of the Eurodollar Portion subject to such Co-Lender's interest in the Loan and the balance of such Eurodollar Portion. The Adjusted Eurodollar Base Rate shall mean a rate per annum, determined for each day during an Interest Period in accordance with the following formula (rounded upwards to the nearest whole multiple of 1/16th of one percent): Eurodollar Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Eurodollar Rate Margin" shall mean 1.625% per annum. "Event of Default" shall have the meaning provided in Section 7. "Expense Cap" shall have the meaning provided in the Syndication Letter. "Fee Letter" shall mean that certain letter dated the date hereof from Lehman Brothers Holdings Inc. to Borrower and the REIT. "FIRREA" means the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended from time to time. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System as constituted from time to time, or any successor thereto in function. "Fees" shall mean all amounts payable pursuant to Sections 2.15, 2.17 and 9.1. "Financing Statement" shall have the meaning provided in Section 3.1(h). "Fixed Charges" means the amount of scheduled lease payments with respect to leasehold interests or obligations of the respective Person. 19 -12- "Florida Note" shall have the meaning provided in Section 2.4(a). "Florida Real Property Asset" shall mean that Pool 1 Real Property Asset located in the state of Florida. "Franchise Agreements" shall mean the franchise agreements described in Schedule 3 (as such Schedule may be amended, from time to time) between the Partnership or HIC and the respective Franchisors pursuant to which the Partnership or HIC has the right to operate the hotel located on the related Real Property Asset under a name and/or hotel system controlled by such Franchisor and any other hotel or hospitality franchise agreement with respect to any New or Substitute Property. "Franchisor" shall mean each of the franchisors under the Franchise Agreements described in Schedule 3, as such Schedule may be amended from time to time. "Franchisor Estoppel and Recognition Letter" shall have the meaning provided in Section 3.1(a)(ix). "Funding Costs" shall have the meaning provided in Section 2.17. "Funds from Operations" shall mean consolidated net income (loss) before extraordinary items, computed in accordance with GAAP, plus, to the extent deducted in determining net income (loss) and without duplication, (i) gains (or losses) from debt restructuring and sales of property, (ii) non-recurring charges, (iii) provisions for losses, (iv) real estate related depreciation and amortization (excluding amortization of financing costs), and (v) amortization of organizational expenses less, to the extent included in net income (loss), (a) non-recurring income and (b) equity income (loss) from unconsolidated partnerships and joint ventures less the proportionate share of funds from operations of such partnerships and joint ventures, which adjustments shall be calculated on a consistent basis. "Furnished Information" shall have the meaning provided in Section 4.15. "GAAP" shall mean United States generally accepted accounting principles on the date hereof and as in effect from time to time during the term of this Agreement, and consistent with those utilized in the preparation of the financial statements referred to in Section 4.5. "Gross Revenues" shall mean, with respect to any Real Property Asset for any period, all income, rents, room rates, additional rents, revenues, issues and profits (including all oil and gas or other mineral royalties and bonuses) and other items including without limitation, all revenues and credit card receipts collected from guest rooms, restaurants, meeting rooms, 20 -13- bars, mini-bars, banquet rooms, recreation facilities, vending machines and concessions derived from the customary operation of such Real Property Asset. "Group" shall have the meaning provided in the Preliminary Statement. "Ground Lease" shall mean those ground leases, together with all amendments and modifications thereto, all as more particularly set forth on Schedule 8 with respect to the Real Property Assets identified on such Schedule, as such Schedule may be amended from time to time. "Ground Lease Estoppel" shall have the meaning provided in Section 3.1(xiv). "HIC" shall mean Hotel Investors Corporation of Nevada, a Nevada corporation. "HIC Assignment of Contracts" shall have the meaning provided in Section 3.1(a)(xxvi). "HIC Assignment of Leases and Rents" shall have the meaning provided in Section 3.1(a)(xxv). "HIC Event of Default" shall have the meaning provided in Section 7.1(j). "HIC Guaranty" shall have the meaning provided in Section 3.1(a)(xxii). "HIC Guaranty Security Agreement" shall have the meaning provided in Section 3.1(a)(xxiv). "HIC Mortgage" shall have the meaning provided in Section 3.1(a)(xxiii). "Increased Capital Costs" shall have the meaning provided in Section 2.18. "Indebtedness" of any Person shall mean, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) all indebtedness of such Person evidenced by a note, bond, debenture or similar instrument, (iii) the outstanding amount drawn and unpaid under all letters of credit issued for the account of such Person and, without duplication, all unreimbursed amounts drawn thereunder, (iv) all indebtedness of any other Person secured by any Lien on any property owned by such Person, whether or not such indebtedness has been assumed, (v) all Contingent Obligations of such Person, (vi) all Unfunded Benefit Liabilities of such Person, (vii) all actual payment obligations of such Person under any interest rate protection agreement (including, without limitation, any interest rate swaps, caps, floors, collars and similar agreements) and currency swaps and similar 21 -14- agreements, (viii) all indebtedness and liabilities secured by any Lien or mortgage on any property of such Person, whether or not the same would be classified as a liability on a balance sheet, (ix) the liability of such Person in respect of banker's acceptances and the estimated liability under any participating mortgage, convertible mortgage or similar arrangement, (x) the aggregate amount of rentals or other consideration payable by such Person in accordance with GAAP over the remaining unexpired term of all Capitalized Leases, (xi) all final, non-appealable judgments or decrees by a court or courts of competent jurisdiction entered against such Person, (xii) all indebtedness, payment obligations, contingent obligations, etc. of any partnership in which such Person holds a general partnership interest, and (xiii) all obligations, liabilities, reserves and any other items which are listed as a liability on a balance sheet of such Person determined on a consolidated basis in accordance with GAAP, but excluding all general contingency reserves and reserves for deferred income taxes and investment credit. "Indemnitee" shall have the meaning provided in Section 9.1(c). "Initial Assets" shall mean the Real Property Assets described on Schedule 1 as of the date hereof. "Initial Facility Amount" shall mean U.S. $75,000,000.00. "Initial Minimum Spending Requirement" shall have the meaning provided in Section 5.19(a). "Initial Replacement Reserve" shall have the meaning provided in Section 5.19(a). "Intercompany Debt" shall mean the indebtedness owed by the Partnership, HIC, or any other Person listed on Schedule 9, to Borrower, all as more particularly described in Schedule 9. "Intercompany Debt Subordination Agreement" shall have the meaning provided in Section 3.1(a)(xiii). "Intercompany Loan Documents" shall mean the notes, leasehold mortgages and other security documents evidencing and/or securing the Intercompany Debt. "Intercreditor Agreement" shall have the meaning provided in Section 9.4. "Interest Period" shall have the meaning provided in Section 2.6. "Lehman Additional Commitment" shall have the meaning provided in the Syndication Letter. 22 -15- "Licenses" shall have the meaning provided in Section 4.18. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same effect as any of the foregoing and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction, domestic or foreign. "Loan" shall mean, in the aggregate, the Advances made to Borrower under this Agreement and the Note and the Swing Line Note, without duplication, pursuant to the terms hereof, the aggregate principal amount of which shall not exceed the Available Facility Amount. "Loan Documents" shall mean this Agreement, the Notes, the Security Instruments, the Environmental Indemnity, the Assignment of Leases and Rents, the Assignment of Contracts, each Financing Statement filed in connection herewith, the Security Agreement, the Franchisor Estoppel and Recognition Letter, the Intercompany Debt Subordination Agreement, Subordination, Non-disturbance and Attornment Agreements, the Vagabond Subordination and Non-Disturbance Agreement, the Partnership Guaranty, the Partnership Guaranty Security Agreement, the Partnership Mortgage, the Partnership Guaranty Assignment of Leases and Rents, the Partnership Assignment of Contracts, the Consent to Assignment, Subordination, Estoppel and Attornment Agreement, the HIC Guaranty, the HIC Guaranty Security Agreement, the HIC Mortgage, the HIC Guaranty Assignment of Leases and Rents, the HIC Assignment of Contracts, the Fee Letter, the Syndication Letter, and any other documents or instruments evidencing, securing or guaranteeing the Loan or perfecting Lender's Lien in the Collateral. "Loan Party" shall mean, individually and collectively, as the context requires, the REIT, the Partnership, the Corporation and HIC; provided, however, that in the event that Lender has released its Liens against all of the Collateral pledged by one or more of such parties, then such party or parties, as of the effective date of such release, shall no longer be included in the definition of Loan Party. "Loan Portion" shall mean each Base Rate Portion and each Eurodollar Portion of the Loan. "Loan to Value Ratio" shall have the meaning provided in Section 5.20. "Loan to Value Ratio Covenant" shall have the meaning provided in Section 5.20. 23 -16- "Major Lease" shall have the meaning provided in Section 3.7 of the Security Instrument. "Margin Stock" shall have the meaning provided such term in Regulation U and Regulation G of the Federal Reserve Board. "Material Adverse Effect" shall mean any condition which has a material adverse effect upon (i) the business, operations, properties, assets, corporate structure or financial condition of Borrower, the REIT, the Partnership, or the Corporation, individually or taken as a whole, (ii) the ability of Borrower, the REIT, the Partnership, or the Corporation to perform any of the Obligations, (iii) the validity or enforceability of any of the Loan Documents, or (iv) the ability of Borrower or the REIT to meet any of the obligations under the Whole Loan Facility. "Maturity Date" shall mean October 1, 1998 or such earlier date on which the principal balance of the Loan and all other sums due in connection with the Loan shall be due as a result of the acceleration of the Loan. "Maximum Facility Amount" shall mean up to U.S. $135,000,000.00, provided that the Syndication occurs pursuant to Section 9.9(k) or the Lehman Additional Commitment is provided pursuant to the terms of the Syndication Letter; if the Syndication does not occur pursuant to Section 9.9(k) or the Lehman Additional Commitment is not provided, the Maximum Facility Amount shall mean $75,000,000.00; in either case, as such amount shall be reduced pursuant to Sections 2.9 or 2.21 or otherwise pursuant to the terms and conditions of this Agreement. "Maximum Legal Rate" shall mean the maximum nonusurious 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 Security Instruments or 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. "Minimum Net Worth" shall have the meaning provided in Section 5.16. "Minimum Replacement Reserve" shall have the meaning provided in Section 5.19(a). "Minimum Spending Requirement" shall have the meaning provided in Section 5.19(a). "Minimum Threshold" shall have the meaning provided in Section 3.2(g). 24 -17- "Multiemployer Plan" shall mean a "pension plan" as defined in Section 3(2) of ERISA which is a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Book Value" shall mean the book value of all of a Person's assets that is reflected on such Person's consolidated financial statements, including adjustment or allowance for depreciation and amortization and calculated in accordance with GAAP. "Net Operating Income" shall mean for any period (i) with respect to each Real Property Asset other than the Vagabond Inns, the lesser of (a) Property Net Cash Flow or (b) 200% of Operating Lease Payments; notwithstanding the foregoing, in the event that the Franchise Agreement with respect to any Real Property Asset has been terminated or has expired after the date hereof, and Borrower has not entered into a replacement Franchise Agreement with a comparable Franchisor reasonably satisfactory to Lender, the Net Operating Income from such Real Property Asset shall be deemed equal to the lesser of (1) 50% of Property Net Cash Flow and (2) 200% of Adjusted Operating Lease Payments for such Real Property Asset and (ii) with respect to the Vagabond Inns, Operating Lease Payments. "New Property" shall have the meaning provided in Section 2.22. "Non-Competition Agreement" means Section 6.6 of that certain Formation Agreement, dated as of November 11, 1994, by and among the REIT (formerly Hotel Investors Trust), the Corporation (formerly Hotel Investors Corporation), the Group and Berl Holdings, L.P., Starwood-Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners IX, L.P., Starwood-Nomura Hotel Investors, L.P., Starwood/Wichita Investors, L.P., Starwood-Huntington Partners, L.P. and Woodstar Partners I, L.P. (collectively, the "Starwood Partners") as amended by that certain Amendment No. 1 to Formation Agreement, dated as of July 6, 1995, by and among the REIT, the Corporation, the Group and the Starwood Partners. "Non-use Fee" shall have the meaning provided in Section 2.15. "Non-use Fee Due Date" shall mean the date which is five (5) Business Days after the date Lender has furnished Borrower with an invoice showing the amount of the Non-use Fee and a detailed calculation of the same. "Note" or "Notes" shall have the meaning provided in Section 2.4(a). "Note A" shall have the meaning provided in Section 2.4(a). "Note B" shall have the meaning provided in Section 2.4(a). "Note C" shall have the meaning provided in Section 2.4(a). 25 -18- "Note D" shall have the meaning provided in Section 2.4(a). "Notice of Borrowing" shall have the meaning provided in Section 2.2(a). "Notice of Conversion or Continuation" shall have the meaning provided in Section 2.8(b). "Notice of Swing Line Advance" shall have the meaning provided in Section 2.2(b). "Obligations" shall mean all payment, performance and other obligations, liabilities and indebtedness of every nature of (i) Borrower and the REIT, without duplication, from time to time owing to Lender or any Co-Lender under or in connection with this Agreement or any other Loan Document, or (ii) the other Loan Parties under or in connection with the Security Instruments or any other Loan Document. "Operating Expenses" shall mean, with respect to any Real Property Asset, for any given period (and shall include the pro rata portion for such period of all such expenses attributable to, but not paid during, such period), all expenses paid, accrued, or payable, as determined in accordance with GAAP and the Uniform System of Accounts by Borrower and the Partnership or HIC, as the case may be, during that period in connection with the operation of such Real Property Asset for which it is to be determined, including without limitation: (i) expenses for cleaning, repair, maintenance, decoration and painting of the such Real Property Asset (including, without limitation, parking lots and roadways), net of any insurance proceeds in respect of any of the foregoing; (ii) wages (including overtime payments), benefits, payroll taxes and all other related expenses for Borrower's, the Partnership's or HIC's, as the case may be, on-site personnel, up to and including (but not above) the level of the on-site manager, engaged in the repair, operation and maintenance of such Real Property Asset and service to tenants and on- site personnel engaged in audit and accounting functions performed by Borrower, the Partnership or HIC; (iii) management fees pursuant to the Management Agreement providing for fees not exceeding market and approved by Lender in its reasonable discretion, but in no event less than the percentage of Gross Revenues set forth on Schedule 14 with respect to the applicable Real Property Asset. Such fees shall include all fees for management services whether such services are performed at such Real Property Asset or off-site; 26 -19- (iv) Franchise fees, reservation fees and other royalties or similar payments due under the Franchise Agreements, not exceeding market and approved by Lender in its reasonable discretion, but in no event less than the percentage of gross room revenues set forth on Schedule 14 with respect to the applicable Real Property Asset; if no percentage is set forth, the calculation of Operating Expenses shall be based on the actual franchise fees, if any; (v) the cost of all electricity, oil, gas, water, steam, heat, ventilation, air conditioning and any other energy, utility or similar item and the cost of building and cleaning supplies; (vi) the cost of any leasing commissions and tenant concessions or improvements payable by Borrower, the Partnership, HIC or any Loan Party pursuant to any leases which are in effect for such Real Property Asset at the commencement of that period as such costs are recognized in accordance with GAAP, but on no less than a straight line basis over the remaining term of the respective Lease, exclusive of any renewal or extension or similar options; (vii) rent, liability, casualty, fidelity, errors and omissions, dram shop liability, workmen's compensation and other required insurance premiums; (viii) legal, accounting and other professional fees and expenses; (ix) the cost (including leasing and financing) of all equipment to be used in the ordinary course of business, which is not capitalized in accordance with GAAP; (x) real estate, personal property and other taxes; (xi) advertising and other marketing costs and expenses; (xii) casualty losses to the extent not reimbursed by an independent third party; and (xiii) all amounts that should be reserved, as reasonably determined by Borrower, the Partnership or HIC, as the case may be, with approval by Lender in its reasonable discretion, for repair or maintenance of the Real Property Asset and to maintain the value of the Real Property Asset including replacement reserves of no less than 4% of Gross Revenues. Notwithstanding the foregoing, Operating Expenses shall not include (i) depreciation or amortization or any other non-cash item of expense unless approved by Lender; (ii) interest, 27 -20- principal, fees, costs and expense reimbursements of Lender in administering the Loan but not in exercising any of its rights under this Agreement or the Loan Documents; (iii) any expenditure (other than leasing and financing costs, leasing commissions, tenant concessions and improvements, and replacement reserves) which is properly treatable as a capital item under GAAP; or (iv) Operating Lease Payments. "Operating Lease Payments" shall mean the rent due and payable to Borrower under the Operating Leases, including, without limitation, all Base Rent, Basic Rent and all Percentage Rent but excluding Additional Rent (as each term is defined in the Operating Leases). "Operating Leases" shall mean those operating leases between Borrower as lessor and the Partnership or HIC as lessee with respect to each Real Property Asset as set forth on Schedule 10, (as such Schedule may be amended from time to time) and any other operating lease in the same form between Borrower and the Partnership or HIC, if applicable, with respect to any New or Substitute Property except that with respect to the Vagabond Inns, it shall mean the Vagabond Leases. "Participant" shall have the meaning provided in Section 9.9. "Partnership" means SLC Operating Limited Partnership, a Delaware limited partnership. "Partnership Assignment of Contracts" shall have the meaning provided in Section 3.1(a)(xix). "Partnership Assignment of Leases and Rents" shall have the meaning provided in Section 3.1(a)(xviii). "Partnership Guaranties" shall have the meaning provided in Section 3.1(a)(xv). "Partnership Guaranty Security Agreement" shall have the meaning provided in Section 3.1(a)(xvii). "Partnership Mortgage" shall have the meaning provided in Section 3.1(a)(xvi). "PBGC" shall mean the Pension Benefit Guaranty Corporation established under ERISA, or any successor thereto. "Permitted Financing" shall mean leases, licenses or financing arrangements with respect to signage, televisions, audio-visual equipment, office supplies, computers, reservation systems, telephone systems, or vans for which aggregate annual lease payments, license fees and 28 -21- debt service is less than the amount per annum set forth for each Real Property Asset on Schedule 11. For each Real Property Asset, such amount is an aggregate limit for that Real Property Asset on all leasing, licensing or financing by the Partnership, HIC and Borrower. The licensing arrangement between Lodge Net Entertainment Corporation and Hotel Investors Corporation (the predecessor of the Corporation), dated August 30, 1994 as more fully described on Schedule 11A, shall also be deemed a Permitted Financing and is not subject to the per annum limitations set forth on Schedule 11. "Permitted Liens" shall have the meaning provided in Section 6.3. "Person" shall mean and include any individual, partnership, joint venture, firm, corporation, limited liability company, association, company, trust or other enterprise or any government or political subdivision or agency, department or instrumentality thereof. "Personal Property" shall mean all Equipment, Inventory and Fixtures, each as defined in the Security Agreement. "Plan" means any employee benefit plan covered by Title IV of ERISA or subject to Section 412 of the Code or Section 302 of ERISA (i) that is maintained by Borrower or any other Loan Party or (ii) with respect to which any such person has or may have any obligation or liability, whether direct or indirect; provided, however, that "Plan" shall not include any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Plan Asset Entity" shall mean any "employee benefit plan" as defined in ERISA, any "plan" as defined in Section 4975 of the Code, and any entity any portion or all of the assets of which are deemed pursuant to United States Department of Labor Regulation Section 2510.3-101 or otherwise pursuant to ERISA or the Code to be, for any purpose of ERISA or Section 4975 of the Code, assets of any such "employee benefit plan" or "plan" which invests in such entity. "Pool" shall mean, individually or collectively, as the context requires, Pool 1, Pool 2, Pool 3 and Pool 4 Real Property Assets and the related Note. "Pool 1 Real Property Assets" shall mean those Real Property Assets set forth on Schedule 2A designated as such, as the same may be adjusted in accordance with the terms of this Agreement. "Pool 2 Real Property Assets" shall mean those Real Property Assets set forth on Schedule 2B designated as such, as the same may be adjusted in accordance with the terms of this Agreement. 29 -22- "Pool 3 Real Property Assets" shall mean those Real Property Assets set forth on Schedule 2C designated as such, as the same may be adjusted in accordance with the terms of this Agreement. "Pool 4 Real Property Assets" shall mean those Real Property Assets set forth on Schedule 2D designated as such, as the same may be adjusted in accordance with the terms of this Agreement. "Property Net Cash Flow" shall mean, with respect to any Real Property Asset, the Gross Revenues derived from the customary operation of such Real Property Asset during the period in question, less Operating Expenses attributable to such Real Property Asset for such period, and shall include only the Gross Revenues and other such income actually received and earned, in accordance with GAAP, including any rent loss or business interruption insurance proceeds, and laundry, parking or other vending or concession income, which are actually received or accrued in accordance with GAAP attributable to such Real Property Asset during the twelve (12) month period ending at the end of the calendar month for which the Property Net Cash Flow is being calculated, as set forth on operating statements satisfactory to Lender. Property Net Cash Flow shall be calculated in accordance with customary accounting principles applicable to real estate and in accordance with the Uniform System of Accounts. Notwithstanding the foregoing, Property Net Cash Flow shall not include (i) any condemnation or insurance proceeds (excluding rent or business interruption insurance proceeds), (ii) any proceeds resulting from the sale, exchange, transfer, financing or refinancing of all or any portion of the Real Property Asset for which it is to be determined, (iii) amounts received from tenants as security deposits, (iv) amounts received as advance reservation deposits unless earned in accordance with GAAP, and (v) any type of income otherwise included in Property Net Cash Flow but paid directly by any tenant to a Person other than Borrower, or the Partnership or HIC or their respective agents or representatives. "Quality Assurance Reports" shall have the meaning provided in Section 5.1(d). "REIT" shall have the meaning set forth in the opening paragraph of this Agreement. "Real Property Assets" shall mean the real property described on Schedule 2, including the Pool 1, Pool 2, Pool 3 and Pool 4 Real Property Assets, including all of the Collateral relating to such Real Property Assets and each New Property and Substitute Property, that, in each case is encumbered by a Mortgage or a Substitute Mortgage and the other Loan Documents; notwithstanding the foregoing, however, upon the release by Lender of the Lien against all of the Collateral relating to a Real Property Asset, such Real Property Asset, as of the effective date of such release, shall no longer be included within the definition of all of the Real Property Assets, Pool 1, Pool 2, Pool 3 or Pool 4 Real Property Assets, as applicable. 30 -23- "Recording Taxes" shall have the meaning provided in Section 3.2(h). "Refunded Swing Line Advances" shall have the meaning provided in Section 2.10(a). "Register" shall have the meaning provided in Section 9.9. "Regulation D" shall mean Regulation D of the Federal Reserve Board as from time to time in effect and any successor to all or any portion thereof. "Related Schedules" shall have the meaning provided in Section 2.21(a). "Release Property" shall have the meaning provided in Section 2.21. "Relevant BBC Date" shall have the meaning provided in Section 5.15. "Relevant LTV Date" shall have the meaning provided in Section 5.20. "Reportable Event" has the meaning set forth in Section 4043(c)(3), (5), (6) or (13) of ERISA (other than a Reportable Event as to which the provision of 30 days' notice to the PBGC is waived under applicable regulations). "Required Lenders" shall mean (i) the Lender and (ii) Co-Lenders (including the Swing Line Lender) which in the aggregate own a direct pro rata ownership interest in the Loan of 66-2/3% or more. "Security Agreement" shall have the meaning provided in Section 3.1(a)(x). "Security Instruments" shall have the meaning provided in Section 3.1(a)(iii). "Senior Lenders" shall mean the Lender, each Co-Lender, and their respective successors and assigns. "Short Interest Period" shall mean any Interest Period that begins on a day other than the first Business Day of any calendar month and which shall end on the day that immediately precedes the first Business Day of the next succeeding calendar month following the commencement of such Short Interest Period. "Solvent" as to any Person shall mean that (i) the sum of the assets of such Person, at a fair valuation based upon appraisals or comparable valuation, will exceed its 31 -24- liabilities, including contingent liabilities, (ii) such Person will have sufficient capital with which to conduct its business as presently conducted and as proposed to be conducted and (iii) such Person has not incurred debts, and does not intend to incur debts, beyond its ability to pay such debts as they mature. For purposes of this definition, "debt" means any liability on a claim, and "claim" means (x) a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured, or (y) a right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. With respect to any such contingent liabilities, such liabilities shall be computed in accordance with GAAP at the amount which, in light of all the facts and circumstances existing at the time, represents the amount which can reasonably be expected to become an actual or matured liability. "Subordination, Attornment and Non-Disturbance Agreement" shall have the meaning provided in Section 3.1(a)(xi). "Subsidiary" of any Person shall mean and include (i) any corporation Controlled by such Person, directly or indirectly through one or more intermediaries, and (ii) any partnership, association, joint venture or other entity Controlled by such Person, directly or indirectly through one or more intermediaries and (iii) all of the parties listed as Subsidiaries on Schedule 3. "Substitute Mortgage" shall have the meaning provided in Section 2.21. "Substitute Property" shall have the meaning provided in Section 2.21. "Swing Line Advance" shall mean any Advance (or readvance) of the Loan that is evidenced by the Swing Line Notes. "Swing Line Lender" shall mean the Co-Lender designated as the Swing Line Lender upon the closing of the Syndication to provide Swing Line Advances. "Swing Line Note" shall mean have the meaning provided in Section 2.4(b). "Swing Line Participation Certificate" shall have the meaning provided in Section 2.10(b). "Syndication" shall have the meaning provided in Section 9.9(k). "Syndication Letter" shall have the meaning provided in Section 9.9(k). 32 -25- "Taxes" shall have the meaning provided in Section 2.19. "Telerate Page 314" means the display designated as "Page 314" on the Telerate Service (or such other page as may replace Page 314 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits). "Telerate Page 3750" means the display designated as "Page 3750" on the Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits). "Tenant Estoppel Certificate" shall have the meaning provided in Section 3.1(a)(vii). "Termination Date" shall mean the date on which the earliest of the following occurs: (i) the Non-Competition Agreement expires or otherwise terminates and the Required Lenders elect to terminate the Draw Period and make no further advances; (ii) Borrower is in breach of the covenants contained in Sections 5.26 and 6.4, and the Required Lenders elect to terminate the Draw Period and make no further Advances or (iii) the Maturity Date. "Termination Event" shall mean (i) a Reportable Event, or (ii) the initiation of any action by Borrower, the REIT, any member of Borrower's, the REIT's or any other Loan Party's ERISA Controlled Group or any other person to terminate a Plan or the treatment of an amendment to Plan as a termination under ERISA, in either case, which could result in liability to Borrower, the REIT or any Loan Party, (iii) the institution of proceedings by the PBGC under Section 4042 of ERISA to terminate a Plan or to appoint a trustee to administer any Plan, (iv) any partial or total withdrawal from a Multiemployer Plan which in either case, could result in liability to Borrower, the REIT or any Loan Party or (v) the taking of any action that would require Security to the Plan under Section 401(a)(29) of the Code. "Title Policy" shall have the meaning provided in Section 3.1(i). "Title Searches" shall have the meaning provided in Section 5.14. "Total Debt" means with respect to any Person at any time, all Indebtedness of such Person and its Subsidiaries as determined on a consolidated basis in accordance with GAAP. 33 -26- "Transaction Costs" shall mean all costs and expenses paid or payable by Borrower or any other Loan Party relating to the Transactions including, without limitation, the costs and expenses of Lender in conducting its due diligence with respect to the Transactions, financing fees, commitment fees, advisory fees, appraisal fees, legal fees, accounting fees, title insurance premiums, recording charges and taxes, mortgage recording taxes, intangibles taxes, documentary taxes, stamp taxes or similar taxes and the Collateral Agent Fees, whether directly or as reimbursement to Lender or to the Collateral Agent. Borrower's and the REIT's obligation to pay Transaction Costs which are costs and expenses of the Lender in connection with the closing of the Initial Facility Amount and the Syndication (including any upfront fees due to the Collateral Agent) is subject to the terms of the Syndication Letter and the Expense Cap. "Transactions" shall mean each of the transactions contemplated by the Loan Documents. "Transferee" shall have the meaning provided in Section 9.7. "Treasury Rate" shall mean the semi-annual yield (without de-compounding), as reported in The Wall Street Journal (of if such rate is not published therein, in the Federal Reserve Statistical Release H.15 - Selected Interest Rates under the heading "U.S. Government Securities/Treasury constant maturities") on the date of the Available Borrowing Base calculation (provided, however, if such date is not a Business Day, then on the next succeeding Business Day) for the current U.S. Treasury security with a maturity date most closely approximating the date which is 10 years from such date of calculation, plus 3.25%. In the event such rate is not published in either The Wall Street Journal or Release H.15, Lender shall select a comparable publication to determine the Treasury Rate. "Type" shall mean the type of any portion of the Loan determined with respect to the interest option applicable thereto, i.e., a Base Rate Portion or a Eurodollar Portion. "UCC Searches" shall have the meaning provided in Section 3.1(g). "Unfunded Benefit Liabilities" means with respect to any Plan at a particular time, the amount (if any) by which (i) the present value of all benefit liabilities under such Plan as defined in Section 4001(a)(16) of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan (on the basis of assumptions prescribed by the PBGC for the purpose of Section 4044 of ERISA). "Uniform System of Accounts" mean the Uniform System of Accounts for Hotels as approved by the American Hotel and Motel Association (as in effect from time to time) applied on a consistent basis. 34 -27- "Vagabond Inns" shall mean those Real Property Assets identified as Vagabond Inns on Schedule 2B. "Vagabond Leases" shall mean those three leases described on Schedule 10 between Borrower as lessor and Imperial Hotels Corporation as lessee with respect to the Vagabond Inns. "Vagabond Subordination and Non-Disturbance Agreement" shall have the meaning provided in Section 3.1(a)(xxi). "Whole Loan Facility" means that certain Mortgage Loan Funding Facility made by Lehman Commercial Paper Inc. to Borrower and SLT Realty Company, L.L.C., dated July 25, 1995. SECTION 2. AMOUNT AND TERMS OF REVOLVING CREDIT FACILITY. Section 2.1 Advances. (a) Subject to and upon the terms and conditions herein set forth, Lender (and each Co-Lender) agrees, at any time and from time to time on and after the Closing Date and prior to the Termination Date, to make its pro rata share of Advances to Borrower, and the Swing Line Lender agrees, at any time and from time to time after the Syndication occurs and prior to the Termination Date, to make Swing Line Advances to the Borrower, which Advances with respect to each Note (including all Swing Line Advances) shall not exceed in aggregate principal amount at any time outstanding, the Available Facility Amount for such Note at such time. (b) Advances may be voluntarily prepaid pursuant to Section 2.11, and, subject to the other provisions of this Agreement, including, without limitation, Sections 2.9, 2.10, 2.12 and 2.21, any amounts so prepaid may be reborrowed prior to the Termination Date. All outstanding Advances shall mature on the Maturity Date, without further action on the part of Lender or any Co-Lender. (c) Each Advance of the Loan (other than a Swing Line Advance) shall be in the aggregate minimum amount of One Million Dollars (U.S. $1,000,000.00) or any integral multiple of Five Hundred Thousand Dollars (U.S. $500,000.00) in excess thereof. Each Swing Line Advance shall be in the aggregate minimum amount of Two Hundred Fifty Thousand Dollars (U.S. $250,000.00) or any integral multiple of Fifty Thousand Dollars (U.S. $50,000.00) in excess thereof. No Advance shall be made after the Termination Date. 35 -28- (d) The aggregate principal amount at any time outstanding under all Notes shall not exceed the Aggregate Available Facility Amount at such time for such Notes and the aggregate principal amount at any time outstanding under each Note shall not exceed the Available Facility Amount for such Note. Borrower may choose the Notes under which an Advance shall be made, provided, however, that (i) the initial Advance will be made under the Florida Note up to the principal amount of the Florida Note and under Note A-1, up to, in the aggregate, the Available Facility Amount for Note A; and (ii) in the event that the funding of an Advance would cause the principal amount of the Note Borrower has designated for such Advance to exceed the Available Facility Amount for such Note, or if Borrower fails to make such a designation, the excess amount of such Advance shall be funded under the other Notes in the following manner and priority: first, under Note A, up to the Available Facility Amount for Note A, second, under Note B, up to the Available Facility Amount for Note B, third, under Note C; up to the Available Facility Amount for Note C, and fourth, under Note D, up to the Available Facility Amount for Note D. The portion of the aggregate principal balance of the Aggregate Available Facility Amount evidenced by the Swing Line Notes shall not exceed, in the aggregate U.S. $10,000,000.00. (e) The obligation of Lender and each Co-Lender to make their pro rata share of each Advance of the Loan is several and not joint. Neither Lender nor any Co-Lender shall be liable for the failure of any other Co-Lender to fund its pro rata share of any Advance hereunder provided that such Co-Lender has executed and delivered an Assignment and Assumption Agreement. Except as provided in Section 2.10, no Lender or Co-Lender other than the Swing Line Lender shall have any obligation to make a Swing Line Advance. Section 2.2 Notice of Borrowing. (a) Whenever Borrower desires an Advance hereunder (other than a Swing Line Advance), it shall give Lender at Lender's Office prior to 11:00 A.M., New York City time, at least three (3) Business Days' prior facsimile, or telephonic notice (promptly confirmed in writing) of each Advance to be made hereunder. Each such notice (a "Notice of Borrowing") (i) shall be irrevocable, (ii) shall be executed by the general partner of Borrower or a senior executive officer of Borrower, (iii) shall specify (x) the aggregate principal amount of the requested Advance, (y) the date of the Advance, (which shall be a Business Day) and (z) the initial Interest Period to be applicable thereto, or, if such Advance is not a Eurodollar Portion, that such Advance shall be a Base Rate Portion, (iv) the Note under which the Advance will be made, (v) shall certify that, taking into account the amount of the requested Advance, no Default or Event of Default has occurred and is continuing, and all provisions of the Loan Documents including, but not limited to, the Available Borrowing Base Covenant with respect to each Note and the Loan to Value Ratio Covenant with respect to each Pool will be complied with after giving effect to such Advance, and (vi) shall be in the form annexed hereto as Exhibit "A-1". Lender shall, upon determining the Eurodollar Rate for any Interest Period, promptly notify Borrower thereof. Notwithstanding the foregoing, if Borrower requests an Advance to cure a default under the Whole Loan Facility, Borrower may request such Advance one (1) Business 36 -29- Day prior to the date of the requested Advance provided that in addition to compliance with the conditions of this Section 2.2(a), such Advance shall be a Base Rate Portion and Borrower certifies, in writing, that such Advance shall be used solely for the purpose of curing such default under the Whole Loan Facility and authorizes and directs Lender to make such Advance directly to, or for the account of, Lehman Commercial Paper, Inc. (b) Whenever Borrower desires a Swing Line Advance hereunder, it shall give Lender and Swing Line Lender at Lender's Office and Swing Line Lender's Office prior to 11:00 A.M. New York City time, on the date that the Swing Line Advance is to be made, which shall be a Business Day, facsimile or telephonic notice (confirmed in writing prior to 12:00 noon, New York City Time on the same day). Each such notice (a "Notice of Swing Line Advance") (i) shall be irrevocable, (ii) shall be executed by the general partner of Borrower or a senior executive officer of Borrower (iii) shall specify the aggregate principal amount of the requested Swing Line Advance, (iv) shall specify the date of the Swing Line Advance, which shall be a Business Day, (v) shall certify that, taking into account the amount of the requested Swing Line Advance, no Default or Event of Default has occurred and is continuing, and all provisions of the Loan Documents including, but not limited to, the Available Borrowing Base Covenant with respect to each Note and the Loan to Value Ratio Covenant with respect to each Pool will be complied with after giving effect to such Swing Line Advance, and (vi) shall be in the form annexed hereto as Exhibit "A-2." Each Swing Line Advance shall be a Base Rate Portion and shall be allocated pro-rata among the four Swing Line Notes. Section 2.3 Disbursement of Funds. No later than 2:00 P.M., New York City time on the date specified in each Notice of Borrowing, provided all conditions precedent to the making of such Advance have been complied with, and further provided that Lender has received, in immediately available federal funds, each Co-Lender's pro rata share of such Advance from each Co-Lender, (or, in the case of a Swing Line Advance, Lender has received in immediately available funds the amount of the Swing Line Advance from the Swing Line Lender), Lender will make available to Borrower by disbursing to or at the direction of Borrower, the amount of the requested Advance. If Lender has not received from any Co-Lender such Co-Lender's pro rata share of such Advance, Lender shall nonetheless disburse the portion of the Advance received by Lender, together with Lender's pro rata share of such Advance, pursuant to this Section 2.3. Section 2.4 The Note. (a) Borrower's and the REIT's obligation to pay the principal of, and interest on, the Loan shall be evidenced by (i) the promissory note (as amended, modified, supplemented, extended or consolidated, "Note A-1") duly executed and delivered by Borrower and the REIT substantially in the form of Exhibit "B-1" hereto in a principal amount equal to $103,954,000.00, and the amended and restated renewal note (as amended, modified, supplemented, extended or consolidated, the "Florida Note") duly executed and delivered by Borrower substantially in the form of Exhibit "B-2" hereto, in a principal amount equal to 37 -30- $3,400,000.00, (Note A-1 and the Florida Note hereinafter referred to together as "Note A") (ii) the promissory note (as amended, modified, supplemented, extended or consolidated, "Note B") duly executed and delivered by Borrower and the REIT substantially in the form of Exhibit "B-1" hereto in a principal amount equal to $8,753,000.00, (iii) the promissory note (as amended, modified, supplemented, extended or consolidated, "Note C") duly executed and delivered by Borrower and the REIT substantially in the form of Exhibit "B-1" hereto in a principal amount equal to $13,235,000.00, and (iv) the promissory note (as amended, modified, supplemented, extended or consolidated, "Note D") duly executed and delivered by Borrower and the REIT substantially in the form of Exhibit "B-1" hereto in a principal amount equal to $5,658,000.00 (Note A, Note B, Note C and Note D individually a "Note" and collectively, together with any related Swing Line Note, as the context may require, hereinafter referred to as the "Notes") with blanks in each Note appropriately completed in conformity herewith. Each Note shall (i) be payable to the order of Lender, (ii) be dated the Closing Date, and (iii) mature on the Maturity Date. After the Syndication, if required by a Co-Lender, Borrower and (except for the Florida Note) the REIT hereby agree to execute for each Note a supplemental Note in the principal amount of such Co-Lender's pro rata share of each Note substantially in the form of Exhibit "B-1" hereto, with blanks appropriately completed, and each such supplemental Note shall (i) be payable to order of Lender, as Agent, on account of such Co-Lender, (ii) be dated as of the Closing Date, and (iii) mature on the Maturity Date. Each such supplemental Note shall evidence a portion of the existing indebtedness hereunder and not any new or additional indebtedness of Borrower. (b) Borrower's and the REIT's obligation to pay the principal of, and interest on the Swing Line Advances shall be evidenced by a promissory note duly executed and delivered by Borrower and the REIT, substantially in the form of Exhibit B-2 hereto (the "Swing Line Notes"), supplementing Note A-1, in the principal amount of $10,000,000.00. The Swing Line Note shall be a supplemental Note with respect to Note A-1 and shall evidence a portion of the indebtedness under Note A-1 and not evidence any new or additional indebtedness of Borrower or the REIT. The Swing Line Note shall (i) be payable to order of Lender, as Agent, on account of the Swing Line Lender or, at the Swing Line Lender's option, to the order of the Swing Line Lender, (ii) be dated as of the date the Syndication occurs, and (iii) mature on the Maturity Date. (c) Lender is hereby authorized, at its option, (i) to endorse on the schedule attached to each Note (including the Swing Line Note) (or on a continuation of such schedule attached to each such Note and made a part thereof) an appropriate notation evidencing the date and amount of each Advance evidenced thereby (including the Swing Line Lender in the case of Swing Line Advances), and the date and amount of each principal and interest payment in respect thereof, and/or (ii) to record such Advances and such payments in its books and records. Such schedule or such books and records, as the case may be, shall be conclusive and binding on 38 -31- Borrower absent manifest error provided that the failure to make any notation shall not affect the obligations of Borrower or the REIT or the rights of Lender or any Co-Lender hereunder. Section 2.5 Interest. (a) Borrower and (except with respect to the Florida Note) the REIT shall pay interest in respect of the unpaid principal amount of each Base Rate Portion from the date of the making of such Base Rate Portion until such Base Rate Portion shall be paid in full, or converted to a Eurodollar Portion, at a rate per annum which shall be equal to the sum of the Base Rate Margin plus the Base Rate in effect from time to time, such rate to change automatically and without notice as and when the Base Rate changes. (b) Borrower and (except with respect to the Florida Note) the REIT shall pay interest in respect of the unpaid principal amount of each Eurodollar Portion from the date of the making of such Eurodollar Portion until such Eurodollar Portion shall be paid in full, continued as a Eurodollar Portion or converted to a Base Rate Portion, at a rate per annum which shall be equal to the sum of the Eurodollar Rate Margin plus the relevant Eurodollar Rate. (c) Intentionally Omitted. (d) In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal amount of the Loan and, to the extent permitted by law, overdue interest in respect of the Loan, shall bear interest at the Default Rate, calculated from the date such payment was due without regard to any grace or cure periods contained herein. (e) Interest on the Loan shall accrue from and including the date of each Borrowing thereof to but excluding the date of any repayment thereof (provided that any Advance borrowed and repaid on the same day shall accrue one day's interest) and Borrower and (except with respect to the Florida Note) the REIT shall pay such interest (i) in respect of each Base Rate Portion, (A) monthly in arrears on the first day of each month, (B) on the date of any prepayment or conversion, (C) on the Maturity Date (whether by acceleration or otherwise) and (D) after the Maturity Date, on demand, and (ii) in respect of each Eurodollar Portion, in arrears (A) on the last day of the applicable Interest Period, (B) on the date of any prepayment or conversion (on the amount prepaid or converted), (C) on the Maturity Date (whether by acceleration or otherwise), and (D) after the Maturity Date, on demand. (f) Interest on the outstanding principal balance of Base Rate Portions shall be calculated on the basis of a three hundred sixty (360) day year based on twelve (12) thirty (30) day months, except that interest due and payable for a period of less than a full month shall be calculated by multiplying the actual number of days elapsed in such period by a daily rate based on said 360-day year. Interest on the outstanding principal balance of Eurodollar Portions shall 39 -32- be calculated on the basis of a three hundred sixty (360) day year based on the actual number of days elapsed. (g) This Agreement and the Note are subject to the express condition that at no time shall Borrower or the REIT be obligated or required to pay interest on the principal balance of the Loan at a rate which could subject Lender or any Co-Lender (including the Swing Line 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 Loan Documents, Borrower or the REIT is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of the Maximum Legal Rate, the interest rate or the Default Rate, as the case may be, shall 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 does not exceed the Maximum Legal Rate of interest from time to time in effect and applicable to the Loan for so long as the Loan is outstanding. Section 2.6 Interest Periods. (a) Borrower shall, in each Notice of Borrowing or Notice of Conversion or Continuation in respect of the making of, conversion into or continuation of a Eurodollar Portion, select the interest period (each such period or any Short Interest Period an "Interest Period") applicable to such Eurodollar Portion, which Interest Period, other than a Short Interest Period, shall, at the option of Borrower, be either a one month, two-month or three-month period subject to Section 2.6(b) below, provided that: (i) the Interest Period (other than a Short Interest Period) for any Eurodollar Portion shall commence on the first Business Day of a calendar month and shall expire on the day immediately preceding the day that the next Interest Period (other than a Short Interest Period) commences; (ii) if the date of an Advance is not the first Business Day of a calendar month, the Interest Period for such Eurodollar Portion shall be a Short Interest Period and shall commence on the date of the making of such Advance and expire on the day immediately preceding the first Business Day of the next succeeding calendar month; and (iii) no Interest Period in respect of any Eurodollar Portion shall extend beyond the Maturity Date. (b) Notwithstanding the foregoing, in the event that the last day of an Interest Period for any Eurodollar Portion occurs within the thirty (30) day period ending on a voluntary 40 -33- prepayment date pursuant to Section 2.11 or the Maturity Date, Borrower may upon three (3) Business Days notice to Lender, which notice shall be in the form annexed hereto as Exhibit C-1, request a Short Interest Period for such Eurodollar Portion. Neither Lender nor the Co-Lenders shall be under any obligation to permit Borrower to select a Short Interest Period, and the Eurodollar Base Rate offered to Borrower for any Short Interest Period shall be determined by Lender and the Co-Lenders in accordance with the provisions of this Agreement. Lender shall notify Borrower, either orally or in writing, prior to 11:00 a.m. New York City time, on the date on which the Short Interest Period is to begin, of the Eurodollar Base Rate, Eurodollar Portion and the length of the Short Interest Period that would be applicable to such Short Interest Period and Borrower shall orally confirm its acceptance of such Eurodollar Base Rate at or prior to 11:00 a.m. New York City time and shall deliver written confirmation of such acceptance to Lender at or prior to 2:00 p.m. New York City time on such date. If such confirmation differs in any respect with the commencement date or length of the Short Interest Period, the Eurodollar Base Rate or applicable Eurodollar Portion agreed to by Lender, Lender shall be under no obligation to create such Eurodollar Portion, and Eurodollar Portions shall be continued in accordance with Section 2.6(c). (c) If upon the expiration of any Interest Period, Borrower has failed to elect or confirm a new Interest Period or Eurodollar Base Rate to be applicable to any Eurodollar Portion as provided above in Sections 2.6(a) and 2.6(b) or failed to convert such Eurodollar Portion to a Base Rate Portion, all in accordance with Section 2.8, Borrower shall be deemed to have elected to continue such Eurodollar Portions as Eurodollar Portions with an Interest Period of one month (or, if at such time Eurodollar Portions are not available pursuant to Section 2.17, Borrower shall be deemed to have elected to convert such Eurodollar Portion into a Base Rate Portion), effective as of the expiration date of such current Interest Period. Section 2.7 Minimum Amount of Eurodollar Portions. All advances, borrowings, conversions, continuations, payments, prepayments and selection of Interest Periods hereunder shall be made or selected so that, after giving effect thereto, each Eurodollar Portion shall (i) have a principal amount equal to or greater than One Million Dollars (U.S. $1,000,000.00) and (ii) be in an integral multiple of Five Hundred Thousand and 00/100 Dollars (U.S. $500,000.00) in excess of such minimum amount. Subject to compliance with such minimum amounts there shall be no limit on the number of Eurodollar Portions. Section 2.8 Conversion or Continuation. (a) Subject to the other provisions hereof, Borrower shall have the option (i) to convert at any time all or any part of the outstanding Base Rate Portions (other than Swing Line Advances, but including Refunded Swing Line Advances,) to Eurodollar Portions, (ii) to convert, at the expiration of the applicable Interest Period, any outstanding Eurodollar Portions to Base Rate Portions, or (iii) to continue all or any part of the outstanding Eurodollar Portions as Eurodollar Portions for one or more additional Interest Periods, subject to Section 2.7, on the expiration of the Interest Period applicable thereto (or 41 -34- prior to such expiration date, provided Borrower pays Funding Costs in connection therewith pursuant to Section 2.17); provided that Borrower shall not have the right to continue any Eurodollar Portion or convert any Base Rate Portion into, a Eurodollar Portion when any Default with respect to the payment of interest or principal hereunder or any Event of Default has occurred and is continuing and in such case all outstanding Eurodollar Portions shall automatically convert into a Base Rate Portion effective as of the expiration date of the related Interest Period. Notwithstanding anything to the contrary herein, all Swing Line Advances shall be Base Rate Portions, and Borrower shall not be entitled to convert any Swing Line Advance into a Eurodollar Portion. In the event Eurodollar Portions are not available pursuant to Section 2.16, Borrower shall be deemed to have elected to convert such Eurodollar Portions into Base Rate Portions, and if such conversion occurs prior to the expiration date of the applicable Interest Period, Borrower shall also pay all Funding Costs and other costs, expenses and losses in connection therewith pursuant to Sections 2.16 and 2.17. (b) In order to elect to convert or continue a Loan Portion under this Section 2.8, Borrower shall deliver an irrevocable notice thereof in the form annexed hereto as Exhibit "C-2" (a "Notice of Conversion or Continuation") to Lender no later than 11:00 A.M., New York City time, (which notice may be by facsimile transmission provided that an original is delivered prior to the close of business on the immediately succeeding Business Day) three (3) Business Days prior to the proposed conversion or continuation date in the case of a conversion to, or a continuation of, a Eurodollar Portion. A Notice of Conversion or Continuation shall specify (v) the requested conversion or continuation date (which shall be a Business Day), (w) the amount and Type of the Loan Portion to be converted or continued, (x) whether a conversion or continuation is requested, (y) in the case of a conversion to, or a continuation of, a Eurodollar Portion, the requested Interest Period and (z) the existing Contract Rate applicable to the Loan Portion to be converted or continued. Section 2.9 Voluntary Reduction of Maximum Facility Amount; Termination of Maximum Facility Amount. (a) Upon at least three (3) Business Days' prior irrevocable written notice annexed hereto as Exhibit "D" (or telephonic notice promptly confirmed in writing) to Lender, Borrower shall have the right, without premium or penalty, to permanently reduce the Maximum Facility Amount, provided that (a) Borrower may not reduce the Maximum Facility Amount below the aggregate principal amount outstanding under the Loan at the time of such requested reduction, (b) any such partial reduction shall be in the minimum aggregate amount of Five Million Dollars (U.S. $5,000,000.00) or any integral multiple of One Million Dollars (U.S. $1,000,000.00) in excess thereof, (c) notwithstanding any such voluntary reduction of the Maximum Facility Amount, none of the Liens affecting the Collateral shall be released unless Borrower shall have complied with the terms and conditions of Section 2.21, (d) Borrower may not reduce the Maximum Facility Amount to an amount less than Twenty Five Million Dollars (U.S. $25,000,000.00) and (e) if the Maximum Facility Amount shall be reduced below the Aggregate Available Facility Amount, the Available Facility Amount for each Note shall be 42 -35- reduced at Borrower's direction, provided that such reductions do not result in a breach of the Available Borrowing Base Covenant or the Loan to Value Covenant; if such direction results in a breach of either the Available Borrowing Base Covenant or the Loan to Value Covenant or if Borrower fails to specify the Note or Notes to be reduced, the Available Facility Amount for each Note shall be reduced pro rata, in each case so that the Aggregate Available Facility Amount shall equal the Maximum Facility Amount. Any reduction of the Maximum Facility Amount shall be applied pro rata to Lender's and each Co-Lender's respective percentage interest in the Loan. (b) Upon at least three (3) Business Days prior irrevocable written notice to Lender, Borrower shall have the right to terminate the Loan, this Agreement and reduce the Maximum Facility Amount to zero, provided that Borrower, on the date specified in such notice, pays to Lender the entire outstanding principal balance of the Loan, together with all interest accrued and unpaid thereon, all Funding Costs, and all other sums due under the Note (including without limitation, the Swing Line Note), this Agreement and the other Loan Documents; upon such termination, Lender and the Co-Lender shall have no further obligation to make any Advances. Section 2.10 Swing Line Advances. (a) The Swing Line Lender, at any time in its sole and absolute discretion, may on behalf of the Borrower and the REIT (which hereby irrevocably directs the Swing Line Lender to act on their behalf) request each Co-Lender, including the Swing Line Lender, to make an Advance in an amount equal to such Co-Lender's pro rata share of the amount of the Swing Line Advances (the "Refunded Swing Line Advances") outstanding on the date such notice is given. Unless any of the events described in Section 7.1(e) shall have occurred (in which event the procedures of subsection 2.10(b) shall apply) each Co-Lender shall, not later than 2:00 p.m., New York City time, on the Business Day next succeeding the date on which such notice is given, make available to the Swing Line Lender in immediately available funds an amount equal to the Refunded Swing Line Advance to be made by such Co-Lender. The proceeds of such Refunded Swing Line Advance shall be immediately applied to repay the Swing Line Advance. Upon any request by the Swing Line Lender to the Co-Lenders pursuant to this subsection 2.10(a), Lender shall promptly give notice to the Borrower of such request. Refunded Swing Line Advances shall be Base Rate Portions until converted by Borrower in accordance with Section 2.8. (b) If prior to the making of a Refunded Swing Line Advance pursuant to subsection 2.10(a), one of the events described in Section 7.1(e) shall have occurred, each Co-Lender will, on the date such Refunded Swing Line Advance was to have been made, purchase an undivided participating interest in the outstanding Swing Line Advance in an amount equal to its pro rata share of such Swing Line Advance. Each Co-Lender will immediately transfer to the Swing Line Lender, in immediately available funds, the amount of its participation, and upon receipt thereof the Swing Line Lender will deliver to such Co-Lender a participation certificate (a 43 -36- "Swing Line Participation Certificate") in the form annexed as Exhibit J, appropriately completed by the Swing Line Lender, dated the date of receipt of such funds and in the amount of such Co-Lender's participation. (c) Whenever, at any time after the Swing Line Lender has received from any Co-Lender such Co-Lender's participating interest in a Swing Line Advance, the Swing Line Lender receives any payment on account thereof, the Swing Line Lender will distribute to such Co-Lender its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Co-Lender's participating interest was outstanding and funded); provided, however, that in the event that such payment was received by the Swing Line Lender and is required to be returned, such Co-Lender will return to the Swing Line Lender any portion thereof previously distributed by the Swing Line Lender to it. (d) Each Co-Lender's obligation to purchase participating interests pursuant to subsection 2.10(b) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (a) any set-off, counterclaim, recoupment, defense or other right which such Co-Lender or any Loan Party may have against the Swing Line Lender, any Loan Party or anyone else for any reason whatsoever; (b) the occurrence or continuation of any Default or Event of Default; (c) any adverse change in the condition (financial or otherwise) of any Loan Party; (d) any breach of this Agreement or the other Loan Documents by any Loan Party or any Co-Lender; or (e) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. Section 2.11 Voluntary Prepayments. Borrower and the REIT shall have the right to prepay the Loan, in whole or in part, from time to time on the following terms and conditions: (a) Borrower shall give Lender written notice (or telephonic notice promptly confirmed in writing), in the form attached hereto as Exhibit E, which notice shall be irrevocable, of its intent to prepay all or a portion of the Loan, at least three (3) Business Days prior to a prepayment of Eurodollar Portions and Base Rate Portions, which notice shall specify the amount of such prepayment and what Loan Portions are to be prepaid, whether or not the prepayments shall be applied to a Swing Line Advance, and, in the case of Eurodollar Portions, the specific Borrowing(s) pursuant to which made, (b) each prepayment shall be in an aggregate principal amount of One Million Dollars (U.S. $1,000,000.00) (Two Hundred Fifty Thousand (U.S. $250,000.00) for a Swing Line Advance) or any integral multiple of Five Hundred Thousand U.S. Dollars (U.S. $500,000.00) (Fifty Thousand (U.S. $50,000.00) for a Swing Line Advance) in excess thereof, and (c) prepayments of Eurodollar Portions made pursuant to this Section on a date other than the last day of the Interest Period applicable thereto shall be accompanied by payment of any Funding Costs which Lender and the Co-Lenders shall incur as a result of such early payment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. 44 -37- Section 2.12 Mandatory Prepayments. (a) On each date after the Closing Date on which Borrower or the REIT actually receives a distribution of the proceeds of any insurance payment or condemnation award in respect of any of the Real Property Assets, and if Lender is not obligated to make such proceeds available to Borrower for the restoration of any Real Property Asset or to release such proceeds to Borrower under the terms of the Security Instruments, Borrower shall prepay the outstanding principal balance of the related Note secured by such Real property Asset in an amount equal to the lesser of (i) one hundred percent (100%) of such proceeds and (ii) the Allocated Loan Amount with respect to such Real Property Asset and, in either case, the applicable Funding Costs as a result of such payment. All prepayments made pursuant to this subsection shall be applied in accordance with the provisions of Section 2.13, and the Available Facility Amount for such Note shall be reduced by such amount. The Allocated Loan Amount with respect to such Real Property Asset will be reduced in an amount equal to such prepayment. (b) On each day on which the Aggregate Available Facility Amount is reduced pursuant to the terms of this Agreement, including, without limitation, if the Available Borrowing Base Covenant or Loan to Value Ratio Covenant are no longer satisfied, Borrower shall prepay the Loan to the extent, if any, that the outstanding principal amount of the Loan exceeds such reduced Aggregate Available Facility Amount, together with any applicable Funding Costs as a result of such payment. Such payments shall be applied to the Notes for which the Available Borrowing Base Covenant or Loan to Value Covenant is not met. Section 2.13 Application of Payments and Prepayments. Unless specifically provided otherwise, all payments and prepayments of the Loan, whether voluntary or otherwise, shall be applied first, to unpaid Fees and any Funding Costs, second, to pay any accrued and unpaid interest then payable with respect to the Loan, and third, to pay the outstanding principal amount of the Loan. Payments applied to the outstanding principal amount of the Loan shall if voluntary be applied to the Notes and Loan Portions (including Swing Line Advances) specified by Borrower and if not specified by Borrower, shall be first applied to the Swing Line Advances, then the other Base Rate Portions of the Loan and then to pay the Eurodollar Portions of the Loan being repaid in the order of such Eurodollar Portion's maturity and allocated to each Note on a pro rata basis; notwithstanding the foregoing, no payments shall be allocated to the Florida Note if such payment would reduce the outstanding principal amount of the Florida Note to less than $3,400,000.00, unless at the time of application of such payment the outstanding principal amount of Notes A-1 (including the Swing Line Note, if any) B, C and D are each $0.00. Section 2.14 Method and Place of Payment. (a) Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 12:00 noon, 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, 45 -38- be deemed to have been paid on the next succeeding Business Day. Each payment (including all prepayments on account of principal and interest on the Loan), to the extent received, shall constitute payment by Borrower to each Co-Lender and Swing Line Lender in the amount of such Co-Lender's pro rata share or the Swing Line Lender's share of such payment. (b) Except as expressly provided to the contrary in Section 2.6 hereof, whenever any payment to be made hereunder or under the Note or other Loan Documents shall be stated to be due on a day which is not an Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension. (c) All payments made by Borrower hereunder, under the Note and the other Loan Documents, shall be made irrespective of, and without any deduction for, any setoff or counterclaims. Section 2.15 Fees. Borrower and the REIT shall pay to Lender a fee (the "Non-use Fee"), computed at the per annum rate (based on a year of 360 days, for the actual number of days elapsed) of one-quarter of one percent (0.25%) on the average daily unfunded portion of the Initial Facility Amount, or, if the Syndication has occurred, the applicable Maximum Facility Amount from and including the Closing Date through and including the Maturity Date, payable, in arrears, on the later of the Non-use Fee Due Date or the first day of each calendar quarter beginning on the Closing Date through the Maturity Date and on the Maturity Date. For purposes of calculating the Non-use Fee, all amounts outstanding under any Swing Line Advance (but excluding any Refunded Swing Line Advance) shall be deemed to be part of the unfunded portion of the Initial Facility Amount or, if the Syndication has occurred, the then applicable Maximum Facility Amount. Each payment of the Non-use Fee, to the extent received by Lender, shall constitute payment by Borrower and the REIT to each Co-Lender in the amount of such Co-Lender's pro rata share of the Non-use Fee. Section 2.16 Interest Rate Unascertainable, Increased Costs, Illegality. (a) In the event that Lender has determined or, with respect to any Co-Lender or Participants, has been notified that (which determination or notice shall, if made in good faith and absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period, that by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of the Eurodollar Rate; or 46 -39- (ii) at any time, that the relevant Eurodollar Rate applicable to any of its Eurodollar Portions shall not represent the effective pricing to Lender or any Co-Lender for funding or maintaining its Eurodollar Portions, or Lender or any Co-Lender shall incur increased costs or reduction in the amounts received or receivable hereunder in respect of any Eurodollar Portion, in any such case because of (x) any change since the date of this Agreement in any applicable law or governmental rule, regulation, guideline, order, request or directive or any interpretation thereof and including the introduction of any new law or governmental rule, regulation, guideline, order, request or directive (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D of the Federal Reserve Board to the extent included in the computation of the Eurodollar Rate), whether or not having the force of law and whether or not failure to comply therewith would be unlawful, and/or (y) other circumstances affecting Lender, any Co-Lender or the interbank Eurodollar market or the position of Lender or any Co-Lender in such market; or (iii) at any time, that the making or continuance by it of any Eurodollar Portion has become unlawful in order for Lender or any Co-Lender, in good faith, to comply with any law or governmental rule, regulation, guideline, order, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or has become impracticable as a result of a contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, Lender shall, promptly after making such determination or receiving notice thereof from any Co-Lender, give notice by telephone promptly confirmed in writing to Borrower. Thereafter (x) in the case of clause (i) above, Borrower's right to request advances, conversions or continuations of Eurodollar Portions shall be suspended, and any Notice of Borrowing, request for Short Interest Period or Notice of Conversion or Continuation given by Borrower with respect to any Borrowing of Eurodollar Portions which has not yet been made shall be deemed cancelled and rescinded by Borrower, (y) in the case of clause (ii) above, Borrower shall pay to Lender, within ten (10) Business Days after receipt of Lender's written demand therefor, such additional amounts (in the form of an increased rate of interest, or a different method of calculating interest, or otherwise, as Lender shall determine) as shall be required to compensate Lender or any Co-Lender for such increased costs or reduction in amounts received or receivable hereunder (it being understood and agreed by the parties hereto that in the event that Lender shall fail to notify Borrower within ten (10) Business Days after such determination, then Borrower shall not be liable to pay to Lender any additional amounts relating to the period prior to Lender's notifying Borrower, and (z) in the case of clause (iii) above, Borrower shall take one of the actions specified in clause (b) below as promptly as 47 -40- possible and, in any event, within the time period required by law. The written demand provided for in clause (y) shall demonstrate in reasonable detail the circumstances giving rise to such demand and the calculation of the amounts demanded; provided that Borrower and the REIT shall not be obligated to pay an amount in excess of the amount directly attributable to the Loan hereunder. (b) In the case of any Eurodollar Portion or requested Eurodollar Portion affected by the circumstances described in clause (a)(ii) above, Borrower may, and in the case of any Eurodollar Portion affected by the circumstances described in clause (a)(iii) above, Borrower shall, either (i) if any such Eurodollar Portion has not yet been made but is then the subject of a Notice of Borrowing, a request for Short Interest Period or a Notice of Conversion or Continuation, be deemed to have cancelled and rescinded such notice, or (ii) if any such Eurodollar Portion is then outstanding, require Lender to convert each such Eurodollar Portion into a Base Rate Portion at the end of the applicable Interest Period or such earlier time as may be required by law, in each case by giving Lender notice (by telephone promptly confirmed in writing) thereof within two (2) Business Days after Borrower was notified by Lender pursuant to clause (a) above. (c) In the event that Lender determines at any time following the giving of notice based on the conditions described in clause (a)(i) and (a)(iii) above that such conditions no longer exist, Lender shall promptly give notice thereof to Borrower, whereupon Borrower's right to request Eurodollar Portions from Lender and Lender's and any Co-Lender's obligation to make Eurodollar Portions shall be automatically restored. (d) The amount of any increased costs or reductions in amounts referred to in Section 2.16(a)(ii) with respect to Lender and each Co-Lender shall be based on the assumption that Lender and any Co-Lender funded all of its Eurodollar Portions in the interbank Eurodollar market, although the parties hereto agree that Lender or Co-Lender may fund all or any portion of a Eurodollar Portion, in any manner it independently determines. For purposes of any demand for payment made by a Lender under Sections 2.16(a)(ii) or 2.18, in attributing Lender's or any Co-Lender's general costs relating to eurocurrency operations or its commitments or customers, or in averaging any costs over a period of time, Lender may use any reasonable attribution and/or averaging method which it deems appropriate, reasonable and practical. The agreements in this Section 2.16 shall survive the termination of this Agreement and the payment of the Note and all other Obligations. Section 2.17 Funding Losses. Borrower and, except with respect to Funding Costs in connection with the Florida Note, the REIT, shall compensate Lender, upon Lender's delivery of a written demand therefor to Borrower and the REIT, (which demand shall set forth in detail the basis for requesting such amounts and shall, absent manifest error, be final and conclusive and binding upon all of the parties hereto), for all reasonable losses, expenses and liabilities, to the 48 -41- extent actually incurred (including, without limitation, any loss, expense or liability incurred by Lender or any Co-Lender in connection with the liquidation or reemployment of deposits or funds required by it to make or carry its Eurodollar Portions), excluding loss of anticipated profits ("Funding Costs"), that Lender or any Co-Lender sustains: (a) if for any reason (other than a default by Lender or any Co-Lender) a Borrowing of, or conversion from or into, or a continuation of, Eurodollar Portions does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion or Continuation (whether or not rescinded, cancelled or withdrawn or deemed rescinded, cancelled or withdrawn, pursuant to Sections 2.16(a) or 2.16(b) or otherwise), (b) if any prepayment (whether voluntary or mandatory), repayment (including, without limitation, payment after acceleration) or conversion of any of its Eurodollar Portions occurs on a date which is not the last day of the Interest Period applicable thereto, (c) if any prepayment of any of its Eurodollar Portions is not made on any date specified in a notice of prepayment given by Borrower, or (d) as a consequence of any default by Borrower or the REIT in repaying its Eurodollar Portions or any other amounts owing hereunder in respect of its Eurodollar Portions when required by the terms of this Agreement. Calculation of all amounts payable to Lender under this Section 2.17 shall be made on the assumption that Lender and each Co-Lender has funded its relevant Eurodollar Portion through (i) the purchase of a Eurodollar deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of such Eurodollar Portion with a maturity equivalent to the Interest Period applicable to such Eurodollar Portion, and (ii) the transfer of such Eurodollar deposit from an offshore office of Lender or any Co-Lender to a domestic office of Lender or any Co-Lender in the United States of America, provided that Lender or any Co-Lender may fund its Eurodollar Portions in any manner that it in its sole discretion chooses and the foregoing assumption shall only be made in order to calculate amounts payable under this Section 2.17. The agreements in this Section 2.17 shall survive the termination of this Agreement and the payment of the Note and all other Obligations. Section 2.18 Increased Capital. With respect to each Eurodollar Portion, if Lender shall have determined (or received notice from any Co-Lender of its determination), in good faith, that compliance with any applicable law, rule, regulation, guideline, request or directive (whether or not having the force of law) which shall be imposed, issued or amended from and after the date of this Agreement by any governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital or assets of Lender or any Co-Lender as a consequence of its commitments or obligations hereunder, then from time to time, upon Lender's delivering a written demand therefor to Borrower, setting forth its reasonable calculations, Borrower and, except with respect to Increased Capital Costs in connection with the Florida Note, the REIT, shall pay to Lender on demand such additional amount or amounts ("Increased Capital Costs") as will compensate Lender or any Co-Lender for such reduction. Such calculations may use any reasonable averaging and attribution methods selected by Lender. The agreements in this Section 2.18 shall survive the termination of this Agreement and the payment of the Note and all other Obligations. 49 -42- Section 2.19 Taxes. (a) All payments made by Borrower or the REIT under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental authority excluding, in the case of Lender or any Co-Lender, net income and franchise taxes imposed on Lender or any Co-Lender by the jurisdiction under the laws of which Lender is organized or any political subdivision or taxing authority thereof or therein, or by any jurisdiction in which Lender's or Co-Lender's Domestic Lending Office or Eurodollar Lending Office, as the case may be, is located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"). (b) Notwithstanding anything to the contrary herein, if at any time or from time to time Taxes are required to be deducted or withheld from the payments required to be made to Lender or any Co-Lender hereunder solely by reason of a Change in Law after the date hereof (other than as a result of any transfer or assignment of any of the obligations of Borrower and the REIT hereunder), all payments required to be made by Borrower and, except with respect to the Florida Note, the REIT, hereunder (including any additional amounts that may be payable pursuant to this clause (b)) shall be increased to the extent required so that the net amount received by Lender or any Co-Lender after the deduction or withholding of Taxes imposed solely by reason of a Change in Law after the date hereof will be not less than the full amount that would otherwise have been receivable had no such deduction or withholding been imposed by reason of such Change in Law. In the event that this clause (b) shall be operative, Borrower and the REIT shall promptly provide to Lender evidence of payment of such Taxes to the appropriate taxing authority and shall promptly forward to Lender any official tax receipts or other documentation with respect to the payment of the Taxes as may be issued by the taxing authority. If Borrower or the REIT fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to Lender the required receipts or other required documentary evidence, Borrower and the REIT shall indemnify Lender and any Co-Lender for any incremental taxes, interest or penalties that may become payable by Lender or Co-Lender as a result of any such failure. The agreements in this Section 2.19 shall survive the termination of this Agreement and the payment of the Note and all other Obligations. (c) For purposes of this Section 2.19 the term "Change in Law" shall mean the following events: (i) the enactment of any legislation by the United States, including the enactment, amendment or modification of a treaty; (ii) the lapse, by its terms, of any law of the United States or any treaty to which the United States is a party; or (iii) the promulgation of any temporary or final regulation under the Code. (d) Each Co-Lender that is not incorporated under the laws of the United States of America or a state thereof agrees that, prior to the first date on which any payment is 50 -43- due to it hereunder, it will deliver to Borrower and Lender (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Co-Lender is entitled to receive payments under this Agreement and the Note payable to it, without deduction or withholding of any United States federal income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Co-Lender required to deliver to Borrower and Lender a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the preceding sentence further undertakes to deliver to Borrower and Lender two further copies of the said letter and Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires (which, in the case of the Form 4224, is the last day of each U.S. taxable year of the non-U.S. Co-Lender) or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to Borrower and Lender, and such other extensions or renewals thereof as may reasonably be requested by Borrower or Lender, certifying in the case of a Form 1001 or 4224 that such Co-Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Co-Lender from duly completing and delivering any such letter or form with respect to it and such Co-Lender advises Borrower and Lender that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax. Notwithstanding clause (a), if a Co-Lender fails to provide a duly completed Form 1001 or 4224 or other applicable form and, under applicable law, in order to avoid liability for Taxes, Borrower is required to withhold on payments made to such a Co-Lender that has failed to provide the applicable form, Borrower shall be entitled to withhold the appropriate amount of Taxes. In such event, Borrower shall promptly provide to such Co-Lender or Lender evidence of payment of such Taxes to the appropriate taxing authority and shall promptly forward to such Co-Lender or Lender any official tax receipts or other documentation with respect to the payment of the Taxes as may be issued by the taxing authority. Section 2.20 Use of Proceeds. Borrower shall use the proceeds of the Loan to acquire interests in additional hospitality properties, and hotels, for costs associated with the construction, renovation and development of such hospitality properties and hotels, for working capital, for the initial funding of capital expenditures, replacement reserves or other escrows required hereunder, to pay various Transaction Costs and general corporate purposes, including the payment of Distributions (subject to the conditions of this Agreement). Section 2.21 Release and Substitution of Collateral. (a) Provided that no Event of Default has occurred and is continuing, Borrower shall have the right, from time to time, to 51 -44- obtain a release of a Real Property Asset from the Lien of the related Security Instrument and Loan Documents (a "Release Property") upon delivery to Lender of a written request for such release at least five (5) Business Days prior to the requested release date. In the event Borrower seeks to release a Real Property Asset from the Lien of the related Security Instrument, Lender shall release such Real Property Asset from the Lien of the related Security Instrument and the Loan Documents, but only upon receipt by Lender of the following: (i) if after giving effect to the Release, the aggregate Allocated Loan Amounts for the remaining Real Property Assets in the Pool to which the Release Property belonged is less than the then outstanding principal balance of the related Note, a wire transfer of immediately available federal funds in an amount equal to the difference between (A) the outstanding principal balance of such Note and (B) the aggregate Allocated Loan Amounts for such remaining Real Property Assets; notwithstanding the foregoing, if the Non-Competition Agreement has expired or is otherwise terminated, a wire transfer of immediately available federal funds in an amount equal to the lesser of (x) the outstanding principal balance of the related Note and (y) the greater of the Allocated Loan Amount or the Available Borrowing Base calculated for the Release Property, in either case together with all accrued interest on the amount being prepaid, and any costs and expenses incurred by Lender to effect the Transaction contemplated by this Section; such payment shall be applied to the Note related to the Release Property; (ii) A certificate of the general partner of Borrower or senior executive officer of Borrower certifying that (i) the Non-Competition Agreement has either expired or terminated or is in full force of effect, and (ii) the Real Property Assets remaining encumbered by the Liens of the Security Instruments after giving effect to the payment of the Allocated Loan Amount or the Available Borrowing Base calculated for such Real Property Asset, continue to satisfy the Available Borrowing Base Covenant and the Loan to Value Ratio Covenant. Simultaneously with compliance with the conditions set forth in this Section 2.21(a), (w) Lender and any Co-Lender shall release the Lien with respect to all Collateral relating to the applicable Release Property, (x) Lender shall revise Schedules 1, 2, 2A, 2B, 2C, 2D, 3, 8, 10, 11, 11A, 12, 14, 16 and 17 (the "Related Schedules") and (y) the Available Facility Amount shall be reduced to the extent of the applicable amounts prepaid hereunder. If the Non-Competition Agreement has expired or otherwise terminated, the Maximum Facility Amount, the Aggregate Available Facility Amount and the Available Facility Amount for such Note shall be irrevocably reduced by the amount of such prepayment. (b) Provided that no Default or Event of Default has occurred and is continuing, and the Non-Competition Agreement has not expired or otherwise terminated, prior to the Termination Date, Borrower shall have the right, subject to Lender's consent, which 52 -45- consent may be withheld in Lender's sole discretion, to obtain a release of a Real Property Asset from the Lien of the related Security Instrument and Loan Documents (a "Release Property"), if Borrower simultaneously substitutes another fully licensed, stabilized and operating hospitality property owned in fee simple by Borrower and leased by the Partnership pursuant to an Operating Lease (a "Substitute Property"), and subjects such Substitute Property and Operating Lease to the Lien of a new mortgage, deed of trust, deed to secure debt or similar security instruments, in the same form and substance as the Security Instruments ("Substitute Mortgage") and to the Lien of the Loan Documents, as a first lien thereon. Lender's consent to such release and substitution may be conditioned on, among other things, receipt by Lender of the following: (i) Evidence reasonably satisfactory to Lender that the Substitute Property is fully operational, stabilized and is of similar or higher quality or value to the Release Property. (ii) An Appraisal (or, at the election of Lender, an internal valuation by Lender) of the Substitute Property prepared within six (6) months prior to delivery and reasonably satisfactory to Lender. (iii) Evidence reasonably satisfactory to Lender (which may include an opinion of counsel with respect to the procedural and substantive requirements for the enforcement of mortgages or deeds of trust in the state where the Substitute Property is located and the impact of an out of state enforcement action on the enforcement of the Substitute Mortgage and related Loan Documents within the state where the Substitute Property is located) that subjecting the Substitute Property to the Lien of the Substitute Mortgage and the Loan Documents does not and will not affect or impair the ability of Lender to enforce its remedies under all of the Security Instruments and Loan Documents with respect to the Pool to which the Substitute Property has been added or to realize the benefits of the cross-collateralization. (iv) An opinion of Borrower's and the Partnership's (and HIC's, if applicable) counsel reasonably satisfactory to Lender stating (u) that the Substitute Mortgage and the Loan Documents by which the Substitute Property will be encumbered have been duly authorized, executed and delivered by Borrower and, if the Partnership has entered into an Operating Lease with respect to the Substitute Property, the Partnership, are valid and enforceable in accordance with their terms, subject to bankruptcy and equitable principles, (v) that Borrower (and the REIT, if necessary) and, if the Partnership entered into an Operating Lease with respect to the Substitute Property, the Partnership, are qualified to do business and in good standing under the laws of the jurisdiction where the Substitute Property is located, or that Borrower or the REIT or the Partnership, as applicable, are not required by Applicable Law to qualify to do business in such jurisdiction, (w) based on a certificate of Borrower (or the Partnership, or HIC as the 53 -46- case may be) the encumbrance of the Substitute Property with the Liens of the Substitute Mortgage and the Loan Documents shall not cause a breach of, or a default under any agreement, document or instrument to which Borrower is a party or to which it or its properties are bound or affected and (x) the anticipated release and substitution will not affect the status of the REIT as a qualified real estate investment trust under Section 856 of the Code. (v) A certification by Borrower and the REIT (w) that the Non-Competition Agreement has not expired or otherwise terminated and is in full force and effect, (x) that the certificates, opinions and other instruments which have been or are therewith delivered to or deposited with Lender in connection with such release and substitution conform to the requirements of this Agreement and the Security Instruments, (y) that all conditions precedent herein have been complied with and (z) that all conditions precedent to the delivery of the Substitute Mortgage and Loan Documents contained in this Agreement have been fulfilled. (vi) Evidence reasonably satisfactory to Lender that Borrower, the REIT and the other Loan Parties are, and will remain after the consummation of the transaction, Solvent. (vii) Original executed counterparts of the Substitute Mortgage and the Loan Documents encumbering the Substitute Property and the related Operating Lease and related Collateral, including without limitation, a Partnership Guaranty Security Agreement and a Partnership Mortgage, or a HIC Guaranty Security Agreement and a HIC Mortgage, financing statements or other documents necessary to grant or perfect Lender's first priority security interest in the fixtures and personalty located thereon and the Gross Revenues and Accounts Receivable derived therefrom; the principal amount of such Substitute Mortgage shall equal the face amount of the Note that such Substitute Mortgage secures. (viii) A title insurance policy issued by a title insurance company reasonably satisfactory to Lender insuring the lien of the Substitute Mortgage on the Substitute Property, in form and substance satisfactory to Lender insuring that the Substitute Mortgage is a valid and enforceable first lien on the good and marketable fee simple title or leasehold estate of Borrower to the Substitute Property, as the case may be, in an amount equal to the amount of the Loan allocated to the Substitute Property, subject only to such exceptions that Lender has approved together with such affirmative insurance and other endorsements reasonably required by Lender, including a revolving credit endorsement, together with a "tie-in" and first loss endorsement satisfactory to Lender, or, if such endorsement is not available in the state in which the Substitute Property is located, in an amount equal to the greater of one hundred ten percent (110%) of the 54 -47- amount of the Loan allocated by Lender to the Substitute Property or the amount on which mortgage or intangibles tax was paid with respect to the Security Instrument for the Substitute Property, together with a "last dollar endorsement". Such title insurance policy shall not contain any exception for any state of facts that an accurate survey might show or that a survey made after the date of the survey referred to in Section 2.21(b)(xii) might show. (ix) Evidence reasonably satisfactory to Lender to the effect that the Substitute Property and the use thereof are in substantial compliance with the applicable zoning, subdivision, and all other applicable federal, state or local laws and ordinances affecting the Substitute Property, and that all material building and operating licenses and permits necessary for the use and occupancy of the Substitute Property as an hospitality property or hotel including, but not limited to, current certificates of occupancy, have been obtained and are in full force and effect. (x) An Environmental Report dated within six (6) months prior to delivery which states that the Substitute Property does not contain any Hazardous Substances (as defined in the Security Instrument) or risk of contamination from off-site Hazardous Substance, and which otherwise shall be reasonably satisfactory to Lender. (xi) Payment of all Transaction Costs and other expenses incurred by Lender and all Co-Lenders including reasonable counsel fees and disbursements in connection with the release of any Release Property and the Substitute Property and its inclusion as Collateral. In the event that the jurisdiction in which the Substitute Property is located imposes a mortgage recording or intangibles tax, or similar tax, and does not permit the allocation of indebtedness for the purpose of determining the amount of such tax payable, if permitted by law in such jurisdiction, such tax shall be paid on an amount equal to 125% of the Allocated Loan Amount for the Substitute Property. (xii) A recent survey of the Substitute Property prepared by a land surveyor licensed in the state where the Substitute Property is located pursuant to standards for title surveys reasonably satisfactory to Lender and otherwise reasonably satisfactory to Lender, provided that no structural additions to the improvements shown on such survey or new structures have been made or built since the date of such survey and that there has been no change in the legal description of the Substitute Property since the date of such survey, whether due to sales, transfers, condemnation or otherwise. (xiii) Evidence reasonably satisfactory to Lender indicating whether the Substitute Property is in a flood plain. 55 -48- (xiv) Payment of all recording charges, filing fees, taxes, or other expenses, including but not limited to intangibles taxes and documentary stamp taxes in connection with the recording of the Substitute Mortgage and the Lien necessary to grant and perfect Lender a first priority lien on and security interest in the Substitute Property. (xv) A property inspection report dated within six (6) months of delivery prepared by an independent licensed engineer reasonably satisfactory to Lender, prepared in accordance with Lender's then current guidelines for property inspection reports, stating, among other things, that the Substitute Property is in good condition and repair and free of damage or waste and complies in all material respects with the Americans with Disabilities Act, and is otherwise reasonably satisfactory to Lender. (xvi) Annual operating statements and occupancy statements for the Substitute Property for Borrower's and the Partnership's most recent fiscal year (and such prior fiscal years as reasonably required by Lender in order for Lender to perform its due diligence with respect to the Substitute Property), together with a year to date operating statement, current occupancy statements, and a budget for the current fiscal year, each certified by Borrower and the Partnership, and a certificate of no adverse change since the date thereof executed by the general partner of Borrower and the Partnership or senior executive officer of Borrower and the Partnership, in each case in form and substance satisfactory to Lender. (xvii) Original certificates and copies of policies of insurance required by Lender under the terms of the Substitute Mortgage for the Substitute Property. (xviii) Evidence of the qualification and good standing of Borrower and, if the Partnership has entered into an Operating Lease with respect to the Substitute Property, the Partnership, in the state where the Substitute Property is located unless such qualification is not required in such state by Applicable Law. (xix) Certified copies of all Leases (as defined in the Security Instrument) with respect to the Substitute Property and Tenant Estoppel Certificates from tenants under Major Leases, as required by Lender, all in form and substance reasonably satisfactory to Lender. (xx) Certified copies of all material contracts and agreements relating to the management, leasing and operation of the Substitute Property, including, without limitation, if any, the Franchise Agreement each of which shall be in form and substance reasonably satisfactory to Lender. 56 -49- (xxi) Such evidence as Lender reasonably deems necessary to indicate compliance in all material respects with Applicable Laws and such evidence as Lender may deem reasonably necessary or appropriate to evidence the availability of all utilities, including water, sewers, gas and electricity, as may be necessary for the use of the Substitute Property as intended. (xxii) Access to plans and specifications for the Substitute Property. (xxiii) Certified copies of all material consents, licenses and approvals, if any, required in connection with the substitution of a Substitute Property, including liquor and gaming licenses, as applicable and such consents, licenses and approvals shall be in full force and effect. (xxiv) A certification by the general partner of Borrower or senior executive officer of Borrower and the REIT certifying that all of the representations and warranties contained in the Security Instruments and in the other Loan Documents, after giving effect to the substitution of the Substitute Property, are true and correct in all material respects with respect to the Substitute Property and that there is no Default or Event of Default hereunder. (xxv) A certificate of the general partner of Borrower or senior executive officer of Borrower and the REIT together with other evidence satisfactory to Lender (which shall include the comfort letter or audit described in Section 5.1(b)(iii)) that, after the substitution of a Substitute Property and the release of the Release Property, the Available Borrowing Base Covenant and the Loan to Value Ratio Covenant are satisfied. (xxvi) UCC Searches with respect to the Substitute Property, Borrower, and the Loan Parties in the state where the Substitute Property is located and the jurisdictions where such Person has its principal place of business. (xxvii) A Franchisor Estoppel and Recognition Letter from the franchisor under the Franchise Agreement, if any, for the Substitute Property. (xxviii) A certified copy of the Operating Lease for the Substitute Property with the Partnership satisfactory to Lender in its reasonable discretion or with such other entity satisfactory to Lender in its sole discretion and which Operating Lease is subordinate to the Lien of the Security Instrument and is otherwise satisfactory to Lender in Lender's sole discretion. (xxix) Lender shall have received a certificate of the general partner of Borrower and if the Partnership has entered into an Operating Lease with respect to the Substitute 57 -50- Property, the general partner of the Partnership, and dated the date of the Substitution, certifying (i) the names and true signatures of the incumbent officers of such Person authorized to sign the applicable Loan Documents, (ii) the by-laws of such Person as in effect on the date of the Substitution, (iii) the resolutions of such Person's board of directors approving and authorizing the execution, delivery and performance of all Loan Documents executed by such Person, and (iv) that there have been no changes in the certificate of incorporation of such Person since the date of the most recent certification thereof by the appropriate Secretary of State. (xxx) Certified copies of the most recent Quality Assurance Reports, if any, which shall be reasonably satisfactory to Lender. (xxxi) If the Borrower owns a leasehold estate in the Substitute Property, (A) a certified copy of the Ground Lease for the Substitute Property, together with all amendments and modifications thereto and a recorded memorandum thereof, which Ground Lease shall be satisfactory in all respects to Lender in its sole discretion, and which shall provide, among other things, (i) for a remaining term of no less than 10 years from the Maturity Date, (ii) that the Ground Lease shall not be terminated until Lender has received notice of a default thereunder and has had a reasonable opportunity to cure or complete foreclosure, and fails to do so in a diligent manner, (iii) for a new lease on the same terms to the Lender as tenant if the Ground Lease is terminated for any reason, (iv) the non-merger of fee and leasehold interests, and (v) that insurance proceeds and condemnation awards (from the fee interest as well as the leasehold interest) will be applied pursuant to the terms of the Security Instrument, and (B) a Ground Lease Estoppel substantially in the form of Exhibit K, executed by the fee owner and ground lessor of the Substitute Property, which estoppel shall be satisfactory to Lender in its sole discretion. (xxxii) Such other certificates, opinions, documents and instruments relating to the substitution reasonably requested by Lender, and all corporate and other proceedings and all other documents (including, without limitation, all documents referred to herein and not appearing as exhibits hereto) and all legal matters in connection with the substitution shall be satisfactory in form and substance to Lender in its reasonable discretion. (c) Provided that Borrower is otherwise in compliance with the terms and conditions of Section 2.21(b), Borrower shall be permitted to request a Release of a Real Property Asset securing one Note and provide a Substitute Property to further secure one of the other Notes, provided, however, that all Pool 2 Real Property Assets shall be located in California and secure the indebtedness under Note B only, and all Pool 3 Real Property Assets shall be located in Washington and secure the indebtedness under Note C only and all Pool 4 58 -51- Real Property Assets shall be located in Nevada and secure the indebtedness under Note D only and the Available Facility Amount for such Note does not exceed the face amount of such Note. (d) Upon such substitution, Lender shall (i) revise Schedules 1, 2, 2A, 2B, 2C, 2D and the Related Schedules to reflect the Release of the Release Property and the addition of the Substitute Property (ii) adjust the Allocated Loan Amounts as Lender deems reasonably necessary among the Real Property Assets in the applicable Pool and (iii) in the event Borrower has requested a Release and substitution of Real Property Assets which affects two Notes as contemplated in Section 2.21(c), Lender shall increase or decrease the Available Facility Amount for each Note as applicable. Section 2.22 Increasing Available Facility Amount. Borrower may, prior to the Termination Date and subject to the limitations set forth herein, increase the Available Facility Amount for a Note by offering to add additional properties (in addition to the Initial Assets) as security for the Loan and encumbering them with the Lien of the Security Instrument securing such Note and the Loan Documents (each, a "New Property"). If Lender determines that such New Properties are satisfactory to Lender in Lender's sole discretion, subject to continued satisfaction of the Loan to Value Ratio Covenant and the Available Borrowing Base Covenant (after giving effect to such New Property) with respect to the related Note, and all the conditions in this Section 2.22 are complied with, the Available Facility Amount for such Note shall be increased when New Properties have been encumbered by the Lien of the Security Instrument securing such Note and the related Loan Documents by an amount equal to the lesser of 55% of Lender's internal valuation of the New Properties or 50% of the appraised value of the New Properties based on Appraisals reasonably satisfactory to Lender; or, if the Syndication has occurred, 50% of the appraised value of the New Properties based on Appraisals reasonably satisfactory to Lender and further subject to the condition that each New Property (including the related Operating Lease) be encumbered by the Lien of the Security Instruments securing such Note and the Loan Documents prior to any increase in the Available Facility Amount for such Note and within forty-five (45) days of notification by Lender to Borrower that such New Property is satisfactory. In no event shall the Aggregate Available Facility Amount, after taking into account the increase in the Available Facility Amount for such Notes be increased to more than the Maximum Facility Amount. In addition to the restrictions set forth above, at any time that the Available Facility Amount for such Note is to be increased at the request of Borrower, the following conditions precedent must be satisfied: (a) No Default or Event of Default has occurred and is continuing or would result from the consummation of the proposed addition of the New Property; 59 -52- (b) The increase in the Aggregate Available Facility Amount for each addition shall be equal to or in excess of the lesser of $10,000,000 or the difference between the Maximum Facility Amount and the Aggregate Available Facility Amount; (c) Borrower, REIT, the Partnership and all other applicable Loan Parties have executed and delivered to Lender (at Borrower's sole cost and expense) all of the documents required under Section 2.21(b) for a Substitute Property and have complied with all of the conditions contained in Section 2.21(b) with respect to a Substitute Property; (d) If the principal amount of a Note must be increased, Borrower and the REIT agree that they shall execute a new or amended Note covering the amount of such increase and provide to Lender such amendments, supplements, modifications or increases to the applicable Security Instruments and Loan Documents as Lender may deem reasonably necessary in connection therewith, which may include some or all of the documents or items required under Section 2.21(b) in connection with a Substitute Property and under Section 3.1 in connection with the initial Advance, and it is understood that any new Note shall be cross-defaulted with all other Notes, Security Instruments and Loan Documents and cross collateralized with the Real Property Assets securing such Note, such cross collateralization to be accomplished through the recordation of a Security Instrument as a first lien on any New Property and a modification and increase of the Security Instruments on the existing Real Property Assets securing such Note. (e) No increase in the Available Facility Amount for any Note may take place after the Termination Date. Section 2.23 Breach of Available Borrowing Base Covenant or Loan to Value Ratio Covenant. In the event that the Available Facility Amount for a Note shall have been reduced pursuant to Section 5.15 or 5.20, and Borrower elects to add additional Collateral pursuant to the terms of this Section in order to cause the Available Borrowing Base Covenant and/or the Loan to Value Ratio Covenant to be satisfied, in addition to complying with all of the requirements of Section 2.22, Borrower shall: (a) deliver to Lender within five (5) Business Days after the breach of the Available Borrowing Base Covenant or the Loan to Value Ratio Covenant, a "Request For Additional Collateral" substantially in the form of Exhibit "F", hereto, executed by the general partner of Borrower or a senior executive officer of Borrower, which request shall contain a certification that (i) the appraised value of the New Property would be adequate to satisfy the Loan to Value Ratio Covenant if combined with the then existing Real Property Assets, (ii) that 60 -53- in Borrower's reasonable opinion the Net Operating Income from the New Property would be sufficient to satisfy the Available Borrowing Base Covenant if combined with the then existing Real Property Assets, (iii) to the best of Borrower's knowledge after due inquiry, there are no Hazardous Materials (as defined in the Security Instruments) on or in the New Property and (iv) the New Property is subject to an Operating Lease with the Partnership or such other entity satisfactory to Lender in its sole discretion and which Operating Lease is subordinate to the Lien of the Security Instrument and is otherwise satisfactory to Lender in its sole discretion. (b) if Lender notifies Borrower that such request has been accepted, within 45 days of receipt of such notice, Borrower shall comply with all of the conditions in this Section 2.23 and have consummated the addition of the New Property to the Collateral for the Loan. During such 45 day period Borrower shall not be entitled to any Advance under the related Note. Section 2.24 Adjustment of Allocated Loan Amounts upon Addition of New Property. Upon the addition of any New Property pursuant to Section 2.22 or 2.23, Lender shall revise Schedules 1, 2, 2A,2B, 2C and 2D and the Related Schedules to reflect the addition of such New Property or Properties and to adjust the Allocated Loan Amounts as Lender deems necessary among the Real Property Assets. Section 2.25 Maximum Number of Transactions. Notwithstanding anything to the contrary herein, the maximum aggregate number of (a) releases and simultaneous substitutions of Substitute Properties pursuant to Section 2.21(b) and (b) the simultaneous addition of one or more New Properties in a single transaction pursuant to Section 2.22, in any combination during the term of the Facility shall not exceed seven (7). With respect to clause (b) above, it is understood and agreed that additions of more than one New Property in any single simultaneous transaction shall constitute one transaction for purposes of this Section 2.25. Section 2.26 Increasing Allocable Loan Amounts. Provided no Default or Event of Default has occurred and is continuing, Borrower shall have the one time right, upon written notice to Lender, commencing on October 1, 1996 and ending on April 1, 1997, to request Lender to revise the Allocated Loan Amounts on Schedule 1 with respect to the Real Property Assets identified on Schedule 1 as the Sheraton Colony Square Atlanta, the Dallas Park Central and the Riverside Inn, Portland. Such notice shall be accompanied by an Appraisal, reasonably satisfactory to Lender, for the related Real Property Asset. All such Appraisals shall be prepared on an "as is" basis and be based on the then existing condition of the Real Property Asset, and shall not assume the completion or performance of any renovations or maintenance work in the calculation of value. Borrower shall also provide such additional information regarding the related Real Property Asset as Lender shall reasonably request in connection with Lender's review of the related Allocated Loan Amounts. Lender shall notify Borrower within 45 Business Days of its receipt of the Appraisal and all required information that the Allocated Loan Amounts for the Related Real Property Assets will not be revised or of the revised Allocated 61 -54- Loan Amounts, and shall revise Schedule 1 accordingly. Any revision of such Allocated Loan Amounts shall be in Lender's reasonable discretion and shall be based, in part, on 50% of the value of the related Real Property Asset as indicated in the Appraisal delivered by Borrower in connection with the notice. After any such revision the Available Borrowing Base Covenant and Loan to Value Ratio Covenant shall continue to be satisfied. Notwithstanding the foregoing, in no event shall the Allocated Loan Amounts for Sheraton Colony Square Atlanta, Dallas Park Central and Riverside Inn Portland exceed $18,000,000.00, $6,200,000.00 and $8,800,000.00, respectively. No revision of the Allocated Loan Amounts shall increase the Maximum Facility Amount, the Aggregate Available Facility Amount or the Available Facility Amount with respect to any Note. SECTION 3. CONDITIONS PRECEDENT. Section 3.1 Conditions Precedent to the Initial Advance. The obligation of Lender and, after the Syndication, each Co-Lender to make the initial Advance of the Loan (or its pro rata share thereof) on the Closing Date and the first Advance after the Syndication is subject to the satisfaction by Borrower on the Closing Date and on the date of Syndication of the following conditions precedent: (a) Loan Documents. (i) Amended and Restated Line of Credit Agreement. Borrower and the REIT shall have executed and delivered this Agreement to Lender. (ii) The Notes. Borrower and the REIT shall have executed and delivered to Lender the Notes in the amount, maturity and as otherwise provided herein. (iii) Security Instruments. Borrower shall have executed and delivered to Lender mortgages, deeds of trust, deeds to secure debt or other security instruments substantially in the form set forth as Exhibit "G" hereto (as amended, restated, modified or supplemented from time to time, collectively, the "Security Instruments"), with respect to each of the Real Property Assets. (iv) Assignment of Leases and Rents. Borrower shall have executed and delivered the Assignment of Leases and Rents substantially in the form set forth as Exhibit "H" hereto with respect to each Real Property Asset (as amended, restated, modified or supplemented from time to time, the "Assignment of Leases and Rents"). (v) Environmental Indemnity. Borrower and the REIT shall have executed and delivered to Lender the Environmental Indemnity substantially in the form set forth 62 -55- as Exhibit "I" hereto, (as amended, restated, modified or supplemented from time to time the "Environmental Indemnity"). (vi) Swing Line Note. Prior to the first Swing Line Advance, Borrower and the REIT shall have executed and delivered to Lender and the Swing Line Lender the Swing Line Note in the amount, maturity and as otherwise provided herein. (vii) Tenant Estoppel Certificates. Borrower, the Partnership or HIC, as the case may be, shall have delivered to Lender with respect to each tenant identified on Schedule 4, a tenant estoppel certificate substantially in the form of Exhibit "O" hereto or in a form otherwise satisfactory to Lender in its reasonable discretion, executed by such tenant (as amended, restated, modified or supplemented, the "Tenant Estoppel Certificate"). (viii) Assignment of Contracts. Borrower shall have executed and delivered to Lender the Assignment of Franchise Agreement, Agreements, Permits and Contracts substantially in the form set forth as Exhibit "L" hereto, (as amended, restated, modified or supplemented from time to time, the "Assignment of Contracts"). (ix) Franchisor Estoppel and Recognition Letter. Borrower, or the Partnership, or HIC, as applicable, shall have delivered to Lender with respect to each Real Property Asset subject to a Franchise Agreement, a franchisor estoppel and recognition letter substantially in the form set forth as Exhibit "M" hereto or in a form otherwise satisfactory to Lender in its reasonable discretion, executed by Franchisor, (as amended, restated, modified or supplemented from time to time, the "Franchisor Estoppel and Recognition Letter"). (x) Security Agreement. Borrower shall have executed and delivered to Lender the Security Agreement with respect to each Real Property Asset substantially in the form of Exhibit "N" hereto, (as amended, restated, modified or supplemented from time to time, the "Security Agreement"). (xi) Subordination, Attornment and Non-Disturbance Agreements. Borrower shall have delivered a Subordination, Attornment and Non-disturbance Agreement substantially in the form of Exhibit "P" hereto with respect to each tenant identified on Schedule 4, fully executed by such tenant (as amended, restated, modified or supplemented from time to time, the "Subordination, Attornment and Non-Disturbance Agreement"). (xii) Termination of Borrower's and the Corporation's Security Interest in the Collateral. Borrower and the Corporation shall have executed and delivered an 63 -56- agreement terminating all security interests either party may have in the Collateral with respect to the Intercompany Debt and releasing the Collateral from such security interest in a form reasonably satisfactory to Lender. (xiii) Intercompany Debt Subordination Agreement. Borrower and the Partnership and HIC, as the case may be, shall have executed and delivered an Intercompany Debt Subordination Agreement substantially in the form of Exhibit "Q" hereto with respect to all Intercompany Debt (as amended and restated, modified or supplemented from time to time, the "Intercompany Debt Subordination Agreement"). (xiv) Ground Leases. If the Borrower owns a leasehold estate in Real Property Asset, (A) a certified copy of the Ground Lease for such Real Property Asset, together with all amendments and modifications thereto and a recorded memorandum thereof, which Ground Lease shall be satisfactory in all respects to Lender in its sole discretion and (B) a Ground Lease Estoppel substantially in the form of Exhibit K, executed by the fee owner and ground lessor of such Real Property Asset, which estoppel shall be satisfactory to Lender in its sole discretion. (xv) Partnership Guaranties. The Partnership shall have executed and delivered to Lender partnership guaranties substantially in the form of Exhibit "R" hereto with respect to each of Note A, Note B and Note C (as amended, restated, modified or supplemented, the "Partnership Guaranties"). (xvi) Partnership Mortgage. The Partnership shall have executed and delivered to Lender mortgages, deeds of trust, deeds to secure debt or other security instruments substantially in the form of Exhibit "S" hereto with respect to each Operating Lease under which the Partnership is the lessee (as amended, restated, modified or supplemented, the "Partnership Mortgage"), provided that, with respect to Real Property Assets located in the District of Columbia, Florida and Virginia, the related Partnership Mortgage shall not be recorded unless an Event of Default shall have occurred. (xvii) Partnership Guaranty Security Agreements. The Partnership shall have executed and delivered to Lender a security agreement substantially in the form of Exhibit "T" hereto with respect to each Partnership Guaranty (as amended, restated, modified or supplemented, the "Partnership Guaranty Security Agreement"). (xviii) Partnership Assignment of Leases and Rents. The Partnership shall have executed and delivered an assignment of leases and rents substantially in the form of Exhibit "U" hereto with respect to each Operating Lease under which the Partnership is the lessee (as amended, restated, modified or supplemented, the "Partnership Agreement of Leases and Rents"), provided that, with respect to Real Property Assets located in the 64 -57- District of Columbia, Florida and Virginia, the related Partnership Assignment of Leases and Rents shall not be recorded unless an Event of Default shall have occurred. (xix) Partnership Assignment of Contracts. The Partnership shall have executed and delivered to Lender an assignment of franchise agreement, agreements, permits and contracts substantially in the form of Exhibit "L" hereto with respect to each Partnership Guaranty (as amended, restated, modified or supplemented, the "Partnership Assignment of Contracts"). (xx) Consent To Assignment, Subordination, Estoppel and Attornment Agreement. Borrower and Partnership and HIC, as applicable, shall have executed and delivered to Lender a consent to assignment, subordination, estoppel and attornment agreement to each Real Property Asset other than the Vagabond Inns substantially in the form of Exhibit "V" hereto (as amended, restated, modified or supplemented, the "Consent To Assignment, Subordination, Estoppel and Attornment Agreement"). (xxi) Vagabond Subordination and Non-Disturbance Agreement. Borrower shall have delivered a subordination and non-disturbance agreement substantially in the form of Exhibit "W" hereto executed by Imperial Hotels Corporation for each of the Vagabond Inns (as amended, restated, modified or supplemented, the "Vagabond Subordination and Non-Disturbance Agreement"). (xxii) HIC Guaranty. HIC shall have executed and delivered to Lender a partnership guaranty substantially in the form of Exhibit "X" hereto with respect to Note D (as amended, restated, modified or supplemented, the "HIC Guaranty"). (xxiii) HIC Mortgage. The HIC shall have executed and delivered to Lender mortgages, deeds of trust, deeds to secure debt or other security, instruments substantially in the form of Exhibit "S" hereto with respect to each of the Pool 4 Real Property Assets (as amended, restated, modified or supplemented, the "HIC Mortgage"). (xxiv) HIC Guaranty Security Agreements. The HIC shall have executed and delivered to Lender a security agreement substantially in the form of Exhibit "T" hereto with respect to the HIC Guaranty (as amended, restated, modified or supplemented, the "HIC Guaranty Security Agreement"). (xxv) HIC Assignment of Leases and Rents. The HIC shall have executed and delivered an assignment of leases and rents substantially in the form of Exhibit "U" hereto with respect to each of the Pool 4 Real Property Assets (as amended, restated, modified or supplemented, the "HIC Agreement of Leases and Rents"). 65 -58- (xxvi) HIC Assignment of Contracts. The HIC shall have executed and delivered to Lender an assignment of franchise agreements, permits and contracts substantially in the form of Exhibit "L" hereto with respect to the HIC Guaranty (as amended, restated, modified or supplemented, the "HIC Assignment of Contracts"). (xxvii) Termination of Participation. Borrower shall have executed and delivered a termination of its participation interest in the Merrill Facility in a form reasonably satisfactory to Lender. (b) Opinions of Counsel. Lender shall have received legal opinions, dated the Closing Date, from counsel to Borrower, the REIT, the Partnership, the Corporation and HIC, in form and substance reasonably satisfactory to Lender and its counsel, that, among other things: (i) this Agreement and the Loan Documents have been duly authorized, executed and delivered by Borrower and are valid and enforceable in accordance with their terms, subject to bankruptcy and equitable principles; (ii) that Borrower and the Partnership and HIC are qualified to do business and in good standing under the laws of the jurisdiction in which it is organized and where the Real Property Assets are located, or that they are not required by Applicable Law to qualify to do business in such jurisdiction; (iii) based upon a certificate of Borrower and the other Loan Parties, the encumbrance of the Real Property Assets with the liens of the Loan Documents shall not cause a breach of, or a default under, any material agreement, document or instrument to which Borrower, the REIT, the Partnership, HIC or the Corporation is a party or to which they or any of their properties are bound or affected; (iv) Lender has a valid and perfected Lien in the Collateral; and (v) the Loan does not violate any usury laws. (c) Organizational Documents. Lender shall have received (i) with respect to HIC and the Corporation, the certificate of incorporation of such Loan Party, as amended, modified or supplemented to the Closing Date, certified to be true, correct and complete by the Borrower and such Loan Party together with a good standing certificate from the appropriate Secretary of State and a good standing certificate from the Secretaries of State (or the equivalent thereof) of each other State in which each Real Property Asset is located and in which each of them is required to be qualified to transact business, each to be dated a date not more than ten (10) days prior to the Closing Date, (ii) with respect to Borrower and the Partnership, the agreement of limited partnership of such Person, as amended, modified or supplemented to the Closing Date, together with a copy of the certificate of limited partnership of such entity, as amended, modified or supplemented to the Closing Date, certified to be true, correct and complete by a general partner of such Person, together with a good standing certificate from the appropriate Secretary of State and a good standing certificate from the Secretaries of State (or the equivalent thereof) of each other State in which each Real Property Asset is located and in which each of them is required to be qualified to transact business, each to be dated not more than ten (10) days prior to the Closing Date and (iii) with respect to the REIT, its declaration of trust, as amended, modified or supplemented to the Closing Date, certified to be true, complete and correct by a senior executive officer of the REIT, together with a copy of a good standing certificate (or the equivalent thereof), from the appropriate Secretary of State as of a date not more than ten 66 -59- (10) days prior to the Closing Date and a good standing certificate (or its equivalent) from the Secretaries of State (or the equivalent thereof) or each state in which the REIT is required to be qualified in order to transact business. (d) Certified Resolutions, etc. Lender shall have received a certificate of the secretary or assistant secretary of Borrower and each of the Loan Parties which is a corporation and dated the Closing Date, certifying (i) the names and true signatures of the incumbent officers of such Person authorized to sign the applicable Loan Documents, (ii) the by-laws of such Person as in effect on the Closing Date, (iii) the resolutions of such Person's board of directors approving and authorizing the execution, delivery and performance of all Loan Documents executed by such Person, and (iv) that there have been no changes in the certificate of incorporation of such Person since the date of the most recent certification thereof by the appropriate Secretary of State. (e) Estoppel Certificates. Lender shall have received executed estoppel letters or certificates substantially in the form of Exhibit "O" hereto from each of the parties listed on Schedule 4, with respect to the leases set forth on such schedule (each, an "Estoppel Certificate"). (f) Insurance. Lender shall have received certificates of insurance demonstrating insurance coverage in respect of each of the Real Property Assets of types, in amounts, and with insurers satisfactory to Lender and otherwise in compliance with the terms, provisions and conditions of the Mortgage. (g) UCC Searches. Lender shall have received satisfactory (i.e., showing no Liens other than Permitted Liens) UCC searches, together with tax lien, judgment and litigation searches conducted in the appropriate jurisdictions and as requested by Lender, performed by a search firm acceptable to Lender with respect to the Real Property Assets, Accounts Receivable, Borrower and each of the other Loan Parties (collectively, the "UCC Searches"). (h) Financing Statements. Lender shall have received UCC-1 financing statements signed by Borrower or other applicable Loan Party, as debtor, naming the Collateral Agent as secured party, in form suitable for filing in the appropriate offices of each jurisdiction where the Real Property Assets and Borrower and the applicable Loan Parties are located (each, a "Financing Statement"). 67 -60- (i) Title Insurance Policies; Surveys. Lender shall have received (i) title insurance policies issued by a title insurance company satisfactory to Lender insuring the lien of the Security Instruments on the Real Property Assets, in form and substance reasonably satisfactory to Lender insuring that the Security Instruments are a first lien on the good and marketable fee simple title or leasehold estate of Borrower to the Real Property Asset, as the case may be, in an amount equal to the amount of the Allocated Loan Amount for each Real Property Asset, subject only to such exceptions that Lender has approved together with such affirmative insurance and other endorsements reasonably required by Lender, including a revolving credit endorsement, together with a "tie-in" and first loss endorsement satisfactory to Lender, or, if such endorsement is not available in the state in which such Real Property Asset is located, in an amount equal to the greater of one hundred ten percent (110%) of the Allocated Loan Amount for such Real Property Asset or the amount on which mortgage or intangibles tax was paid with respect to the Security Instrument for such Real Property Asset, together with a "last dollar endorsement" (the "Title Policy"); such title insurance policy shall not contain any exception for any state of facts that an accurate survey might show or that a survey made after the date of the survey referred to in clause (ii) below might show; and (ii) a recent survey with respect to each of the Real Property Assets prepared by a land surveyor licensed in each of the states where the Real Property Assets are located pursuant to standards for title surveys reasonably satisfactory to Lender and otherwise reasonably satisfactory to Lender, provided that no structural additions to the improvements shown on such survey or new structures have been made or built since the date of such survey and that there has been no change in the legal description of the Property since the date of such survey, whether due to sale, transfer, condemnation or otherwise. (j) Financial Statements. Lender shall have received the (i) financial reports described in Section 5.1(a) for the most recently ended fiscal year of Borrower and the relevant Loan Parties and the unaudited consolidated financial statements of Borrower and the relevant Loan Parties for each fiscal quarter of Borrower and such Loan Parties ending since the end of such entity's most recent fiscal year and (ii) for each Real Property Asset, annual operating statements and occupancy statements for Borrower's, the Partnership's and HIC's most recent fiscal year together with current year to date operating statements, current occupancy statements and the approved operating and capital budget for the current fiscal year. Such financial statements shall be acceptable to Lender in its sole discretion. (k) Environmental Matters. Lender shall have received the Environmental Reports dated within six (6) months prior to the Closing Date each of which shall be in form and substance satisfactory to Lender and shall include, without limitation, the following: (i) a Phase I environmental site assessment analyzing the presence of environmental contaminants, polychlorinated biphenyls or storage tanks and other Hazardous Substances at each of the Real Property Assets, the risk of contamination from off-site Hazardous Substances and compliance with Environmental Laws, such assessments shall be conducted in accordance with ASTM Standard E 1527-93, or any successor thereto published by ASTM, (ii) an asbestos survey of 68 -61- each of the Real Property Assets, which shall include random sampling of materials and air quality testing, and (iii) such further site assessments Lender may require due to the results obtained in (i) or (ii) hereof or in its reasonable discretion. (l) Fees and Operating Expenses. Lender shall have received, for its account, all fees and expenses due and payable pursuant to the Syndication Letter on or before the Closing Date. (m) Consents, Licenses, Approvals, etc. Lender shall have received certified copies of all material consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by Borrower and the other Loan Parties, and the validity and enforceability, of the Loan Documents, or in connection with any of the Transactions, and such consents, licenses (including without limitation, liquor and gaming licenses, as applicable) and approvals shall be in full force and effect. (n) Appraisals. With respect to the Closing Date, Lender shall have completed its internal valuation of the Real Property Assets or have received Appraisals reasonably acceptable to Lender and the value of the Real Property Assets as determined pursuant to Lender's internal valuations, or the Appraisals, as the case may be, shall be reasonably satisfactory to Lender. With respect to the first Advance after the Syndication, Lender shall have received Appraisals reasonably acceptable to Lender for each of the Real Property Assets and the value of the Real Property Assets, as determined pursuant to the Appraisals, shall be reasonably satisfactory to Lender. (o) Engineering Reports. Lender shall have received engineering reports dated within six (6) months prior to the Closing Date and in form and substance reasonably satisfactory to Lender with respect to each of the Real Property Assets; such engineering reports shall be prepared in accordance with Lender's then current guidelines for property inspection reports by licensed engineers acceptable to Lender, and such report should state, among other things, that each Real Property Asset is in good condition and repair, free from damage and waste and, to the best of such engineer's knowledge, complies in all material respects with the Americans with Disabilities Act (the "Engineering Reports"). (p) Zoning Compliance. Lender shall have received evidence reasonably satisfactory to Lender to the effect that each of the Real Property Assets and the use thereof are in substantial compliance with the applicable zoning, subdivision, and all other applicable federal, state or local laws and ordinances affecting each of the Real Property Assets, and that all building and operating licenses and permits necessary for the use and occupancy of each of the Real Property Assets as hospitality properties or hotels including, but not limited to, current certificates of occupancy, have been obtained and are in full force and effect. 69 -62- (q) Leases. Lender shall have received certified copies of all Operating Leases and the Leases identified on Schedule 15 with respect to each Real Property Asset which shall be reasonably satisfactory to Lender. (r) Contracts and Agreements. Lender shall have received certified copies of all Franchise Agreements and all material contracts and agreements relating to the management, leasing and operation of each of the Real Property Assets, each of which shall be reasonably satisfactory to Lender. (s) Plans and Specifications. Lender shall have had access to copies of plans and specifications for each of the Real Property Assets. (t) Representations and Warranties. Lender shall have received a certification by the general partner of Borrower or senior executive officer of Borrower and the REIT certifying that all of the representations and warranties contained in this Agreement, the Security Instruments and the other Loan Documents are true and correct with respect to each of the Real Property Assets, Borrower and each Loan Party, and that there is no Default or Event of Default hereunder. (u) Certification as to Covenants. Lender shall have received a certificate of the general partner of Borrower or senior executive officer of Borrower and the REIT together with other evidence reasonably satisfactory to Lender (which shall include the comfort letter or audit described in Section 5.1(b)(iii) with respect to the Net Operating Income of each Real Property Asset and the calculation of financial covenants) that, as of the Closing Date, the Available Borrowing Base Covenant and the Loan to Value Ratio Covenant are satisfied for each Pool and that, as of the Closing Date and after giving effect to the Transaction to be consummated thereon, the financial covenants will be met, and there is no Default or Event of Default hereunder. (v) Certification as to Applicable Laws. Lender shall have received such evidence as Lender shall deem reasonably necessary to establish (including, without limitation, a certificate of the general partner of Borrower, the Partnership or HIC, as applicable, or of a senior executive officer of Borrower, the Partnership or HIC, as applicable, certifying) that each Real Property Asset complies in all material respects with Applicable Laws as of the Closing Date. (w) Quality Assurance Reports. Lender shall have received certified copies of the most recent Quality Assurance Reports, each of which shall be reasonably satisfactory to Lender. 70 -63- (x) Intercompany Debt. Lender shall have received certified copies of all Intercompany Loan Documents. (y) Flood Plain. Lender shall have received reasonably satisfactory evidence indicating which of the Real Property Assets are in a flood plain. (z) Additional Matters. Lender shall have received such other certificates, opinions, documents and instruments relating to the Transactions as may have been reasonably requested by Lender, and all corporate and other proceedings and all other documents (including, without limitation, all documents referred to herein and not appearing as exhibits hereto) and all legal matters in connection with the Transactions shall be satisfactory in form and substance to Lender. Section 3.2 Conditions Precedent to All Advances of the Loan. The obligation of Lender and, after the Syndication, each Co-Lender, to make any Advance under the Loan (including the initial Advance made on or after the Closing Date, the first Advance after the date of Syndication, and any Swing Line Advances by the Swing Line Lender) (or its pro rata share thereof) is subject to the satisfaction on the date such Advance is made of the following conditions precedent: (a) Representations and Warranties. The representations and warranties contained herein and in the other Loan Documents (other than representations and warranties which expressly speak only as of a different date) shall be true and correct in all material respects on such date both before and after giving effect to the making of such Advance or, if such representations and warranties are not true and correct in all material respects, the facts giving rise to the breach have been disclosed to Lender in writing and Lender, has approved, in its sole discretion, such facts. (b) No Event of Default. No Event of Default shall have occurred and be continuing on such date either before or after giving effect to the making of such Advance, and Borrower shall be in compliance with the Available Borrowing Base Covenant and the Loan to Value Covenant. (c) No Injunction. No law or regulation shall have been adopted, no order, judgment or decree of any governmental authority shall have been issued, and no litigation shall be pending or threatened, which in the good faith judgment of Lender would enjoin, prohibit or restrain, or impose or result in the imposition of any material adverse condition upon, the making of the Advances or Borrower's obligation to pay (or Lender or any Co-Lender's or the Swing Line Lender's rights to receive payment) of the Loan and the other Obligations or the consummation of the Transactions. 71 -64- (d) No Material Adverse Change. No event, act or condition shall have occurred after the Closing Date which, in the judgment of Lender has had or could have a Material Adverse Effect. (e) Notice of Borrowing. Lender shall have received a fully executed Notice of Borrowing, Notice of Conversion or Continuation, or Notice of Swing Line Advance, as the case may be, in respect of the Advance to be made on such date. (f) No Litigation. Except for matters identified on Schedule 5 (as the same may be amended or supplemented), no actions, suits or proceedings shall be pending or threatened with respect to the Transactions or the Loan Documents, Borrower or any of the other Loan Parties, or with respect to the Real Property Assets, that could, individually or in the aggregate, likely be expected to result in a Material Adverse Effect and matters identified on Schedule 5, individually or in the aggregate, do not result in a Material Adverse Effect. (g) Title Insurance Policies. If the amount of principal outstanding at the time of any Advance (other than the initial Advance with respect to any of the Notes) (and excluding the portion of such Advance, if any, that is a Swing Line Advance) is less than $35,000,000.00 under Note A, $8,753,000.00 under Note B, $13,235,000.00 under Note C or $5,658,000.00 under Note D (the "Minimum Threshold"), then, with respect to an Advance under the Note or Notes which have principal then outstanding of less than the respective Minimum Threshold, if required by Lender in its sole discretion, Lender shall have received an endorsement to each of the Title Policies insuring Lender with respect to the Real Property Assets in the Pool securing such Note (or if such Title Policy contains an endorsement that insures Lender that all future Advances shall have the same priority as the initial Advance of the Loan, a Title Search with respect to the related Real Property Asset securing such Note indicating) that as of the date of the Advance, there are no Liens on the Real Property Assets securing such Note other than the Liens existing on the Closing Date and listed in the respective Title Policy issued on the Closing Date. Notwithstanding the foregoing, Lender may elect, in its sole discretion, in lieu of the foregoing, to perform Title Searches with respect to some or all of the Real Property Assets with respect to Note A on a quarterly basis at Borrower's sole cost and expense, provided that (i) Advances (other than Swing Line Advances) aggregating $25,000,000.00 or more have been made during the immediately preceding Quarter, or (ii) Advances (other than Swing Line Advances) aggregating $25,000,000.00 or more have been made since the date of the last Title Search. The results of all such Title Searches shall be satisfactory to Lender in its reasonable discretion. Notwithstanding the foregoing, provided that the outstanding principal amount under each Note is equal to or greater than the respective Minimum Threshold, no endorsements or Title Searches shall be required with respect to any Swing Line Advance. (h) Payment of Recording Taxes. Lender shall have received proof of payment of any required recording fees, mortgage recording taxes, documentary stamp taxes, 72 -65- intangibles taxes or other similar costs ("Recording Taxes") in connection with the making of such Advance. Borrower and the REIT acknowledge that if the outstanding principal under the Florida Note is at any time less than $3,400,000.00, no further Advance shall be permitted under the Florida Note until Borrower has delivered proof of payment of all Recording Taxes in connection with such Advance. (i) Appraisals. Prior to the first Advance in connection with or after the occurrence of the Syndication, Lender shall have received satisfactory Appraisals of all of the Real Property Assets. (j) Additional Matters. Lender shall have received such other certificates, opinions, documents and instruments relating to the Transactions as may have been reasonably requested by Lender, and all corporate and other proceedings and all other documents (including, without limitation, all documents referred to herein and not appearing as exhibits hereto) and all legal matters in connection with the Transactions shall be reasonably satisfactory in form and substance to Lender. Section 3.3 Acceptance of Borrowings. The acceptance by Borrower of the proceeds of each Advance shall constitute a representation and warranty by Borrower to Lender that all of the conditions required to be satisfied under this Section 3 in connection with the making of such Advance and all of the terms and provisions of this Agreement have been satisfied. Section 3.4 Sufficient Counterparts. All certificates, agreements, legal opinions and other documents and papers referred to in this Section 3, unless otherwise specified, shall be delivered to Lender and shall be reasonably satisfactory in form and substance to Lender (unless the form thereof is prescribed herein) and Borrower shall deliver sufficient counterparts of all such materials for distribution to Lender and each Co-Lender. SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce Lender to enter into this Agreement and to make the Loan, Borrower and the REIT make the following representations and warranties, which shall survive the execution and delivery of this Agreement and the Note and the making of the Loan and each Advance: Section 4.1 Corporate/Partnership Status. Each of Borrower and the other Loan Parties (a) is a duly organized and validly existing corporation or partnership, as the case may be, in good standing under the laws of the jurisdiction of its incorporation or formation, (b) has all requisite corporate or partnership power and authority, as the case may be, to own its property and assets (including the Real Property Assets) and to transact the business in which it is engaged or presently proposes to engage (including this Transaction) and (c) has duly qualified 73 -66- and is authorized to do business and is in good standing as a foreign corporation or foreign partnership, as the case may be, in every jurisdiction in which the Real Property Assets are located, unless it is not required to so qualify by Applicable Law, or in which the nature of its business requires it to be so qualified. Section 4.2 Corporate/Partnership Power and Authority. Each of Borrower and the other Loan Parties has the corporate or partnership power and authority, as the case may be, to execute, deliver and carry out the terms and provisions of each of the Loan Documents to which it is a party and has taken all necessary corporate or partnership action, as the case may be, to authorize the execution, delivery and performance by it of such Loan Documents. Each of Borrower and the other Loan Parties has duly executed and delivered each such Loan Document, and each such Loan Document constitutes its legal, valid and binding obligation, enforceable in accordance with its terms, except as enforcement may be limited by applicable insolvency, bankruptcy or other laws affecting creditors' rights generally, or general principles of equity whether enforcement is sought in a proceeding in equity or at law. Section 4.3 No Violation. Neither the execution, delivery or performance by Borrower or any other Loan Party of the Loan Documents to which it is a party, nor the compliance by such Person with the terms and provisions thereof nor the consummation of the Transactions, (a) will, to the best of Borrower's or the REIT's knowledge, contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, which contravention would have a Material Adverse Effect on the value of the Collateral as a whole, or (b) will conflict in any material respect with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (except pursuant to the Security Instruments and the Loan Documents) upon any of the property or assets (including the Real Property Assets) of Borrower or any of the other Loan Parties pursuant to the terms of any indenture, mortgage, deed of trust, or other material agreement or instrument to which Borrower or any of the other Loan Parties is a party or by which it or any of its property or assets (including the Real Property Assets) is bound or to which it may be subject, which contravention would have a Material Adverse Effect on the value of the Collateral as a whole, or (c) will, with respect to Borrower or any Loan Party which is a partnership, violate in any material respect any provisions of the partnership agreement of such Person, or (d) will, with respect to the Borrower or any of the Loan Parties which is a corporation, violate in any material respect any provision of the Certificate of Incorporation or By-Laws of such Person. Section 4.4 Litigation. Except as set forth on Schedule 5, there are no actions, suits or proceedings, judicial, administrative or otherwise (including any condemnation or similar proceeding) pending or, to the best of Borrower's or the REIT's knowledge, threatened with respect to any of the Transactions or Loan Documents, Borrower, its Subsidiaries, or any of the 74 -67- other Loan Parties or their respective Subsidiaries, or with respect to the Real Property Assets, that could, individually or in the aggregate, result in a Material Adverse Effect. All matters set forth on Schedule 5 do not, individually or in the aggregate, result in a Material Adverse Effect. Section 4.5 Financial Statements: Financial Condition; etc. The financial statements delivered pursuant to Section 3.1(j) were prepared in accordance with GAAP consistently applied and fairly present the financial condition and the results of operations of Borrower, the Loan Parties and the Real Property Assets covered thereby on the dates and for the periods covered thereby, except as disclosed in the notes thereto and, with respect to interim financial statements, subject to normally recurring year-end adjustments. There is no material liability (contingent or otherwise) not reflected in such financial statements or in the notes thereto. 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 or would affect Borrower's or the REIT's ability to perform its obligations under this Agreement or Borrower's, the REIT's, the Partnership's, the Corporation's or HIC's ability to perform its obligations under the Loan Documents. Section 4.6 Solvency. On the Closing Date and after and giving effect to the Transactions, Borrower and the Loan Parties will be Solvent. Section 4.7 Material Adverse Change. Since the date of the most recent audited financial statements delivered pursuant to Section 3.1(j), there has occurred no event, act or condition, and to the best of Borrower's or the REIT's knowledge, there is no prospective event or condition which has had, or could have, a Material Adverse Effect. Section 4.8 Use of Proceeds; Margin Regulations. All proceeds of each Advance will be used by Borrower only in accordance with the provisions of Section 2.20. No part of the proceeds of any Advance will be used by Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Advance nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations G, T, U or X of the Federal Reserve Board. Section 4.9 Governmental Approvals. To the best of Borrower's or the REIT's knowledge, no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required (or, if required, has been obtained) to authorize, or in connection with (i) the execution, delivery and performance of any Loan Document or the consummation of any of the Transactions or (ii) the legality, validity, binding effect or enforceability of any Loan Document, except for such orders, consents, approvals, licenses, authorizations, filings, recording, registration or exemption that would not have a Material Adverse Effect. 75 -68- Section 4.10 Security Interests and Liens. The Security Instruments and the related Loan Documents create, as security for the Obligations, valid and enforceable Liens on all of the Collateral, in favor of Lender and subject to no other liens (except for Permitted Liens), except as enforceability may be limited by applicable insolvency, bankruptcy or other laws affecting creditors rights generally, or general principles of equity, whether such enforceability is considered in a proceeding in equity or at law. Section 4.11 Tax Returns and Payments. Borrower, the REIT and the other Loan Parties filed all tax returns required to be filed by it for which the filing date has passed and not been extended and has paid all taxes and assessments payable by such Persons which have become due, other than (a) those not yet delinquent or (b) those that are reserved against in accordance with GAAP which are being diligently contested in good faith by appropriate proceedings. Section 4.12 ERISA. As of the Closing Date or disclosed prior to an Advance, neither Borrower or any of the other Loan Parties has any Plans other than those listed on Schedule 6. No accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA) still outstanding, or Reportable Event, which exceeds $5,000,000.00 or which has or could reasonably be expected to have a Material Adverse Effect has occurred with respect to any Plan and there is no lien outstanding under Section 412 of the Code or Section 302 of ERISA with respect to any Loan Party's assets. As of the Closing Date, the Unfunded Benefit Liabilities do not in the aggregate exceed $1,000,000.00. Borrower and the other Loan Parties have not failed to comply in all material respects with the requirements of ERISA and the Code and plan documents for any Employee Benefit Plan which has or could reasonably be expected to have a Material Adverse Effect and are not in default (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan which has or could reasonably be expected to have a Material Adverse Effect. Neither Borrower nor any of the other Loan Parties, nor any member of their respective ERISA Controlled Groups (determined without reference to Section 414(m) or (o) of the Code, if liabilities of entities in Borrower or the other Loan Parties' ERISA Controlled Group solely by reason of Section 414(m) or (o) could not result in liability to Borrower or any Loan Parties) is subject to any present or potential withdrawal liability pursuant to Section 4201 or 4204 of ERISA which, individually or in the aggregate is in excess of $5,000,000.00 or has or could reasonably be expected to have a Material Adverse Effect. To the best knowledge of Borrower and the other Loan Parties, no Multiemployer Plan is or is likely to be disqualified for tax purposes, in reorganization (within the meaning of Section 4241 of ERISA or Section 418 of the Code) or is insolvent (as defined in Section 4245 of ERISA), which event would have a Material Adverse Effect. No liability to the PBGC (other than required premium payments), the Internal Revenue Service (with respect to an Employee Benefit Plan), any Plan or any trust established under Section 4049 of ERISA has been, or is expected by Borrower or the other Loan Parties to be, incurred by Borrower or the 76 -69- other Loan Parties (other than annual contributions) which is in excess of $5,000,000.00 or would have a Material Adverse Effect. Except as otherwise disclosed on Schedule 6 hereto or disclosed prior to an Advance, none of Borrower or the other Loan Parties has any contingent liability with respect to any post-retirement benefits under any "welfare plan" (as defined in Section 3(1) of ERISA) or withdrawal liability or exit fee or charge with respect to any "welfare plan" (as defined in Section 3(1) of ERISA), other than liability for continuation coverage under Part 6 of Title I of ERISA or state laws which require similar continuation coverage for which the employee pays approximately the full cost of coverage, and other than such liability that is both not more than $5,000,000.00 and that would not have a Material Adverse Effect. No lien under Section 412(n) of the Code or 302(f) of ERISA or requirement to provide security under Section 401(a)(29) of the Code or Section 307 of ERISA has been or is reasonably expected by Borrower or the other Loan Parties to be imposed on the assets of Borrower or the other Loan Parties. Except as disclosed on Schedule 6 or disclosed prior to an Advance neither Borrower nor any other Loan Party is a party to any collective bargaining agreement. Neither Borrower nor any Loan Party has engaged in any transaction prohibited by Section 408 of ERISA or Section 4975 of the Code which has a Material Adverse Effect. As of the Closing Date and throughout the term of the Loan, neither Borrower nor any other Loan Party is or will be an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, and none of the assets of Borrower or any other Loan Party will constitute "plan assets" of one or more such plans for purposes of Title I of ERISA. As of the Closing Date and throughout the term of the Loan, neither Borrower nor any other Loan Party is or will be a "governmental plan" within the meaning of Section 3(3) of ERISA and neither Borrower nor any other Loan Party will be subject to state statutes applicable to Borrower or such Loan Party regulating investments and fiduciary obligations, of Borrower or any Loan Party with respect to governmental plans. Section 4.13 Intentionally Omitted. Section 4.14 Representations and Warranties in Loan Documents. All representations and warranties made by Borrower or any other Loan Party in the Loan Documents are true and correct in all material respects. Section 4.15 True and Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower or any other Loan Party in writing to Lender on or prior to the Closing Date, for purposes of or in connection with this Agreement or any of the Transactions (the "Furnished Information") is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower or any other Loan Party in writing to Lender will be, true, accurate and complete in all material respects and will not omit any material fact necessary to make such information (taken as a whole) not misleading on the date as of which such information is dated or furnished. As of the Closing Date, and as of the date of Syndication, there are no facts, events or conditions directly and specifically affecting Borrower, 77 -70- or any other Loan Party known to Borrower and not disclosed to Lender, in the Furnished Information, in the Schedules attached hereto or in the other Loan Documents, which, individually or in the aggregate, have or could be expected to have a Material Adverse Effect. Section 4.16 Ownership of Real Property; Existing Security Instruments. Borrower has good and marketable fee simple title or a leasehold estate, as the case may be, subject to any Permitted Liens, in all of the Real Property Assets and Borrower, Partnership and HIC each have good title to all of their personal property subject to no Lien of any kind except for Permitted Liens. As of the date of this Agreement, there are no options or other rights to acquire any of the Real Property Assets that run in favor of any Person and there are no mortgages, deeds of trust, indentures, debt instruments or other agreements creating a Lien against any of the Real Property Assets, other than Permitted Liens. Section 4.17 No Default. To the best of the Borrower's or the REIT's knowledge, no Default or Event of Default exists under or with respect to any Loan Document. No Default or Event of Default exists under or with respect to the Operating Leases, the Intercompany Debt, the Franchise Agreements or the Whole Loan Facility. To the best of Borrower's or the REIT's knowledge, neither Borrower, any Loan Party nor any of their respective Subsidiaries is in default in any material respect beyond any applicable grace period under or with respect to any other material agreement, instrument or undertaking to which it is a party or by which it or any of its properties or assets is bound in any respect, the existence of which default could result in a Material Adverse Effect. Section 4.18 Licenses, etc. To the best of the Borrower's or the REIT's knowledge, Borrower, the Partnership, and HIC for each Real Property Asset other than the Vagabond Inns, have obtained and hold in full force and effect, all material franchises, trademarks, tradenames, copyrights, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals which are necessary for the operation of the Real Property Assets (other than the Vagabond Inns) and their respective businesses as presently conducted, including without limitation, liquor and gaming licenses, as applicable ("Licenses"). Other than as indicated on Schedule 18, all liquor licenses are issued in either the name of (i) the Corporation, (ii) an entity wholly owned and controlled by the Corporation which has entered into a management agreement or lease agreement with respect to such liquor license with the Partnership or the Corporation, on terms and conditions reasonably satisfactory to Lender, or (iii) an individual who is both a resident of the state in which the related Real Property Asset is located and is an employee of either Borrower, the Partnership, the Corporation or the REIT at the level of general manager for the Real Property Assets in such state or higher. Section 4.19 Compliance With Law. To the best of the Borrower's or the REIT's knowledge, Borrower and each Loan Party is in compliance in all material respects with all 78 -71- Applicable Laws and other laws, rules, regulations, orders, judgments, writs and decrees, noncompliance with which could result in a Material Adverse Effect. Section 4.20 Brokers. Borrower, each Loan Party, Lender and each Co-Lender hereby represent and warrant that no brokers or finders were used in connection with procuring the financing contemplated hereby and Borrower hereby agrees to indemnify and save Lender and each Co-Lender harmless from and against any and all liabilities, losses, costs and expenses (including attorneys' fees or court costs) suffered or incurred by Lender or any Co-Lender as a result of any claim or assertion by any party claiming by, through or under Borrower, that it is entitled to compensation in connection with the financing contemplated hereby, and Lender and each Co-Lender hereby agrees to indemnify and save Borrower harmless from and against any and all liabilities, losses, costs and expenses (including attorneys' fees or court costs) suffered or incurred by Borrower as a result of any claim or assertion by any party claiming by, through or under Lender or any Co-Lender that it is entitled to compensation in connection with the financing contemplated hereby. Section 4.21 Judgments. To the best of the Borrower's or the REIT's knowledge, (i) there are no judgments, decrees, or orders of any kind against Borrower or any Loan Party unpaid of record which would materially or adversely affect the ability of Borrower or any Loan Party to comply with its obligations under the Loan or this Agreement in a timely manner, (ii) there are no federal tax claims or liens assessed or filed against Borrower or any Loan Party, (iii) there are no material judgments against Borrower or any Loan Party unsatisfied of record or docketed in any court of the States in which the Real Property Assets are located or in any other court located in the United States, (iv) no petition in bankruptcy or similar insolvency proceeding has ever been filed by or against Borrower or any Loan Party, and (v) neither Borrower nor any Loan Party has ever made any assignment for the benefit of creditors or taken advantage of any insolvency act or any act for the benefit of debtors. Section 4.22 Property Manager. As of the date hereof, the managers of the Real Property Assets are the entities described on Schedule 12 (the "Managers"). Section 4.23 Assets of the REIT. The sole asset of the general partner of Borrower is its general partnership interest in Borrower and such other assets that may be incidental to or required in connection with the ownership of such general partnership interest, or as set forth in Schedule 13. Section 4.24 REIT Status. The REIT intends to qualify for its taxable year ending December 31, 1995, and intends thereafter to remain qualified as a "real estate investment trust" as defined in Section 856 of the Code and is grandfathered from the application of Section 269B of the Code pursuant to Section 132(c)(3) of the Deficit Reduction Act of 1984. 79 -72- Section 4.25 The Partnership. The Corporation and entities wholly owned and Controlled by the Corporation are the sole general partners of the Partnership. Section 4.26 HIC. The Corporation is the owner and holder of all of the issued and outstanding stock of HIC. Section 4.27 Intercompany Debt. No Intercompany Debt is secured by any Collateral. Section 4.28 Personal Property. For all Real Property Assets other than the Vagabond Inns, Borrower, the Partnership and HIC, own, lease or license adequate Personal Property to maintain and operate each Real Property Asset as a hotel in accordance with the standards of this Agreement, the Loan Documents, the related Operating Leases and the related Franchise Agreements. The Personal Property is not subject to any liens, leases or financing arrangements other than Permitted Liens. Section 4.29 Operations. The REIT conducts its business only through Borrower, except as described on Schedule 13 and the Corporation conducts its business only through the Partnership and HIC, except as described on Schedule 13A. Section 4.30 Stock. The REIT and the Corporation list all of their outstanding shares of stock on the New York Stock Exchange and such shares trade as "paired shares" subject to a pairing agreement between the REIT and the Corporation. Section 4.31 Ground Leases. With respect to those Real Property Assets in which Borrower holds a leasehold estate under a Ground Lease, with respect to each such Ground Lease (except as may be set forth on Schedule 8) (i) Borrower is the owner of a valid and subsisting interest as tenant under the Ground Lease; (ii) the Ground Lease is in full force and effect, unmodified and not supplemented by any writing or otherwise; (iii) all rent, additional rent and other charges reserved therein have been paid to the extent they are payable to the date hereof; (iv) Borrower enjoys the quiet and peaceful possession of the estate demised thereby, subject to any sublease; (v) the Borrower is not in default under any of the terms thereof and there are no circumstances which, with the passage of time or the giving of notice or both, would constitute an event of default thereunder; (vi) the lessor under the Ground Lease is not in default under any of the terms or provisions thereof on the part of the lessor to be observed or performed; (vii) the lessor under the Ground Lease has satisfied all of its repair or construction obligations, if any, to date pursuant to the terms of the Ground Lease; (viii) the execution, delivery and performance of the Security Instrument do not require the consent (other than those consents which have been obtained and are in full force and effect) under, and will not contravene any provision of or cause a default under, the Ground Lease; (ix) Schedule 8 lists all the Ground Leases to which any of the Real Property Assets are subject and all amendments and 80 -73- modifications thereto; and (x) the lessor indicated on Schedule 8 for each Ground Lease is the current lessor under the related Ground Lease. Section 4.32 Survival. The foregoing representations and warranties shall survive the execution and delivery of this Agreement and shall continue in full force and effect until the indebtedness evidenced by the Note has been fully paid and satisfied and Lender and the Co-Lenders have no further commitment to advance funds hereunder. The request for any Advance under this Agreement by Borrower or on its behalf shall constitute a certification that the aforesaid representations and warranties are true and correct as of the date of such request, except to the extent any such representation or warranty shall relate solely to an earlier date. SECTION 5. AFFIRMATIVE COVENANTS. Borrower and the REIT covenant and agree that on and after the Closing Date and until the Obligations are paid in full: Section 5.1 Financial Reports. (a) Borrower and the REIT will furnish to Lender: (i) annual audited consolidated or combined, as the case may be, financial statements of (A) Borrower and REIT, (B) the Partnership, HIC and the Corporation and (C) Borrower, the REIT, the Partnership and the Corporation, each prepared in accordance with GAAP within 90 days of the end of Borrower's fiscal year prepared by nationally recognized independent public accountants (which accountant's opinion shall be unqualified), reasonably satisfactory to Lender; (ii) within 45 days after the close of each quarterly accounting period in each fiscal year, the consolidated or combined, as the case may be, balance sheet of (A) Borrower and REIT, (B) the Partnership, HIC and the Corporation and (C) Borrower, the REIT, the Partnership, HIC and the Corporation, each as of the end of such quarterly period and the related consolidated statements of income, cash flow and shareholders' equity for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, each prepared in accordance with GAAP certified by Borrower, the Partnership and HIC, as applicable; (iii) quarterly and annual operating statements (prepared on a basis consistent with that used in the preparation of the GAAP consolidated or combined, as the case may be, financial statements of Borrower, the REIT, the Partnership, the Corporation and HIC, and in compliance with the Uniform System of Accounts) for each Real Property Asset, separately disclosing the amounts paid under the related Operating Lease and including a comparison and reconciliation with the most recent Annual Operating Budget, within 45 days of the end of each calendar quarter, certified by the Borrower, the Partnership and HIC (iv) copies of all of Borrower's, REIT's, the Partnership's, the Corporation's and HIC's quarterly and annual filings with the Securities and Exchange Commission and all shareholder reports and letters to the REIT's, HIC's and the Corporation's shareholders and all other publicly released information promptly after their filing or mailing, and (v) an annual operating and capital budget for each of the Real Property Assets (the "Annual Operating Budget"), including cash flow projections for the upcoming year, 81 -74- presented on a monthly basis consistent with the quarterly and annual operating statements referred to in clause (iii) above at least 15 days prior to the start of each calendar year. Borrower will furnish or cause to be furnished such additional reports or data, but no more often than on a quarterly basis, as Lender may reasonably request including, without limitation management and marketing reports for each Real Property Asset. Borrower and each Loan Party shall maintain a system of accounting capable of furnishing all such information and data, and shall maintain its respective books and records respecting financial and accounting matters in a proper manner and on a basis consistent with that used in the preparation of the GAAP consolidated financial statements of Borrower. Unless otherwise specified above financial reports requested by Lender of Borrower shall be provided to Lender no later than 15 days after such request. (b) Officer's Certificates; Comfort Letters. (i) At the time of the delivery of the financial statements under clause (a) above, Borrower shall provide a certificate of the general partner of Borrower or a senior executive officer of Borrower and the REIT that such financial statements have been prepared in accordance with GAAP (unless such financial statements are not required to be prepared in accordance with GAAP pursuant to this Agreement) and fairly present the financial condition and the results of operations of Borrower, REIT, the Partnership, HIC, the Corporation and the Real Property Assets on the dates and for the periods indicated, subject, in the case of interim financial statements, to normally recurring year end adjustments, (y) to the best knowledge of such general partner or senior executive officer of Borrower and the REIT that no Default or Event of Default has occurred on the date of such certificate or, if any Default or Event of Default has occurred and is continuing on such date, specifying the nature and extent thereof and the action Borrower proposes to take in respect thereof and (z) that since the date of the prior financial statements delivered pursuant to such clause no change has occurred in the financial position of Borrower, REIT, the Partnership, HIC, the Corporation which change could result in a Material Adverse Effect, and (ii) at the time of delivery of the Annual Operating Budget pursuant to Section 5.1(a)(v), a written statement of the assumptions used in connection with respect to the Annual Operating Budget, together with a certificate of the general partner of Borrower or a senior executive officer of Borrower and the REIT to the effect that such budget and assumptions are reasonable and represent Borrower's, Partnership's and HIC's good faith estimate of such Property Net Cash Flow and anticipated capital expenditures, it being understood and agreed that there may often be a difference between financial projections and actual results. (ii) Within 45 days of the end of each calendar quarter, Borrower shall provide a certificate of the general partner of Borrower or of a senior executive officer of Borrower and the REIT certifying that no Default or Event of Default has occurred, that there has been no change in the REIT's tax status as a real estate investment trust as defined under Section 856 of the Code, confirming compliance with the covenant in Sections 5.3, 5.4, 5.5, 5.8, 5.9, 5.19 and 5.27 and demonstrating compliance with the financial covenants set forth in 82 -75- Sections 5.15, 5.16, 5.17, 5.18, 5.20, 6.3, 6.4 and 6.7 hereof (including providing copies of the most recently available unaudited operating statements of the Real Property Assets) and the provisions of Sections 5.12, 5.13, 5.19(a), (b) and (c), 5.21, 5.26, 5.27 and 5.28 and such other Sections as reasonably requested by Lender and containing calculations verifying such compliance commencing with the calendar quarter ending on December 31, 1995; provided that the certificate for the last calendar quarter with respect to Sections 5.16, 5.17, 5.18 and 6.7 may be delivered within 90 days after the end of such fiscal year with the audited financial statements for the year then ended. A similar certificate with respect to covenants set forth in Sections 5.21, 6.3 and 6.4, shall be provided by the Partnership and HIC at the same times that the Borrower's and the REIT's certificate is required hereunder. In the event the Available Borrowing Base is less than 102.5% of the Available Facility Amount with respect to any Note, and until such time as the Available Borrowing Base is equal to or greater than 102.5% of the Available Facility Amount for each of the Notes, Lender may request that a certificate of the general partner of Borrower or a senior executive officer of Borrower and the REIT certifying compliance with the Available Borrowing Base Covenant set forth in Section 5.15 (and containing calculations demonstrating such compliance) be delivered to Lender on a monthly basis. (iii) Within 90 days of the end of Borrower's fiscal year through the Maturity Date, and prior to any increase of the Available Facility Amount pursuant to Section 2.22, the addition of any New Property pursuant to Section 2.23, the Release of any Collateral pursuant to Section 2.21(a) and the substitution of any Substitute Properties pursuant to Section 2.21(b), Borrower and the REIT, at Borrower and the REIT's sole cost and expense, shall provide a comfort letter or audit prepared by a nationally recognized independent certified public accounting firm satisfactory to Lender verifying that the covenants contained in Sections 5.15, 5.16, 5.17, 5.18, 5.19(a), (b) and (c), and 6.7 are complied with at the end of such period and will be in compliance with such covenants after giving effect to such increase, addition, release or substitution, as the case may be. (c) Notice of Default or Litigation. Promptly after Borrower or any other Loan Party obtains actual knowledge thereof, Borrower shall give Lender notice of (i) the occurrence of a Default or any Event of Default, (ii) the occurrence of (x) any default that is not cured, or any event of default, under any partnership agreement of Borrower, any mortgage, deed of trust, indenture or other debt or security instrument, covering any of the assets of Borrower or (y) any event of default under any Franchise Agreement, Operating Lease, Intercompany Debt or any other material agreement relating to the Real Property Assets, to which Borrower, the Partnership or HIC is a party, which, if not cured could result in a Material Adverse Effect, (iii) any litigation or governmental proceeding pending or threatened (in writing) against Borrower, any other Loan Party which could result in a Material Adverse Effect and (iv) any other event, act or condition which could result in a Material Adverse Effect. Each notice delivered pursuant to this Section 5.1(c) shall be accompanied by a certificate of a general 83 -76- partner or senior executive officer of Borrower setting forth the details of the occurrence referred to therein and describing the actions Borrower proposes to take with respect thereto. (d) Quality Assurance. Promptly after Borrower or the Partnership or any other Loan Party receives any quality assurance reports or similar reports of inspection or compliance from the Franchisor under any Franchise Agreement ("Quality Assurance Reports"), Borrower shall deliver copies thereof to Lender, but in no event later than thirty days after receipt. (e) Other Information. From time to time, Borrower and the REIT shall provide such other information and financial documents relating to Borrower, the REIT or the other Loan Parties as Lender may reasonably request. Section 5.2 Books, Records and Inspections. Borrower, the Partnership and HIC shall, at their respective principal places of business or at each Real Property Asset, keep proper books of record and account in which full, true and correct entries shall be made. Borrower, the Partnership and HIC shall permit or cause to be permitted officers and designated representatives of Lender and any Co-Lender to visit and inspect any of the Real Property Assets, and to examine and copy the books of record and account of Borrower, the Partnership and HIC and the Real Property Assets (including, without limitation, leases, statements, bills and invoices), discuss the affairs, finances and accounts of Borrower, the Partnership and HIC and be advised as to the same by, its and their officers and independent accountants, all upon reasonable notice and at such reasonable times as Lender or any Co-Lender may desire. Section 5.3 Maintenance of Insurance. Borrower and the other Loan Parties shall (a) maintain with financially sound and reputable insurance companies insurance on itself and its properties in commercially reasonable amounts and with respect to the Real Property Assets in at least such amounts and against at least such risks as are required, under the Security Instruments, (b) maintain Lender as named additional insured in respect of any such liability insurance required to be maintained under the Security Instruments, and (c) furnish to Lender from time to time, upon written request, certificates of insurance or certified copies or abstracts of all insurance policies required under this Agreement and the other Loan Documents and such other information relating to such insurance as Lender may reasonably request. Section 5.4 Taxes. Borrower and the other Loan Parties shall pay or cause to be paid, when due (i.e., before any penalty or fine could be levied or charged), all taxes, charges and assessments and all other lawful claims required to be paid by Borrower, the other Loan Parties, except as contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves have been established with respect thereto in accordance with GAAP. Upon request from Lender, Borrower shall provide evidence to Lender of payment of such taxes, charges, assessments and other lawful claims. 84 -77- Section 5.5 Corporate Franchises; Conduct of Business. (a) Borrower and each Loan Party shall do or cause to be done, all things necessary to preserve and keep in full force and effect its existence and good standing (i) in the State of its organization and (ii) in each state in which a Real Property Asset is located, unless such Person is not required to qualify in such State by Applicable Law, and its respective franchises, tradenames licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals, except where the failure to so preserve any of the foregoing (other than existence and good standing) could not, individually or in the aggregate, result in a Material Adverse Effect. (b) Borrower, the Partnership and HIC shall carry on and conduct their businesses in substantially the same manner and substantially the same field of enterprise as they are presently conducted. (c) The REIT shall carry on and conduct its business in substantially the same manner and substantially the same field of enterprise as it is presently conducted and only through Borrower, except as described in Schedule 13. (d) The Corporation shall carry on and conduct its business in substantially the same manner and substantially the same field of enterprise as it is presently conducted and only through the Partnership and HIC, except as described in Schedule 13A. Section 5.6 Compliance with Law. Borrower and the other Loan Parties shall comply in all material respects with all Applicable Laws, in respect of the conduct of their business and the ownership of their property (including the Real Property Assets), except for such Applicable Laws, (a) which Borrower or such other Loan Party are contesting in good faith and in compliance with and pursuant to appropriate proceedings diligently prosecuted (provided that such contest does not and cannot (i) expose any of Lender, any Co-Lender, Borrower, the other Loan Parties to any criminal liability or penalty, (ii) give rise to a Lien against any of the Collateral or any Real Property Asset, or (iii) otherwise materially adversely affect any of the Collateral or the value thereof), or (b) the failure to observe which, taken individually or in the aggregate, could not result in a Material Adverse Effect. Section 5.7 Performance of Obligations. Borrower and the REIT shall perform all of their respective material obligations under the terms of each mortgage, indenture, security agreement, debt instrument, lease, undertaking and contract relating to any Real Property Assets, or by which it or any of the Real Property Assets is bound. 85 -78- Section 5.8 Stock. REIT and the Corporation shall maintain in good standing their listing of all outstanding shares of stock on the New York Stock Exchange and such shares shall continue to trade as "paired shares". Section 5.9 Maintenance of Personal Property. Borrower, the Partnership and HIC shall own, lease or license Personal Property adequate to maintain and operate each Real Property Asset as a hotel in accordance with the standards of this Agreement, the Loan Documents, the related Operating Leases and the related Franchise Agreements, including compliance with the Loan to Value Ratio Covenant for each Pool. Neither Borrower, the Partnership nor HIC shall lease, license, encumber or enter into any other financing arrangements with respect to any of the Personal Property in excess of the Permitted Financing. With respect to the Real Property Asset identified on Schedule 2 as Doubletree, California, and on all other California Real Property Assets (other than the Vagabond Inns) which are owned, leased, or operated by any Loan Party or an Affiliate thereof, all Personal Property shall be owned by Borrower. Section 5.10 Maintenance of Properties. Borrower and the other Loan Parties shall ensure that the Real Property Assets are maintained in a manner consistent with their current condition and repair, normal wear and tear and casualty damage in the process of being repaired or restored excepted. Section 5.11 Compliance with ERISA. (a) Borrower and the other Loan Parties shall maintain each Employee Benefit Plan in compliance with all material applicable requirements of ERISA and the Code and with all material applicable regulations promulgated thereunder so that no failure to so comply will cause liability to Borrower or any Loan Party in excess of $5,000,000.00 or have a Material Adverse Effect. Borrower and the other Loan Parties shall provide to Lender, within ten (10) days of Lender's request, any document, filing or correspondence relating to an Employee Benefit Plan which the Lender reasonably requests. Borrower and the other Loan Parties shall also provide to Lender, with ten (10) days of filing or receipt, (i) any notice from the Department of Labor or Internal Revenue Service of assessment or investigation regarding a prohibited transaction under Section 4975 of the Code or Section 406 of ERISA, (ii) any notice from a Multiemployer Plan of withdrawal with respect to a Multiemployer Plan, (iii) notice from the Internal Revenue Service of imposition of excise tax with respect to an Employee Benefit Plan, (iv) any Form 5500 filed by any Borrower or Loan Party with respect to an Employee Benefit Plan which includes a qualified accountant's opinion, or (v) notice regarding a proposed termination from the PBGC; provided, however, that items in (i)-(iii) need only be provided if the events could result in Material Adverse Effect. (b) Neither Borrower nor any other Loan Party shall 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 under this Agreement or the other Loan Documents) to be a non- 86 -79- exempt (under a statutory or administrative class exemption) prohibited transaction under ERISA or result in a violation of a state statute regulating governmental plans that would subject Lender to liability for a violation of ERISA or such a state statute. (c) Borrower and the REIT further covenant and agree to deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as reasonably requested by Lender in its sole discretion, that (i) neither Borrower or any other Loan Party is an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a "governmental plan" within the meaning of Section 3(3) of ERISA; (ii) neither Borrower or any other Loan Party is subject to state statutes applicable to Borrower or any Loan Party regulating investments and fiduciary obligations of Borrower or any Loan Party with respect to governmental plans; and (iii) with respect to each Loan Party and Borrower, at least one of the following circumstances is true: (1) Equity interests in Borrower or such Loan Party are publicly offered securities, within the meaning of 29 C.F.R. Section 2510.3-101(b)(2); (2) Less than 25 percent of each outstanding class of equity interests in Borrower or such Loan Party are held by "benefit plan investors" within the meaning of 29 C.F.R. Section 2510.3-101(f)(2); or (3) Borrower or such Loan Party qualifies as an "operating company" or a "real estate operating company" within the meaning of 29 C.F.R. Section 2510.3-101(c) or (e) or an investment company registered under The Investment Company Act of 1940. Section 5.12 Settlement/Judgment Notice. Borrower and the REIT agree that they shall, within ten (10) days after a settlement of any obligation in excess of $1,000,000.00 provide written notice to Lender of such settlement together with a certification signed by a senior executive officer of Borrower and the REIT certifying based upon the most recent quarterly consolidated financial statements of Borrower and the REIT, such settlement will not cause Borrower or the REIT to violate the financial covenants set forth in Sections 5.16, 5.17 and 5.18 hereof. Borrower and the REIT further agree that they shall, within ten (10) days after entry of a final judgment in excess of $1,000,000.00 or final judgments in excess of $1,000,000.00 in the aggregate during the immediately preceding twelve (12) month period, provide written notice to Lender of such judgment together with a certification signed by a senior executive officer of Borrower and the REIT certifying, based upon the most recent quarterly consolidated financial statements of Borrower and the REIT, such judgment will not cause Borrower or the REIT to violate the financial covenants set forth in Sections 5.16 and 5.17 hereof. Borrower and the REIT further agree that they will provide written notice to Lender after entry of any judgment in excess of $1,000,000.00. 87 -80- Section 5.13 Acceleration Notice. Borrower and the REIT agree that they shall, within ten (10) days after receipt of written notice that any Indebtedness of Borrower or the REIT hereof has been accelerated, provide written notice to Lender of such acceleration. Section 5.14 Lien Searches; Title Searches. In addition to searches and endorsements required in connection with an Advance, Borrower shall, upon Lender's request therefor given from time to time, and at Lender's expense, deliver (a) reports of UCC, tax lien, judgment and litigation searches with respect to Borrower, each of the other Loan Parties, and (b) searches of title to each of the Real Property Assets (each, a "Title Search"). Such Title Searches and lien searches required under this Agreement shall be conducted by search firms designated by Lender in each of the locations designated by Lender. Section 5.15 Available Borrowing Base Covenant. Borrower shall at all times maintain an Available Borrowing Base for each Note for the aggregate of all Real Property Assets applicable to each such Note (measured on a monthly basis based on a trailing twelve month analysis) greater than or equal to the Available Facility Amount for each such Note; provided, however, that to the extent the available borrowing base covenant (the "Available Borrowing Base Covenant") set forth in the preceding clause is not met at the end of any calendar month for a particular Note, then: (a) the Available Facility Amount for such Note and the Aggregate Available Facility Amount shall be immediately and automatically, without any act or notice by Lender, reduced to the extent necessary to cause the Available Borrowing Base Covenant to be satisfied; and (b) to the extent that the then outstanding principal balance of the Loan (including outstanding Swing Line Advances) exceeds the Available Facility Amount for such Note as reduced as a result of a reduction of the Available Facility Amount for such Note pursuant to clause (a) above, Borrower shall repay, without penalty or premium (other than as provided in Section 2.17), that portion of the outstanding principal balance of the Note which is in excess of the Available Facility Amount for such Note within five (5) Business Days of the earliest of (i) Borrower's receipt of written notice that the Available Borrowing Base Covenant is no longer satisfied, (ii) Borrower's delivery of the Section 5.1(b)(ii) certificate indicating that the Available Borrowing Base Covenant is no longer satisfied (or, if such certificate is not delivered on or prior to the date provided for in Section 5.1(b)(ii), the date on which such certificate was required to be delivered thereunder) and (iii) Borrower's determination that the Available Borrowing Base Covenant is no longer satisfied. 88 -81- (c) Neither the Aggregate Available Facility Amount nor the Available Facility Amount with respect to such Note shall be reduced pursuant to Section 5.15(a) above if (i) Borrower shall provide Lender, within five Business Days of the earliest date in clause (i), (ii) or (iii) of Section 5.15(b) (the "Relevant BBC Date"), with (A) a certificate of the general partner or a senior executive officer of Borrower substantially in the form of Exhibit F stating that it intends to provide an additional real property or properties to Lender pursuant to Section 2.23 within 45 days of the Relevant BBC Date and (B) evidence, reasonably satisfactory to Lender, that the Net Operating Income for such additional real property or properties for the twelve (12) month period most recently ended together with the Net Operating Income of the other Real Property Assets securing such Note, would have enabled Borrower to meet the Available Borrowing Base Covenant on the Relevant BBC Date with respect to such Note and (C) such additional real property or properties shall be satisfactory to Lender in its sole discretion and (ii) Borrower shall have provided Lender within 45 days of the Relevant BBC Date with such additional collateral pursuant to Section 2.23 hereof and such additional collateral, in the aggregate with the other Real Property Assets securing the Loan, is capable of meeting the Available Borrowing Base Covenant with respect to such Note at such time. In the event that (I) Borrower shall fail to deliver to Lender the items set forth in clause 5.15(c)(i) above within five (5) Business Days of the Relevant BBC Date, (II) the additional property or properties offered by Borrower are not satisfactory to Lender or (III) Borrower shall fail to subject such additional property or properties to the Liens of the Loan Documents pursuant to Section 2.23 or comply with any other provision of Section 2.23 within the time period provided above, then the Aggregate Available Facility Amount and the Available Facility Amount with respect to such Note shall immediately be reduced without any further action on the part of Borrower or Lender pursuant to Section 5.15(b) and Borrower shall prepay the Loan to the extent, if any, required pursuant to Section 5.15(b). (d) In the event that the Aggregate Available Facility Amount and the Available Facility Amount with respect to such Note is reduced pursuant to the terms of this Section 5.15, Borrower shall have the ability to partially or fully reinstate the Aggregate Available Facility Amount and the Available Facility Amount for such Note to its previous level by delivering to Lender, with respect to periods ending at the end of any calendar month (but no sooner than one month following a Relevant BBC Date), a certificate of a general partner or a senior executive officer of Borrower, in the form of the quarterly certificate required pursuant to Section 5.1(b)(ii), demonstrating that as of the end of such month, Borrower is in compliance with the Available Borrowing Base Covenant to the extent of the requested reinstatement of the Aggregate Available Facility Amount and the Available Facility Amount with respect to such Note. 89 -82- Section 5.16 Minimum Net Worth. The minimum net worth of Borrower shall not, at any time, be less than $215,000,000.00 plus 75% of the net proceeds (after payment of underwriter and placement fees and other expenses directly related to such equity offering) received from subsequent equity offerings by the REIT, calculated on a GAAP basis; however, the conversion or exchange of existing operating partnership units in Borrower for shares in the REIT for which the REIT does not receive cash compensation shall not be deemed an equity offering for purposes of this Section 5.16. Section 5.17 Total Indebtedness. (a) The maximum combined Total Debt of Borrower and the REIT shall not exceed at any time 55% of the combined Net Book Value of Borrower and the REIT, calculated without duplication. (b) The maximum combined Total Debt of Borrower and the Partnership shall not exceed at any time 55% of the combined Net Book Value of Borrower and the Partnership, calculated without duplication, provided that Total Debt and Net Book Value shall exclude amounts related to the Intercompany Debt between (i) the Corporation and the Partnership and their consolidated Subsidiaries and (ii) the REIT and Borrower and their consolidated Subsidiaries. Section 5.18 Coverage Ratios. (a) The ratio of (x) actual consolidated EBITDA of Borrower and the REIT (without duplication) for any period of twelve consecutive months (or if twelve consecutive months have not passed since July 6, 1995, the period of time from July 6, 1995) (in either case the "Base Period"), to (y) the sum of Debt Service plus Fixed Charges of the Borrower and the REIT for such Base Period shall not at any time be less than (i) 2.15 to 1 at any time during the nine month period commencing on July 6, 1995 and (ii) 2.25 to 1 for any period thereafter. (b) The ratio of (x) actual EBITDA (adjusted to include replacement reserves of 4% of gross hotel revenues) of Borrower and the Partnership for the applicable Base Period, to (y) the sum of Debt Service plus Fixed Charges of Borrower and the Partnership for the same Base Period shall not at any time be less than (i) 2.40 to 1 at any time during the nine month period commencing on July 6, 1995 and (ii) 2.50 to 1 thereafter. For purposes of this Section 5.18(b), EBITDA and Debt Service shall exclude amounts related to the Operating Leases with the Partnership as tenant and intercompany debt between (A) the Corporation and the Partnership and their consolidated Subsidiaries and (B) the REIT and the Borrower and their consolidated Subsidiaries. Section 5.19 Replacement Reserve and Deferred Maintenance Reserve. (a) After the Closing Date Borrower shall spend at least the amounts set forth on Schedule 16 for each Real Property Asset on or before December 31, 1996 (the "Initial Minimum Spending Requirement"). For the calendar year commencing on January 1, 1997 and for each calendar year thereafter, 90 -83- Borrower shall spend, or cause to have spent, a minimum spending amount (the "Minimum Spending Requirement") for each Real Property Asset equal to 4% of the annual Gross Revenues from each Real Property Asset per annum on repair, replacement and maintenance of the related Real Property Asset during the applicable calendar year. The Minimum Spending Requirement for each calendar year shall be determined annually by Lender, and shall be based on Gross Revenues for the immediately preceding calendar year, and Lender shall revise Schedule 16 accordingly. In the event that Borrower has spent more than the Minimum Spending Requirement for a Real Property Asset in any calendar year, Borrower may apply such excess, up to an amount equal to 2% of the annual Gross Revenues from the Real Property Asset, to reduce the amount of the Minimum Spending Requirement that must be spent in the immediately succeeding calendar year. Borrower shall deliver evidence reasonably satisfactory to Lender no more frequently than monthly, but at least quarterly, of the portion of the Initial Minimum Spending Requirement and the Minimum Spending Requirement, as the case may be, for each Real Property Asset that has been spent; such evidence shall include copies of paid invoices or other receipts for work done or materials provided and such other information as reasonably requested by Lender. On July 1, 1996, and on the first day of July of each year thereafter, Lender shall determine the portion of the Initial Minimum Spending Requirement or the Minimum Spending Requirement for that calendar year that has not been spent and determine the amount to be reserved for such repair, replacement and maintenance as provided below (such amount, the "Initial Replacement Reserve" or the "Minimum Replacement Reserve", as the case may be). Such amount to be reserved shall equal the difference between (i) the portion of the Minimum Spending Requirement for the applicable year that has not been spent and (ii) the difference between (A) (1) the lesser of 55% of the value of the related Real Property Asset according to Lender's internal valuation or 50% of the value according to an Appraisal of the related Real Property Asset, or (2) if the Syndication has occurred, 50% of the value according to the Appraisal of such Real Property Asset and (B) the Allocated Loan Amount for such Real Property Asset. Borrower shall maintain, from the date of notice of the Initial Replacement Reserve or the Minimum Replacement Reserve, as the case may be, until such time as the Initial Minimum Spending Requirements or the Minimum Spending Requirement, as the case may be, for such calendar year have been spent in full, an amount equal to the Initial Replacement Reserve and the Minimum Replacement Reserve for such calendar year, as the case may be, in the form of (x) readily available and unrestricted cash held in a segregated account or (y) borrowing capacity under this Agreement, as measured by the unfunded portion of the Aggregate Available Facility Amount; provided however, that during any given calendar year the amounts required to be maintained as the Initial Replacement Reserve or the Minimum Replacement Reserve shall be reduced from time to time to the extent that such sums were actually spent on repair, replacement and maintenance of the Real Property Assets as determined by Lender in its reasonable discretion. (b) Borrower shall spend the amounts shown on Schedule 17 (as the same may be amended from time to time) for each Real Property Asset listed on such Schedule prior to 91 -84- January 1, 1997 to perform the specified maintenance set forth on such Schedule (the "Deferred Maintenance Spending Requirement"). Borrower shall deliver evidence reasonably satisfactory to Lender on or prior to December 31, 1996 that such work has been completed; such evidence shall include copies of paid invoices or other receipts for work done or materials provided, and may include an updated Engineering Report. Borrower shall maintain an amount (the "Deferred Maintenance Reserve") equal to the difference between (i) the Deferred Maintenance Spending Requirement and (ii) the difference between (A) (1) the lesser of 55% of the value of the related Real Property Asset according to Lender's internal valuation or 50% of the value according to an Appraisal of the related Real Property Asset, or (2) if the Syndication has occurred, 50% of the value according to the Appraisal of such Real Property Asset and (B) the Allocated Loan Amount for such Real Property Asset in the form of (x) readily available and unrestricted cash held in a segregated account or (y) borrowing capacity under this Agreement, as measured by the unfunded portion of the Aggregate Available Facility Amount. The Deferred Maintenance Reserve shall be reduced, from time to time, to the extent that such sums were actually spent to perform the required work as determined by Lender in its reasonable discretion. (c) With respect to the Real Property Asset identified as Bay Valley, Michigan on Schedule 1, Borrower shall complete the soil excavation and replacement as described in and pursuant to the Corrective Action Plan for Bay Valley Resort Facility, 2470 Old Bridge Road, Bay City, Michigan prepared for Hotel Investors Trust, Los Angeles, California, by Earth Tech, dated January 1995, Project 22424.03 as modified by the Options Update for Bay Valley Resort, Bay City, Michigan prepared by Earth Tech and dated October 18, 1995 (the "Corrective Action Plan") on or prior to October 1, 1996, and shall comply with the ground water monitoring program as described in and pursuant to the Corrective Action Plan throughout the term of the Loan. Borrower shall deliver a quarterly report to Lender with respect to the status of the soil excavation and replacement and the ground water monitoring; upon the completion of the soil excavation and replacement, Borrower shall deliver a report with respect to the gound water monitoring every second quarter, in each case, concurrently with the report delivered pursuant to Section 5.1(b)(ii). Until such time as Lender receives a report from Earth Tech or another environmental consultant reasonably satisfactory to Lender that the soil excavation and replacement has been completed and the ground water monitoring has commenced, each in accordance with Applicable Law and the Corrective Action Plan, Borrower shall maintain the amount set forth on Schedule 17 with respect to such Real Property Asset for soil excavation and remediation as part of the Deferred Maintenance Reserve pursuant to Section 5.19(b); provided, however, that such amount shall be reduced from time to time to the extent that such sums were actually spent on the soil excavation and replacement, or on the ground water monitoring, as determined by Lender in its reasonable discretion. Section 5.20 Loan to Value Ratio. Borrower shall at all times maintain the ratio of Available Facility Amount for each Note to the most recent aggregate appraised value according to the Appraisals, updates to existing Appraisals or Lender's internal valuation most recently 92 -85- delivered or prepared, as the case may be, pursuant to Section 5.25 or, if no such updated appraisal has been prepared and delivered to Borrower with respect to a Real Property Asset, according to the Appraisal or internal valuation completed for such Real Property Asset on or before the Closing Date, unless Borrower or Lender reasonably believes that the value is less, of not more than 50% of the value according to an Appraisal or 55% of the value according to Lender's internal valuation, provided, however, that all determinations of Loan to Value Ratios from and after the Syndication shall be based on 50% of appraised value determined by Appraisals reasonably satisfactory to the Lender of all Real Property Assets securing each such Note, measured in the aggregate (the "Loan to Value Ratio"); provided, however, that to the extent the loan to value ratio covenant (the "Loan to Value Ratio Covenant") set forth in the preceding clause is not satisfied for a particular Note, then: (a) the Available Facility Amount for such Note and the Aggregate Available Facility Amount shall be immediately and automatically, without any act or notice by Lender, reduced to the extent necessary to cause the Loan to Value Ratio Covenant to be satisfied; and (b) to the extent that the then outstanding principal balance of the Loan (including outstanding Swing Line Advances) exceeds the Available Facility Amount for such Note as reduced as a result of a reduction of the Available Facility Amount for such Note pursuant to clause (a) above, Borrower shall repay, without penalty or premium (other than as provided in Section 2.17), that portion of the outstanding principal balance of the Note which is in excess of the Available Facility Amount for such Note within five (5) Business Days after the earlier to occur of (i) Borrower's receipt of the Section 5.25 Appraisal(s) or Lender's internal valuations, provided that, if the Syndication has occurred, only Appraisals delivered in connection with the Syndication or Section 5.25 shall be used, (ii) Borrower's receipt of Lender's written notice that the Loan to Value Ratio Covenant is no longer satisfied and (iii) Borrower's delivery of the Section 5.1(b)(ii) certification indicating that the Loan to Value Ratio Covenant is no longer satisfied; provided, however, that Borrower has the option of returning the Aggregate Available Facility Amount and the Available Facility Amount for such Note to its level prior to the impact of clause (a) above, by (i) providing Lender with evidence satisfactory to Lender respecting the value of the Real Property Assets securing such Note (such as a new Appraisal) which would cause Lender, in its sole discretion, or, if such evidence is a new Appraisal, in its reasonable discretion, to modify its determination respecting the Loan to Value Ratio Covenant, or (ii) providing Lender, within 45 days of the earliest date in clause (i), (ii), or (iii) of Section 5.20(b), with additional collateral satisfactory to Lender pursuant to Section 2.23 hereof which, in the aggregate with the other Real Property Assets securing the Loan is capable of meeting the Loan to Value Ratio Covenant and otherwise in compliance with Section 5.20(c). 93 -86- (c) Neither the Aggregate Available Facility Amount nor the Available Facility Amount with respect to such Note shall be reduced pursuant to Section 5.20(a) above if (i) Borrower shall provide Lender within five Business Days of the earliest date in clause (i), (ii) or (iii) of Section 5.20(b) (the "Relevant LTV Date"), with (A) a certificate of the general partner or a senior executive officer of Borrower substantially in the form of Exhibit F stating that it intends to provide an additional real property or properties to Lender pursuant to Section 2.23 within 45 days of the Relevant LTV Date and (B) evidence, reasonably satisfactory to Lender that the appraised value of such additional real property or properties as determined by Appraisals satisfactory to Lender together with the values of the other Real Property Assets securing the Loan (as determined in accordance with this Section 5.20), would have enabled Borrower to meet the Loan to Value Ratio Covenant on the Relevant LTV Date and (C) such additional real property or properties shall be satisfactory to Lender in its sole discretion and (ii) Borrower shall have provided to Lender within 45 days of the Relevant LTV Date with such additional collateral pursuant to Section 2.23 hereof and such additional collateral in the aggregate with the other Real Property Assets securing the Loan is capable of meeting the Loan to Value Ratio Covenant at such time. In the event that (I) Borrower shall fail to deliver to Lender the items set forth in clause 5.20(c)(i) above within five (5) Business Days of the Relevant LTV Date, (II) the additional property or properties offered by Borrower are not satisfactory to Lender or (III) Borrower shall fail to subject such additional property or properties to the Liens of the Loan Documents pursuant to Section 2.23 or comply with any other provision of Section 2.23 within the time period provided above, then the Aggregate Available Facility Amount and the Available Facility Amount with respect to such Note shall immediately be reduced without any further action on the part of Borrower or Lender pursuant to Section 5.20(b) and Borrower shall prepay the Loan to the extent, if any, required pursuant to Section 5.20(b). (d) In the event that the Aggregate Available Facility Amount and the Available Facility Amount with respect to such Note is reduced pursuant to the terms of this Section 5.20, Borrower has the ability to partially or fully reinstate the Aggregate Available Facility Amount and the Available Facility Amount with respect to such Note to its level prior to such reduction by providing Lender with evidence satisfactory to Lender respecting the value of the Real Property Assets (such as a new Appraisal) which would cause Lender, in its sole discretion, or, if such evidence is a new Appraisal, in its reasonable discretion, to modify its determination respecting the Loan to Value Ratio Covenant. Section 5.21 Manager. Borrower shall terminate the management agreements listed on Schedule 12 (other than the management agreement with respect to the Real Property Asset identified on such Schedule as Harvey Wichita) prior to December 31, 1995 and the Partnership 94 -87- shall manage such Real Property Asset thereafter pursuant to the Operating Lease; however, the Partnership may enter into a new management agreement for any Real Property Asset with Lender's consent, which consent shall not be unreasonably withheld, and provided that such management agreement shall be on market terms and at market rates with a bona fide independent third party manager that is in the business of managing hotels and otherwise reasonably satisfactory to Lender. Section 5.22 Further Assurances. Borrower and the REIT will, at Borrower's and the REIT's sole cost and expense, at any time and from time to time upon request of Lender take or cause to be taken any action and execute, acknowledge, deliver or record any further documents, opinions, deeds of trust, deeds to secure debt, mortgages, security agreements or other instruments which Lender in its reasonable discretion deems necessary or appropriate to carry out the purposes of this Agreement and the other Loan Documents including (i) to consummate the transfer or sale of the Loan or any portion thereof, provided that Borrower's, the REIT's and each other Loan Party's obligations hereunder and under the Loan Documents shall not be increased or their rights diminished or abridged without their consent, (ii) to preserve, protect and perfect the security intended to be created and preserved in the Real Property Assets and (iii) to establish, preserve and protect the security interest of Lender in and to the Accounts Receivable and any personal property owned by Borrower, the Partnership on HIC installed in, furnished to or used or intended to be used in connection with any construction in connection with the Real Property Assets or the operation thereof. Section 5.23 REIT Status. The REIT shall elect to be treated as a "real estate investment trust" for the taxable year ending on December 31, 1995 and thereafter shall at all times maintain its status as and continue to elect to be treated as, a "real estate investment trust" under Section 856 of the Code and shall at all times maintain its status as grandfathered from the application of Section 269B of the Code pursuant to Section 132(c)(3) of the Deficit Reduction Act of 1984. Section 5.24 Mortgage Covenants. Borrower shall comply with all of the terms and conditions and covenants in the Security Instruments, the Environmental Indemnity and the other Loan Documents. Section 5.25 Appraisals. Lender shall have the right during the term of the Loan to commission new Appraisals or updates to existing Appraisals for one or more Real Property Assets. Prior to the first Advance after the Syndication, Borrower shall have delivered satisfactory Appraisals for all of the Real Property Assets (the cost of which, with respect to the Initial Assets only, shall be subject to the Expense Cap). Borrower shall only be obligated to pay for Appraisals or updated Appraisals or Lender's internal valuations or updates thereof in connection with (i) an increase in the Available Facility Amount (other than as a result of the Syndication, provided that such increase is based on the Initial Assets), (ii) the addition of a 95 -88- Substitute Property or New Property, (iii) a Default or an Event of Default, (iv) the first update of any Appraisal and (v) any Appraisal delivered pursuant to Section 2.26. All other Appraisals, updates of Appraisals, internal valuations or updates thereof shall be performed at Lender's sole cost and expense. Borrower shall reasonably cooperate with the appraisers performing the Appraisals of the Real Property Assets and, with respect to those Appraisals requested by Lender, any Co- Lender or any Participant, shall deliver copies of such Appraisals to Lender promptly after receipt but in no event later than five days after written notice from Lender (provided Borrower has theretofore received such Appraisal). In Lender's sole discretion, Lender may elect to update and review its own internal valuation, or prepare its own internal valuation in lieu of one or more of the Appraisals which may be required under this Section 5.25. Borrower shall pay, to the extent required pursuant to the provisions of this Section 5.25, within five (5) Business Days of Lender's request therefor, Lender's out-of-pocket costs and expenses for each such internal valuation or review or update thereof and each Appraisal or update thereof for each Real Property Asset. Borrower shall reimburse Lender for its out-of-pocket costs and expenses in accordance with the preceding sentence in connection with the internal valuations done pursuant to Section 3.1(n) no later than the Closing Date (subject to the Expense Cap). Notwithstanding the foregoing, however, if an internal valuation has been prepared and the Loan to Value Ratio is in dispute, Borrower shall deliver to Lender Appraisals, at Borrower's sole cost and expense, of each Real Property Asset. Section 5.26 Maintenance of Control. An officer, director, employee or general partner of the Group shall at all times remain a Trustee of the REIT and a Director of the Corporation (it being acknowledged by Lender that changes in composition of REIT's Trustees or Corporation's Directors shall not constitute a change in control). Section 5.27 Maintenance of Intercompany Debt. Except as set forth on Schedule 9, no Intercompany Debt shall be secured by any of the Collateral. Section 5.28 Transfer of Licenses. With respect to all of the Real Property Assets (other than the Vagabond Inns but only for so long as the Vagabond Inns are not leased or operated by a Loan Party or an Affiliate of any Loan Party), to the extent that any Licenses are not in the name of the applicable Loan Party, Borrower and the REIT shall promptly commence or cause the applicable Loan Party to commence, and diligently proceed to have all such Licenses issued in the name of the applicable Loan Party or deliver evidence reasonably satisfactory to Lender that the failure to have such License in the name of the applicable Loan Party does not materially adversely affect the operation and use of the related Real Property Asset. Borrower shall notify Lender within 10 Business Days of the end of each calendar quarter of the status of the various Licenses that have not been transferred to the applicable Loan Party. Notwithstanding the foregoing, Borrower shall have all liquor licenses (other than with respect to the liquor licenses held by Imperial Hotels Corporation with respect to the Vagabond Inns and the liquor license held by the Currency Club as tenant under a restaurant lease on the 96 -89- Real Property Asset identified as Dallas Park Central on Schedule 2) issued and maintained in either the name of (i) the Corporation, (ii) an entity wholly owned and controlled by the Corporation which has entered into a management agreement or lease agreement with respect to such liquor licenses with the Partnership or the Corporation on terms and conditions reasonably satisfactory to Lender or (iii) an individual who is both a resident of the state in which the related Real Property Asset is located and is an employee of either Borrower, the Partnership, the Corporation or the REIT at the level of general manager for the Real Property Assets in such state or higher within ninety (90) days of the date hereof. SECTION 6. NEGATIVE COVENANTS. Borrower covenants and agrees for itself and on behalf of the other Loan Parties that on and after the Closing Date until the Obligations are paid in full: Section 6.1 INTENTIONALLY DELETED. Section 6.2 INTENTIONALLY DELETED. Section 6.3 Liens. Borrower, the Partnership and HIC shall not, create, incur, assume or suffer to exist, directly or indirectly, any Lien on any of the Collateral, or any of the Real Property Assets, other than the following (collectively, the "Permitted Liens"): (a) Liens existing on the Closing Date and set forth on Schedule 7 hereto or listed in the Title Policies issued on the Closing Date; (b) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are being maintained in accordance with GAAP; (c) Statutory Liens of landlords and Liens of mechanics, materialmen and other Liens imposed by Law (other than any Lien imposed by ERISA) created in the ordinary course of business for amounts not yet due or (i) which are being contested in good faith by appropriate proceedings diligently conducted, and with respect to which adequate bonds have been posted if required to do so by Applicable Law or the terms of the Mortgage; (d) Easements, rights-of-way, zoning and similar restrictions and other similar charges or encumbrances not interfering with the ordinary conduct of the business of Borrower and which do not detract materially from the value of any of the Real Property Assets to which they attach or impair materially the use thereof by Borrower or materially adversely affect the security interests of Lender in the Collateral; 97 -90- (e) Permitted Financing; and (f) Liens granted to Lender pursuant to the Security Instruments securing the Obligations. Section 6.4 Restriction on Fundamental Changes. Without the prior written consent of Lender, which consent may be withheld in the sole and absolute discretion of Lender, (a) Borrower and the other Loan Parties shall not enter into any merger or consolidation following which the REIT or an entity wholly owned by the REIT is no longer the sole general partner of the Borrower; or a merger or consolidation following which the Corporation or entities wholly owned by the Corporation are no longer the sole general partners of the Partnership or the Corporation is no longer the sole shareholder of HIC; if such events occur without the prior written consent of Lender, all Advances shall be due and payable in full, including all principal, interest and Fees, on the earliest to occur of the expiration of each related Interest Period with respect to Eurodollar Portions or the next payment date with respect to Base Rate Portions, or the Maturity Date; and (b) the REIT shall not sell, transfer, pledge, assign or encumber its general partnership interest in Borrower and the Corporation shall not sell, transfer, pledge, assign or encumber its (i) general partnership interest in the Partnership or (ii) its stock in HIC, except to an entity wholly owned by the Corporation. Section 6.5 Transactions with Affiliates. Borrower and the other Loan Parties shall not enter into any material transaction or series of related transactions, whether or not in the ordinary course of business, with any Affiliate of Borrower, other than on terms and conditions substantially as favorable as would be obtainable at the time in a comparable arm's-length transaction with a Person other than an Affiliate of Borrower. Section 6.6 Plans. Borrower and the other Loan Parties shall not, and shall make reasonable efforts under the circumstances not to permit any member of their respective ERISA Controlled Group to, (i) take any action which would (A) increase the aggregate present value of the Unfunded Benefit Liabilities under all Plans, or withdrawal liability under a Multiemployer Plan for which Borrower or any Loan Party or any member of their respective ERISA Controlled Groups (determined without reference to Section 414(m) or (o) of the Code, if liabilities of entities in Borrower or the Loan Parties' ERISA Controlled Group solely by reason of Section 414(m) or (o) of the Code could not result in liability to Borrower or any Loan Party) could reasonably be expected to be liable, to an amount in excess of $5,000,000.00 or which has or could be reasonably expected to have a Material Adverse Effect or (B) result in liability to Borrower or any Loan Party for any post-retirement benefit under any "welfare plan" (as defined in Section 3(1) of ERISA) or any withdrawal liability or exit fee or charge with respect to any "welfare plan" (as defined in Section 3(1) of ERISA), other than liability for continuation coverage under Part 6 of Title I of ERISA or state laws which require similar continuation 98 -91- coverage for which the employee pays approximately the full cost of coverage, and other than such liability would not be in excess of $5,000,000.00 or have a Material Adverse Effect or (ii) engage in any transaction prohibited by Section 408 of ERISA or Section 4975 of the Code which has a Material Adverse Effect. Section 6.7 Payout Ratios. (a) The REIT and the Corporation (without duplication) shall not pay or declare Distributions that exceed the greatest of (i) (A) 105% for the first three quarters commencing on July 6, 1995, and (B) 100% for any period thereafter, of the Funds From Operations of the REIT and the Corporation (without duplication) in any four consecutive calendar quarters (or if four consecutive calendar quarters have not passed since July 6, 1995, the quarterly periods from July 6, 1995); provided that notwithstanding the foregoing, the REIT may pay or declare Distributions during the period of time from July 1, 1995 through June 30, 1996 up to $0.47 per share of stock of the REIT per quarter without violating this covenant, (ii) the amount necessary to maintain the REIT's status as a real estate investment trust under Section 856 of the Code, or (iii) the amount necessary for the REIT to avoid the payment of any federal income or excise tax (the "Maximum Combined Payout Ratio"). (b) The REIT shall not pay or declare Distributions that exceed the greatest of (i) (A) 105% for the first three quarters commencing on July 6, 1995, and (B) 100% for any period thereafter of the combined Funds From Operating of the REIT in any four consecutive calendar quarters (or if four consecutive calendar quarters have nor passed since July 6, 1995, the quarterly periods of time from July 6, 1995); provided that, notwithstanding the foregoing, the REIT may pay or declare Distributions during the period of time from July 1, 1995 through June 30, 1996 up to $0.47 per share of stock of the REIT per quarter without violating this covenant, (ii) the amount necessary to maintain the REIT's status as a real estate investment trust under Section 856 of the Code or (iii) the amount necessary for the REIT to avoid the payment of any federal income or excise tax (the "Maximum REIT Payment Ratio"). Section 6.8 Operating Leases. Borrower shall not terminate any Operating Lease, and shall not, without the prior written consent of Lender, modify or amend any Operating Lease (other than modifications of a ministerial nature which do not amend or modify any economic terms or terms that would have an adverse effect on the value of the Collateral or Lender's security interest therein). Section 6.9 Borrower's Partnership Agreement. Neither Borrower nor the REIT shall amend or modify Section 7.4 of Borrower's Partnership Agreement or default under any of its obligations under Borrower's Partnership Agreement. 99 -92- SECTION 7. EVENTS OF DEFAULT Section 7.1 Events of Default. Each of the following events, acts, occurrences or conditions shall constitute an Event of Default under this Agreement, regardless of whether such event, act, occurrence or condition is voluntary or involuntary or results from the operation of law or pursuant to or as a result of compliance by any Person with any judgment, decree, order, rule or regulation of any court or administrative or governmental body: (a) Failure to Make Payments. Borrower or the REIT shall (i) default in the payment when due of any principal of the Loan, or (ii) default in the payment within five (5) days after the due date of (x) any interest on the Loan or (y) any Fees, Transaction Costs or any other amounts owing hereunder; provided, however, that any interest payable with respect to any delinquent payment shall be calculated at the Default Rate from the date such payment was actually due as if there were no grace period. (b) Breach of Representation or Warranty. Any representation or warranty made by Borrower the REIT or any other Loan Party herein or in any other Loan Document or in any certificate or statement delivered pursuant hereto or thereto shall prove to be false or misleading in any material respect on the date as of which made or deemed made: provided, however, that if such breach is capable of being cured, then Borrower and the REIT shall have a period of thirty (30) days after the earlier of (i) the actual knowledge of such breach by Borrower or the REIT or (ii) delivery of notice from Lender of such breach, to cure any such breach. (c) Breach of Covenants. (i) Borrower or the REIT or any other Loan Party shall fail to perform or observe any agreement, covenant or obligation arising under Sections 5.1, 5.8, 5.15, 5.20, 5.23, 6.4(b), 6.6, 6.8 and 6.9, the Fee Letter, or fail to pay all sums when due pursuant to Section 6.4(a). (ii) Borrower or any of the Loan Parties shall fail to perform or observe any agreement, covenant or obligation arising under Sections 5.9, 5.16, 5.17, 5.18, 5.28, 6.3 and 6.7 and such failure shall continue uncured for thirty (30) days after the earlier of (A) the actual knowledge of such failure by Borrower or such Loan Party or (B) delivery of notice from Lender thereof. (iii) Borrower or any of the Loan Parties shall fail to perform or observe any agreement, covenant or obligation arising under this Agreement (except those described in subsections (a), (b) and (c)(i) and (c)(ii) above and (d), (e), (f), (g), (h), (i) and (j) below), other than Section 5.26, the breach of which shall not be deemed an Event of Default, and such failure 100 -93- shall continue uncured for thirty (30) days after delivery of notice thereof, or such longer period of time as is reasonably necessary to cure such Default, provided that Borrower or such Loan Party has commenced and is diligently prosecuting the cure of such Default and cures it within ninety (90) days. (iv) An Event of Default shall occur under any of the Loan Documents other than this Agreement. (d) Default Under Other Agreements. (i) Borrower, the REIT or any other Loan Party shall default beyond any applicable grace period in the payment, performance or observance of any obligation or condition with respect to any recourse Indebtedness (other than the Whole Loan Facility) or any other event shall occur or condition exist, if the effect of such default, event or condition is to accelerate the maturity of any such recourse Indebtedness (other than the Whole Loan Facility) or to permit (without regard to any required notice or lapse of time) the holder or holders thereof, or any trustee or agent for such holders, to accelerate the maturity of any such recourse Indebtedness (other than the Whole Loan Facility), or any such recourse Indebtedness (other than the Whole Loan Facility) shall become or be declared to be due and payable prior to its stated maturity; or an Event of Default (as defined therein) shall occur under the Whole Loan Facility. (ii) Borrower or the REIT or HIC is in default under (A) any non-recourse Indebtedness of Borrower that is equal to or in excess of $10,000,000, which default results in accelerated Indebtedness or (B) any other non-recourse Indebtedness that could have a Material Adverse Effect on Borrower's ability to perform its obligations in connection with the Loan. (iii) Borrower, the Partnership, HIC, or Imperial Hotels Corporation, as the case may be, is in default under any material term of the applicable Operating Lease beyond any applicable grace periods provided therein. (e) Bankruptcy, etc. (i) Borrower or any other Loan Party shall commence a voluntary case concerning itself under the Bankruptcy Code; or (ii) an involuntary case is commenced against Borrower or any other Loan Party and the petition is not dismissed within ninety (90) days, after commencement of the case or (iii) a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of Borrower, any other Loan Party or Borrower or any other Loan Party commences any other proceedings under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Borrower, any other Loan Party or there is commenced against Borrower or any other Loan Party any such proceeding which remains undismissed for a period of ninety (90) days; or (iv) any order of relief or other order approving any such case or proceeding is entered; 101 -94- or (v) Borrower or any other Loan Party is adjudicated insolvent or bankrupt; or (vi) Borrower or any other Loan Party suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of ninety (90) days; or (vii) Borrower or any other Loan Party makes a general assignment for the benefit of creditors; or (viii) Borrower, any other Loan Party shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or (ix) Borrower or any other Loan Party shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debt; or (x) Borrower or any other Loan Party shall by any act or failure to act consent to, approve of or acquiesce in any of the foregoing; or (xi) any corporate or partnership action is taken by Borrower or any other Loan Party for the purpose of effecting any of the foregoing. 102 -95- (f) ERISA. (i) Any Termination Event shall occur, or (ii) any Plan shall incur an accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, or fail to make a required installment payment on or before the due date under Section 412 of the Code or Section 302 of ERISA, or (iii) Borrower or any of the Loan Parties or a member of their respective ERISA Controlled Group shall have engaged in a transaction which is prohibited under Section 4975 of the Code or Section 406 of ERISA and an exemption shall not be applicable or have been obtained under Section 408 of ERISA or Section 4975 of the Code, or (iv) Borrower or any of the other Loan Parties or any member of their respective ERISA Controlled Group shall fail to pay when due an amount which it shall have become liable to pay to the PBGC, any Plan, any Multiemployer Plan, or a trust established under Section 4049 of ERISA, or (v) Borrower shall have received a notice from the PBGC of its intention to terminate a Plan or to appoint a trustee to administer such Plan, or Multiemployer Plan which notice shall not have been withdrawn within fourteen (14) days after the date thereof, or (vi) a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that a Plan must be terminated or have a trustee appointed to administer any Plan, or (vii) Borrower or any of the other Loan Parties or a member of their respective ERISA Controlled Group suffers a partial or complete withdrawal from a Multiemployer Plan or is in default (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan, or (viii) a proceeding shall be instituted against any of Borrower or any of the other Loan Parties, which proceeding is reasonably likely to succeed, to enforce Section 515 of ERISA, or (ix) any other event or condition shall occur or exist with respect to any Employee Benefit Plan or Plan, any Multiemployer Plan, which could reasonably be expected to subject Borrower or any of the other Loan Parties or any member of their respective ERISA Controlled Group to any tax, penalty or other liability (other than annual contributions or which is not an Event of Default otherwise under this Section 7.1) or the imposition of any lien or security interest on Borrower or any of the other Loan Parties or any member of their respective ERISA Controlled Group, or (x) with respect to any Multiemployer Plan, the institution of a proceeding to enforce Section 515 of ERISA, which proceeding is reasonably likely to succeed, to terminate such Plan, the receipt of a notice of reorganization or insolvency under Sections 4241 or 4245 of ERISA, in any event; provided, however, that events or circumstances in Sections 7.1(f)(i) through (x) shall only be an Event of Default if it results in or is reasonably expected to result in liability to Borrower or any Loan Party in excess of $5,000,000.00 or if it has or is likely to have a Material Adverse Effect; or (xi) the assets of Borrower or any other Loan Party become or are deemed to be assets of an Employee Benefit Plan. No Event of Default under this Section 7.1(f) shall be deemed to have been or be waived or corrected because of any disclosure by Borrower or any Loan Party. (g) Judgments. One or more judgments or decrees (i) in an aggregate amount of $5,000,000 or more are entered against Borrower or the REIT or any Loan Party since the Closing Date or (ii) which, with respect to Borrower, the REIT and the other Loan Parties, could result in a Material Adverse Effect, shall be entered by a court or courts of competent 103 -96- jurisdiction against any of such Persons (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing) and (x) any such judgments or decrees shall not be stayed (by appeal or otherwise), discharged, paid, satisfied, bonded or vacated within thirty (30) days. (h) REIT. (i) The REIT fails to remain a publicly-traded real estate investment trust or the REIT and the Corporation fail to remain in good standing with the New York Stock Exchange and with the Securities and Exchange Commission or (ii) their shares fail to continue to trade as "paired shares" and such failure is not cured within thirty (30) days, if a cure is permitted under Applicable Law. (i) First Priority Lien. The Loan Documents after delivery thereof shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority lien on the Collateral (subject to the Permitted Liens) purported to be covered, hereby or thereby. (j) HIC. Notwithstanding anything to the contrary contained herein, if an Event of Default has occurred solely with respect to HIC or with respect to any Real Property Asset in Pool 4 or the related Loan Document, (an "HIC Event of Default"), the Available Facility Amount for Note D shall be immediately reduced to $0.00, and such HIC Event of Default shall not be deemed an Event of Default under this Agreement unless Borrower has failed to repay, without penalty or premium (other than as provided in Section 2.17) the outstanding principal balance of Note D together with all accrued and unpaid interest thereon and all Fees and Funding Costs within five (5) Business Days of the date of the HIC Event of Default. Section 7.2 Rights and Remedies. (a) Upon the occurrence of any Event of Default described in Section 7.1(e), the Aggregate Available Facility Amount, the Available Facility Amount with respect to each Note and the Maximum Facility Amount shall automatically and immediately terminate and the unpaid principal amount of and any and all accrued interest on the Loan and any and all accrued Fees and other Obligations shall automatically become immediately due and payable, with all additional interest thereon calculated at the Default Rate from the occurrence of the Default until the Loan is paid in full and without presentation, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by Borrower, the REIT and the other Loan Parties, and the obligation of Lender and all Co-Lenders (including the Swing Line Lender) to make any Advances hereunder shall thereupon terminate; and upon the occurrence and during the continuance of any other Event of Default, Lender may, by written notice to Borrower, (i) declare that the Aggregate Available Facility Amount, the Available Facility Amount for each Note and the Maximum Facility Amount is terminated, whereupon the Aggregate Available 104 -97- Facility Amount, the Available Facility Amount for each Note and the Maximum Facility Amount and the obligation of Lender and all Co-Lenders (including the Swing Line Lender) to make any Advances (or their pro rata share thereof) hereunder shall immediately terminate, and (ii) declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loan and any and all accrued Fees and other Obligations to be, and the same shall thereupon be, immediately due and payable with all additional interest thereon calculated at the Default Rate from the occurrence of the Default until the Loan is paid in full and without presentation, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by Borrower, the REIT and the other Loan Parties. (b) Upon the occurrence of any Event of Default and during its continuance, Lender shall have the right to record the Partnership Mortgages and the Partnership Assignments of Leases and Rents with respect to the Real Property Assets located in the District of Columbia, Florida, and Virginia, and Borrower and the REIT shall pay all Transaction Costs in connection therewith. (c) Lender and any Co-Lender (including the Swing Line Lender) may offset any indebtedness, obligations or liabilities owed to Borrower against any indebtedness, obligations or liabilities of Borrower to it. (d) Lender and any Co-Lender may avail itself of any remedies available to it under the Loan Documents or at law or equity. SECTION 8. INTENTIONALLY DELETED. SECTION 9. MISCELLANEOUS. Section 9.1 Payment of Lender's, Collateral Agent's and Co-Lender's Expenses, Indemnity, etc. Borrower and the REIT shall: (a) whether or not the Transactions hereby contemplated are consummated, pay (i) all reasonable out-of-pocket costs and expenses of Lender in connection with Lender's due diligence review of the Collateral, the negotiation, preparation, execution and delivery of the Loan Documents, the creation, perfection or protection of Lender's, the Collateral Agent and Co- Lender's Liens in the Collateral (including, without limitation, fees and expenses for title insurance, property inspections, consultants, surveys, lien searches, filing and recording fees, and escrow fees and expenses), all internal valuations and Appraisals of the Real Property Assets made by Lender (subject to the provisions of Section 5.25) in connection with the administration of the Loan and any amendment, waiver or consent relating to any of the Loan Documents 105 -98- including Releases, substitutions of Substitute Properties and the addition of New Properties (including, without limitation, as to each of the foregoing, the reasonable fees and disbursements of any outside or special counsel to Agent, Lender or the Collateral Agent) and of Agent, Lender, the Collateral Agent and Co-Lenders in connection with the preservation of rights under, any amendment, waiver or consent relating to, and enforcement of, the Loan Documents and the documents and instruments referred to therein or in connection with any restructuring or rescheduling of the Obligations (including, without limitation, the reasonable fees and disbursements of counsel for Agent, Lender and the Collateral Agent). Notwithstanding anything to the contrary contained herein or in any other Loan Document, Borrower's and the REIT's obligation to pay Lender's and the Collateral Agent's (other than the Collateral Agent Fees but including the Collateral Agent's transition fee) reasonable out-of-pocket costs and expenses in connection with the closing of the Loan and the Syndication for legal fees, internal due diligence, Appraisals (subject to the provisions of Section 5.25) and Engineering Reports and Environmental Reports with respect to the Initial Assets only shall not exceed the Expense Cap. (b) pay, and hold Agent, Lender and each Co-Lender harmless from and against, any and all present and future stamp, excise and other similar taxes with respect to the foregoing matters and hold Agent, Lender and each Co-Lender harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to Lender or such Co-Lender) to pay such taxes; and (c) indemnify Agent, Lender (in its capacity as Lender and as Agent) and each Co-Lender, its officers, directors, employees, representatives and agents (each an "Indemnitee") from, and hold each of them harmless against, any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnitee in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) that may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, asserted against or incurred by any Indemnitee as a result of, or arising in any manner out of, or in any way related to or by reason of, (i) any of the Transactions or the execution, delivery or performance of any Loan Document, (ii) the breach of any of Borrower's, the REIT's or other Loan Party's representations and warranties or of any of Borrower's, the REIT's or other Loan Party's Obligations, (iii) a default under Sections 4.12 or 5.11, including, without limitation, 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, and (iv) the exercise by Agent, Lender and the Co-Lenders of their rights and remedies (including, without limitation, foreclosure) under any agreements creating any such Lien (but excluding, as to any Indemnitee, any such losses, liabilities, claims, damages, expenses, obligations, penalties, 106 -99- actions, judgments, suits, costs or disbursements to the extent incurred by reason of the gross negligence or willful misconduct of such Indemnitee as finally determined by a court of competent jurisdiction) (collectively, "Indemnified Liabilities"). Borrower and the REIT further agree that, without Lender's prior written consent, which shall not be unreasonably withheld, they will not enter into any settlement of a lawsuit, claim or other proceeding arising or relating to any Indemnified Liability unless such settlement includes an explicit and unconditional release from the party bringing such lawsuit, claim or other proceeding of each Indemnitee. Notwithstanding anything contained herein to the contrary, neither Borrower nor the REIT shall be liable to pay to Agent, Lender or any Co-Lender any amounts with respect to a Real Property Asset for claims, other than Environmental Claims (as defined in the Environmental Indemnity), based upon an event occurring after the consummation of a transfer by or in lieu of foreclosure of all of the Collateral relating to such Real Property Asset to the extent such amounts relate solely to the period after the date of the consummation of such transfer of Collateral. Borrower's and the REIT's obligations under this Section shall survive the termination of this Agreement and the payment of the Obligations. Section 9.2 Notices. Except as otherwise by expressly provided herein, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile, or cable communication), and shall be deemed to have been duly given or made when delivered by hand, or five (5) days after being deposited in the United States mail, certified or registered, postage prepaid, or, in the case of facsimile notice, when sent, answerback received, or, in the case of a nationally recognized overnight courier service, one (1) Business Day after delivery to such courier service, addressed, in the case of Borrower and Lender, at the addresses specified below, or to such other addresses as may be designated by any party in a written notice to the other parties hereto. If to Lender, as follows: For all notices given in accordance with Sections 2.2, 2.6(b), 2.8(b), 2.9(a) and 2.11 of this Agreement to: Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. Three World Financial Center, 9th Floor New York, New York 10285 Telephone Number: (212) 526-6970 Telecopier Number: (212) 528-8986 Attention: Frank Gilhool 107 -100- with copies thereof to: Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. Three World Financial Center, 29th Floor New York, New York 10285 Telephone Number: (212) 526-3140 Telecopier Number: (212) 528-9696 Attention: Donald Petrow Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. Three World Financial Center, 7th Floor New York, New York 10285 Telecopier Number: (212) 526-3721 Attention: Scott Kimmel and Annette Nazareth For all other notices to: Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. Three World Financial Center, 29th Floor New York, New York 10285 Telephone Number: (212) 526-3140 Telecopier Number: (212) 528-9696 Attention: Donald Petrow with a copy thereof to: Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc. Three World Financial Center, 7th Floor New York, New York 10285 Telecopier Number: (212) 526-3721 Attention: Scott Kimmel and Annette Nazareth 108 -101- If to Borrower, as follows: SLT Realty Limited Partnership, c/o Starwood Lodging Trust 11845 West Olympic Boulevard, Suite 550 Los Angeles, California 90064 Telephone Number: (310) 575-3900 Telecopier Number: (310) 575-9143 Attention: Mr. Ronald C. Brown with copies thereof to: Sidley & Austin 555 West Fifth Street Los Angeles, California 90013-1010 Telephone Number: (213) 896-6031 Telecopier Number: (213) 896-6600 Attention: Sherwin L. Samuels, Esq. Section 9.3 Successors and Assigns; Participations; Assignments. This Agreement shall be binding upon and inure to the benefit of Borrower, the REIT, Lender, the Co-Lenders, all future holders of the Note and their respective successors and assigns. Section 9.4 Amendments and Waivers. (a) Neither this Agreement, the Note, any other Loan Document to which Borrower, the REIT or any Loan Party is a party nor any terms hereof or thereof may be amended, supplemented, modified or waived other than in a writing executed by Borrower, the REIT, such Loan Party and Lender. If all or a portion of the Loan and the Maximum Facility Amount is sold to a Co-Lender pursuant to Section 9.9(k), the Borrower and the REIT acknowledge and agree that any amendment, modification approval, waiver or request to be granted regarding the terms of this Agreement shall be given in accordance with the terms, provisions and conditions of the intercreditor agreement (the "Intercreditor Agreement") to be entered into between Lender, as agent, and each Co-Lender (the "Intercreditor Agreement"), provided that such terms, provisions and conditions shall have been disclosed to Borrower and the REIT; Lender agrees that the terms of such Intercreditor Agreement shall not be inconsistent with this Agreement, the other Loan Documents or the Assignment and Assumption. 109 -102- (b) In the case of any waiver, Borrower, the REIT, Lender and all Co-Lenders shall be restored to their former position and rights hereunder and under the outstanding Note and any other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. Section 9.5 No Waiver; Remedies Cumulative. No failure or delay on the part of Lender or any Co-Lender in exercising any right, power or privilege hereunder or under any other Loan Document and no course of dealing between Borrower, the REIT or any other Loan Party and Lender or any Co-Lender shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which Lender or any Co-Lender would otherwise have. No notice to or demand on Borrower, the REIT or any other Loan Party in any case shall entitle Borrower, the REIT or any other Loan Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender or any Co-Lender, to any other or further action in any circumstances without notice or demand. Section 9.6 Governing Law; Submission to Jurisdiction. (a) This Agreement shall be deemed to be a contract entered into pursuant to the laws of the State of New York and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the State of New York, provided however, that with respect to the creation, perfection, priority and enforcement of the lien of the Security Instruments, and the determination of deficiency judgments, the laws of the State where the Real Property Asset is located shall apply. (b) Any legal action or proceeding with respect to this Agreement or any other Loan Document and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and Lender, and each Co-Lender, and, by execution and delivery of this Agreement, Borrower and the REIT hereby accept for themselves and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. Borrower and the REIT irrevocably consent to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to Borrower and the REIT at its address set forth in Section 9.2. Borrower and the REIT and Lender and each Co-Lender hereby irrevocably waive any objection which they may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Loan Document brought in the courts referred to above and hereby further irrevocably waive and agree not to plead or claim in any such court that any such 110 -103- action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of Lender or any Co-Lender, to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against Borrower or the REIT in any other jurisdiction. Section 9.7 Confidentiality; Disclosure of Information. Each party hereto shall treat the transactions contemplated hereby and all financial and other information furnished to it about Borrower, the other Loan Parties and the Real Property Assets, as confidential; provided, however, that such confidential information may be disclosed (a) as required by law or pursuant to generally accepted accounting procedures, (b) to officers, directors, employees, agents, partners, attorneys, accountants, engineers and other consultants of the parties hereto who need to know such information, provided such Persons are instructed to treat such information confidentially, (c) by Lender to any Participant, Co-Lender, servicer, or assignee ("Transferee"), which disclosure to Transferees and prospective Transferees may include any and all information which has been delivered to Lender by Borrower pursuant to this Agreement or the other Loan Documents or which has been delivered to Lender in connection with Lender's credit evaluation of Borrower prior to entering into this Agreement, provided that such Transferee agrees to be bound by the provisions of this Section 9.7, or (d) upon the written consent of the party whose otherwise confidential information would be disclosed. Borrower and the REIT acknowledge and agree that Lender may provide to the Co-Lenders, and that Lender and each of the Co-Lenders may provide to any Participant, originals or copies of this Agreement, all Loan Documents and all other documents, instruments, certificates, opinions, insurance policies, letters of credit, reports, requisitions and other materials and information of every nature or description, and may communicate all oral information, at any time submitted by or on behalf of Borrower or the REIT or received by Lender in connection with the Loan or Borrower or the REIT. Section 9.8 Recourse. The Loan and the Obligations shall be fully recourse to Borrower; however, no personal liability or personal deficiency judgment shall be asserted or enforced against the REIT except as a result and to the extent of (i) fraud or intentional misrepresentation by Borrower or any other Loan Party; (ii) Borrower's or any other Loan Party's misapplication or misappropriation of Gross Revenues or Accounts Receivable received by Borrower after the occurrence of an Event of Default; (iii) the misapplication or the misappropriation of insurance proceeds or condemnation awards; or (iv) the occurrence of an Event of Default under Section 7.1(f) of this Agreement and nothing contained in this Section 9.8 shall limit, affect or impair any of Lender's rights or remedies against the REIT under the Environmental Indemnity Agreement. Notwithstanding the foregoing, the agreement of Lender to not assert or enforce personal liability or a personal deficiency judgment against the REIT SHALL BECOME NULL AND VOID and shall be of no further force and effect in the event that there is any breach of Section 7.4 of Borrower's Partnership Agreement or of Sections 111 -104- 5.5(c), 6.4(b) or 6.9 of this Agreement. Lender and each Co-Lender acknowledges and agrees that the name "Starwood Lodging Trust" is a designation of the REIT and its Trustees (as Trustees but not personally) under a Declaration of Trust dated August 25, 1969, as amended and restated as of June 6, 1988, as further amended on February 1, 1995 and as further amended on June 19, 1995 and as the same may be further amended from time to time, and all persons dealing with the REIT shall look solely to the REIT's assets for the enforcement of any claims against the REIT, as the Trustees, officers, agents and security holders of the REIT assume no personal liability for obligations entered into on behalf of the REIT, and their respective individual assets shall not be subject to the claims of any person relating to such obligations. The foregoing shall govern all direct and indirect obligations of the REIT under this Agreement and the Loan Documents. 112 -105- Section 9.9 Sale of Loan, Co-Lenders, Participations and Servicing. (a) After the earliest to occur of (or simultaneously with) (i) the Syndication, (ii) January 31, 1996 or (iii) Borrower's rejection of a Syndication, Lender may, at its option, sell with novation all or any part of its right, title and interest in, and to, and under the Loan, including, without limitation, all or a portion of its obligation to make Advances, and its interest in the outstanding principal balance of the Loan, to one or more entities (any entity that purchases an interest in the Loan with novation, a "Co-Lender"); notwithstanding the foregoing, provided that no Event of Default has occurred and is continuing, any such sale with novation during the Draw Period to any Co-Lender that is not an Affiliate of Lender shall be subject to Borrower's prior written approval, which approval shall not be unreasonably withheld or delayed. Each Co-Lender shall purchase an interest in the Loan of at least $5,000,000.00. Lender and each Co-Lender shall enter into an assignment and assumption agreement substantially in the form attached hereto as Exhibit "Y" (the "Assignment and Assumption") assigning a portion of Lender's rights and obligations under the Loan, and pursuant to which the Co-Lender accepts such assignment and assumes the assigned obligations. From and after the effective date specified in the Assignment and Assumption (A) each Co-Lender shall be a party hereto and to each Loan Document to the extent of the applicable percentage or percentages set forth in the Assignment and Assumption and, except as specified otherwise herein, shall succeed to the rights and obligations of Lender hereunder and thereunder in respect of the Loan (including, without limitation, its pro rata share of Lender's obligations to make Advances hereunder), and (B) Lender, as lender shall, to the extent such rights and obligations have been assigned pursuant to such Assignment and Assumption, relinquish its rights and be released from its obligations hereunder and under the Loan Documents. The liabilities of Lender and each of the Co-Lenders shall be several and not joint, and Lender's obligations to Borrower under this Agreement shall be reduced by the amount of each such Assignment and Assumption. Neither Lender nor any Co-Lender shall be responsible for the obligations of any other Co- Lender. Lender and each Co-Lender shall be liable to Borrower only for their respective proportionate shares of the Loan. If for any reason any of the Co-Lenders shall fail or refuse to abide by their obligations under this Agreement, Lender and the other Co- Lenders shall not be relieved of their obligations, if any, hereunder, including their obligations to make their pro rata share of any Advance on the date set forth for such Advance in the Notice of Borrowing. 113 -106- (b) Intentionally Omitted. (c) Borrower and the REIT agree that they shall, in connection with any sale of all or any portion of the Loan, whether in whole, subject to Section 9.9(d), or to a Co-Lender or Participant, within ten (10) business days after requested by Lender, furnish Lender with the certificates required under Section 9.22(a) and (b) and such other information as reasonably requested by any Co-Lender or Participant in performing its due diligence in connection with its purchase of an interest in the Loan. (d) During the Draw Period and provided that no Default or Event of Default has occurred and is continuing, Lender shall retain at least a ten percent (10%) direct ownership interest in the Loan and in the Maximum Facility Amount. (e) Unless the entire Loan has been sold to a single entity other than an Affiliate of Lender, Lender (or an Affiliate of Lender) shall act as administrative agent for itself and the Co-Lenders (together with any successor administrative agent, the "Agent") pursuant to this Section 9.9(e). Subsequent to the Syndication, Lender shall have the right to appoint a successor administrative agent for the Loan or delegate any portion of the administrative agent's duties. Borrower acknowledges that Lender, as Agent shall have the sole and exclusive authority to execute and perform this Agreement and each Loan Document on behalf of itself, as Lender and as agent for itself and the Co-Lenders. Borrower may rely conclusively on the actions of Lender as Agent to bind Lender and the Co-Lenders, notwithstanding that the particular action in question may, pursuant to this Agreement or any Intercreditor Agreement among Lender and the Co-Lenders, be subject to the consent or direction of the Co-Lenders. Lender may resign as Agent of the Co-Lenders, in its sole discretion, without the consent of Borrower; provided however, that prior to the Syndication, Lender may only resign as Agent (i) after an Event of Default has occurred or (ii) if required to by the Co-Lenders. Upon any such resignation, the Co-Lenders shall have the right to appoint a successor Agent. If, within thirty (30) days of the Agent's resignation, a successor Agent has not been appointed or such successor has not accepted such appointment, then the retiring Agent may, on behalf of the Co-Lenders, appoint a successor Agent. Upon appointment of a successor Agent, the successor Agent shall succeed to the rights, powers and duties of the Agent hereunder and the retiring Agent's rights, powers and duties as Agent shall be terminated without any other or further act or deed on the part of the retiring Agent, Borrower, or the Co-Lenders. The Collateral Agent shall have no duties or obligations with respect to Borrower or the Loan other than to serve as a custodian of the Collateral as agent of Lender and the Co-Lenders and to serve as mortgagee, beneficiary or secured party, as the case may be, of record with respect to the Loan Documents for the benefit of Lender and the Co-Lenders pursuant to a Custodial Agreement dated the date hereof between Lender as Agent, and the Collateral Agent 114 -107- (the "Custodial Agreement"). Lender and the Co-Lenders shall have the right to terminate or change the Collateral Agent and enter into a new Custodial Agreement, provided that the Collateral Fees to be paid by Borrower hereunder are not significantly increased. (f) Except to the extent its obligations hereunder and its interest in the Loan have been assigned pursuant to one or more Assignments and Assumption, Lehman Brothers Holdings Inc. ("Lehman") as Lender, shall have the same rights and powers under this Agreement as any other Co-Lender and may exercise the same as though it were not the Agent. The term "Co-Lender" or "Co- Lenders" shall, unless otherwise expressly indicated, include Lehman in its individual capacity. Lehman and the other Co-Lenders and their respective affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, Borrower, Loan Party or any Affiliate of Borrower or Loan Party and any Person or entity who may do business with or own securities of Borrower or Loan Party or any Affiliate of Borrower or Loan Party or any Subsidiary thereof, all as if they were not serving in such capacities hereunder and without any duty to account therefor to each other. (g) This Agreement is being entered into by Lender individually and as agent for one or more Co-Lenders, and upon the execution and delivery of each Assignment and Assumption, privity of contract shall be created as between (i) Lender and each Co-Lender and (ii) Borrower and each Co-Lender. (h) Lender, as Agent shall maintain at its domestic lending office or at such other location as Lender, as Agent shall designate in writing to each Co-Lender and Borrower a copy of each Assignment and Assumption delivered to and accepted by it and a register for the recordation of the names and addresses of the Co-Lenders, the amount of each Co-Lender's proportionate share of the Maximum Facility Amount and the Loan and the name and address of each Co-Lender's agent for service of process (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrower, Lender, as Agent and the Co-Lenders may treat each person or entity whose name is recorded in the Register as a Co-Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection and copying by Borrower or any Co-Lender during normal business hours upon reasonable prior notice to the Agent. A Co-Lender may change its address and its agent for service of process upon written notice to Lender, as Agent and Borrower, which notice shall only be effective upon actual receipt by Lender and Borrower, which receipt will be acknowledged by Lender as Agent, and Borrower upon request. (i) Notwithstanding anything herein to the contrary, any financial institution or other entity may be sold a participation interest in the Loan by Lender or any Co-Lender without Borrower's consent (such financial institution or entity, a "Participant") (x) if such sale is without novation and (y) if the other conditions set forth in this paragraph are met. No Participant shall be considered a Lender or Co-Lender hereunder or under any Note or the Loan 115 -108- Documents. No Participant shall have any rights under this Agreement, the Notes or any of the Loan Documents and the Participant's rights in respect of such participation shall be solely against Lender or Co-Lender, as the case may be, as set forth in the participation agreement executed by and between Lender or Co-Lender, as the case may be, and such Participant. The terms of any participation agreement between Lender or Co-Lender, as the case may be, and its Participant shall not grant the Participant any consent rights except for consent to (i) changes in the interest rate and term of the Loan, (ii) increase in the principal amount of the Loan (except for protective advances and increases made in accordance with Sections 2.22, 2.23 and 2.24 hereof), (iii) release of collateral (except for Section 2.21 hereof), (iv) release of any party liable for repayment of the Loan, (v) forbearance, (vi) consents to subordinate financing of the Real Property Asset(s), (vii) the acceleration of the Loan or commencement of foreclosure, (viii) the acquisition of foreclosed property and (ix) the management of, and ultimate sale of, real estate owned. No participation shall relieve Lender or Co-Lender, as the case may be, from its obligations hereunder or under the Notes or the Loan Documents and Lender or Co-Lender, as the case may be,shall remain solely responsible for the performance of its obligations hereunder. (j) Notwithstanding any other provision set forth in this Agreement, the Lender or any Co-Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, amounts owing to it in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System), provided that no such security interest or the exercise by the secured party of any of its rights thereunder shall release Lender or Co-Lender from its funding obligations hereunder. (k) If prior to January 31, 1996, Lender receives written commitments from one or more Co-lenders to fund, in the aggregate, up to an additional $60,000,000.00 under the Loan, pursuant to the terms and conditions of the Syndication Letter dated the date hereof between Lender and Borrower and the REIT (the "Syndication Letter"), the Maximum Facility Amount shall, upon execution and delivery of Assignment and Assumption Agreements and Intercreditor Agreements satisfactory to Lender, upon payment of all Commitment Fees pursuant to and as defined in the Fee Letter and the Syndication Letter, and upon notice to and acceptance by Borrower, increase the Maximum Facility Amount up to $135,000,000.00 without any further action on the part of Lender or any Co- Lender (the "Syndication"). Any such increase in the Maximum Facility Amount is subject to the terms and conditions of the Syndication Letter. Upon Syndication, Borrower may elect to have a portion of the Maximum Facility Amount, up to an aggregate amount of $10,000,000.00, consist of Swing Line Advances from one designated Co-Lender (the "Swing Line Lender"). Notwithstanding anything to the contrary contained herein, but subject to the terms and conditions of the Syndication Letter, Lender shall be under no obligation to advance 116 -109- other proceeding arising or relating to such a liability unless such settlement includes an explicit and unconditional release from the party bringing such lawsuit, claim or more than $75,000,000.00 from its own funds. The sale of pro rata interests in the initial $75,000,000.00 Initial Facility Amount to Co-lenders shall not be deemed a Syndication. (l) Each Lender, Co-Lender and Participant represents, warrants and covenants, and each person to whom a Lender or Co-Lender or Participant directly or indirectly sells or assigns or otherwise transfers all or any part of its right, title or interest in, or to, or under the Loan (i.e., a Transferee), shall be deemed to represent, warrant and covenant, to Borrower and each of the Loan Parties that they and each other Person to whom all or any part of any Lender, Co-Lender, Participant or Transferee's right, title or interest in, or to, or under the Loan is directly or indirectly sold or assigned or otherwise transferred are not, and shall not be, a Plan Asset Entity at any time any Lender, Co-Lender, Participant, Transferee or other Person has any right, title or interest in, or to, or under the Loan, unless such person being a Plan Asset Entity would not result in a non-exempt prohibited transaction under section 406 of ERISA or Section 4975 of the Code because of an exemption or otherwise. Notwithstanding any provision of this Agreement or any Loan Document, if this representation, warranty and covenant is breached and a prohibited transaction under Section 406 of ERISA in Section 4975 of the Code results, (i) neither Borrower nor any Loan Party shall be considered to be in breach of any representation, warranty or covenant of this Agreement or of any Loan Document that is breached or becomes untrue as a result of a prohibited transaction caused by a sale or assignment or other transfer in violation of the preceding sentence, (ii) no Event of Default or Default shall be considered to occur pursuant to this Agreement as a result of a prohibited transaction caused by a sale or assignment or other transfer in violation of the preceding sentence, and similarly no default to the detriment of Borrower or any Loan Party shall be deemed to occur pursuant to any other Loan Document as a result of a prohibited transaction caused by a sale or assignment or other transfer in violation of the preceding sentence and (iii) the Person breaching the representation, warranty and covenant shall indemnify and hold harmless Borrower and each Loan Party from any and all actual, but in no event consequential, losses, expenses, and liabilities resulting to Borrower and any Loan Party resulting therefrom or in connection therewith. In the event that liability is sought to be imposed on any Person pursuant to the indemnification in the subsection (iii) of the preceding sentence ("ERISA Indemnitee"), then such ERISA Indemnitee shall have the right, if it so chooses, to control any litigation or arbitration involving potential liability, loss or expenses under such subsection (iii) and if such ERISA Indemnitee is not timely informed of a claim for liability and given the right to exercise such control, then indemnification under subsection (iii) in the preceding sentence shall be null and void. Borrower and the Loan Parties agree that, without the prior written consent of the ERISA Indemnitee, which shall not unreasonably be withheld, they shall not enter into any settlement of a lawsuit, claim or other proceeding arising or relating to such a liability unless such settlement includes an explicit and unconditional release from the party bringing such lawsuit, claim or 117 -110- other proceeding of each Lender, Co-Lender, Participant and any Transferee, including each ERISA Indemnitee. Section 9.10 Borrower's and REIT's Assignment. Neither Borrower nor the REIT may assign its rights or obligations hereunder without the prior written consent of Lender. Section 9.11 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. Section 9.12 Effectiveness. This Agreement shall become effective on the date on which all of the parties hereto shall have signed a counterpart hereof and shall have delivered the same to Lender. Section 9.13 Headings Descriptive. The heading of the several Sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 9.14 Marshaling; Recapture. Lender shall be under no obligation to marshal any assets in favor of Borrower, the REIT, any other Loan Party or any other party or against or in payment of any or all of the Obligations. To the extent Lender receives any payment by or on behalf of Borrower, the REIT or any other Loan Party, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to Borrower, the REIT or such other Loan Party or its estate, trustee, receiver, custodian or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the obligation or part thereof which has been paid, reduced or satisfied by the amount so repaid shall be reinstated by the amount so repaid and shall be included within the liabilities of Borrower, the REIT or such other Loan Party to Lender as of the date such initial payment, reduction or satisfaction occurred. Section 9.15 Severability. In case any provision in or obligation under this Agreement or the Note or the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 118 -111- Section 9.16 Survival. Except as expressly provided to the contrary herein, all indemnities set forth herein including, without limitation, in Sections 2.16, 2.17, 2.18, 2.19 and 9.1 shall survive the execution and delivery of this Agreement, the Note and the Loan Documents and the making and repayment of the Loan hereunder. Section 9.17 Domicile of Loan Portions. Lender may transfer and carry any Loan Portion at, to or for the account of any domestic or foreign branch office, subsidiary or affiliate, subject to Sections 2.19 and 9.9, and provided that such transfer does not result in any increase in the costs to be paid by Borrower and the REIT under Sections 2.16, 2.18 or 2.19. Section 9.18 Intentionally Omitted. Section 9.19 Calculations; Computations. Except as otherwise expressly provided herein, the financial statements to be furnished to Lender pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved and consistent with GAAP as used in the preparation of the financial statements referred to in Section 4.5. SECTION 9.20 WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, THE REIT, LENDER AND ALL CO-LENDERS EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. Section 9.21 No Joint Venture. Notwithstanding anything to the contrary herein contained, Lender by entering into this Agreement or by taking any action pursuant hereto, will not be deemed a partner or joint venturer with Borrower or the REIT and Borrower and the REIT agree to hold Lender harmless from any damages and expenses resulting from such a construction of the relationship of the parties hereto or any assertion thereof. Section 9.22 Estoppel Certificates. (a) Borrower, the REIT and Lender each hereby agree at any time and from time to time upon not less than ten (10) Business Days prior written notice by Borrower or Lender to execute, acknowledge and deliver to the party specified in such notice, a statement, in writing, certifying whether this Agreement is unmodified and in full force and effect (or if there have been modifications, whether the same, as modified, is in full force and effect and stating the modifications hereto), and stating whether or not, to the best knowledge of such certifying party, any Default or Event of Default has occurred and is then continuing, and, if so, specifying each such Default or Event of Default; provided, however, that it shall be a condition precedent to Lender's obligation to deliver the statement pursuant to this 119 -112- Section, that Lender shall receive, together with Borrower's request for such statement, a certificate of a general partner or senior executive officer of Borrower and the REIT stating that no Default or Event of Default exists as of the date of such certificate (or specifying such Default or Event of Default). (b) Within ten (10) Business Days of Lender's request, Borrower shall execute and deliver a certificate of the general partner of Borrower or senior executive officer of Borrower and the REIT confirming the then aggregate outstanding principal balance of the Loan, the outstanding principal balance with respect to each Note of each Eurodollar Portion and each Base Rate Portion, the Contract Rate for each Loan Portion, the dates to which all interest has been paid, and the Interest Period for each Eurodollar Portion. Such statement shall be binding and conclusive on Borrower absent manifest error. Section 9.23 No Other Agreements. This Agreement, the Loan Documents, the Fee Letter and the Syndication Letter constitute the entire understanding of the parties with respect to the transactions contemplated hereby, and all prior understandings with respect thereto, whether written or oral, shall be of no force and effect. Section 9.24 Controlling Document. In the event of a conflict between the provisions of this Agreement and the other Loan Documents the provisions of this Agreement shall control and govern the conflicting provisions of the other Loan Documents. Section 9.25 No Benefit to Third Parties. This Agreement is for the sole and exclusive benefit of Borrower, the REIT and Lender and the Co-Lenders and the Swing Line Lender and all conditions of the obligation of Lender and the Co-Lenders and the Swing Line Lender to make Advances hereunder are imposed solely and exclusively for the benefit of Lender and the Co-Lenders and the Swing Line Lender and their respective assigns 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 and any Co-Lender and the Swing Line Lender will refuse to make Advances in the absence of strict compliance with any and 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 at any time if it in its sole discretion deems it advisable to do so. Without limiting the generality of the foregoing, Lender shall not have any duty or obligation to anyone to ascertain that funds advanced hereunder are used as required by the terms hereof or to pay the cost of constructing the improvements on any of the Real Property Assets or to acquire materials and supplies to be used in connection therewith or to pay costs of owning, operating and maintaining same. Section 9.26 Joint and Several. Subject to the terms and conditions of Section 9.8, Borrower and the REIT are each jointly and severally liable for the payment in full of the Loan 120 -113- and all other sums owing under this Agreement, the Note, the Security Instruments and any other Loan Documents and the performance of all of the Obligations. 121 -114- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. SLT REALTY LIMITED PARTNERSHIP By: Starwood Lodging Trust, its general partner By: ------------------------------- Name: Title: STARWOOD LODGING TRUST By: ------------------------------------- Name: Title: LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation By: ------------------------------------- Name: Title: BANKERS TRUST COMPANY, AS COLLATERAL AGENT FOR THE BENEFIT OF THE SENIOR LENDERS By: ------------------------------------- Name: Title: EX-21 10 SUBSIDIARIES OF THE CORPORATION & THE TRUST 1 EXHIBIT 21 SUBSIDIARIES OF THE CORPORATION ------------------------------- SLC Operating Limited Partnership Hotel Investors of Arizona, Inc. Hotel Investors of Nebraska, Inc. Hotel Investors of Michigan, Inc. Hotel Investors of Missouri, Inc. Hotel Investors Corporation of Nevada Hotel Investors of Virginia, Inc. Columbus Operators, Inc. Lyntex Properties, Inc. Western Host, Inc. SUBSIDIARIES OF THE TRUST ------------------------- SLT Realty Limited Partnership Starlex Company LLC SLT Realty Company LLC EX-23 11 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-64335 and 33-64335-01 of Starwood Lodging Trust and Starwood Lodging Corporation on Form S-3, of our report dated March 24, 1995, appearing in this Annual Report on Form 10-K of Starwood Lodging Trust and Starwood Lodging Corporation for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Los Angeles, California March 5, 1996 2 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-64335 and 33-64335-01 of Starwood Lodging Trust and Starwood Lodging Corporation on Form S-3 of our report dated January 31, 1996 appearing in the Annual Report on Form 10-K of Starwood Lodging Trust and Starwood Lodging Corporation for the year ended December 31, 1995. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Los Angeles, California March 5, 1996 EX-27.1 12 STARWOOD LODGING CORP. - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ON THE JOINT ANNUAL REPORT ON FORM 10K. 0000316206 STARWOOD LODGING CORPORATION 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 8,622,000 0 8,318,000 0 0 8,433,00 95,348,000 0 120,721,000 14,610,000 0 0 0 138,000 10,740,000 120,721,000 148,179,000 149,184,000 0 109,259,000 36,495,000 0 5,470,000 (1,739,000) (1,739,000) (1,739,000) 0 0 0 (1,739,000) (0.22) 0.00
EX-27.2 13 STARWOOD LODGING TRUST - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ON THE JOINT ANNUAL REPORT ON FORM 10K. 0000048595 STARWOOD LODGING TRUST 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 710,000 0 168,798,000 0 0 14,619,000 241,610,000 0 425,737,000 13,698,000 0 0 0 138,000 204,728,000 425,737,000 0 44,023,000 0 0 11,416,000 0 12,429,000 12,864,000 12,864,000 12,864,000 0 (2,155,000) 0 10,709,000 1.35 0.00
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