-----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, DOfqq1gtnuy7+t71P+KPfEKFeDtqCj8tK5rP/E1EvC63l17Nsg/nqR7Vqx6C2WmL gimIBIDZoFSnb8bRK54Xrw== 0000950152-98-005142.txt : 19980609 0000950152-98-005142.hdr.sgml : 19980609 ACCESSION NUMBER: 0000950152-98-005142 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980608 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REALTY REFUND TRUST CENTRAL INDEX KEY: 0000082473 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 346647590 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-56301 FILM NUMBER: 98644043 BUSINESS ADDRESS: STREET 1: 925 EUCLID AVENUE STREET 2: SUITE 1750 CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2166220046 MAIL ADDRESS: STREET 1: 925 EUCLID AVENUE STREET 2: SUITE 1750 CITY: CLEVELAND STATE: OH ZIP: 44115 S-2 1 REALTY REFUND TRUST 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ REALTY REFUND TRUST (Exact name of registrant as specified in its Declaration) ------------------------ OHIO (State or other jurisdiction of incorporation or organization) 1750 HUNTINGTON BUILDING 925 EUCLID AVENUE CLEVELAND, OHIO 44115 (216) 622-0046 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 34-6647590 (I.R.S. Employer Identification Number) GREGORY D. BRUHN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 1750 HUNTINGTON BUILDING 925 EUCLID AVENUE CLEVELAND, OHIO 44115 (216) 622-0046 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: JAMES B. ARONOFF, ESQ. THOMPSON HINE & FLORY LLP 3900 KEY CENTER 127 PUBLIC SQUARE CLEVELAND, OHIO 44114 (216) 566-5504 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(l) of this form, check the following box: [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box: [ ] CALCULATION OF REGISTRATION FEE
=================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- Shares of Beneficial Interest, without par value............................. 2,950,743 $4.28 $12,629,180.04 $3,725.61 ===================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c); based on the average of the high and low reported sales prices on the New York Stock Exchange on June 1, 1998. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE TO BE OFFERED BY SEVERAL HOLDERS OF THE SHARES OF BENEFICIAL INTEREST OF REALTY REFUND TRUST This Prospectus relates to the offering ("Offering") by certain selling stockholders ("Selling Stockholders") named herein under "Selling Stockholders" of up to 2,950,743 shares ("Shares") of beneficial interest, without par value ("Common Stock"), of Realty ReFund Trust ("Company"), which Shares have been or will be issued to the Selling Stockholders in one or more private placements, or may be issued to the Selling Stockholders upon conversion by the Selling Stockholders of Class A Units of limited partner interests ("Units") in RRF Limited Partnership, a Delaware limited partnership ("Partnership"). Under the Agreement of Limited Partnership of the Partnership, as amended ("Partnership Agreement"), the Company, as the sole general partner of the Partnership, is obligated to convert the Units, at the option of the holders thereof, for a like number of shares of Common Stock, except to the extent that the Ownership Limit is reached in which case the Company may elect to purchase any Units in excess of the Ownership Limit for cash. The Units were originally issued by the Partnership in private placements for cash or interests in entities which owned and operated hotel properties. The distribution of the Shares by the Selling Stockholders is not subject to any underwriting agreement. The Company will receive none of the proceeds from the sale of Shares hereunder. All expenses of registration incurred in connection with this Offering are being borne by the Company, but all selling and other expenses incurred by Selling Stockholders will be borne by such Selling Stockholders. None of the Shares offered pursuant to this Prospectus have been registered prior to the filing of the Registration Statement of which this Prospectus is a part. Other than the Shares, the Common Stock of the Company is listed on the New York Stock Exchange ("NYSE") under the symbol "RRF." The Shares are the subject of a pending listing application with the NYSE. The last reported sale price of Common Stock on June 1, 1998 on the NYSE was $4.3125 per share. On June 1, 1998, 1,667,817 shares of Common Stock were held by 444 holders of record. To preserve its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended ("REIT"), the Company limits the amount of Common Stock that may be owned by any single person or affiliated group to 4.9% of the outstanding shares and restricts the transferability thereof under certain circumstances. The Shares may be sold by the Selling Stockholders from time to time on the NYSE or such other national securities exchange or automated interdealer quotation system on which the Shares are then listed, through negotiated transactions or otherwise at market prices prevailing at the time of the sale or at negotiated prices. See "PLAN OF DISTRIBUTION." SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY. Each Selling Stockholder and any broker executing sell orders on behalf of the Selling Stockholders may be deemed to be an "underwriter" within the meaning of the Securities Act of 1933, as amended ("Securities Act"). Commissions received by any such broker may be deemed to be underwriting commissions under the Securities Act. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. 3 THE COMPANY Realty ReFund Trust is a self-administered equity REIT that, at June 1, 1998, owned an approximate 12.4% general partner interest in the Partnership, which presently owns directly or indirectly, together with RRF Sub Corp., a wholly-owned subsidiary of the Company, interests in nine hotels with an aggregate of 1,480 suites in Arizona and southern California (collectively, "Hotels"). The Hotels are operated as InnSuites Hotels(R). Three of the Hotels are also marketed as "Best Western(R)" and one primarily as a "Holiday Inn(R)Hotel and Suites." All of the Hotels are managed by InnSuites Innternational Hotels, Inc. ("ISIH"). Unless the context otherwise requires, all references herein to the business and assets of the Company refer to Realty ReFund Trust, the Partnership, RRF Sub Corp. and their respective subsidiaries on a consolidated basis and all references herein to the Partnership shall include RRF Sub Corp. To enable the Company to qualify as a REIT, the Partnership leases the Hotels, and expects to lease any additional hotels acquired by it in the future, to Realty Hotel Lessee Corp., or a wholly-owned subsidiary thereof ("Lessee"), pursuant to leases providing for the payment of rent based primarily upon the suite revenues of such Hotels ("Percentage Leases"). The Lessee pays rent to the Partnership under the Percentage Leases and, in addition, pays all franchise fees, management fees and other operating expenses of the Hotels leased by it. The Partnership, in turn, distributes such rental payments, less expenses, to the Company. The Company seeks to increase operating cash flow and enhance stockholder value through both acquisitions and internal growth. The Company believes that InnSuites Hotels are particularly attractive investments because of the following factors: the favorable recognition of the InnSuites Hotels brand among consumers in the Southwest and Western regions of the United States; the leadership position of InnSuites Hotels within the market niche of middle market studio and two-room suite hotels and the relative strength of that market within the hotel industry; and the Company's positive experience and expertise with InnSuites Hotels. The Company believes that a substantial number of hotels meeting its investment criteria remain to be acquired and repositioned at attractive prices. The Company's growth strategy is to utilize management's expertise and knowledge of the hotel industry to acquire hotel assets and oversee the refurbishment, repositioning and management of such assets and to utilize its asset management role to improve the quality of the Hotels through upgrading and repositioning, thereby improving their revenue performance. James F. Wirth, Trustee, Chairman, Chief Executive Officer and President of the Company, has been engaged in the hotel business for approximately 27 years, including serving as Assistant to the President and Division President of Ramada Inns, where he started in 1970. Pursuant to the Percentage Leases, the Company will participate in any increases in hotel revenues, thereby improving its operating cash flow. In addition, the Company may expand certain of its hotel properties by constructing additional extended-stay suites with meeting space, if market and other conditions warrant. The Company was formed as an unincorporated Ohio real estate investment trust on April 28, 1971. The Company's executive offices are located at 1750 Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44115 and its telephone number is (216) 622-0046. BUSINESS OBJECTIVES The Company believes that, while the lodging industry as a whole has benefitted from an improved supply/demand dynamic, the greatest opportunities for revenue growth and profitability will arise from the skillful acquisition, management and repositioning of hotel properties. An integral element of this management is the continuous evaluation of each Hotel's position in its market and the implementation, as necessary, of changes in rates, amenities and customer focus to maximize the continuing returns from the Hotels. The Company attributes the historical performance of the Hotels to the implementation of this asset management strategy. The Company's primary business objectives are to maximize current returns to its stockholders through increases in cash flow available for distribution and to increase long-term total returns to stockholders through appreciation in value of the hotel assets and Common Stock. The Company will seek to achieve these objectives through participation in increased revenues from the Hotels pursuant to the Percentage Leases and by selective acquisition, ownership, redevelopment, repositioning and expansion of hotel properties. The Company will seek 2 4 to continue to invest in properties where the Company's established industry and marketing expertise and other resources will enable it to improve the acquired hotel's performance. Business Strategy. The Company's strategies to meet its objectives include the following: Growth. The Company believes that, based on historical operating results and the strength of InnSuites Hotels' management team, portfolio and markets, the Hotels should provide the Company with the opportunity for cash flow growth through the Percentage Leases. The Company believes that the revenue and cash flow of the Hotels will be maximized by intensive management and marketing. The Company believes that Lessee's continued commitment to customer service and the experience of its management team should position the Company to capitalize on the expected continued strength in the economy and improvement in the U.S. hotel market. The Company's objectives include enhancing its competitive market position through the continuation of a regular program of renovation, capital improvement and niche marketing. Acquisitions. The Company believes that attractive opportunities exist to acquire additional hotel properties serving the market segment served by the Hotels. The Company plans to expand the InnSuites Hotels system in southern California and other markets in the southwestern United States where it believes newly acquired properties will, at stabilization, add to earnings. The Company expects to continue to affiliate with InnSuites Hotels(R), Holiday Inn(R), Best Western(R) and/or other franchise companies. The Company believes it has the capacity to acquire additional hotels without significantly increasing management and overhead expenses. Renovation and Development. Land for the addition of "extended-stay" suites may be available adjacent to four of the Hotels. Such additional suites may enable the Company to avoid duplication of overhead and capitalize on InnSuites Hotels' past success by broadening service to include weekly and/or monthly extended-stay guests while retaining the ability to offer the additional suites on a daily basis during peak travel season. The Company believes that a regular program of capital improvements at the Hotels, including replacement and refurbishment of furniture, fixtures and equipment, will enhance its competitiveness and maximize revenue growth under the Percentage Leases. As part of its ongoing renovation and capital expenditures program, the Company expects to spend approximately $1,043,000 on capital improvements at the Hotels during the 1999 fiscal year. These expenditures will be funded from Company contributions to a Capital Expenditures Fund and/or from the Hotels' revenues during that period. The Company may develop additional limited-service or extended-stay hotels on land that the Company may acquire contiguous to the properties currently owned or elsewhere in its current geographic markets. The Company believes that selective development of hotels in or near its existing geographic markets will enable it to take advantage of operating and marketing efficiencies to generate attractive returns on investment. Financing Strategy. As of January 31, 1998, the Company, on a consolidated pro forma basis, had an aggregate of $26,780,000 of outstanding debt. While its organizational documents contain no limitation on the amount of debt it may incur, the Company intends to achieve a debt to total market capitalization ratio or debt to appraised value of real estate ratio (measured at the time debt is incurred) of not more than 50% to 55%. The Company may from time to time re-evaluate its debt capitalization policy in light of economic conditions, relative costs of debt and equity capital, market values of its properties, acquisition, development and expansion opportunities, and other factors. Any indebtedness may be incurred by the Company or the Partnership. Indebtedness incurred by the Company may be in the form of bank borrowings, secured or unsecured, and publicly or privately placed debt instruments, the proceeds of which would be loaned or contributed to the Partnership. Indebtedness incurred by the Partnership may be in the form of purchase money obligations to the sellers of properties, publicly or privately placed debt instruments, further borrowings from the Company, or financing from banks, institutional investors or other lenders, any of which indebtedness may be unsecured or may be secured by mortgages or other interests in the property owned by the Partnership. This indebtedness may be with recourse to all or any part of the property of the Company or the Partnership, or recourse may be limited to the specific property to which the indebtedness relates. The proceeds from any borrowings by the Company or 3 5 the Partnership may be used for the payment of distributions or dividends, for working capital, or to refinance existing indebtedness or to finance acquisitions or expansions of properties. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification and -- Distribution Requirements." The Company has entered into a $12,000,000 senior secured revolving credit facility with Pacific Century Bank ("Credit Facility"). The Company intends to use the Credit Facility to provide interim financing for property acquisitions and capital improvements in anticipation of long-term financing and to fund working capital requirements. The Credit Facility is secured by first mortgages on three of the Hotels. RISK FACTORS In addition to the other information contained in, or incorporated by reference into, this Prospectus, prospective investors should carefully consider the following factors in evaluating an investment in the Shares offered hereby. HOTEL INDUSTRY RISKS OPERATING RISKS The Hotels are subject to all operating risks common to the hotel industry. These risks include, among other things, intense competition from other hotels; potential over-building in the hotel industry, which has adversely affected occupancy, average daily rate ("ADR") and revenue per available room or suite ("REVPAR") in the past; increases in operating costs due to inflation and other factors, which increases have not always been, and may not necessarily in the future be, offset by increased suite rates; dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and the effects of general and local economic conditions. Such factors could adversely affect the Lessee's ability to make lease payments and, consequently, adversely affect the Company's ability to make any required payments of principal and interest on indebtedness and to make distributions to stockholders. Further, annual adjustments to the base rent and the thresholds for the computation of percentage rent under the Percentage Leases, based upon a formula taking into account changes in the U.S. Consumer Price Index ("CPI"), would (in the absence of offsetting increases in suite revenue and in the event of any decrease in suite revenue) result in decreased revenues to the Partnership and, therefore, decreased amounts available to the Company for required payments of principal and interest on indebtedness and to make distributions to stockholders. COMPETITION Competition for Guests; Operations. The hotel industry is highly competitive. Each of the Hotels experiences competition primarily from other mid-market hotels in its immediate vicinity, but also competes with other hotel properties in its geographic market. Some of the competitors of the Hotels have substantially greater marketing and financial resources than the Company and the Lessee. A number of additional hotel rooms have been added, are under development or have been announced in a number of the Company's markets, and additional hotel rooms may be developed in the future. Such additional hotel rooms have had, and may continue to have, an adverse effect on the revenues of the Hotels in such markets. Competition for Acquisitions. The Company may be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company prudently can manage. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell. SEASONALITY OF HOTEL BUSINESS The hotel industry is seasonal in nature. Similarly, the Hotels' operations historically have been seasonal in nature, reflecting relatively higher occupancy rates at a majority of the Hotels during the first fiscal quarter of each year, and to a lesser extent, the fourth fiscal quarter, and relatively lower occupancy rates at a majority of the 4 6 Hotels during the second fiscal quarter of each year. Accordingly, seasonality can be expected to cause significant quarterly fluctuations in the Company's lease revenue, to the extent it receives percentage rent. Hotels located in southern Arizona historically experience their most profitable periods in the winter season, whereas Hotels located in northern Arizona and California historically experience their most profitable periods during the summer season, providing some balance to the general seasonality in the hotel business. INVESTMENT CONCENTRATION IN SINGLE INDUSTRY The Company's current strategy is to acquire interests exclusively in hotel properties. The Company will not seek to invest in assets selected to reduce the risks associated with investments in the hotel industry and will be subject to risks inherent in concentrating investments in a single industry. Therefore, the adverse effect on the Company's lease revenue and amounts available for required payments of principal and interest on indebtedness and to make distributions to stockholders resulting from a downturn in the hotel industry will be more pronounced than if the Company had diversified its investments outside of the hotel industry. EMPHASIS ON INNSUITES HOTELS; MARKET CONCENTRATION All but one of the Hotels are marketed as InnSuites Hotels (with modest marketing of that Hotel as an InnSuites affiliate). Accordingly, the Company is subject to risks inherent in concentrating the Company's investments in the InnSuites Hotels brand, such as a reduction in business following adverse publicity related to the brand, which could have an adverse effect on the Company's lease revenues and amounts available for required payments of principal and interest on indebtedness and to make distributions to stockholders. The Hotels are located in Arizona and southern California. Therefore, adverse events or conditions that affect those areas particularly (such as natural disasters or adverse changes in local economic conditions) could have a more pronounced negative impact on the operations of the Company and amounts available for required payments of principal and interest on indebtedness and to make distributions to stockholders than events affecting other areas. CONSTRAINTS ON ACQUISITIONS AND IMPROVEMENTS The Company intends to continue to pursue its current growth strategy, which includes acquiring, repositioning and improving hotel properties. There is a risk that the Company will not have access to sufficient equity or debt capital to pursue its acquisition strategies indefinitely. The Company generally cannot retain cash generated by operating activities. To qualify as a REIT, the Company must distribute at least 95% of its taxable income annually. The Company's $12 million Credit Facility currently expires in 2001. Since the Company generally cannot retain earnings and the term of the Company's Credit Facility is limited, the Company's ability to continue to make hotel acquisitions following the expiration or utilization of the Credit Facility will depend primarily on its ability to obtain additional private or public equity or debt financing. There can be no assurance that such financing will be available to make future investments. CONFLICTS OF INTEREST GENERAL Because of the direct and indirect ownership interests of Mr. Wirth in, and his positions with, the Company, the Lessee and affiliates, there were inherent conflicts of interest in connection with the Company's acquisition of hotels in which he held such an interest and in the ongoing lease and operation of the Hotels. Accordingly, the interests of the Company's stockholders may not have been, and in the future may not be, solely reflected in all decisions made or actions taken by officers and Trustees of the Company. 5 7 NO ARMS-LENGTH BARGAINING ON PERCENTAGE LEASES AND COMPENSATION ARRANGEMENTS FOR OFFICERS AND TRUSTEES The terms of the Percentage Leases and the initial compensation arrangements for officers and Trustees of the Company were not negotiated on an arms-length basis and, accordingly, may not reflect fair market values or terms. Management of the Company believes, however, that the terms of such agreements are fair to the Company. The lease payments under the Percentage Leases have been, and future Percentage Lease rents will be, calculated with reference to historical financial data and the projected operating and financial performance of the Hotels to which they relate. The terms of the Percentage Leases are believed by management of the Company to be typical of provisions found in other leases entered into in similar transactions. Management believes that the initial and current compensation arrangements for officers and Trustees of the Company, as well as the substantial ownership interests in the Company held by Mr. Wirth, provide incentives for them to seek to maximize stockholder value, by tying incentive compensation to increases in the market value of the Common Stock. The Percentage Leases and the employee compensation plans were approved by the Company's independent Trustees. The Company does not own any interest in the Lessee. ADVERSE TAX CONSEQUENCES TO CERTAIN AFFILIATES ON A SALE OF CERTAIN HOTELS Certain affiliates of the Company may have unrealized gain in their investments in the seven hotels acquired by the Company on January 31, 1998 ("Initial Hotels"). A subsequent sale of such Initial Hotels by the Company may cause adverse tax consequences to such persons. Therefore, the interests of the Company and certain of its affiliates, including Mr. Wirth, could be in opposition in connection with the disposition of any of such Initial Hotels. However, decisions with respect to the disposition of any of the Initial Hotels must be approved by a majority of the independent Trustees. RISKS OF LEVERAGE; SUBSTANTIAL AMOUNTS OF FLOATING RATE DEBT At April 30, 1998, the Company's outstanding debt and capital lease obligations consisted of approximately $34.14 million in principal amount outstanding, including approximately $8.53 million under the Credit Facility, a substantial portion of which indebtedness bears interest at floating rates. Since the Company intends to continue to acquire additional studio and two-room suite hotels and must distribute annually at least 95% of its taxable net income to maintain its REIT status, it may borrow additional funds to make investments or distributions. The Company has obtained the Credit Facility to provide, as necessary, funds for investments in additional hotel properties, working capital and cash for distributions. The Credit Facility is secured by a first mortgage on the Company's interest in three of the Hotels. The majority of the Company's floating rate debt bears interest at the 30-day London Interbank Offered Rate ("LIBOR") plus 2.75%. There can be no assurance that the Company will be able to meet its present or future debt service obligations and, to the extent that it cannot, it risks the loss of some or all of its assets to foreclosure. Changes in economic conditions could result in higher interest rates, which could increase debt service requirements on the Company's floating rate debt and could reduce the amounts available for distribution to stockholders. Adverse economic conditions could cause the terms on which borrowings become available to become unfavorable to the Company. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in the Hotels at times that may not permit realization of the maximum return on such investments. TAX RISKS FAILURE TO QUALIFY AS A REIT The Company operates in a manner intended to qualify as a REIT for federal income tax purposes. Although the Company has not requested, and does not expect to request, a ruling from the Internal Revenue Service ("Service") that it qualifies as a REIT, it has received an opinion of its counsel that, based on certain assumptions and representations, it so qualifies. Investors should be aware, however, that opinions of counsel are not binding on the Service or any court. The REIT qualification opinion only represents the view of counsel to the Company 6 8 based on counsel's review and analysis of existing law, which includes no controlling precedent. Furthermore, both the validity of the opinion and the continued qualification of the Company as a REIT will depend on the Company's continuing ability to meet various requirements concerning, among other things, the ownership of its outstanding stock, the nature of its assets, the sources of its income, and the amount of its distributions to stockholders of the Company. See "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of the Company." If the Company were to fail to qualify as a REIT in any taxable year, the Company would not be allowed a deduction for distributions to stockholders in computing its taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Unless entitled to relief under certain provisions of the Internal Revenue Code of 1986, as amended ("Code"), the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, the funds available for required payments of principal and interest on indebtedness and to make distributions to stockholders would be reduced for each of the years involved. Although the Company operates in a manner designed to allow it to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Trustees, with the consent of a majority of the stockholders, to revoke the REIT election. See "FEDERAL INCOME TAX CONSIDERATIONS." REIT MINIMUM DISTRIBUTION REQUIREMENTS In order to qualify as a REIT, the Company generally is required each year to distribute to stockholders at least 95% of its net taxable income (excluding any net capital gain). In addition, the Company is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income plus 95% of its capital gain net income for that year. The Company intends to make distributions to stockholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. The Company's income consists primarily of its share of the income of the Partnership and the Company's cash available for distribution consists primarily of its share of cash distributions from the Partnership. Differences in timing between taxable income and cash available for distribution and the effects of seasonality on the hospitality industry could require the Company, through the Partnership, to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. For federal income tax purposes, distributions paid to stockholders may consist of ordinary income, capital gains, nontaxable return of capital, or a combination thereof. The Company provides its stockholders with an annual statement as to its designation of the taxability of distributions. Distributions by the Partnership will be determined by the Company's Board of Trustees and will depend on a number of factors, including the amount of the Partnership's cash available for distribution, the Partnership's financial condition, any decision by the Board of Trustees to reinvest funds rather than to distribute such funds, the Partnership's capital expenditures, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deem relevant. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification and -- Distribution Requirements." FAILURE OF THE PARTNERSHIP TO BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES; IMPACT ON REIT STATUS The Company believes that the Partnership will be classified as a partnership for federal income tax purposes. If the Service were to challenge successfully the tax status of the Partnership as a partnership for federal income tax purposes, the Partnership would be taxable as a corporation and would be subject to federal income tax on its taxable income at regular corporate rates. In such event, since the value of the Company's ownership interest in the Partnership constitutes more than 10% of the Partnership's voting securities and exceeds 5% of the Company's assets, the Company likely would cease to qualify as a REIT. Furthermore, the imposition of a corporate tax on the Partnership would substantially reduce the amount of cash available for distribution to the Company and its stockholders. 7 9 EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK One of the factors that may influence the price of the Company's Common Stock in public trading markets is the annual yield from distributions by the Company on the Common Stock, as compared to yields on other financial instruments. Thus, an increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the market price of the Common Stock. RECENTLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY The Company was reorganized and the Partnership and the Lessee were organized in fiscal 1998 and, therefore, have limited operating histories. Although the management of the Company and of the Lessee have substantial experience in developing, financing and operating hotel properties, they have limited experience in operating as a REIT. The Company must rely on the Lessee, and the Lessee, in turn, will depend upon ISIH, to generate sufficient cash flow from the operation of the Hotels to enable the Lessee to meet its rent obligations under the Percentage Leases. All of the Hotels are managed on behalf of the Lessee by ISIH. All management contracts extend for a term of five (5) years from the date of acquisition of the Hotel to which such contract relates, but ISIH does not have, or will not have, any liability or obligation to the Partnership for the payment of rent under the Percentage Leases. The obligations of the Lessee under the Percentage Leases are unsecured. The Lessee's only assets are cash, receivables, inventory, supplies and prepaid expenses needed in the operation of the Hotels, the franchise licenses for the Hotels, and its rights and benefits under the Percentage Leases. At January 31, 1998, the Lessee had a total stockholders' equity of approximately $250,000. See "THE COMPANY" and "PARTNERSHIP AGREEMENT." RELIANCE ON KEY PERSONNEL AND BOARD OF TRUSTEES Stockholders have no right or power to take part in the management of the Company except through the election of Trustees and the exercise of voting rights on certain specified matters. The Board of Trustees is responsible for managing the Company. The Company's future success, including particularly the implementation of the Company's acquisition growth strategy, is substantially dependent on the active participation of the Company's two executive officers, Mr. Wirth and Gregory D. Bruhn, the Company's Executive Vice President and Chief Financial Officer. The loss of the services of either of these individuals could have a material adverse effect on the Company. REAL ESTATE INVESTMENT RISKS The Company's investments are subject to varying degrees of risk generally incident to the ownership of real property, including, in addition to the risks discussed below, adverse changes in general or local economic conditions, zoning laws, traffic patterns and neighborhood characteristics, tax rates, governmental rules and fiscal policies, and by civil unrest, acts of war and other adverse factors which are beyond the control of the Company. ILLIQUIDITY OF REAL ESTATE Real estate investments are relatively illiquid. The ability of the Company to alter its portfolio in response to changes in economic and other conditions will be limited. Also, no assurances can be given that the market value of any of the Hotels will not decrease in the future. There can be no assurance that the Company will be able to dispose of such investments when it finds disposition advantageous or necessary or that the sale price realized in any disposition will recoup or exceed the amount of the Company's investment therein. UNINSURED AND UNDERINSURED LOSSES Each of the Hotels is covered by comprehensive policies of insurance, including liability, fire and extended coverage. Management believes such specified coverage is of the type and amount customarily obtained by owners of similar real property assets. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, that may be uninsurable or not economically insurable. Two of 8 10 the Hotels are located in California, which is subject to relatively higher seismic risks. Although one of these Hotels was constructed under the more recent and stringent post-1984 building codes that were intended to reduce the likelihood or extent of damage from seismic activity, no assurance can be given that an earthquake would not cause substantial damage and losses to that Hotel. The Company's Board of Trustees may exercise discretion in determining amounts, coverage limits and the deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on the Company's investments at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the Company's lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical to rely on insurance proceeds to replace property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to such property. ENVIRONMENTAL MATTERS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Liability also may extend to persons holding a security interest in the property under certain limited circumstances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the owner's ability to dispose of such property, to fully utilize such property without restriction or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for the release of hazardous or toxic substances, including the release of asbestos-containing materials ("ACMs") into the air, and third parties may seek recovery from owners or operators of real property for personal injury or property damage associated with such releases, including exposure to released ACMs. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require unanticipated expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. In connection with the ownership of the Hotels and any subsequently acquired hotels, the Company may be potentially liable for such costs. The cost of defending against claims of liability, complying with environmental regulatory requirements or remediating acontaminated property could materially adversely affect the business, assets or results of operations of the Company and the Partnership and, consequently, amounts available for required payments of principal and interest on indebtedness and to make distributions to stockholders. Phase I environmental audits from independent environmental engineers were obtained with respect to each of the Hotels prior to the acquisition thereof by the Company. The principal purpose of a Phase I audit is to identify indications of potential environmental contamination for which the Hotels may be responsible and, secondarily, to assess, to a limited extent, the potential for environmental regulatory compliance liabilities. The Phase I audits of the Hotels were designed to meet the requirements of lenders to the Hotels and the then current industry standards governing Phase I audits, and consistent with those requirements, none of the audits involved testing of groundwater, soil or air. Accordingly, they do not represent evaluations of conditions at the studied sites that would be revealed only through such testing. In addition, their assessment of environmental regulatory compliance issues was general in scope and was not a detailed determination of the Hotels' complete compliance status. Similarly, the audits did not involve comprehensive analysis of potential off-site liability. The Phase I audit reports have not revealed any environmental liability that management believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such liability. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. 9 11 COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT Under the Americans with Disabilities Act of 1990 ("ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While management of the Company believes that, based upon an examination thereof and consultation with professionals, the Hotels are substantially in compliance with these requirements, a determination that the Company is not in compliance with the ADA could result in additional expense, the imposition of fines and/or an award of damages to private litigants. If the Company were required to make substantial modifications at the Hotels to comply with the ADA, the Company's ability to make required payments of principal and interest on indebtedness and to make distributions to stockholders could be adversely affected. INCREASES IN PROPERTY TAXES Each Hotel is subject to real and personal property taxes. The real and personal property taxes on hotel properties in which the Company invests may increase as property tax rates change, as the properties are improved and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, the Company's ability to make required payments of principal and interest on indebtedness and to make distributions to stockholders could be adversely affected. OWNERSHIP LIMITATION In order for the Company to maintain its qualification as a REIT, not more than 50% in value of its outstanding stock may be owned, actually and constructively under the applicable attribution provisions of the Code, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of the taxable year (other than the first year), and the Company must be beneficially owned by 100 or more persons during at least 335 days of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year. For the purpose of preserving the Company's REIT qualification, the Company's Second Amended and Restated Declaration of Trust ("Declaration") prohibits ownership (taking into account applicable constructive ownership provisions of the Code) of more than 4.9% of any class of the Company's outstanding capital stock by any person ("Ownership Limit"), and, subject to certain exceptions, prohibits any transfer that would result in (i) any person owning shares in excess of the Ownership Limit, (ii) the Company's shares being beneficially owned by fewer than 100 persons (determined without reference to any constructive ownership rules), (iii) the Company being "closely held" within the meaning of the Code or otherwise failing to qualify as a REIT under the Code, or (iv) the Company owning, actually and constructively under the applicable attribution provisions of the Code, 10% or more of the ownership interests in the Lessee or any sublessee. Any attempted transfer of shares that would violate any one or more of such prohibitions will be void and of no force or effect whatsoever with respect to any shares in excess of such limits (and, in the case of the prohibition against the Company having fewer than 100 stockholders, will be entirely void) and the attempted transferee will not acquire any right or interest in such excess shares. The Company may take any lawful action deemed necessary or advisable to ensure compliance with the Ownership Limit provisions and to preserve its status as a REIT, including without limitation refusing to recognize or record any prohibited transfer. Should any person at any time hold any shares in violation of the Ownership Limit (other than a violation of the requirement that a REIT have at least 100 stockholders), then that number of shares in excess of the number such person could hold without violating the Ownership Limit will be immediately designated as "Shares-in-Trust" and transferred automatically and by operation of law to, and be held in, a trust for the benefit of such beneficiaries as may be designated by the trustee of such trust (which trustee shall be designated by the Company and be a person that is unaffiliated with the Company or any prohibited owner). The trustee will be entitled to receive all distributions on, and to exercise all voting rights of, any Shares-in-Trust. The record holder of any shares so designated as Shares-in-Trust and transferred to the trustee shall have no right or interest in such shares or trust, except the right (upon satisfaction of certain conditions) to receive from the proceeds of sale of such shares to a qualified person or entity an amount equal to the lesser of (i) the amount paid therefor by such record holder (if acquired by him for value), or the market price of such shares determined as provided in the Declaration (if acquired by him otherwise than for value), and (ii) the amount received by the trustee from the sale of such Shares-in-Trust. 10 12 The Company or its designee may elect, within specified time limits, to purchase from the trustee any Shares-in-Trust at the lesser of (a) the amount to which the record holder would be entitled pursuant to clause (i) of the immediately preceding paragraph or (b) the market price of such shares, determined as provided in the Declaration, on the date of its election to purchase such shares. Accordingly, the record holder of any shares that are designated as Shares-in-Trust may experience a financial loss if the price at which such shares are sold to a qualified person or entity, or the Company, is less than that paid by such record holder therefor. See "CERTAIN DECLARATION AND STATUTORY PROVISIONS -- Declaration Provisions -- Restrictions on Ownership and Transfer" and "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification." LIMITATION ON ACQUISITION AND CHANGE IN CONTROL OWNERSHIP LIMIT The Ownership Limit, which provides that no person may own more than 4.9% in value of any class of the outstanding Common Stock of the Company, may have the effect of precluding an acquisition of control of the Company by a third party without the approval of the Board of Trustees, even if such change in control were to be in the stockholders' interests. CLASSIFICATION OF BOARD OF TRUSTEES The Board of Trustees is presently divided into three classes, comprised of two Trustees each. Trustees are elected to staggered three year terms. The Declaration provides that, subject to any rights of holders of preferred stock, if any, and unless the Board of Trustees otherwise determines, any vacancies will be filled by the affirmative vote of a majority of the remaining Trustees, though less than a quorum. Accordingly, the Board of Trustees could temporarily prevent any stockholder from enlarging the Board of Trustees and filling the new Trusteeships with such stockholder's own nominees. Any Trustee so elected shall hold office until the next annual meeting of stockholders. RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS No assurance can be provided that the Company will not be required to make and fund significant additional improvements to the Hotels in the future to obtain or maintain its franchise and/or trademark licenses. Failure to complete improvements, when required, in a manner satisfactory to the franchisor could result in the failure to issue, or the cancellation, of one or more franchise licenses. In addition, the Company may desire to operate additional hotels acquired by it under franchise licenses, and such franchisors may require that significant capital expenditures be made to such additional hotels as a condition of granting such franchise licenses. The continuation of franchise licenses for the Hotels is subject to the maintenance of specified operating standards and other terms and conditions. Under each Percentage Lease, the Partnership is obligated, among other things, to pay the costs of maintaining the structural elements of each Hotel and to set aside as a reserve 4% of gross hotel suite revenues per month, on a cumulative basis, and to fund from the reserve or from other sources capital expenditures (subject to approval by the Company's Board of Trustees) for the periodic replacement or refurbishment of furniture, fixtures and equipment required for the retention of such franchise licenses. The Company's predecessors in ownership made, and in the future the Company may be obligated or deem it advisable to make, capital investments in the Hotels of more than 4% of the gross suite revenues thereof. Should the Company be required or elect to do so in the future, such investments may necessitate the use of borrowed funds or the reduction of distributions. The Lessee is responsible for routine maintenance and repair expenditures with respect to the Hotels. The failure to maintain the standards or adhere to the other terms and conditions of the franchise licenses could result in the loss or cancellation of such franchise licenses. It is possible that a franchisor could condition the continuation of a franchise license upon the completion of substantial capital improvements, which the Board of Trustees may determine to be too expensive or otherwise unwarranted in light of general economic conditions or the operating results or prospects of the affected Hotel. In that event, the Board of Trustees may elect to allow the franchise license to lapse, in which event the Company will be obligated to indemnify the Lessee against any loss or liability incurred by it as a consequence of such decision. In any case, if a franchise is terminated, the Company and the Lessee may seek to obtain a suitable replacement franchise, or to 11 13 operate the affected Hotel independent of a franchise license. The loss of any franchise license could have a material adverse effect upon the operations or the underlying value of the Hotel covered by such license because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a number of the franchise licenses for the Hotels could have a material adverse effect on the Company's revenues under the Percentage Leases and the Company's cash available to make required payments of principal and interest on indebtedness and to make distributions to its stockholders. USE OF PROCEEDS The Selling Stockholders will receive all of the proceeds from the sale of Shares offered hereby. The Company will not receive any proceeds from the sale of such Shares. SELLING STOCKHOLDERS The following table sets forth the name of each Selling Stockholder and (i) the number of shares of Common Stock beneficially owned by each Selling Stockholder as of June 1, 1998, (ii) the maximum number of Shares which may be offered for the account of each Selling Stockholder under this Prospectus, and (iii) the amount and percentage of Common Stock that would be owned by each Selling Stockholder after completion of the Offering, assuming the sale of all of the Shares which may be offered hereunder. Except as otherwise noted below, none of the Selling Stockholders has, within the past three years, had any position, office or other material relationship with the Company.
AMOUNT OF AND PERCENTAGE OF COMMON STOCK OWNED AFTER THE COMMON MAXIMUM NUMBER OF OFFERING(2) NAME OF STOCK OWNED SHARES WHICH MAY BE ---------------------- SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE ------------------- -------------------- ------------------- -------- ----------- Phil and Cindy Alderink............... 42 3,733 3,733 * Mason E. or Donna Anderson, Ttees Anderson Trust...................... 4,573 462,427 462,427 10.01 Wayne D. Anderson..................... 24 2,554 2,554 * Karyn L. Anderson-Holt................ 24 2,554 2,554 * B & R Venture Capital, AZ Pship Charles Reusch...................... 822 83,263 83,263 1.80 Dr. Otto L. & Robbie K. Bendheim, Ttees Bendheim Decl. Self-Trst...... 300 33,585 33,585 * Dr. James Berens...................... 147 18,254 18,254 * Joel L. Burns......................... 237 28,427 28,427 * Dr. Daniel B. Carroll................. 273 27,560 27,560 * N. R. Chandragiri..................... 51 5,110 5,110 * Joyce R. Cohen, Ttee Allan Cohen Decedent Trst....................... 201 20,438 20,438 * TDA & Jean Collet Rev Trst Jean Collet/WFB Co-Ttees Wells Fargo Bank................................ 510 50,025 50,025 1.08 Larry and Judith Conrad Family Trust............................... 114 11,231 11,231 * C. E. Cooney.......................... 78 7,460 7,460 * Lyle A. Deo........................... 99 9,327 9,327 * Agnes Duisberg........................ 396 37,307 37,307 * Carl R. Duisberg...................... 123 15,212 15,212 * Joseph Freund......................... 48 6,084 6,084 * Steven & Gail Getzwiller.............. 102 10,220 10,220 * Dr. David Gralnek..................... 129 7,818 7,818 * Henry & Freida Green.................. 150 14,437 14,437 * Mr. & Mrs. J. W. Hancock.............. 102 10,220 10,220 * Guy Hayden III........................ 63 7,119 7,119 * Lori Hayden-Boyd...................... 51 5,598 5,598 * Dave Hiddessen........................ 63 7,608 7,608 * Robert Hiddessen Trust Dave Hiddessen, Ttee................ 48 6,084 6,084 * Jack Horner........................... 120 11,371 11,371 *
12 14
AMOUNT OF AND PERCENTAGE OF COMMON STOCK OWNED AFTER THE COMMON MAXIMUM NUMBER OF OFFERING(2) NAME OF STOCK OWNED SHARES WHICH MAY BE ---------------------- SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE ------------------- -------------------- ------------------- -------- ----------- Kathleen Housley, Ttee Rev Trst....... 42 3,733 3,733 * M. William & Susan Isbell, Ttees...... 297 29,847 29,847 * Andrew G. Isbell...................... 9 1,021 1,021 * Elizabeth D. Isbell................... 9 1,021 1,021 * John B. Isbell........................ 9 1,021 1,021 * M. William Isbell II.................. 60 7,108 7,108 * Diane Jones........................... 345 42,595 42,595 * Madeline B. Jones..................... 9 1,021 1,021 * Thomas T. Koziol...................... 69 6,528 6,528 * Kriz Family Trust James & Evelyn Kriz, Ttees.......... 102 10,220 10,220 * Paul & Margaret Larmour............... 78 7,460 7,460 * Murray Leonard........................ 102 10,220 10,220 * Timothy Lewis......................... 99 9,327 9,327 * David A. Lindley...................... 129 12,570 12,570 * Delvin Lindley........................ 360 36,338 36,338 * Kay Lindley........................... 78 7,460 7,460 * John B. Lynch......................... 39 3,730 3,730 * Chastine Mangelsdorf.................. 180 16,790 16,790 * Aubrey Maze........................... 99 12,171 12,171 * Dr. Charles S. Meinstein.............. 168 10,154 10,154 * Dennis & Jeanie Merideth.............. 180 16,790 16,790 * Richard Minor & Deborah Kerr-Minor, Ttees............................... 1,094 12,021 12,021 * Richard & Jacqueline Olness........... 651 62,858 62,858 1.36 Dr. Charles Parker.................... 396 37,307 37,307 * Lorance Pemble and Phyllis Pemble Liv. Rev. Trust.......................... 396 37,307 37,307 * James & Joanne Retzer................. 198 18,653 18,653 * Roadrunner Properties Ltd. Dr. John Bull....................... 75 9,129 9,129 * Simran Limited Partnership Dr. Charanjit S. Dhillon............ 51 5,110 5,110 * George M. Thornton.................... 198 18,653 18,653 * Mr. & Mrs. Glen Volkenant............. 51 5,110 5,110 * Dr. E. B. Waldman..................... 75 9,129 9,129 * Zemer Investments an AZ Pship Dr. James C. Zemer.................. 747 76,978 76,978 1.67 Christian Collet...................... 102 10,005 10,005 * Miranda Collet........................ 102 10,005 10,005 * Paul Collet........................... 21 2,542 2,542 * Myra Ann Goodwin, Ttee Myra Ann Goodwin Family Trust....... 51 5,110 5,110 * Serena C. Murray...................... 102 10,005 10,005 * Olive B. Schwartz, Ttee F/B/O U/AGMT.............................. 225 25,433 25,433 * Southard Revocable Liv. Trust Fred & Lois Southard, Ttees......... 297 30,824 30,824 * Michael Vekasi........................ 99 9,327 9,327 * Michael Schuette...................... 201 20,438 20,438 * Patrick R. Deren...................... 48 6,084 6,084 * Lee J. Flory(3)....................... 1,173 119,517 119,517 2.59 Robert & Carol Slanicky............... 501 54,999 54,999 1.19 Donald & Jere Brunson................. 48 6,084 6,084 * Victor C. Smith Jr.................... 396 37,307 37,307 * Jay Dee Conrad........................ 15 1,904 1,904 *
13 15
AMOUNT OF AND PERCENTAGE OF COMMON STOCK OWNED AFTER THE COMMON MAXIMUM NUMBER OF OFFERING(2) NAME OF STOCK OWNED SHARES WHICH MAY BE ---------------------- SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE ------------------- -------------------- ------------------- -------- ----------- BRZ Partnership Jim Zazanis......................... 396 37,307 37,307 * John H. Lankester..................... 396 37,307 37,307 * Dr. David S. Trump.................... 549 56,372 56,372 1.22 Gerald Gabel.......................... 345 29,069 29,069 * Tracey Schecht........................ 357 33,577 33,577 * PFI LC, Dr. Robert & Bette Lyn Peterson, Mgrs...................... 303 30,658 30,658 * David Ben Collet...................... 21 2,541 2,541 * James R. Conrad....................... 15 1,898 1,898 * Hospitality Corporation International(4).................... 3,194 3,194 3,194 * Hulsey Hotels Corporation(4).......... 300 300 300 * Hotels America LLC(4)................. 1,188 1,188 1,188 * InnSuites Hotels LLC(4)............... 12,519 12,519 12,519 * InnSuites International, Inc. AZ(4)... 8,280 8,280 8,280 * Innternational Suites Corp.(4)........ 981 981 981 * Pepper Tree/Freeway Community(4)...... 867 867 867 * Marc E. Berg(3)....................... 7,634 102,275 102,275 2.21 James F. & Gail J. Wirth(5)........... 643,036 643,036 643,036 13.92 FBO Brian Wirth(6) F. L. Wirth, Custodian.............. 396 396 396 * FBO Christopher Wirth(6) F. L. Wirth, Custodian.............. 396 396 396 * FBO Eric Wirth(6) F. L. Wirth, Custodian.............. 396 396 396 * FBO Pam Wirth(6) F. L. Wirth, Custodian.............. 396 396 396 * Don Schwatken......................... 120 120 120 * Dr. Gerald Miller..................... 795 795 795 * Stephen Jacobs........................ 168 168 168 * L. W. Harper.......................... 33 33 33 * Chris Cochran......................... 99 99 99 * Wm. Michael & Beth Cochran Living Trust........................ 60 60 60 * Deer Family Trust, Elsie & James A. Deer, Sr., Tees............ 1,200 1,200 1,200 * Murray Hollenberg..................... 200 200 200 * Mackenzie & Alma Lathrop.............. 75 75 75 * Dr. Holly Marten...................... 150 150 150 * Ruth Anderson......................... 0 1,200 1,200 * Teresa Kabe........................... 0 300 300 * Mary Fabre............................ 0 1,200 1,200 * Dan Michael Rasmussen................. 0 300 300 * Jeff Welty............................ 0 300 300 * Russell Quick......................... 0 300 300 * Larry Ferguson........................ 0 4,800 4,800 * Ash Beshay............................ 0 1,500 1,500 * Maria Casillo......................... 0 900 900 * Vangie Estaban........................ 0 900 900 * Ed Gonzales........................... 0 300 300 * Margaret Maldonado.................... 0 900 900 * Crystal Cantu......................... 0 300 300 * Dolores De Avila...................... 0 300 300 * Nicole Rivas.......................... 0 300 300 * Estela Rosillo........................ 0 300 300 *
14 16
AMOUNT OF AND PERCENTAGE OF COMMON STOCK OWNED AFTER THE COMMON MAXIMUM NUMBER OF OFFERING(2) NAME OF STOCK OWNED SHARES WHICH MAY BE ---------------------- SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE ------------------- -------------------- ------------------- -------- ----------- Juaquin Serrano....................... 0 300 300 * Jose Serrato.......................... 0 300 300 * Martha Torres......................... 0 300 300 * Graciela Aldama....................... 0 300 300 * Imelda Gandara........................ 0 300 300 * Joel Gandara.......................... 0 300 300 * Victor Munoz.......................... 0 300 300 * Pedro Tabar........................... 0 300 300 * Frank L. Wirth(7)..................... 0 3,000 3,000 * Joel Wirth(8)......................... 0 3,000 3,000 * Gerry Thornton........................ 0 3,000 3,000 * Chris Thornton........................ 0 900 900 * Marc Thornton......................... 0 900 900 * Craig Thornton........................ 0 900 900 * John Phillips......................... 0 1,200 1,200 * Arlene Jones.......................... 0 600 600 * Ana De Souza.......................... 0 300 300 * Christina Canavan..................... 0 300 300 * Caridad Herrera....................... 0 300 300 * Alejandro Melchor..................... 0 600 600 * Anneliese Michel...................... 0 300 300 * Jessicah Levale....................... 0 300 300 * Maria Babylonia....................... 0 600 600 * Ruth Lay.............................. 0 2,100 2,100 * Toni Lindner.......................... 0 1,200 1,200 * Lila Spitzer.......................... 0 300 300 * Freda Zapanta......................... 0 600 600 * Reyes Garcia.......................... 0 600 600 * Saul Rodriguez........................ 0 300 300 * Andy Calef............................ 0 300 300 * Stacey Gonzales....................... 0 300 300 * Michelle Orion........................ 0 3,300 3,300 * Saralee Ralim......................... 0 1,200 1,200 * Marie Reyes Lorudes................... 0 600 600 * Lorena Gutierrez...................... 0 300 300 * Inocente Contreras.................... 0 300 300 * Karla Lopez........................... 0 300 300 * Erin Milhaven......................... 0 300 300 * Michael Carpenter..................... 0 300 300 * Karen Basye........................... 0 300 300 * Ken Sliwa............................. 0 13,800 13,800 * Cindy Weishaupt....................... 0 600 600 * Ed Meyer.............................. 0 600 600 * Patricia Villasenor................... 0 300 300 * Linda Godinez......................... 0 300 300 * Patricia Richards..................... 0 300 300 * Alan Irvin............................ 0 300 300 * James Nichols......................... 0 600 600 * Carla Sego............................ 0 300 300 * Calvin Quick.......................... 0 12,900 12,900 * Martha Gomez.......................... 0 3,300 3,300 * Judy Correll.......................... 0 600 600 * Mary Valencia......................... 0 2,400 2,400 * Almadelia Verdugo..................... 0 1,200 1,200 * John Hardin........................... 0 1,200 1,200 *
15 17
AMOUNT OF AND PERCENTAGE OF COMMON STOCK OWNED AFTER THE COMMON MAXIMUM NUMBER OF OFFERING(2) NAME OF STOCK OWNED SHARES WHICH MAY BE ---------------------- SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE ------------------- -------------------- ------------------- -------- ----------- Julie Valle........................... 0 1,200 1,200 * Sharon Steinbrenner................... 0 900 900 * Glenda Simpson........................ 0 900 900 * Loretta May........................... 0 900 900 * Araceli Martinez...................... 0 900 900 * Maria Garcia.......................... 0 1,200 1,200 * Hector Tapia.......................... 0 300 300 * Vonnie Cayeaux........................ 0 8,100 8,100 * Beth L Miles.......................... 0 2,700 2,700 * James Green........................... 0 11,100 11,100 * Carmen Ethington...................... 0 900 900 * Sue Smith............................. 0 900 900 * Manuela Andrade....................... 0 900 900 * Maria Sigala.......................... 0 900 900 * Betty Kretchmer....................... 0 900 900 * Lilia Arzola.......................... 0 600 600 * Rick Mora............................. 0 600 600 * Leocodia Rubio........................ 0 600 600 * Janna Turner.......................... 0 600 600 * Barbara Martin........................ 0 1,500 1,500 * Helna Campugan........................ 0 300 300 * Sandra Dilger......................... 0 300 300 * Suzanne Eaton......................... 0 300 300 * Rhonda Nordin......................... 0 300 300 * Maria Matty........................... 0 900 900 * Evangelina Morales.................... 0 300 300 * Donna Murry........................... 0 600 600 * Diane Nichols......................... 0 6,000 6,000 * John Pedersen......................... 0 1,200 1,200 * Helen Alegria......................... 0 2,400 2,400 * Leticia Blois......................... 0 600 600 * Margarita Campos...................... 0 900 900 * Maria Casillas........................ 0 900 900 * Sharon Hensien........................ 0 2,400 2,400 * Jerra Huckins......................... 0 900 900 * Layshorn Brewer....................... 0 300 300 * Cheryl Ann Simmons.................... 0 300 300 * Ronilo Aguilar........................ 0 300 300 * Henry Johnson......................... 0 300 300 * Jan Rustad............................ 0 300 300 * Norma Huckins......................... 0 1,500 1,500 * Rita Jurgel........................... 0 3,300 3,300 * Brenda Marine......................... 0 1,200 1,200 * Helen Sperce.......................... 0 600 600 * David Manzanares...................... 0 1,200 1,200 * Bethany Clark......................... 0 600 600 * Rebecca Nguyen........................ 0 300 300 * Lori Reid............................. 0 300 300 *
- --------------- * Less than 1% (1) Beneficial ownership as of June 1, 1998. (2) Assumes conversion of all Units into Shares. Assumes sale of all Shares registered hereunder, although Selling Stockholders are under no obligation known to the Company to sell any Shares at this time. (3) Trustee of the Company since January 30, 1998. 16 18 (4) Owned or controlled by James F. Wirth. (5) Trustee, Chairman, President and Chief Executive Officer of the Company since January 30, 1998, and his wife. (6) Child of James F. Wirth. (7) Father of James F. Wirth. (8) Brother of James F. Wirth. PLAN OF DISTRIBUTION The Shares may be sold pursuant to the offer made hereby from time to time by the Selling Stockholders. The Selling Stockholders may sell the Shares being offered hereby: (i) in ordinary brokerage transactions and in transactions in which brokers solicit purchasers; (ii) in privately negotiated direct sales or sales effected through agents not involving established trading markets; or (iii) through transactions in put or call options or other rights (whether exchange-listed or otherwise) established after the effectiveness of the Registration Statement of which this Prospectus is a part. The Shares may be sold at prices and on terms then prevailing or at prices related to the then current market price of the Common Stock on the NYSE or at other negotiated prices. In addition, any of the Shares that qualify for sale pursuant to Rule 144 may be sold in transactions complying with such rule, rather than pursuant to this Prospectus. The Shares consist of (i) Common Stock issued to Selling Stockholders in private transactions exempt from the registration requirements of the Securities Act, and (ii) Common Stock issued or to be issued to Selling Stockholders upon conversion by the Selling Stockholders of Units previously issued to such persons in private transactions exempt from the registration requirements of the Securities Act. Upon the exercise of a Selling Stockholder's conversion rights, the Company will convert each Unit into a share of Common Stock and, consequently, its interest in the Partnership will increase. In the case of sales of the Shares effected to or through broker-dealers, such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders or the purchasers of the Shares sold by or through such broker-dealers, or both. The Company has advised the Selling Stockholders that the anti-manipulative Rules 10b-6 and 10b-7 under the Securities Exchange Act of 1934, as amended ("Exchange Act"), may apply to their sales in the market and has informed them of the need to deliver copies of this Prospectus. The Company is not aware as of the date of this Prospectus of any agreements between any of the Selling Stockholders and any broker-dealers with respect to the sale of the Shares offered by this Prospectus. The Selling Stockholders and any broker-dealer or other agent executing sell orders on behalf of the Selling Stockholders may be deemed to be "underwriters" within the meaning of the Securities Act, in which case the commissions received by any such broker-dealer or agent and profit on any resale of the Shares may be deemed to be underwriting commissions under the Securities Act. The commissions received by a broker-dealer or agent may be in excess of customary compensation. The Company will receive no part of the proceeds from the sale of any Shares hereunder. The Selling Stockholders will pay their costs and expenses of selling the Shares hereunder, including commissions and discounts of underwriters, brokers, dealers or agents, while the Company has agreed to pay the costs and expenses incident to the registration and qualification of the Shares offered hereby, including applicable filing fees and legal and accounting fees and expenses. In addition, the Company has agreed to indemnify the Selling Stockholders against certain liabilities, including certain liabilities arising under the Securities Act. The Selling Stockholders may elect to sell all, a portion or none of the Shares offered by them hereunder. 17 19 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of an unlimited number of shares of Common Stock. The following summary description does not purport to be complete and is qualified in its entirety by reference to the Company's Declaration. See "CERTAIN DECLARATION PROVISIONS -- Declaration Provisions." COMMON STOCK Under the Declaration, the Company has authority to issue an unlimited number of shares of Common Stock. Under Ohio law, stockholders generally are not responsible for a corporation's debts or obligations. At June 1, 1998, the Company had outstanding 1,667,817 shares of Common Stock. In addition, 2,203,731 shares of Common Stock are issuable upon conversion of outstanding Units by the Selling Stockholders. The holders of Common Stock are entitled to one vote per share on all matters voted on by stockholders, including the election of Trustees. The Company's Declaration does not provide for cumulative voting in the election of directors. Matters subject to a vote by the stockholders, including the election of Trustees, generally require the affirmative vote of a majority of the outstanding Common Stock present in person or by proxy at a stockholder's meeting. Amendments to the Declaration require the affirmative vote of two-thirds of the outstanding Common Stock whether or not present in person or by proxy at a stockholder's meeting. Except as otherwise required by law, the holders of Common Stock exclusively possess all voting power. The Company's Board of Trustees is divided into three classes, comprised of two Trustees each, which have staggered three-year terms. At least two years would be required in order to change the membership of a majority of the Board of Trustees. In order to maintain its qualification as a REIT, the Company must make annual distributions to stockholders of at least 95% of its taxable income (which does not include net capital gains). For the year ended January 31, 1998, the Company had distributions totaling $.15 per share, none of which was required to satisfy the 95% REIT distribution test. Under certain circumstances, the Company may be required to make distributions in excess of cash available for distribution in order to meet such REIT distribution requirements. In such event, the Company presently would expect to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions required to retain its qualification as a REIT for federal income tax purposes. The Company currently anticipates that it will maintain at least a dividend rate of $0.20 per share of Common Stock per year or $0.05 per share of Common Stock per quarter for the immediate future, unless actual results of operations, economic conditions or other factors differ from its current expectations. To the extent that cash flow from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in Percentage Lease revenue, the Company expects to utilize other cash on hand or borrowings under the Credit Facility to make such distributions. No assurance can be given, however, that the Company will make distributions in the future at the current rate, or at all. The timing and amount of future distributions, if any, made by the Company will be determined by the Board of Trustees and will depend on a number of factors, including the amount of cash available for distribution, funds available from operations, the Company's financial condition, capital expenditure requirements for the Company's properties, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees may deem relevant. The holders of Common Stock are entitled to such dividends, if any, as may be declared from time to time by the Board of Trustees from funds legally available therefor and, upon liquidation, are entitled to receive, pro rata, all assets of the Company available for distribution to such holders. All shares of Common Stock are or, when issued upon conversion of Units, will be fully paid and nonassessable and will have no preemptive rights. 18 20 The following table sets forth certain pro forma financial information for the Company for the year ended January 31, 1998, which was used to establish the expected distribution per share. The following table is presented as if the acquisition of the Hotels (except for the San Diego hotel) had occurred on February 1, 1997.
YEAR ENDED JANUARY 31, 1998 ---------------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net income........................................ $ 216.0 Add: Minority interest...................................... 2,040.0 Depreciation and amortization.......................... 2,070.0 Less: Additions to Capital Expenditures Fund................ (938.0) Scheduled principal amortization of long-term debt..... (785.0) -------- Estimated cash available for distributions(1)............... $2,603.0 ======== Estimated initial annual distribution(2).................... $1,772.0 Estimated initial annual distribution to Company's stockholders (3).......................................... $ 333.6 Estimated initial annual distribution per share/unit(4)..... $ .20 Estimated payout ratio of cash available for distribution(5)........................................... 68%
- --------------- (1) If the Partnership received only the minimum rent under the Percentage Leases, the estimated cash available for distribution would be $1,408. (2) Based on 1,667,817 shares of Common Stock, 2,203,731 Units and 4,688,494 Class B Units outstanding, and the equivalent of 299,622 Units held by non-exchanging minority partners. (3) Based on 1,667,817 shares of Common Stock outstanding and an initial annual distribution rate of $.20 per share. (4) An equivalent annual distribution will be made to each share of Common Stock and each Unit and Class B Unit, irrespective of whether or not a Unit or Class B Unit has been converted or is convertible. (5) Represents the anticipated initial aggregate annual distribution divided by estimated cash available for distribution. The primary source of proceeds to be used for distributions to shareholders is the Company's share of the rents due pursuant to the Percentage Leases. The anticipated revenue may or may not be realized or collected. Accordingly, the statements set forth above with regard to distributions are forward-looking statements involving certain risks and uncertainties that could cause actual results to differ materially from those expressed in such statements. Important factors that could cause such different results include, but are not limited to, competition from other hotels, increases in operating costs, seasonality effects in hotel occupancy and revenues, and the potential loss of a franchise or liquor license in respect of any Hotel or acquired hotel. See "FORWARD-LOOKING STATEMENTS." RESTRICTIONS ON OWNERSHIP AND TRANSFER The Common Stock is subject to certain restrictions upon the ownership and transfer thereof that were adopted for the purpose of enabling the Company to preserve its status as a REIT. For a description of such restrictions, see "CERTAIN DECLARATION AND STATUTORY PROVISIONS -- Declaration Provisions -- Restrictions on Ownership and Transfer." EXCHANGE LISTING The Company's Common Stock is listed on the NYSE under the symbol "RRF." TRANSFER AGENT The transfer agent and registrar for the Common Stock is National City Bank, Cleveland, Ohio. 19 21 SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The following tables set forth (i) selected unaudited pro forma condensed consolidated financial information for the Company for the year ended January 31, 1998, and (ii) selected unaudited pro forma condensed combined financial information for the Lessee for the year ended December 31, 1997. The Pro Forma Condensed Consolidated Balance Sheet of the Company (i) is presented as if the acquisition of the membership interests in Tucson St. Mary's Suite Hospitality LLC ("St. Mary's") as discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" had occurred on January 31, 1998; and (ii) adjusts the historical balance sheet of the Company as of January 31, 1998 for the effects of the acquisition. The Pro Forma Condensed Consolidated Statement of Income for the Company for the year ended January 31, 1998 (i) is presented as if the acquisitions of the Hotels (except for the San Diego hotel) had occurred on February 1, 1997; and (ii) adjusts the historical operating results of the Company for the year ended January 31, 1998 for the effects of those acquisitions. The pro forma information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been, assuming these transactions had been consummated as of January 31, 1998 or as of the beginning of the period presented, nor does it purport to represent the future financial position or results of operations of the Company. The Pro Forma Condensed Combined Statement of Operations of the Lessee for the year ended December 31, 1997 is presented as if the acquisitions of the Hotels (except for the San Diego hotel) and the beginning of the relevant lease years had occurred on January 1, 1997, and therefore incorporates certain assumptions that are included in the Notes to the Pro Forma Condensed Combined Statement of Operations. The pro forma operating information for the Lessee is presented to reflect the pro forma operations of the Lessee for 1997, which operations are the source of funds for the Percentage Lease payments to the Partnership. The following selected financial information and the financial statements contained in the Company's Form 10-K for the year ended January 31, 1998 should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and all other historical financial statements and notes included elsewhere in this Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." 20 22 REALTY REFUND TRUST PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
TRUST ST. MARY'S PRO FORMA PRO HISTORICAL HISTORICAL ADJUSTMENTS FORMA ---------- ---------- ----------- ------- (A) (A) (B) ASSETS INVESTMENTS IN HOTEL PROPERTIES, net............ $41,241 $6,315 $ -- $47,556 CASH AND CASH EQUIVALENTS....................... 2,379 106 (16)(C) 2,469 ACCOUNTS RECEIVABLE............................. -- 52 (52)(C) -- INVENTORY....................................... -- 97 (97)(C) -- OTHER ASSETS.................................... -- 96 (96)(C) -- ------- ------ ------ ------- TOTAL ASSETS.................................... $43,620 $6,666 $ (261) $50,025 ======= ====== ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY MORTGAGE NOTES PAYABLE.......................... $17,710 $6,000 $ -- $23,710 NOTES PAYABLE TO BANKS.......................... 155 50 -- 205 OTHER NOTES PAYABLE............................. 2,865 -- -- 2,865 ADVANCES PAYABLE TO RELATED PARTIES............. 1,700 1,140 -- 2,840 DUE TO LESSEE................................... 944 -- 130(C) 1,074 ACCOUNTS PAYABLE AND ACCRUED EXPENSES........... 572 690 (391)(C) 871 MINORITY INTEREST IN LIMITED PARTNERSHIP........ 14,075 -- (1,214)(D) 12,861 EQUITY: Shares of beneficial interest without par value; unlimited authorization; 1,667,817 shares issued and outstanding.............. 5,599 (1,214) 1,214(D) 5,599 ------- ------ ------ ------- TOTAL EQUITY.................................... 5,599 (1,214) 1,214 5,599 ------- ------ ------ ------- TOTAL LIABILITIES AND EQUITY.................... $43,620 $6,666 $ (261) $50,025 ======= ====== ====== =======
The accompanying notes to pro forma condensed consolidated balance sheet are an integral part of this balance sheet. 21 23 REALTY REFUND TRUST NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) (A) Derived from the historical balance sheet of the Company as of January 31, 1998 and the historical balance sheet of St. Mary's as of December 31, 1997. (B) Reflects the acquisition of St. Mary's membership interest by the Partnership. Giving effect to the acquisition, the Company is a 12.4% sole general partner in the Partnership. As James F. Wirth, Chairman, President and Chief Executive Officer of the Company and holder of Class B limited partnership units representing 53% of the Partnership, together with his spouse, owned 100% of St. Mary's, no adjustments to the historical carrying amounts of St. Mary's assets and liabilities have been made. (C) Represents the elimination of working capital assets and liabilities assumed by the Lessee. (D) Reflects the elimination of the historical equity of St. Mary's and the adjustment to minority interest resulting from the acquisition. 22 24 REALTY REFUND TRUST PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 31, 1998 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
ST. MARY'S TRUST FORMATION PRO FORMA PRO HISTORICAL TRANSACTIONS ADJUSTMENTS FORMA ---------- ------------ ----------- ---------- (A) (B) (B) PERCENTAGE LEASE REVENUE.................. $ - $7,902 $ 995 $ 8,897 OTHER RENTAL REVENUE...................... 1,367 (1,367) -- -- INTEREST INCOME........................... 55 -- -- 55 ---------- ------ ------ ---------- TOTAL REVENUES.................. 1,422 6,535 995 8,952 ---------- ------ ------ ---------- LOSS ON SALE OF REAL ESTATE............... 36 (36) -- -- INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE........................... 118 1,492 630 2,240 ADVISORY FEE TO RELATED PARTY ADVISOR..... -- 576 112 688 OPERATING EXPENSES OF REAL ESTATE HELD FOR SALE.................................... 1,379 (1,379) -- -- DEPRECIATION AND AMORTIZATION............. 21 1,689 360 2,070 GENERAL AND ADMINISTRATIVE................ 441 137 70 648 REAL ESTATE AND PERSONAL PROPERTY TAXES, CASUALTY INSURANCE AND GROUND RENT...... -- 820 230 1,050 MINORITY INTEREST......................... -- 2,396 (356) 2,040 ---------- ------ ------ ---------- TOTAL EXPENSES AND MINORITY INTEREST...................... 1,995 5,695 1,046 8,736 ---------- ------ ------ ---------- NET INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST.................. $ (573) $ 840 $ (51) $ 216 ========== ====== ====== ========== NET INCOME (LOSS) PER SHARE............... $ (0.34) $ 0.13 ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............................. 1,667,817 1,667,817
The accompanying notes to pro forma condensed consolidated statement of income are an integral part of this statement. 23 25 REALTY REFUND TRUST NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 31, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) (A) Derived from the historical statement of operations for the Company for the year ended January 31, 1998. (B) Represents pro forma adjustments to reflect the acquisitions of the Hotels as of February 1, 1997. The pro forma adjustments include the following: 1. Pro forma percentage rent as calculated pursuant to the terms of the Percentage Leases between the Partnership and the Hotels. 2. Pro forma adjustments to other rental revenue, loss on sale of real estate and operating expenses of real estate held for sale assume the sale of the related real estate occurred as of February 1, 1997. The real estate was sold on September 4, 1997 for $6,000. 3. Pro forma interest expense includes interest on existing mortgage indebtedness assumed by the Partnership. The interest rates on the mortgage debt range from 8.0% to 9.75%. Historical interest expense on $2,300 is eliminated as that loan from related party was retired with proceeds from the sale of the real estate. 4. Pro forma advisory fee to related party advisor (equal to 1% of the Company's invested assets) reflects assets under management having a total appraised value of $68,485. 5. Pro forma depreciation and amortization represents (i) the elimination of historical amortization of the Company related to the real estate held for sale, and (ii) depreciation of the properties owned and acquired by the Company. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 40 years for building and improvements and 7 years for furniture and equipment. These estimated useful lives are based on management's knowledge of the properties and hotel industry in general. The Company's pro forma investment in hotel properties, at cost, consists of the following:
ST. MARY'S FORMATION PRO FORMA TRANSACTIONS ADJUSTMENTS ------------ ----------- Land................................................... $ 3,440 $ 900 Building and improvements.............................. 31,395 3,615 Furniture, fixtures and equipment...................... 6,406 1,800 ------- ------ $41,241 $6,315 ======= ======
6. Pro forma general and administrative expense reflects expenses related to salaries and wages, professional fees, directors expenses and other operating expenses of the properties assumed by the Company. 7. Pro forma real estate and personal property taxes, property and casualty insurance and ground rent expense paid by the Company based on historical amounts. 8. Pro forma minority interest represents 87.6% of net income of the Partnership attributable to minority interest holders who hold 7,191,847 limited partnership units (including non-exchanging minority partners representing the equivalent of 299,622 limited partnership units). The Company holds 1,020,586 units of general partner interests or 12.4% of the total. 24 26
ST. MARY'S FORMATION PRO FORMA TRANSACTIONS ADJUSTMENTS ------------ ----------- Pro forma income before minority interest: Company................................................ $ 55 $ -- RRF Sub Corp........................................... (128) -- Partnership............................................ 2,736 (255) ------- ------ 2,663 (255) Minority interest in pro forma net income of the Partnership at 87.6%................................. 2,396 (223) ------- ------ $ 267 $ (32) ======= ======
25 27 LESSEE PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
HISTORICAL HISTORICAL ST. MARY'S PRO FORMA PRO FORMA HOTEL COMPANIES HOTEL ADJUSTMENTS LESSEE --------------- ----------- ----------- --------- (A) (B) REVENUES: Room revenue.............................. $18,801 $2,562 $ -- $21,363 Food and beverage revenue................. 519 814 -- 1,333 Other revenue............................. 591 166 -- 757 ------- ------ ------- ------- Total Revenues.......................... 19,911 3,542 -- 23,453 ------- ------ ------- ------- EXPENSES: Departmental expenses of Hotels: Rooms................................... 4,915 1,119 -- 6,034 Food and beverage....................... 921 611 -- 1,532 General and administrative................ 3,056 168 90(C) 3,314 Advertising and promotion................. 871 120 -- 991 Utilities................................. 934 350 -- 1,284 Management fees........................... 833 59 (306)(D) 586 Franchisor royalties and other charges.... 582 101 348(E) 1,031 Repairs and maintenance................... 2,473 457 -- 2,930 Real estate and personal property taxes, insurance, and ground rent.............. 912 204 (1,022)(F) 94 Interest expense.......................... 1,854 556 (2,410)(G) -- Depreciation and amortization............. 1,226 248 (1,474)(H) -- Percentage Lease payments................. 0 0 8,897(I) 8,897 ------- ------ ------- ------- Total Expenses....................... 18,577 3,993 4,123 26,693 ------- ------ ------- ------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS..................... $ 1,334 $ (451) $(4,123) $(3,240) ======= ====== ======= =======
The accompanying notes to pro forma condensed combined statement of operations are an integral part of this statement of operations. 26 28 LESSEE NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS) (A) Derived from the historical combined financial statements of the Hotels for the year ended December 31, 1997. (B) Derived from the historical financial statements of St. Mary's. (C) Increase reflects the estimated incremental expenses to be incurred by Lessee in connection with administrative salaries and occupancy expenses, net of historical general and administrative expenses of the Lessee which will be incurred by the Partnership. (D) Reflects the adjustment of management fee expense of the Hotels to a standard 2.5% of revenues per year pursuant to the management agreement entered into between the Lessee and the Partnership. (E) Reflects the adjustment of franchise fees paid to InnSuites to a standard 2.5% of revenues per year (1.25% at four existing properties with dual franchises). (F) Reflects the elimination of real estate and personal property taxes, property and casualty insurance, and ground rent expenses to be paid by the Partnership. (G) Reflects the elimination of interest expense related to debt assumed by the Partnership. (H) Reflects the elimination of depreciation expense related to the investments in hotel properties of the Hotels which were acquired by the Partnership. (I) Represents lease payments calculated on a pro forma basis by applying the rent provisions of the Percentage Leases to the pro forma room and other revenues of the Hotels. 27 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In September 1997, the Company sold its interests in the Carbon & Carbide Building in Chicago, Illinois for $6,000,000, before consideration of closing and other costs related to the sale. A loss of approximately $36,000 was recorded as a result of the sale. The Carbon & Carbide Building was originally acquired in July 1992 when the Company accepted title in lieu of foreclosure. At the time of title acceptance, the Company recorded a provision to write down its investment to estimated net realizable value as it was the Company's intention to sell the real estate. Since that time, the carrying value of the investment increased as a result of considerable investment in building and tenant improvements. Based on both market conditions for similar commercial property in Chicago and the operating performance of the property, the Company recorded a $3,000,000 provision in the fourth quarter of fiscal 1996 to reduce the carrying value of the property to its then estimated net realizable value. The amount of the writedown was based upon the Company's best estimate of the amount of net proceeds which would be realized upon sale of the real estate. In the fourth quarter of fiscal 1997, the Company entered into a contract to sell the building for $6,000,000. Accordingly, the Company recorded an additional provision of $1,085,000 to reduce the carrying value of the real estate held for sale to its estimated net realizable value based upon the pending contract price and estimated costs associated with the potential sale. Having liquidated all of its other investments (primarily wrap-around mortgages) prior to January 31, 1997, the Company's principal asset after the sale of the Carbon & Carbide Building consisted of cash and cash equivalents. On January 31, 1998 the Company contributed $2,081,000 to the Partnership in exchange for a 13.6% general partner interest therein. The Company is the sole general partner of the Partnership. The Partnership issued limited partnership interests representing 86.4% of the Partnership to acquire six hotel properties from various entities. In addition, through RRF Sub Corp., the Company issued 647,231 shares of beneficial interest in exchange for all of the outstanding shares of BPI which owned a hotel located in Scottsdale, Arizona. On February 1, 1998 the Partnership acquired 100% of the ownership interests in the Tucson St. Mary's InnSuites Hotel and Resort for $10,820,000. The Partnership assumed $7,803,000 in mortgage debt and other obligations and issued 699,933 limited partnership units to James and Gail Wirth (of which 28,800 Units were subsequently paid to third parties as advisory fees), who each held a 50% equity ownership in the Tucson St. Mary's hotel. On April 29, 1998, the Partnership acquired 100% of the ownership of the InnSuites Hotel San Diego for $5,148,000. The Partnership invested $1,448,000 in cash (of which $1,348,000 was drawn under the Credit Facility) and became obligated for $3,700,000 in seller financing in the form of two promissory notes secured by mortgage trust deeds on the property. Having completed the acquisition of the Hotels, the Company owns a 12.4% interest in eight of the Hotels through its interest in the Partnership and 100% of the Scottsdale hotel through RRF Sub Corp. In order for the Company to qualify as a REIT, neither the Company nor the Partnership can operate the Hotels. Therefore, each of the Hotels are leased to the Lessee pursuant to Percentage Leases. Each Percentage Lease obligates the Lessee to pay rent equal to the greater of the minimum rent or a percentage rent based on the gross revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel. The Lessee is owned 9.8% by ISIH, an entity owned by Mr. Wirth and his wife. The Company's principal source of revenue is lease payments from the Lessee pursuant to the Percentage Leases. Lease revenue is based upon the room and other revenues of the Hotels leased to the Lessee. The Lessee's ability to make payments to the Partnership pursuant to the Percentage Leases is dependent primarily upon the operations of the Hotels. Therefore, management believes that a discussion of the pro forma operating results of the Lessee and the historical operating results of the Hotels are important to an understanding of the business of the Company. The following discusses (i) the Company's pro forma results of operations for the years ended January 31, 1997 and January 31, 1998; (ii) the Lessee's pro forma results of operations for the year ended December 31, 1997; and (iii) the historical results of the Initial Hotels for the years ended December 31, 1997, 1996 and 1995. GENERAL Results of operations are best explained by three key performance indicators: occupancy, ADR and REVPAR. Increases in REVPAR attributable to increases in occupancy are accompanied by increases in most 28 30 categories of variable operating costs. Increases in REVPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and franchise and licenses fees. PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY The following tables set forth key indicators for (i) all of the Hotels combined, and (ii) all fully operational Hotels (which excludes the Flagstaff, Arizona and the Tucson St. Mary's hotels, which were under renovation), and are useful in understanding the underlying changes in the percentage rent during the Company's pro forma years ended January 31, 1997 and January 31, 1998. The following tables do not include any information regarding the recently acquired San Diego, California hotel.
ALL FULLY-OPERATING HOTELS ALL OPERATING HOTELS (EXCLUDES FLAGSTAFF AND (INCLUDES FLAGSTAFF AND ST. MARY'S) ST. MARY'S) YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, -------------------------- ---------------------------- KEY FACTORS 1997 1996 1995 1997 1996(1) 1995(1) ----------- ------ ------ ------ ------ ------- ------- Occupancy.......................... 74.3% 71.9% 72.2% 63.4% 68.4% 67.6% ADR................................ $71.80 $69.17 $64.50 $66.04 $65.71 $62.80 REVPAR............................. $52.57 $49.75 $46.57 $42.60 $45.79 $42.45
- --------------- (1) Does not include information regarding the Tucson St. Mary's hotel. The pro forma financial information set forth below is presented as if the acquisitions of the Hotels (except for the San Diego hotel) had been consummated as of February 1, 1997. The pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions of the Hotels had been consummated as of February 1, 1997, nor does it purport to represent the results of operations for future periods. Financial information for Tucson St. Mary's, which InnSuites did not own in the fiscal year ended January 31, 1997, is not included in the pro forma 1997 results.
YEAR ENDED JANUARY 31, ------------------ 1998 1997 ------ ------ (UNAUDITED, IN THOUSANDS) Percentage Lease Revenue.................................... $8,897 $7,376 Interest Income............................................. 55 1,638 ------ ------ Total Revenues.................................... 8,952 9,014 ------ ------ Provision for Writedowns of Loan Receivable................. -- 111 Interest on Loans Underlying Wrap Mortgages................. -- 239 Interest Expense on Mortgage and Other Notes Payable........ 2,240 1,929 Advisory Fee to Related Party Advisor....................... 688 576 Depreciation and Amortization............................... 2,070 1,710 General and Administrative.................................. 648 578 Real Estate and Personal Property Taxes and Casualty Insurance and Ground Rent................................. 1,050 942 Minority Interest........................................... 2,040 1,625 ------ ------ Total Expenses and Minority Interest.............. 8,736 7,710 ------ ------ Net Income Attributable to Shares of Beneficial Interest.... $ 216 $1,304 ====== ====== Net Income Per Share -- basic and diluted................... $ .13 $ .78 ====== ======
For the year ended January 31, 1998, the Company had pro forma revenues of $9.0 million from the Percentage Leases that would have been in place at the Hotels (except for the San Diego hotel). The Company had only $.55 million in interest income compared to $1.6 million in interest income from mortgage investments 29 31 in 1997 due to loan repayments during fiscal 1997. Other rental revenue of $1.4 million and operating expenses of $1.4 million and amortization of $.02 million related to the Carbon & Carbide Building (the sale of which closed on September 4, 1997), have been eliminated. Net income to shareholders (after minority interest) declined to $.24 million from $1.3 million due to the elimination of the positive spread on the mortgage investments and presentation of $2.3 million in cash realized from sale of the Carbon & Carbide Building without reflecting any pro forma income or return from investment of that cash. For the year ended January 31, 1997, the Company had pro forma revenues of $7.4 million from the Percentage Leases that would have been in place at the Hotels (except for the San Diego and Tuscon St. Mary's hotels). The Company also had $1.6 million in interest income from mortgage investments which were repaid during fiscal 1997. Expenses included interest expense related to the mortgage investments and a note payable to an affiliated party. Other rental revenue of $2.3 million and operating expenses of $2.1 million and amortization of $.04 million related to the Carbon & Carbide Building (the sale of which closed on September 4, 1997) have been eliminated. PRO FORMA RESULTS OF OPERATIONS OF LESSEE For the year ended December 31, 1997, the Lessee had pro forma revenues of $23.5 million compared to $18.3 million for the year ended December 31, 1996, an increase of $5.2 million (28.4%). This was due to the inclusion of St. Mary's revenue in 1998 and an increase in occupancy from 68.4% in 1996 to 70.6% in 1997 and an increase in ADR from $65.71 in 1996 to $66.04 in 1997 (at the Initial Hotels). Total expenses increased $6.6 million from $20.2 million in the year ended December 31, 1996 to $26.8 million in the year ended December 31, 1997. Increases of $1.1 million in general and administrative expenses, and $1.7 million in Percentage Lease payments were consistent with the inclusion of St. Mary's results, decreased occupancy and increased revenues and, in the case of general and administrative expenses, due to increased legal and accounting and advisory expenses related to the formation of the Partnership. Repairs and maintenance of $2.9 million in 1997 ($.3 million more than in 1996) remained high due to costs of the ongoing refurbishment program which was substantially completed by the end of calendar 1997 and the inclusion of St. Mary's expenses. The larger increase in expenses ($6.6 million) as compared to the $5.2 million increase in revenues resulted in a $1.4 million increased loss to $3.4 million in the year ended December 31, 1997 as compared to the $1.8 million loss for the year ended December 31, 1996. The pro forma net loss of Lessee for 1996 was $1.8 million, due to having incurred $1.7 million of maintenance expense as part of a multi-year refurbishment program and $286,000 of losses due to the renovation of the Flagstaff hotel. The refurbishment programs, including the Flagstaff renovation, were all substantially completed as of the end of calendar 1997. Mr. and Mrs. Wirth's management and trademark corporations have agreed to subordinate their receipt of management fees and trademark fees from the Lessee, to the extent that Flagstaff does not generate sufficient operating cash flow to meet its $250,000 minimum annual rent payment, until Flagstaff has generated sufficient operating cash flow to meet its $250,000 minimum annual rent payment in two consecutive years. The elimination of the maintenance expense associated with refurbishment and Mr. Wirth's subsidy of Flagstaff should enable Lessee to generate a positive cash flow. RESULTS OF OPERATIONS OF THE HOTELS The following table sets forth certain combined historical financial information for the Initial Hotels, as a percentage of revenues, for the periods indicated. 30 32
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- FINANCIAL DATA Room revenue.......................................... 94.4% 96.1% 96.4% Food and beverage revenue............................. 2.6 1.1 0.8 Other revenue......................................... 3.0 2.8 2.8 ------- ------- ------- Total revenue....................................... 100.0 100.0 100.0 ------- ------- ------- Departmental and other expenses....................... 73.2 70.1 69.6 Real estate and personal property taxes, insurance and rent................................................ 4.6 4.8 4.1 Depreciation and amortization......................... 6.2 6.3 6.6 Interest expense...................................... 9.3 8.6 12.5 ------- ------- ------- Income before extraordinary items..................... 6.7 10.2 7.2 Extraordinary item -- gain on early extinguishment of debt................................................ -- 1.7 40.6 ------- ------- ------- Net income............................................ 6.7% 11.9% 47.8% ======= ======= ======= OTHER DATA EBITDA(1), as a % of revenue.......................... 22.2% 25.0% 26.3% Cash Flow from Operating Activities, as a % of revenue............................................. 19.7% 14.4% 13.2% Cash Flow from Investing Activities, as a % of revenue............................................. -8.4% -10.9% -2.5% Cash Flow from Financing Activities, as a % of revenue............................................. -13.8% -6.4% -11.9% KEY FACTORS(2) Occupancy............................................. 70.6% 68.4% 67.6% ADR................................................... $ 68.73 $ 65.71 $ 62.80 REVPAR................................................ $ 48.62 $ 45.79 $ 42.45
- --------------- (1) Represents income (loss) before extraordinary items, excluding interest expense, depreciation and amortization. The Company believes that EBITDA, defined as net income before interest, depreciation, amortization, taxes and extraordinary items, provides a good indicator of the financial performance of the Hotels and will be a significant factor in determining the Lessee's ability to make lease payments to the Partnership. This indicator should not, however, be considered as an alternative to net income as an indication of Lessee's performance or to cash flow as a measure of liquidity. (2) No assurance can be given that the trends reflected in this data will continue or that occupancy, ADR and REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions. These figures include the Flagstaff hotel, acquired in June 1996 and under renovation during the remainder of 1996 and the first half of 1997. The renovation was substantially completed as of October 15, 1997. Comparison of the year ended December 31, 1997 with 1996 for the Initial Hotels Room revenues increased $1.19 million, or 6.7%, from 1996 to 1997. This was driven by increases in ADR at almost all of the Initial Hotels, along with an increase in occupancy of 3.0%. These were attributable to the general improvement in the business travel and tourism industries, lack of any new competition in the markets where the Initial Hotels operate and the InnSuites' refurbishment program. Food and beverage revenue grew $.32 million or 163.5% from 1996 to 1997, relating to the increase in occupancy and expansion of food service, including room service at two of the Initial Hotels. The composition of revenue remained consistent between the periods, with only a slight increase in food and beverage revenues, from 1.1% of the total to 2.6%, which reflects that most of the gains in revenue occurred in occupancy and room rates during this period. 31 33 Departmental and other expenses grew by $1.73 million, or 13.4%, between the years because of expansion of food service, increased payroll costs, general inflationary pressures and increased occupancy. These costs increased as a percentage of revenues from 70.1% in 1996 to 73.2% in 1997, as expenses grew faster than revenues, primarily through increased payroll. Depreciation and amortization increased slightly between 1996 and 1997. Interest expense increased by $.28 million in 1997 compared to 1996 due to refinancing costs of capital improvements. Income before extraordinary items decreased $.54 million primarily due to increased expenses discussed above. A gain on early extinguishment of debt of $.3 million recorded in May 1996 related to the extinguishment of debt at the Flagstaff property. No gains or losses related to the extinguishment of debt were realized in 1997. Net income declined $.85 million due to the extinguishment of debt income realized in 1996 and increased expenses in 1997. EBITDA declined $.17 million, or 3.8%, from 1996 to 1997. This decline is attributable to the increase in expenses during the periods. Comparison of the year ended December 31, 1996 with 1995 for the Initial Hotels Total revenues increased $2.38 million, or 14.9%, from 1995 to 1996. Room revenues increased $2.2 million, or 14.6%, from 1995 to 1996. As can be seen by the growth of REVPAR, revenues as reported were driven by increases in the ADR which occurred at five of the Initial Hotels, while occupancy increased 1.4% overall. This was attributable in part to the general improvement in the business travel and tourism industries as well as to InnSuites' refurbishment program which was substantially completed at all the Initial Hotels by the end of calendar 1997. The continuation of InnSuites' focus on maximizing REVPAR by focusing on increasing ADR while maintaining stable occupancy during this period had significant effects. Food and beverage revenue grew $.066 million, or 50.8%, from 1995 to 1996. The composition of revenue stayed consistent between the periods, with only a slight increase in food and beverage revenues, from .8% of the total to 1.1%. Departmental and other expenses increased by $1.77 million, or 16.0%, between the years substantially because of a $.68 million increase in maintenance associated with the refurbishment program, the inclusion of the operating results of the Flagstaff hotel from January 1, 1996, increases in management and franchise fees due to increased revenues and general inflationary pressures. These costs increased slightly as a percentage of revenues from 69.6% in 1995 to 70.1% in 1996, due to the effect of expenses growing at a faster pace than revenues, in particular maintenance expenses, and the less-profitable operating results of the Flagstaff hotel acquired in 1996. In addition, management fees increased from 3.8% of revenues in 1995 to 4.6% of revenues in 1996 because of higher revenues and increases in the management fee rate implemented in the second quarter of 1996 at four of the Initial Hotels. Real estate and personal property taxes, insurance and rent increased 33.6% from 1995 to 1996. This is primarily attributable to real estate taxes which increased 40.3% due to increased property valuations based on improved revenues. Depreciation and amortization expense increased by $.088 million, or 8.3%, primarily due to the additional depreciation associated with the increased rate of refurbishment at the Initial Hotels. Interest expense decreased $0.42 million, or 21.1%, in 1996 due to (i) principal payments on mortgage notes payable of $2.2 million in 1995 and $.62 million in 1996, net of new mortgage debt of $.99 million in 1996; Income before extraordinary items increased $.72 million primarily due to increases in ADR at the Initial Hotels and decreased interest expense. The gain on early extinguishment of debt of $.3 million recorded in May 1996 related to the extinguishment of debt in Hulsey Hotels (the Flagstaff property) in the form of forgiveness of advances from affiliates and was substantially less than the $6.5 million gain recorded in May 1995 related to the extinguishment of debt at the Ontario property in the form of forgiveness of mortgage debt. 32 34 Net income declined $5.44 million due to substantially larger forgiveness of debt income in 1995, which was offset partially by the improvement in ADR and reduced interest expense in 1996. EBITDA grew $.39 million or 9.3% from 1995 to 1996. This improvement was attributable to the increase in revenues due to growth in ADR during the periods which was partially offset by increases in franchise and management fees. LIQUIDITY AND CAPITAL RESOURCES The Company, through its ownership interest in the Partnership, will have its proportionate share of the benefits and obligations of the Partnership's ownership interests in the Hotels. The Company's principal sources of cash to meet its cash requirements, including distributions to stockholders, will be its share of the Partnership's cash flow. The Partnership's principal source of revenue will be rent payments under the Percentage Leases. Lessee's obligations under the Percentage Leases are unsecured and Lessee's ability to make rent payments to the Partnership under the Percentage Leases, and the Company's liquidity, including its ability to make distributions to stockholders, will be dependent on the Lessee's ability to generate sufficient cash flow from the operation of the Hotels, particularly the Scottsdale hotel, which represents, on a pro forma basis, 58.9% of the Company's cash flow in 1996 and 26.7% in 1997, respectively. For a discussion of the abatement of management and trademark fees at the Flagstaff property, see "Pro Forma Results of Operations of Lessee" above. Beyond the 4% reserve for refurbishment and replacements set aside annually, other than $450,000 in anticipated refurbishing costs at the recently acquired InnSuites Hotel San Diego, the Company has no present commitments for extraordinary capital expenditures. At April 30, 1998, outstanding mortgage debt had been reduced from $23.7 million on a pro forma basis at January 31, 1998 to $20.7 million through line of credit borrowings of $8.3 million and available cash. The Company intends to acquire and develop additional hotels and will incur indebtedness to fund those acquisitions and developments. The Company may also incur indebtedness to meet distribution requirements imposed on a REIT under the Code to the extent that working capital and cash flow from the Company's investments are insufficient to make the required distributions. The terms of the line of credit discussed below permit borrowings for that purpose, but impose certain limitations on the Company's ability to engage in other borrowings. On April 16, 1998, the Company obtained the $12,000,000 Credit Facility to assist it in its funding of acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility are secured by first mortgages on three of the Hotels. The Company may seek to increase the amount of its Credit Facility, negotiate additional credit facilities, or issue debt instruments. Any debt incurred or issued by the Company may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate, and be subject to such other terms as the Company considers prudent. The Company will acquire or develop additional hotels only as suitable opportunities arise, and the Company will not undertake acquisition or redevelopment of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings under the Credit Facility or other borrowings or from the proceeds of additional issuances of Common Stock or other securities. The Company has an option to acquire an additional hotel property in Buena Park, California. See "BUSINESS AND PROPERTIES -- Other Property Owned". There is no agreement or understanding to invest in any properties other than the option property, and there can be no assurance that the Company will successfully acquire or develop additional hotels. The Partnership will contribute to a Capital Expenditures Fund on a continuing basis, from the rent paid under the Percentage Leases, an amount equal to 4% of the Lessee's revenues from operation of the Hotels. The Capital Expenditures Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. The Partnership anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the period from January 1, 1995 through December 31, 1997, the Hotels spent approximately $2.0 million for capital expenditures, excluding hotel acquisitions. The Company considers the majority of these improvements to be revenue producing and therefor these amounts have been capitalized and are being depreciated over their estimated useful lives. The Hotels also spent $7.0 million during 33 35 the period from January 1, 1995 through December 31, 1997 on repairs and maintenance and these amounts have been charged to expense as incurred. INFLATION The Company's revenues initially will be based on the Percentage Leases, which will result in changes in the Company's revenues based on changes in the underlying Hotel revenues. Therefore, the Company initially will be relying entirely on the performance of the Hotels and the Lessee's ability to increase revenues to keep pace with inflation. Operators of hotels in general, and the Lessee in particular, can change room rates quickly, but competitive pressures may limit the Lessee's ability to raise rates faster than inflation. The Company's largest fixed expense is the depreciation of the investment in Hotel properties. The Company's variable expenses, which are subject to inflation, represented approximately 17.5% of pro forma revenues in fiscal 1998. These variable expenses (general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent) are expected to grow with the general rate of inflation. SEASONALITY The Hotels' operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Company's quarterly lease revenue under the Percentage Leases. The Company anticipates that its cash flow from the Lessee's operation of the Hotels will be sufficient to enable the Company to make quarterly distributions at the estimated initial rate of $.05 per share of Common Stock for at least the next twelve months. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, the Company expects to utilize other cash on hand or borrowings to make those distributions. No assurance can be given that the Company will make distributions in the future at the initially estimated rate, or at all. YEAR 2000 COMPLIANCE The Year 2000 problem is the result of computer programs having been written using two digits instead of four digits to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could potentially result in a system failure or miscalculations, causing disruptions of operations and normal business activity. The Company is currently in the process of identifying and evaluating its computer programs that could be affected by the Year 2000 problem and, if necessary, will develop a plan to make its computer programs Year 2000 compliant. If the Company determines that modifications and conversions are necessary, the failure to complete such modifications and conversions in a timely manner may have a material impact on the operations of the Company. The Company has not determined with certainty the total cost which will be incurred by the Company in connection with Year 2000 compliance. However, the Company believes that such costs will not result in a material adverse effect on its financial condition or results of operations. Costs related to the Year 2000 problem are being expensed as incurred. The Company cannot predict the effect of the Year 2000 problem on vendors, customers and other entities with which the Company transacts business, and there can be no assurance that the effect of the Year 2000 problem on such entities will not adversely effect the Company's operations. 34 36 BUSINESS AND PROPERTIES THE PROPERTIES. The following table sets forth certain information in respect of each of the Hotels:
NUMBER NUMBER OF YEAR OF MOST NUMBER OF OF PARKING CONSTRUCTION/ RECENT RESTAURANTS/ MEETING PROPERTY SUITES SPACES BUILDING STRUCTURE ADDITION RENOVATION LOUNGES ROOMS -------- ------ ------- ------------------ ------------- ---------- ------------ ------- InnSuites 123 153 Metal stud construction 1980 1995/1996 0 2-total Hotel Phoenix with stucco exterior of 1000 Best Western sq. ft. InnSuites Hotel 170 200 Metal stud construction 1982/1985 1995/1996 1 6-total Tempe/Phoenix with stucco exterior of 4065 Airport/South sq. ft. Mountain InnSuites Hotel 159 189 Metal stud construction 1981/1983 1995/1996 1 10-total Tucson, Catalina with stucco exterior of 4500 Foothills sq. ft. Best Western InnSuites Hotel 166 196 Metal stud construction 1982/1984 1995/1996 1 11-total Yuma Best Western with stucco exterior of 8900 sq. ft. Holiday Inn Airport 150 180 Wood construction, stucco 1990 1995/1996 1 9-total Hotel and exterior, concrete floors of 5850 Suites/Ontario sq. ft. InnSuites Hotel 134 158 Masonry construction 1966-67/ 1996/1997 1 3-total Flagstaff/ 1972 of 1111 Grand Canyon sq. ft. InnSuites Hotel 134 163 Metal stud construction 1980 1995/1996 1 0 Scottsdale El with stucco exterior Dorado Park Resort InnSuites Hotel Tucson 297 352 Concrete block construction 1960/1967/ 1997 2 10-total St. Mary's with stucco exterior 1971 of 14,252 sq. ft. InnSuites Hotel 147 129 Wood construction 1946/1989 1996 1 7-total San Diego with stucco exterior of 12,000 sq. ft. ----- Total Suites 1,480 ===== FITNESS POOL/ PROPERTY CENTERS JACUZZI OTHER -------- ------- ------- ----- InnSuites Yes Yes Hotel Phoenix Best Western InnSuites Hotel Yes Yes 2 tennis Tempe/Phoenix courts Airport/South Mountain InnSuites Hotel Yes Yes 2 tennis Tucson, Catalina courts Foothills Best Western InnSuites Hotel Yes Yes 2 tennis Yuma Best Western courts Holiday Inn Airport Yes Yes basketball Hotel and court Suites/Ontario InnSuites Hotel Yes Yes Flagstaff/ Grand Canyon InnSuites Hotel Yes Yes Scottsdale El Dorado Park Resort InnSuites Hotel Tucson Yes Yes St. Mary's InnSuites Hotel Yes Yes San Diego Total Suites
General. Each of the Hotels is under the direction of a general manager and an executive committee, who is accountable for, and compensated in part based on, the property's performance. This group oversees day-to-day operations and develops annual budgets and marketing, long-term capital and human resource development plans for the respective Hotel. Each Hotel is responsible for developing its own comprehensive marketing plan, which analyzes local market conditions and the hotel's competition, determines hotel positioning, identifies consumer needs, and outlines marketing objectives and strategies. Each plan will continue to be evaluated quarterly by the Lessee to maintain effectiveness under changing market conditions. The Lessee and ISIH stress comprehensive financial management and revenue reporting and believe their management teams are skilled at anticipating business needs and changes. All hotel departments, including rooms, food and beverage, accounting, sales and marketing, and maintenance, will continue to receive regular on-site performance reviews and to have open lines of communication directly to the Lessee's and ISIH's management. These performance reviews will enable the Lessee and ISIH to maintain an in-depth understanding of each Hotel's marketing opportunities and to insure that the Company's properties receive the direction necessary to enable on-site management to maximize profits. 35 37
AVERAGE DAILY REVENUE PER OCCUPANCY(1) RATE(2) AVAILABLE ROOM(3) ------------- --------------- ----------------- PROPERTY 1997 1996 1997 1996 1997 1996 -------- ----- ----- ------ ------ ------- ------- InnSuites................... 68.2% 72.3% $78.57 $76.04 $53.57 $54.97 Hotel Phoenix Best Western InnSuites Hotel............. 76.0% 73.1% $69.43 $68.43 $52.74 $49.99 Tempe/Phoenix Airport/South Mountain InnSuites Hotel............. 81.5% 84.4% $76.42 $73.87 $62.32 $62.33 Tucson, Catalina Foothills Best Western InnSuites Hotel............. 75.1% 73.7% $64.24 $62.12 $48.28 $45.81 Yuma Best Western Holiday Inn Airport......... 76.6% 66.2% $76.20 $68.35 $56.57 $45.28 Hotel and Suites/Ontario InnSuites Hotel............. 45.9% 45.2% $48.07 $42.40 $22.08 $19.14 Flagstaff/ Grand Canyon InnSuites Hotel............. 65.3% 59.0% $67.53 $67.89 $40.68 $39.58 Scottsdale El Dorado Park Resort InnSuites Hotel Tucson...... 38.1% 37.3% $56.67 $45.99 $21.59 $17.16 St. Mary's (4) InnSuites Hotel............. 51.8% 51.2% $50.24 $45.54 $26.02 $23.32 San Diego
- --------------- (1) Occupancy is calculated by dividing the actual number of rooms rented by the actual number of rooms available for rent and is expressed as a percentage. (2) Average Daily Rate is calculated by dividing actual room revenues by the actual number of rooms rented. (3) Revenue per Available Room is calculated by dividing actual room revenues by the actual number of rooms available for rent. (4) Occupancy, ADR and REVPAR for the InnSuites Hotel Tucson St. Mary's in 1996 are based on partial year data (June through December). 36 38 The following discussion sets forth additional information for each Hotel. Holiday Inn Hotel and Suites Airport Ontario, an InnSuites Hotel Located at the foot of California's San Gabriel Mountains and Mt. Baldy, this Hotel is situated minutes from the Ontario, California International Airport and the newly-opened Ontario Mills Mall. Dining and entertainment are centered around P.J.'s Winery Cafe and Lounge, serving breakfast, lunch and dinner, with a complimentary breakfast buffet and a free daily afternoon social hour. On Wednesdays, guests are treated to the complimentary Manager's barbecue. In addition to the customary risks of hotel ownership, within the Ontario, California submarket there are several new hotels that have either been completed or are under construction. The additional supply has or will create moderate competitive pressure as one or more of these properties are expected to be directly competitive with the Hotel. Concurrently, southern California is experiencing an increase in general economic activity which has served to enhance lodging demand in this submarket. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 76.6% versus 66.2% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $76.20 versus $68.35. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel Tucson/Catalina Foothills Best Western This Hotel is located in northwest Tucson's Catalina Foothills resort area, five miles east of I-10, convenient to downtown and the Tucson International Airport. The Tucson Mall and Foothills Mall and a variety of restaurants and golf courses are within minutes of the property. Many Tucson attractions, including Biosphere II, the Old Tucson movie studio, the Arizona Sonora Desert Museum, the arts district and the University of Arizona are conveniently located for access by the hotel's guests. In addition to the customary risks of hotel ownership, within the Tucson, Arizona submarket there are several new hotels that have either been completed or are under construction, including one or more properties that will be directly competitive with the Hotel. The additional supply has or will create moderate competitive pressure as one or more of these properties are expected to be directly competitive with the Hotel. This new product could enhance this submarket's lodging capacity, creating an increase in competitive pressure. As an offset to the increase in supply, the general Arizona marketplace has experienced renewed economic strength during the past several years, generally boosting lodging demand throughout the state. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 81.5% versus 84.4% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $76.42 versus $73.87. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel & Resort/Tucson St. Mary's Conveniently located off of I-10 at the St. Mary's Road exit, this 297-suite property occupies 11 acres and is centrally located in the heart of Tucson's art and historic downtown district. Attractions include the Tucson Mall, the Tucson Convention Center, the Old Tucson movie studio, the Arizona Sonora Desert Museum, Biosphere II and golfing, and is minutes away from the University of Arizona. In addition to the customary risks of hotel ownership, within the Tucson, Arizona submarket there are several new hotels that have either been completed or are under construction, including one or more properties that will be directly competitive with the Hotel. The additional supply has or will create moderate competitive pressure as one or more of these properties are expected to be directly competitive with the Hotel. This new product could enhance this submarket's lodging capacity, creating an increase in competitive pressure. As an offset to the increase in supply, the general Arizona marketplace has experienced renewed economic strength during the past several years, generally boosting lodging demand throughout the state. As compared to the year 37 39 ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 38.1% versus 37.3% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $56.67 versus $45.99. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel Tempe/Phoenix Airport This Hotel is located on Baseline Road at I-10, less than eight minutes from Phoenix Sky Harbor International Airport with easy access to the Phoenix East Valley and the Tempe/Mesa/Chandler area. Area attractions include spring training baseball, Arizona State University, Firebird Raceway, Old Towne Mill Avenue shopping and dining and South Mountain Resort golf. In addition to the customary risks of hotel ownership, within the Tempe, Arizona submarket there are several new hotels that have either been completed or are under construction, including one or more properties that will be directly competitive with the Hotel. As an offset to the increase in supply, the general Arizona marketplace has experienced renewed economic strength during the past several years, generally boosting lodging demand throughout the state. Additionally, within this specific submarket, a large outlet shopping mall was opened across the street from this Hotel in 1997, which the Company expects will further enhance this submarket's lodging demand. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 76.0% versus 73.1% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $69.43 versus $68.43. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel Yuma Best Western This Hotel is located on Castle Dome Avenue, just off the 16th Street exit of I-8, convenient to the Yuma International Airport, restaurants, golf, shopping and boating on the nearby Colorado River. Many attractions of Yuma and the Colorado River Park, including Fort Yuma, the Yuma Art Center, Yuma Territorial Prison Park and Martinez Lake, are convenient to this property. In addition to the customary risks of hotel ownership, within the Yuma, Arizona submarket, although there have not been in recent years any new hotels added to the supply of lodging, all hotels within the submarket, including the Hotel, are dependent to some extent upon demand from surrounding U.S. military facilities. With no supply growth and only modest demand expansion, the Company has worked to gain market share for this Hotel. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 75.1% versus 73.7% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $64.24 versus $62.12. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel Flagstaff/Grand Canyon This Hotel's hillside location in Arizona Mountain Country is located 90 minutes west of the Grand Canyon. Situated on historic Route 66, hotel guests can conveniently visit downtown Flagstaff's restaurants and pubs, as well as many Native American shops. Other attractions include the Snow Bowl ski resort, the cliffs of Walnut Canyon, the Lowell Observatory and Oak Creek Canyon. In addition to the customary risks of hotel ownership, within the Flagstaff, Arizona submarket there is an abundance of hospitality capacity attempting to capture the Grand Canyon visitor demand. There are also several new hotels that have either been completed or are under construction, including one or more properties that will be directly competitive with the Hotel. As an offset to the increase in supply, the general Arizona marketplace has experienced renewed economic strength during the past several years, generally boosting lodging demand 38 40 throughout the state. That factor is, however, less relevant to this Hotel than to other of the Hotels, as this Hotel relies more heavily on the tourist trade than on the business traveler. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 45.9% versus 45.2% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $48.07 versus $42.40. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel Phoenix Best Western This property is located just off the Squaw Peak Parkway, in the North Phoenix resort area, convenient to the Phoenix International Airport and downtown central Phoenix. The resort area offers golf, tennis, jogging and Squaw Peak hiking trails as well as a variety of restaurants. Nearby attractions include Turf Paradise Racing and shopping at Biltmore Fashion Park, Metro Center and Paradise Valley Mall. In addition to the customary risks of hotel ownership, within the Phoenix, Arizona submarket there are several new hotels that have either been completed or are under construction, including one or more properties that will be directly competitive with the Hotel. As an offset to the increase in supply, the general Arizona marketplace has experienced renewed economic strength during the past several years, generally boosting lodging demand throughout the state. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 68.2% versus 72.3% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $78.57 versus $76.04. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotel Scottsdale El Dorado Park Resort This Hotel is located in the heart of Scottsdale, adjacent to El Dorado Park and 15 minutes from Phoenix's Sky Harbor International Airport. Located beside El Dorado Park, guests of this hotel are offered many attractions, including paddle boats, hiking, golf, walking and jogging trails. Other nearby attractions include Island of Big Surf, the Phoenix Zoo, the Desert Botanical Gardens, Papago Park Golf and the Scottsdale Art Galleries. The Fiesta Bowl, Arizona State University's Sun Devil Stadium and the homes of football's Arizona Cardinals and baseball's San Francisco Giants and Chicago Cubs (spring training) are also easily accessible. In addition to the customary risks of hotel ownership, within the Scottsdale, Arizona submarket there are several new hotels that have either been completed or are under construction, including one or more properties that will be directly competitive with the Hotel. These new properties could significantly enhance this submarket's lodging capacity, creating an increase in competitive pressure. As an offset to the increase in supply, the general Arizona marketplace has experienced renewed economic strength during the past several years, generally boosting lodging demand throughout the state. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 65.3% versus 59.0% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $67.53 versus $67.89. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. InnSuites Hotels San Diego Balboa Park Suite Resort Located in San Diego, California, this Hotel is conveniently located near many major attractions in San Diego, including Balboa Park, the San Diego Zoo, the Convention Center, Sea World, Old Town and beaches. The elegant, colonial style mansion has 147-suites, many of which have fireplaces. Additional amenities include an Olympic-size, terrazzo tile swimming pool and a choice of studio, one, two and three bedroom suites. In addition to the customary risks of hotel ownership, within the San Diego, California submarket there are several new hotels that have either been completed or are under construction. The additional supply has or will 39 41 create moderate competitive pressure as one or more of these properties are expected to be directly competitive with the Hotel. Concurrently, southern California is experiencing an increase in general economic activity which has served to enhance lodging demand in this submarket. As compared to the year ended December 31, 1996, the average occupancy for the period from January 1, 1997 through December 31, 1997 was 51.8% versus 51.2% and the average daily rate for the period from January 1, 1997 through December 31, 1997 was $50.24 versus $45.54. To the knowledge of the Company, this Hotel is in compliance with all relevant environmental regulations. The Company is unaware of any specific fuel or energy requirements with which the Hotel must comply. Finally, as a hotel, this property is not subject to rent control regulations. OTHER PROPERTY OWNED Mr. Wirth holds ownership interests ("Ownership Interests") in one property ("Property Under Option"). The Property Under Option comprises a fifty percent (50%) interest in a 185-suite full-service InnSuites Hotel (formerly a Ramada(R) hotel) located in Buena Park, California. The Ownership Interests may be acquired by the Company between February 1, 1998 and February 15, 1999, upon the Company's exercise of an option granted by Mr. Wirth, at a price equal to the greater of (i) $6,900,000 or (ii) fair market value as determined by an independent appraisal. The existence of the option minimizes the risk of a conflict of interest between Mr. Wirth and the Company because of the existence of the Ownership Interests. The Company did not pay any cash or other additional consideration for the option, and the option may be exercised only by action of a majority of the Company's independent Trustees. LEASING AND MANAGEMENT OF THE HOTELS The Lessee entered into substantially identical Percentage Leases for each Hotel with the Partnership. In addition, ISIH provides property management services to the Hotels, and the InnSuites Licensing Corp. provides trademark and licensing services to the Hotels. Additional information regarding the Percentage Leases is set forth below: Each of the Hotels is leased by the Partnership to the Lessee. The following table sets forth (i) the percentage rent formulas, (ii) the annual minimum rent, and (iii) the pro forma percentage rent and total rent that would have been paid for each Hotel pursuant to the terms of the Percentage Leases based upon historical revenues for the twelve months ended December 31, 1997 as if the Partnership had owned the Hotels and the Percentage Leases had been in effect since January 1, 1997 (amounts in thousands of dollars). 40 42
FOR THE 12 MONTHS ENDED 12/31/97 ---------------------- FRANCHISE HISTORICAL LEASE RENEWAL ANNUAL ROOMS & OTHER ROOMS & PRO FORMA EXPIRATION EXPIRATION MINIMUM PERCENTAGE OTHER ANNUAL HOTEL DATE DATE RENT RENT FORMULA(1) REVENUE RENT(2) ----- ---------- ---------- ------- --------------- ---------- --------- InnSuites Hotel 5/31/07 12/31/98 $ 800 37% under $1,800, $ 2,444 $ 996 Phoenix Best Western 50% from $1,800 to $2,400, 68% over $2,400 InnSuites Hotel 5/31/07 N/A $1,000 37.5% under $1,800, $ 3,480 $1,671 Tempe/Phoenix 50% from $1,800 to $2,700, Airport/South Mountain 70% over $2,700 InnSuites Hotel Tucson, 5/31/07 12/31/98 $1,000 37.5% under $2,000, $ 3,913 $1,848 Catalina Foothills 50% from $2,000 to $3,000, Best Western 70% over $3,000 InnSuites Hotel Yuma 5/31/07 12/31/98 $ 800 32% under $2,100, $ 3,003 $1,214 Best Western 50% from $2,100 to $2,500, 68% over $2,500 Holiday Inn Airport 5/31/07 6/30/04 $ 600 34% under $2,700, $ 3,341 $1,300 Hotel and Suites/Ontario 50% from $2,700 to $3,000, 68% over $3,000 InnSuites Hotel 5/31/07 N/A $ 250 25% under $1,300, $ 1,106 $ 250 Flagstaff/Grand Canyon 40% from $1,300 to $1,500, 58% over $1,500 InnSuites Hotel 5/31/07 N/A $ 600 35% under $1,600, $ 2,105 $ 623 Scottsdale El Dorado Park 50% from $1,600 to $2,000, Resort 68% over $2,000 InnSuites Hotel Tucson 5/31/07 N/A $ 800 35% under $3,500, $ 2,728 $ 995 St. Mary's 50% from $3,500 to $5,000, 68% over $5,000 InnSuites Hotel 5/31/07 N/A $ 500 35% under $1,700, $ 1,391 $ 500 ------ ------- ------ San Diego 50% from $1,700 to $2,200, 70% over $2,200 Total $6,350 $23,511 $9,397 ====== ======= ======
- --------------- (1) Shown as a percentage of revenues. (2) Calculated on a pro forma basis by applying the rent provisions in the Percentage Leases to historical revenues of the properties for the twelve-month period as if January 1, 1997 was the beginning of the lease year. The following summary of the Percentage Leases, and the descriptions of certain provisions thereof set forth herein, are qualified in their entirety by reference to the form of Percentage Lease, which is an exhibit to the Registration Statement of which this Prospectus is a part. Duration. The Percentage Leases have initial terms ending on May 31, 2007, subject to earlier termination on the occurrence of certain contingencies described in the Percentage Leases (including, particularly, the provisions described herein under "-- Damage to Properties," "-- Condemnation of Properties" and "--Termination of Percentage Leases on Disposition of the Hotels"). Amounts Payable Under the Percentage Leases. Lessee is obligated to pay (i) the higher of minimum rent or percentage rent; and (ii) certain other amounts, including interest accrued on any late payment or charge ("Additional Charges"). Minimum rent is a fixed amount determined by negotiation between the Partnership and Lessee. Percentage rent is calculated by multiplying fixed percentages by gross room and other revenues exceeding specified threshold amounts. Minimum rent is payable monthly in arrears, and percentage rent is payable for each quarter within 30 days after the end of the quarter. Both the threshold gross room and other revenue amounts used in computing percentage rent and minimum rent will be adjusted for changes in the CPI. The changes will be calculated at the beginning of each calendar year beginning with 1999, based on the average annual change in the CPI during the prior 12 months. Each Percentage Lease requires Lessee to pay rent, all costs and expenses, and all utility and other charges incurred in the operation of the Hotel. All capital expenditures (as defined in the Percentage Lease) will be the 41 43 responsibility of the Partnership. Each Percentage Lease also provides for rent reductions and abatements in the event of damage or destruction or a partial taking of the Hotel as described under "-- Damage to Properties" and "-- Condemnation of Properties." Lessee is required to carry insurance to cover rental interruption for a period of up to one year. Maintenance and Modifications. The Partnership is required to maintain the underground utilities and the structural elements, including exterior walls (excluding plate glass) and the roof, of the Hotels. The Partnership will also fund the repair, replacement and refurbishment of furniture, fixtures and equipment in the Hotels, when and as considered necessary by the Partnership and will maintain a Capital Expenditures Fund to help provide funds to cover such expenses. See "THE COMPANY -- Business Objectives -- Business Strategy -- Renovations and Development." The Partnership will make a quarterly contribution to the Capital Expenditures Fund in an amount equal to 4% of Lessee's aggregate gross revenues generated from the Hotels. Lessee will be required, at its expense, to maintain the Hotels in good order and repair, except for ordinary wear and tear, and to make nonstructural, foreseen and unforeseen, and ordinary and extraordinary, repairs which may be necessary and appropriate to keep the Hotels in good order and repair. Capital expenses and furniture, fixture and equipment replacements will be paid for by the Partnership generally out of the Capital Expenditures Fund. The Partnership and Lessee will agree on an annual budget for each Hotel. Lessee, at its expense, may make noncapital and capital additions, modifications or improvements to the Hotels, so long as doing so does not significantly alter the character or purposes of the Hotels or significantly detract from their value or operating efficiencies. All such additions, modifications and improvements will be subject to all of the terms of the Percentage Leases and will become the property of the Partnership upon termination of the Percentage Leases. The Partnership will own the furniture, fixtures and equipment, except in limited circumstances under which the Partnership may require Lessee to purchase certain furniture, fixtures and equipment, and Lessee will own substantially all other personal property not affixed to, or considered a part of, the real estate or improvements thereon. Any purchase of furniture, fixtures and equipment by Lessee will be made on terms negotiated between the Partnership and Lessee. Insurance and Property Taxes. The Partnership is responsible for paying real estate and personal property taxes on the Hotels and for maintaining property insurance, including casualty insurance. The Lessee is required to maintain comprehensive general public liability, workers' compensation, 12-month rental interruption insurance and any other insurance customary for properties similar to the Hotels or required by any relevant franchisor, and to have the Partnership named as an additional insured. The Partnership believes that the insurance coverage carried by each Hotel is adequate in scope and amount. Indemnification. Under each Percentage Lease, the Lessee will indemnify the Partnership against all liabilities, costs and expenses (including reasonable attorneys' fees and disbursements) incurred by, imposed on or asserted against the Partnership on account of, among other things, (i) any accident or injury to person or property on or about a Hotel; (ii) any negligence by Lessee or any of its agents as to the leased property; (iii) any environmental liability resulting from conditions caused or resulting thereafter from any action, inaction or negligence of Lessee; (iv) taxes and assessments in respect of a Hotel (other than real estate taxes and income taxes of the Partnership on income attributable to a Hotel); (v) the sale or consumption of alcoholic beverages on or in the real property or improvements thereon; or (vi) any breach of the Percentage Lease by Lessee. The Lessee will not be required, however, to indemnify the Partnership against the Partnership's gross negligence or willful misconduct. Assignment and Subleasing. The Lessee will not be permitted to sublet all or any part of a Hotel or assign its interest under the Percentage Lease, other than to an affiliate of Lessee, without the prior written consent of the Partnership. No assignment, subletting or management agreement will release Lessee from any of its obligations under the Percentage Lease. Management Agreements. Lessee entered into a management agreement with ISIH for the management and operation of the Hotels. Lessee will pay ISIH an annual management fee equal to two and one-half percent (2.5%) of gross revenues. 42 44 Damage to Properties. If damage to or destruction of any Hotel renders such Hotel unsuitable for Lessee's use and occupancy and is covered by insurance, the Partnership will be obligated to repair, rebuild or restore such Hotel, but only to the extent of available insurance proceeds. The Percentage Lease will remain in full force and effect during the first 12 months of any period required for repair or restoration of a Hotel, after which time rent will be equitably abated. Condemnation of Properties. In the event of a total condemnation of a Hotel, each of the Partnership and Lessee will be entitled to terminate the Percentage Lease as of the date of taking. The resulting condemnation award will be allocated between the Partnership and Lessee as set forth in the Percentage Lease. In the event of a partial taking that does not render a Hotel unsuitable for Lessee's use, Lessee must restore the untaken portion of such Hotel to a complete architectural unit. In such a case, the Partnership must provide the required funds to cover the cost of that restoration, which may include that part of the condemnation award specified for restoration. Events of Default. Events of Default under each Percentage Lease include, among others, the following: (i) the failure by Lessee to pay minimum rent when due and the continuation of such failure for a period of 10 days; (ii) the failure by Lessee to pay the percentage rent for any quarter within 10 days after the end of such quarter; (iii) the failure by Lessee to observe or perform any other term of the Percentage Lease and the continuation of such failure beyond any applicable cure period; (iv) an Event of Default under any other Percentage Lease; (v) if Lessee files a petition in bankruptcy or reorganization under any federal or state bankruptcy law or any similar federal or state law, or is adjudicated a bankrupt or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law is filed in any court and Lessee is adjudicated a bankrupt and that adjudication is not vacated or set aside or stayed within 60 days after the entry of an order in respect thereof, or if a receiver of Lessee or of the whole or substantially all of the assets of Lessee is appointed in any proceeding brought by Lessee, or any such receiver, trustee or liquidator is appointed in any proceeding brought against Lessee and that appointment is not vacated or set aside or stayed within 60 days after that appointment is made; (vi) if Lessee voluntarily discontinues operations of a Hotel for more than 30 days, except as a result of damage, destruction or condemnation; or (vii) if the franchise agreement in respect of any Hotel is terminated by the franchisor as a result of any action or failure to act by Lessee or its agents and is not replaced within 90 days after the date of termination by a new franchise agreement that is acceptable to the Partnership acting in its reasonable discretion. If an Event of Default occurs and continues beyond any curative period, the Partnership may terminate the Percentage Lease and any or all of the other Percentage Leases by giving Lessee 30 days' written notice of the date for termination thereof and, unless that Event of Default is cured prior to that termination date, the specified Percentage Leases will terminate on that date and Lessee will be required to surrender possession of the affected Hotels. Termination of Percentage Leases on Disposition of the Hotels. If the Partnership enters into an agreement to transfer a Hotel to a non-affiliate, the Partnership may terminate that Hotel's Percentage Lease by giving Lessee 30 days' prior notice and paying it the fair market value of its leasehold interest in the remaining term of that Percentage Lease. Franchise Agreements. Lessee and/or the relevant Hotel are the franchisee under the franchise agreements for the Hotels. The current franchise agreements for the three Best Western(R) Hotels, which are renewable 43 45 annually, expire on December 31, 1998. The current franchise agreement for the Holiday Inn(R) Hotel expires on June 30, 2004. There can be no assurance that such franchise agreements will be renewed upon their expiration or as to the effect on the Company of any non-renewal. Trademark/License Agreements. Lessee and/or the relevant Hotel are each a licensee under the license agreements pursuant to which InnSuites Licensing Corp. will receive an annual licensing fee equal to 2.5% of gross room revenue from each of the Hotels. Those Hotels which carry a third-party franchise (currently Best Western(R) and Holiday Inn(R)) will have their licensing fee reduced to 1.25% so long as the third-party franchise is in place. Inventory. All working capital assets required in the operation of the Hotels will be purchased by the Lessee at its expense. EMPLOYEES The Company has no employees. The Company's external advisor, Mid-America ReaFund Advisors, Inc. ("MARA") performs, directly or through the Partnership, various acquisition, development, redevelopment and management functions. The Lessee has approximately 493 employees engaged in the operation of the Hotels. The Lessee will continue InnSuites' ongoing recruiting efforts to attract quality talent at all levels of sales and management. None of the persons who will be employees of the Company or the Lessee are represented by a union. The Company believes that its and the Lessee's relations with their respective employees are excellent. LEGAL PROCEEDINGS Neither the Company, the Lessee nor the Partnership is currently involved in any material litigation nor, to the Company's knowledge, is any material litigation currently threatened against the Company, the Lessee or the Partnership. POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES The following supplements the discussion of the Company's growth, acquisition, development and financing strategies set forth in "THE COMPANY." The Company's policies with respect to those activities and the matters discussed below have been established by the Board of Trustees of the Company and may be amended or revised from time to time at the discretion of the Board of Trustees without a vote of the stockholders of the Company, except that changes in certain policies with respect to conflicts of interest must be consistent with legal requirements. INVESTMENT POLICIES Investments in Real Estate. The Company may acquire equity interests in hotel properties other than the Hotels through the Partnership or other entities controlled by the Partnership, or through joint ventures or other types of co-ownership. These investments may be subject to existing mortgage financing and other indebtedness that may have priority over the equity interest of the Company. The Company's current policy is to not invest in any one property more than 25% of its total assets at the time of the investment. Investments in Real Estate Mortgages. While the Company will emphasize equity real estate investments, it may invest in mortgage and other real estate interests, including securities of other REITs, and in nonperforming mortgages with the goal of acquiring the underlying property. The Company may invest in participating or convertible mortgages (which are similar to equity participation) if it may benefit from the cash flow or any appreciation in the value of the subject property. The Company does not currently intend to invest in mortgages or securities of other REITs. 44 46 FINANCING While its organizational documents contain no limitation on the amount of debt it may incur, the Company, subject to the discretion of the Board of Trustees, intends to maintain a debt to total market capitalization ratio or debt to appraised value of real estate ratio (measured at the time the debt is incurred) of not more than 50% to 55%. The Company may from time to time re-evaluate its debt capitalization policy in light of economic conditions, relative costs of debt and equity capital, market value of its properties, acquisition, development and expansion opportunities, and other factors. Any indebtedness may be incurred by the Partnership or the Company. Indebtedness incurred by the Company may be in the form of bank borrowings, secured or unsecured, and publicly or privately placed debt instruments, the proceeds of which would be loaned or contributed to the Partnership. Indebtedness incurred by the Partnership may be in the form of purchase money obligations to the sellers of properties, publicly or privately placed debt instruments, further borrowings from the Company, or financing from banks, institutional investors or other lenders, any of which indebtedness may be unsecured or may be secured by mortgages or other interests in the property owned by the Partnership. This indebtedness may be recourse to all or any part of the property of the Company or the Partnership, or may be limited to the specific property to which the indebtedness relates. The proceeds from any borrowings by the Company or the Partnership may be used for the payment of distributions or dividends, for working capital, or to refinance existing indebtedness or to finance acquisitions or expansions of properties. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification and -- Distribution Requirements." If the Board of Trustees determines to raise additional equity capital, the Board has the authority, without stockholder approval, to issue additional Common Stock of the Company in any manner (and generally on such terms and for such consideration) as it deems appropriate, including in exchange for property. Any such offering might cause a dilution of the existing stockholders' investment in the Company. The Company has obtained the Credit Facility. See "THE COMPANY -- Business Objectives -- Business Strategy -- Financing Strategy" for a description of the terms of the Credit Facility. POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES The Company has authority to offer capital shares or other securities and to repurchase or otherwise reacquire its shares or any other securities, and may engage in such activities in the future. The Company has no outstanding loans to other entities or persons, including its officers and directors, and except as described above under "-- Investment Policies," does not currently intend to make loans to other entities. The Company has not engaged, and does not currently intend to engage, in trading, underwriting or agency distribution or sale of securities of other issuers, and has not invested, and does not currently intend to invest, in the securities of other issuers (other than the Partnership) for the purpose of exercising control. The Company intends to make investments in such a way that it will not be treated as an investment company under the Investment Company Act of 1940. The Company intends to make investments at all times in a manner consistent with the requirements of the Code in order for the Company to qualify as a REIT unless, because of changing circumstances or changes in the Code, in Treasury Regulations or in the interpretations of either, the Company's Board of Trustees determines that it is no longer in the best interests of the Company and its stockholders to qualify as a REIT. CONFLICT OF INTEREST POLICY Neither the Company's governing instruments nor Company policy prohibit any Company Trustee, officer, stockholder or affiliate from having a pecuniary interest in any investment to be acquired or disposed of by the Company or in any transaction to which the Company is a party or in which it has an interest. Determinations to be made on behalf of the Company with respect to relationships or opportunities that represent a conflict of interest for any Company officer or Trustee as such will be subject to the approval of the independent Trustees. See "RISK FACTORS -- Conflicts of Interest." In addition, Mr. Wirth and the other affiliates of InnSuites Hotels have agreed that they will conduct all of their hotel ownership, development and 45 47 acquisition activities through the Company, except as described under "BUSINESS AND PROPERTIES -- Other Property Owned." The Partnership Agreement requires the Company to resolve in favor of the Company's stockholders any conflict of interest between those stockholders, on the one hand, and the limited partners of the Partnership, on the other hand, if the conflict cannot be resolved in a manner not adverse to the interests of either group. The Partnership Agreement also exonerates the Company from monetary damages for losses sustained, liabilities incurred or benefits not derived by limited partners in connection with any such resolution, so long as the Company has acted in good faith. CERTAIN DECLARATION AND STATUTORY PROVISIONS DECLARATION PROVISIONS RESTRICTIONS ON OWNERSHIP AND TRANSFER For the Company to qualify as a REIT under the Code, it must meet certain requirements concerning the ownership of its outstanding stock. Specifically, not more than 50% in value of the Company's outstanding stock may be owned, actually and constructively under the applicable attribution provisions of the Code, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year), and the Company must be beneficially owned by 100 or more persons during at least 335 days of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for Qualification." For the purpose of preserving the Company's REIT qualification, the Company's Declaration contains the "Ownership Limitation Provisions," which restrict the ownership and transfer of the Company's capital stock under certain circumstances. The Ownership Limitation Provisions provide that, subject to certain exceptions specified in the Declaration, no person may own, or be deemed to own by virtue of the applicable attribution provisions of the Code, more than 4.9% of any class of the Company's outstanding capital stock. The Board of Trustees may, but in no event will be required to, waive the Ownership Limit if it determines that such ownership will not jeopardize the Company's status as a REIT. As a condition of such waiver, the Board of Trustees may require opinions of counsel satisfactory to it and/or undertakings or representations from the applicant with respect to preserving the REIT status of the Company. The Ownership Limitation Provisions will not apply if the Board of Trustees and the holders of two-thirds of the outstanding shares of capital stock entitled to vote on such a matter determine that it is no longer in the best interests of the Company to attempt to qualify, or to continue to qualify, as a REIT. Any purported transfer of capital stock of the Company and any other event that would otherwise result in any person or entity violating the Ownership Limit will be void and of no force or effect as to that number of shares in excess of the Ownership Limit, and the purported transferee ("Prohibited Transferee") shall acquire no right or interest (or, in the case of any event other than a purported transfer, the person or entity holding record title to any such shares in excess of the Ownership Limit ("Prohibited Owner") shall cease to own any right or interest) in such excess shares. In addition, if any purported transfer of capital stock of the Company or any other event otherwise would cause the Company to become "closely held" under the Code or otherwise fail to qualify as a REIT under the Code (other than as a result of a violation of the requirement that a REIT have at least 100 stockholders), then any such purported transfer will be void and of no force or effect as to that number of shares in excess of the number that could have been transferred without such result, and the Prohibited Transferee shall acquire no right or interest (or, in the case of any event other than a transfer, the Prohibited Owner shall cease to own any right or interest) in such excess shares. Also, if any purported transfer of capital stock of the Company or any other event would otherwise cause the Company to own, or be deemed to own by virtue of the applicable attribution provisions of the Code, 10% or more of the ownership interests in the Lessee or in any sublessee, then any such purported transfer will be void and of no force or effect as to that number of shares in excess of the number that could have been transferred without such result, and the Prohibited Transferee shall acquire no right or interest (or, in the case of any event other than a transfer, the Prohibited Owner shall cease to own any right or interest) in such excess shares. 46 48 Any such excess shares described above will be transferred automatically, by operation of law, to a trust, the beneficiary of which will be a qualified charitable organization selected by the Company ("Beneficiary"). The trustee of the trust who shall be designated by the Company and be unaffiliated with the Company and any Prohibited Owner, will be empowered to sell such excess shares to a qualified person or entity and distribute to a Prohibited Transferee an amount equal to the lesser of the price paid by the Prohibited Transferee for such excess shares or the sales proceeds received by the trust for such excess shares. In the case of any excess shares resulting from any event other than a transfer, or from a transfer for no consideration, the trustee will be empowered to sell such excess shares to a qualified person or entity and distribute to the Prohibited Owner an amount equal to the lesser of the fair market value of such excess shares on the date of such event or the sales proceeds received by the trust for such excess shares. Prior to a sale of any such excess shares by the trust, the trustee will be entitled to receive, in trust for the benefit of the Beneficiary, all dividends and other distributions paid by the Company with respect to such excess shares, and also will be entitled to exercise all voting rights with respect to such excess shares. Any purported transfer of capital stock of the Company that would otherwise cause the Company to be beneficially owned by fewer than 100 persons will be null and void in its entirety, and the intended transferee will acquire no rights in such stock. All certificates representing shares of capital stock will bear a legend referring to the restrictions described above. Every owner of more than 4.9% (or such lower percentage as may be required by the Code or Treasury Regulations) of the outstanding shares of capital stock of the Company must file a written notice with the Company containing the information specified in the Declaration no later than January 30 of each year. In addition, each stockholder shall upon demand be required to disclose to the Company in writing such information as the Company may request in order to determine the effect, if any, of such stockholder's actual and constructive ownership on the Company's status as a REIT and to ensure compliance with the Ownership Limit. The Ownership Limitation Provisions may have the effect of precluding an acquisition of control of the Company without approval of the Board of Trustees. NUMBER OF TRUSTEES; REMOVAL; FILLING VACANCIES The Declaration provides that the Board of Trustees consist of not less than five persons, subject to increase by the affirmative vote of a majority of the members of the entire Board of Trustees. At all times a majority of the Trustees shall be independent Trustees, except that upon the death, removal or resignation of an independent Trustee, such requirement shall not be applicable for 60 days. Currently, there are six Trustees, four of whom are independent Trustees. The stockholders shall be entitled to vote on the election of Trustees, with each share entitled to one vote. The Board of Trustees is presently divided into three classes, comprised of two Trustees each. Trustees are elected to staggered three year terms. Any Trustee may be removed for cause by the vote of two-thirds of the remaining Trustees. The Declaration provides that, subject to any rights of holders of preferred stock, if any, and unless the Board of Trustees otherwise determines, any vacancies will be filled by the affirmative vote of a majority of the remaining Trustees, though less than a quorum. Any Trustee so elected may qualify as an independent Trustee only if he has received the affirmative vote of at least a majority of the remaining independent Trustees, if any. Accordingly, the Board of Trustees could temporarily prevent any stockholder from enlarging the Board of Trustees and filling the new Trusteeships with such stockholder's own nominees. Any Trustee so elected shall hold office until the next annual meeting of stockholders. LIMITATION OF LIABILITY The Declaration provides that to the maximum extent that Ohio law in effect from time to time permits the limitation of liability of Trustees and officers, no Trustee or officer of the Company shall be liable to the Company or its stockholders for money damages. 47 49 INDEMNIFICATION OF TRUSTEES AND OFFICERS The Declaration and Bylaws require the Company to indemnify its Trustees, officers, employees and agents to the fullest extent permitted from time to time by Ohio law. Ohio law permits a corporation to indemnify its trustees, officers, employees and agents against judgments, penalties, fines, settlements and reasonable expenses (including attorneys fees) actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service to or at the request of the corporation, unless it is established that (i) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and the act or omission was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the indemnified party actually received an improper personal benefit in money, property or services, or (iii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Indemnification is mandatory if the indemnified party has been successful on the merits or otherwise in the defense of any proceeding unless such indemnification is not otherwise permitted as provided in the preceding sentence. In addition to the foregoing, a court of competent jurisdiction, under certain circumstances, may order indemnification if it determines that the person is fairly and reasonably entitled thereto in view of all the relevant circumstances, unless the proceeding was an action by or in the right of the corporation or involved a determination that the person received an improper personal benefit. AMENDMENT The Declaration may be amended by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock, with the stockholders voting as a class with one vote per share. PARTNERSHIP AGREEMENT The following summary of the Partnership Agreement, and the descriptions of certain provisions thereof set forth herein, are qualified in their entirety by reference to the Partnership Agreement, which is an exhibit to the Registration Statement of which this Prospectus is a part. MANAGEMENT The Partnership is a Delaware limited partnership and was formed pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership Agreement, the Company, as the sole general partner of the Partnership ("General Partner"), has full, exclusive and complete responsibility and discretion in the management and control of the Partnership, and the limited partners of the Partnership ("Limited Partners", together with the General Partner, "Partners") have no authority to transact business for, or participate in the management activities or decisions of, the Partnership. However, any amendment to the Partnership Agreement that would (i) affect the conversion rights described under "--Conversion Rights" below, (ii) adversely affect the Limited Partners' rights to receive cash distributions, (iii) alter the Partnership's allocations of income, or (iv) impose on the Limited Partners any obligations to make additional contributions to the capital of the Partnership, requires the consent of Limited Partners holding at least a majority of the Units and Class B Units. TRANSFERABILITY OF INTERESTS The Company may not voluntarily withdraw from the Partnership or transfer or assign its interest in the Partnership unless the transaction in which such withdrawal or transfer occurs results in the Limited Partners receiving property in an amount equal to the amount they would have received had they exercised their conversion rights immediately prior to such transaction, or unless the successor to the Company contributes substantially all of its assets to the Partnership in return for an interest in the Partnership. The Limited Partners may not transfer their interests in the Partnership without the consent of the Company, which the Company may withhold in its sole discretion. The Company may not consent to any transfer that would cause the Partnership to be treated as a separate corporation for federal income tax purposes. 48 50 CAPITAL CONTRIBUTION The Company and the Limited Partners contributed cash or interests in certain of the Hotels to the Partnership in exchange for partnership interests in the Partnership. As required by the Partnership Agreement, immediately prior to a capital contribution by the Company, the Partners' capital accounts and the Carrying Value (as that term is defined in the Partnership Agreement) of the Partnership property shall be adjusted to reflect the unrealized gain or unrealized loss attributable to the Partnership property as if such items had actually been recognized immediately prior to such issuance and had been allocated to the Partners at such time. The Partnership Agreement provides that if the Partnership requires additional funds at any time or from time to time in excess of funds available to the Partnership from borrowing or capital contributions, the Company may borrow such funds from a financial institution or other lender and lend such funds to the Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. As an alternative to borrowing funds required by the Partnership, the Company may contribute the amount of such required funds as an additional capital contribution to the Partnership. If the Company so contributes additional capital to the Partnership, the Company will receive additional partnership interests in the Partnership and the Company's percentage interest in the Partnership will be increased on a proportionate basis with the amount of such additional capital contributions and the value of the Partnership at the time of such contributions. Conversely, the percentage interests of the Limited Partners will be decreased on a proportionate basis in the event of additional capital contributions by the Company. CONVERSION RIGHTS Pursuant to the Partnership Agreement, the Limited Partners holding Units are entitled to conversion rights, which enable them to cause the Partnership to convert their interests in the Partnership (subject to certain restrictions) into shares of Common Stock, except to the extent that the Ownership Limit is reached in which case the Company may elect to purchase any Units in excess of the Ownership Limit for cash. The conversion rights may not be exercised if the issuance of shares of Common Stock by the Company, as General Partner, for any part of the interest in the Partnership sought to be converted would (i) result in any person violating the Ownership Limit contained in the Company's Declaration, (ii) cause the Company to be "closely held" within the meaning of the Code, (iii) cause the Company to be treated as owning 10% or more of the Lessee or any sublessee within the meaning of the Code, or (iv) otherwise cause the Company to fail to qualify as a REIT; unless, in any case, the Partnership or the Company (as the case may be) elects, in its sole and absolute discretion, to pay the conversion amount in cash. The conversion rights may be exercised by the Limited Partners, in whole or in part (in either case, subject to the above restrictions), at any time or from time to time, following the satisfaction of any applicable holding period requirements. At June 1, 1998, the aggregate number of shares of Common Stock issuable upon exercise of the conversion rights by the Limited Partners was 2,203,731. The number of shares issuable upon the exercise of the conversion rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Limited Partners or the stockholders of the Company. TAX MATTERS Pursuant to the Partnership Agreement, the Company is the tax matters partner of the Partnership and, as such, has authority to make tax elections under the Code on behalf of the Partnership. Profit and loss of the Partnership generally are allocated among the partners in accordance with their respective interests in the Partnership based on the number of partnership interests held by the Partners. OPERATIONS The Partnership Agreement requires that the Partnership be operated in a manner that enables the Company to satisfy the requirements for being classified as a REIT and to avoid any federal income tax liability. 49 51 DISTRIBUTIONS The Partnership Agreement provides that the Partnership will distribute cash from operations (including net sale or refinancing proceeds, but excluding net proceeds from the sale of the Partnership's property in connection with the liquidation of the Partnership) quarterly, in amounts determined by the Company in its sole discretion, to the Partners in accordance with their respective percentage interests in the Partnership. Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any Partner loans, any remaining assets of the Partnership will be distributed to all Partners with positive capital accounts in accordance with their respective positive capital account balances. If any Partner, including the Company, has a negative balance in its capital account following a liquidation of the Partnership, it will be obligated to contribute cash to the Partnership equal to the negative balance in its capital account. TERM The Partnership will continue until December 31, 2047, or until sooner dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company as General Partner (unless the Limited Partners elect to continue the Partnership), (ii) the sale or other disposition of all or substantially all the assets of the Partnership, (iii) the conversion of all limited partnership interests in the Partnership (other than those held by the Company, if any), or (iv) the election of the General Partner. FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of the material federal income tax considerations relevant to a prospective holder of Common Stock. The discussion does not purport to deal with all aspects of taxation that may be relevant to a holder of Common Stock in light of their personal investment or tax circumstances, or to certain types of stockholders (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, foreign corporations, and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Code. The Company currently is qualified as a REIT and intends to continue to operate in such manner, but no assurance can be given that the Company will operate in a manner so as to remain qualified as a REIT. The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code sections that govern the federal income tax treatment of a REIT and its stockholders. The discussion is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder ("Treasury Regulations"), and administrative and judicial interpretations thereof, all of which are subject to change prospectively or retrospectively. Thompson Hine & Flory LLP has acted as counsel to the Company commencing February 1, 1998. The Company believes that it will continue to be qualified to be taxed as a REIT for its taxable year ended January 31, 1998, and that its organization and current and proposed method of operation will enable it to continue to qualify as a REIT for its taxable year ended January 31, 1999 and in the future. The Company has obtained an opinion of Thompson Hine & Flory LLP as to its REIT qualifications beginning with its fiscal year ended January 31, 1999. Investors should be aware, however, that opinions of counsel are not binding upon the Service or any court. It must be emphasized that the opinion of Thompson Hine & Flory LLP is based on various assumptions and is conditioned upon certain representations made by the Company as to factual matters, 50 52 including representations regarding the nature of the Company's properties and the future conduct of its business. Such factual assumptions and representations are described below. Moreover, such continued qualification and taxation as a REIT depends upon the Company's ability to meet on a continuing basis, through actual annual operating results, distribution levels, and stock ownership, the various qualification tests imposed under the Code discussed below. Thompson Hine & Flory LLP will not review the Company's compliance with those tests on a continuing basis. Accordingly, no assurance can be given that the actual results of the Company's operation for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of failure to qualify as a REIT, see "-- Failure to Qualify." If the Company continues to qualify for taxation as a REIT, it generally will not be subject to federal corporate income taxes on its net income that is distributed currently to the stockholders. That treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from investment in a corporation. However, the Company will be subject to federal income tax in the following circumstances. First, the Company will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" under Section 55 of the Code. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income tests. Sixth, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if the Company acquires any asset from a C corporation (i.e. , a corporation generally subject to full corporate-level tax) in a transaction in which the basis of the asset in the Company's hands is determined by reference to the basis of the asset (or any other asset) in the hands of the C corporation and the Company recognizes gain on the disposition of such asset during the ten-year period beginning on the date on which such asset was acquired by the Company, then to the extent of such asset's built-in gain (i.e. , the excess of the fair market value of such asset at the time of acquisition by the Company over the adjusted basis in such asset at such time), such gain will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the recognition of built-in gain assume that the Company would make an election pursuant to IRS Notice 88-19 if it were to make any such acquisition. REQUIREMENTS FOR QUALIFICATION The Code defines a REIT as a corporation, trust or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year ("5/50 Rule"); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and to maintain REIT status; (viii) that uses a calendar year for federal income tax purposes unless the REIT (such as the Company) uses a fiscal year and was in existence as a REIT for any taxable year beginning on or before October 4, 1976, and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (ix) that meets certain other tests, described below, regarding the nature of its 51 53 income and assets. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made by the Company to be taxed as a REIT. The Company has issued and will issue sufficient Common Stock in sufficient diversity of ownership to allow it to satisfy requirements (v) and (vi). In addition, the Company's Declaration provides for restrictions regarding transfer of the Common Stock that are intended to assist the Company in continuing to satisfy the share ownership requirements described in (v) and (vi) above. For purposes of determining stock ownership under the 5/50 Rule, a (i) supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual, and (ii) stock held by a trust that is a qualified trust under Section 401(a) of the Code is treated as held by the Company's beneficiaries in proportion to their actuarial interests in the pension trust for purposes of the 5/50 Rule. The Company owns a corporate subsidiary, RRF Sub Corp., which the Company believes to be a "qualified REIT subsidiary". (A qualified REIT subsidiary is any corporation wholly-owned by a REIT.) As such, RRF Sub Corp. is disregarded for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of RRF Sub Corp. are treated as assets, liabilities and items of the Company itself. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income and asset tests, described below. Thus, the Company's proportionate share of the assets, liabilities and items of income of the Partnership (and any lower tier partnership) will be treated as assets and gross income of the Company for purposes of applying the requirements described herein. INCOME TESTS In order for the Company to maintain its qualification as a REIT, there are two requirements relating to the Company's gross income that must be satisfied annually. First, at least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or temporary investment income. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property or temporary investments, and from dividends, other types of interest, and gain from the sale or disposition of Common Stock that do not constitute dealer property, or from any combination of the foregoing. Rents received by the Company will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts of sales. Second, the Code provides that rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such tenant (a "Related Party Tenant") (including in such 10% calculation the attribution of certain interests held by family members, corporations (in which such owner owns more than 10% of the value of the outstanding shares) and a partnership in which such person owns 25% or more of the capital or profits, or held by certain partners of any such person). Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as "rents from real property," the Company generally must not operate or manage the property or furnish or render more than a de minimis amount 52 54 of services to the tenants of such property, other than through an "independent contractor" from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by the Company are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." Pursuant to the Percentage Leases, the Lessee leases from the Partnership and the Subsidiary Partnerships (as defined below) and RRF Sub Corp. the land, buildings, improvements, furnishings, and equipment comprising the Hotels for a ten-year period. The Percentage Leases provide that the Lessee is obligated to pay to the Partnership or RRF Sub Corp., as the case may be, (i) the greater of a fixed rent ("Base Rent") or a percentage rent ("Percentage Rent") (collectively, "Rents") and (ii) certain other amounts, including interest accrued on any late payments or charges ("Additional Charges"). The Percentage Rent is calculated by multiplying fixed percentages by the gross suite revenues and food and beverage rent revenues for each of the Hotels in excess of certain levels. The Base Rent accrues and is required to be paid monthly. Although Percentage Rent is due quarterly, the Lessee will not be in default for non-payment of Percentage Rent due in any calendar year if the Lessee pays, within 90 days of the end of the calendar year, the excess of Percentage Rent due and unpaid over the Base Rent with respect to such year. For purposes of this section, the term "Partnership" includes the Subsidiary Partnerships and RRF Sub Corp. when the context requires. In order for the Base Rent, the Percentage Rent, and the Additional Charges to constitute "rents from real property," the Percentage Leases must be respected as true leases for federal income tax purposes and not treated as service contracts, joint ventures or some other type of arrangement. The determination of whether the Percentage Leases are true leases depends on an analysis of all the surrounding facts and circumstances. In making such a determination, courts have considered a variety of factors, including the following: (i) the intent of the parties, (ii) the form of the agreement, (iii) the degree of control over the property that is retained by the property owner (e.g., whether the lessee has substantial control over the operation of the property or whether the lessee was required simply to use its best efforts to perform its obligations under the agreement), and (iv) the extent to which the property owner retains the risk of loss with respect to the property (e.g., whether the lessee bears the risk of increases in operating expenses or the risk of damage to the property). In addition, Section 7701(e) of the Code provides that a contract that purports to be a service contract (or a partnership agreement) is treated instead as a lease of property if the contract is properly treated as such, taking into account all relevant factors, including whether or not: (i) the service recipient is in physical possession of the property, (ii) the service recipient controls the property, (iii) the service recipient has a significant economic or possessory interest in the property (e.g., the property's use is likely to be dedicated to the service recipient for a substantial portion of the useful life of the property, the recipient shares the risk that the property will decline in value, the recipient shares in any appreciation in the value of the property, the recipient shares in savings in the property's operating costs, or the recipient bears the risk of damage to or loss of the property), (iv) the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract, (v) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and (vi) the total contract price does not substantially exceed the rental value of the property for the contract period. Since the determination whether a service contract should be treated as a lease is inherently factual, the presence or absence of any single factor may not be dispositive in every case. The Company believes that the Percentage Leases will be treated as true leases for federal income tax purposes. Such belief is based, in part, on the following facts: (i) the Partnership and the Lessee intend for their relationship to be that of a lessor and lessee and such relationship will be documented by lease agreements, (ii) the Lessee has the right to exclusive possession and use and quiet enjoyment of the Hotels during the term of the Percentage Leases, (iii) the Lessee bears the cost of, and will be responsible for, day-to-day maintenance and repair of the Hotels, other than the cost of maintaining underground utilities and structural elements, and will dictate how the Hotels are operated, maintained and improved, (iv) the Lessee bears all of the costs and expenses of operating the Hotels (including the cost of any inventory and supplies used in their operation) during the term of the Percentage Leases (other than real and personal property taxes, and the cost of replacement or refurbishment of furniture, fixtures and equipment, to the extent such costs do not exceed the allowance for such costs provided by the Partnership under each Percentage Lease), (v) the Lessee benefits from any savings in the 53 55 costs of operating the Hotels during the term of the Percentage Leases, (vi) in the event of damage or destruction to a Hotel, the Lessee will be at economic risk because it will be obligated either (A) to restore the property to its prior condition, in which event it will bear all costs of such restoration or (B) purchase the Hotel for an amount generally equal to the Partnership's investment in the property, (vii) the Lessee will indemnify the Partnership against all liabilities imposed on the Partnership during the term of the Percentage Leases by reason of (A) injury to persons or damage to property occurring at the Hotels or (B) the Lessee's use, management, maintenance or repair of the Hotels, (viii) the Lessee is obligated to pay substantial fixed rent for the period of use of the Hotels, and (ix) the Lessee stands to incur substantial losses (or reap substantial gains) depending on how successfully it operates the Hotels. INVESTORS SHOULD BE AWARE THAT THERE ARE NO CONTROLLING TREASURY REGULATIONS, PUBLISHED RULINGS, OR JUDICIAL DECISIONS INVOLVING LEASES WITH TERMS SUBSTANTIALLY THE SAME AS THE PERCENTAGE LEASES THAT DISCUSS WHETHER SUCH LEASES CONSTITUTE TRUE LEASES FOR FEDERAL INCOME TAX PURPOSES. THEREFORE, THE RELATIONSHIP BETWEEN THE PARTNERSHIP AND THE LESSEE IS BASED UPON ALL OF THE FACTS AND CIRCUMSTANCES AND UPON RULINGS AND JUDICIAL DECISIONS INVOLVING SITUATIONS THAT ARE CONSIDERED TO BE ANALOGOUS. THERE CAN BE NO COMPLETE ASSURANCE THAT THE SERVICE WILL NOT ASSERT SUCCESSFULLY A CONTRARY POSITION. If the Percentage Leases are recharacterized as service contracts or partnership agreements, rather than true leases, part or all of the payments that the Partnership receives from the Lessee may not be considered rent or may not otherwise satisfy the various requirements for qualification as "rents from real property." In that case, the Company likely would not be able to satisfy either the 75% or 95% gross income tests and, as a result, would lose its REIT status. In order for the Rents to constitute "rents from real property," several other requirements also must be satisfied. One requirement is that the Rents attributable to personal property leased in connection with the lease of the real property comprising a Hotel must not be greater than 15% of the Rents received under the Percentage Lease. The Rents attributable to the personal property in a Hotel is the amount that bears the same ratio to total rent for the taxable year as the average of the adjusted bases of the personal property in the Hotel at the beginning and at the end of the taxable year bears to the average of the aggregate adjusted bases of both the real and personal property comprising the Hotel at the beginning and at the end of the such taxable year ("Adjusted Basis Ratio"). The initial adjusted basis of the personal property in each Hotel was less than 15% of the initial adjusted bases of both the real and personal property comprising such hotel. The basis of such personal property, to the extent it was included in the Hotels at the time of their purchase, was based on appraisals at the date of purchase. There can be no assurance, however, that the Service would not assert that the personal property originally acquired by the Partnership had a value in excess of the appraised value, or that a court would not uphold such assertion. If such a challenge were successfully asserted, the Company could fail the 15% Adjusted Basis Ratio as to one or more of the Percentage Leases, which in turn potentially could cause it to fail to satisfy the 95% or 75% gross income tests and thus lose its REIT status. Another requirement for qualification of the Rents as "rents from real property" is that the Percentage Rent must not be based in whole or in part on the income or profits of any person. The Percentage Rent, however, will qualify as "rents from real property" if it is based on percentages of receipts or sales and the percentages (i) are fixed at the time the Percentage Leases are entered into, (ii) are not renegotiated during the term of the Percentage Leases in a manner that has the effect of basing Percentage Rent on income or profits, and (iii) conform with normal business practice. More generally, the Percentage Rent will not qualify as "rents from real property" if, considering the Percentage Leases and all the surrounding circumstances, the arrangement does not conform with normal business practice but is in reality used as a means of basing the Percentage Rent on income or profits. Since the Percentage Rent is based on fixed percentages of the gross revenues from the Hotels that are established in the Percentage Leases and the Company represented that the percentages (i) will not be renegotiated during the terms of the Percentage Leases in a manner that has the effect of basing the Percentage Rent on income or profits and (ii) conform with normal business practice, the Percentage Rent should not be considered based in whole or in part on the income or profits of any person. Furthermore, the Company represented that, with respect to other hotel properties that it acquires in the future, it will not charge rent for any property that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage of gross revenues, as described above). 54 56 A third requirement for qualification of the Rents as "rents from real property" is that the Company must not own, directly or constructively, 10% or more of the Lessee. The constructive ownership rules generally provide that, if 10% or more in value of the stock of the Company is owned, directly or indirectly, by or for any person, the Company is considered as owning the ownership interests in any lessee that are owned, directly or indirectly, by or for such person. The Company does not currently own, directly or constructively, any ownership interest in the Lessee. In addition, the Partnership Agreement provides that a converting Limited Partner will not be permitted to convert Units (unless the Company elects, in its sole discretion, to pay cash in lieu of Common Stock) to the extent that the acquisition of Common Stock by such partner would result in the Company being treated as owning, directly or constructively, 10% or more of the ownership interests of the Lessee or of the ownership interests in any sublessee. Thus, the Company should never own, directly or constructively, 10% or more of the Lessee or any sublessee. Furthermore, the Company represents that, with respect to other hotel properties that it acquires in the future, it will not rent any property to a Related Party Tenant. However, because the Code's constructive ownership rules for purposes of the Related Party Tenant rules are broad and it is not possible to monitor continually direct and indirect transfers of shares of Common Stock, no absolute assurance can be given that such transfers or other events of which the Company has no knowledge will not cause the Company to own constructively 10% or more of the Lessee at some future date. A fourth requirement for qualification of the Rents as "rents from real property" is that the Company cannot furnish or render (i) impermissible services to the Lessee or the tenants of the Hotels, or manage or operate the Hotels, other than through an independent contractor from whom the Company itself does not derive or receive any income, or (ii) unpermitted services to the Lessee, except in either case to a de minimis extent. Provided that the Percentage Leases are respected as true leases, the Company should satisfy this requirement because the Partnership is not performing any services other than customary ones for the Lessee. Furthermore, the Company represents that, with respect to other hotel properties that it acquires in the future, it will not perform noncustomary services with respect to the tenant of the property. As described above, however, if the Percentage Leases are recharacterized as service contracts or partnership agreements, the Rents likely would be disqualified as "rents from real property" because the Company would be considered to furnish or render services to the occupants of the Hotels and to manage or operate the Hotels other than through an independent contractor who is adequately compensated and from whom the Company derives or receives no income. If the Rents do not qualify as "rents from real property" because the rents attributable to personal property exceed 15% of the total Rents for a taxable year, the portion of the Rents that is attributable to personal property will not be qualifying income for purposes of either the 75% or 95% gross income tests. Thus, if the Rents attributable to personal property, plus any other nonqualifying income, during a taxable year exceeds 5% of the Company's gross income during the year, the Company would lose its REIT status. If, however, the Rents do not qualify as "rents from real property" because either (i) the Percentage Rent is considered based on income or profits of the Lessee, (ii) the Company owns, directly or constructively, 10% or more of the Lessee, or (iii) the Company furnishes noncustomary services to the Lessee (other than through a qualified independent contractor) or manages or operates the Hotels, none of the Rents would qualify as "rents from real property." In that case, the Company likely would lose its REIT status because it would be unable to satisfy either the 75% or 95% gross income tests. In addition to the Rents, the Lessee is required to pay to the Partnership the Additional Charges. To the extent that the Additional Charges represent either (i) reimbursements of amounts that the Lessee is obligated to pay to third parties or (ii) penalties for nonpayment or late payment of such amounts, the Additional Charges should qualify as "rents from real property." To the extent, however, that the Additional Charges represent interest that is accrued on the late payment of the Rents or the Additional Charges, the Additional Charges should not qualify as "rents from real property," but instead should be treated as interest that qualifies for the 95% gross income test. The Company believes that the Rents and the Additional Charges will qualify as "rents from real property" for purposes of the 75% and 95% gross income tests, except to the extent that the Additional Charges represent interest that is accrued on the late payment of the Rents or the Additional Charges (which will be qualifying gross income for the 95% test but not the 75% test). However, there can be no complete assurance that the Service will not assert successfully a contrary position and, therefore, prevent the Company from qualifying as a REIT. 55 57 The term "interest," as defined for purposes of the 75% gross income test, generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Furthermore, to the extent that interest from a loan that is based on the residual cash proceeds from sale of the property securing the loan constitutes a "shared appreciation provision" (as defined in the Code), income attributable to such participation feature will be treated as gain from the sale of the secured property. The net income from any prohibited transaction entered into by the Company is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. All inventory required in the operation of the Hotels will be purchased by the Lessee or its designee as required by the terms of the Percentage Leases. Accordingly, the Company and the Partnership believe that no asset owned by the Company or the Partnership is held for sale to customers and that a sale of any such asset will not be in the ordinary course of business of the Company or the Partnership. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the facts and circumstances in effect from time to time, including those related to the particular property. Nevertheless, the Company and the Partnership will attempt to comply with the terms of safe-harbor provisions in the Code prescribing when asset sales will not be characterized as prohibited transactions. Complete assurance cannot be given, however, that the Company or the Partnership can comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." The Company will be subject to tax at the maximum corporate rate on any income from foreclosure property (other than income that would be qualified income under the 75% gross income test), less expenses directly connected with the production of such income. However, gross income from such foreclosure property will qualify under the 75% and 95% gross income tests. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property (i) that is acquired by a REIT as the result of such REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness that such property secured and (ii) for which such REIT makes a proper election to treat such property as foreclosure property. However, a REIT will not be considered to have foreclosed on a property where such REIT takes control of the property as a mortgagee-in- possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Under the Code, property generally ceases to be foreclosure property as of the close of the third taxable year following the taxable year in which the REIT acquired such property (or longer if an extension is granted by the Secretary of the Treasury). The foregoing grace period is terminated and foreclosure property ceases to be foreclosure property on the first day (i) on which a lease is entered into with respect to such property that, by its terms, will give rise to income that does not qualify under the 75% gross income test or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify under the 75% gross income test, (ii) on which any construction takes place on such property (other than completion of a building, or any other improvement, where more than 10% of the construction of such building or other improvement was completed before default became imminent) or (iii) which is more than 90 days after the day on which such property was acquired by the REIT and the property is used in a trade or business that is conducted by the REIT (other than through an independent contractor from whom the REIT itself does not derive or receive any income). As a result of the rules with respect to foreclosure property, if the Lessee defaults on its obligations under a Percentage Lease for a Hotel, the Company terminates the Lessee's leasehold interest, and the Company is unable to find a replacement Lessee for such Hotel within 90 days of such foreclosure, gross income from hotel operations conducted by the Company from such Hotel would cease to qualify for the 75% and 95% gross income tests. In such event, the Company likely would be unable to satisfy the 75% and 95% gross income tests and, thus, would fail to qualify as a REIT. It is possible that, from time to time, the Company or the Partnership will enter into hedging transactions with respect to one or more of its assets or liabilities. Any such hedging transactions could take a variety of 56 58 forms, including interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts and options. To the extent that the Company or the Partnership enters into an interest rate swap or cap contract to hedge any interest rate risk with respect to indebtedness incurred to acquire or carry real estate assets, any periodic income or gain from the disposition of such contract should be qualifying income for purposes of the 95% gross income test. To the extent that the Company or the Partnership hedges with other types of financial instruments or in other situations, it may not be entirely clear how the income from those transactions will be treated for purposes of the various income tests that apply to REITs under the Code. The Company intends to structure any hedging transactions in a manner that does not jeopardize its status as REIT. If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. Those relief provisions will be generally available if the Company's failure to meet such tests is due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of those relief provisions. As discussed above in "-- Taxation of the Company," even if those relief provisions apply, a tax would be imposed with respect to the net income attributable to the excess of 75% or 95% of the Company's gross income over its qualifying income in the relevant category, whichever is greater. ASSET TESTS The Company, at the close of each quarter of its tax year, also must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must be represented by cash or cash items (including certain receivables), government securities, "real estate assets" and, in cases where the Company raises new capital through stock or long-term (at least five-year) debt offerings, temporary investments in stock or debt instruments during the one-year period following the Company's receipt of such capital. The term "real estate assets" includes interests in real property, interests in mortgages on real property to the extent the mortgage balance does not exceed the value of the associated real property, and shares of other REITs. For purposes of the 75% asset requirement, the term "interest in real property" includes an interest in land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold in real property and an option to acquire real property (or a leasehold in real property). Second, of the investments not included in the 75% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities (except for its ownership interest in the Partnership and Subsidiary Partnership or the stock of a subsidiary with respect to which it has held 100% of the stock at all times during the subsidiary's existence). For purposes of the asset requirements, the Company will be deemed to own its proportionate share of the assets of the Partnership (and any Subsidiary Partnership), rather than its general partnership interest in the Partnership. The Company represents that, at all relevant times, (i) at least 75% of the value of its total assets will be represented by real estate assets, cash and cash items (including receivables), and government securities and (ii) it will not own any securities that do not satisfy the 75% asset requirement (except for the stock of subsidiaries with respect to which it has held 100% of the stock at all times during the subsidiary's existence). In addition, the Company represents that it will not acquire or dispose, or cause the Partnership to acquire or dispose, of assets in a way that would cause it to violate either asset requirement. The Company believes that it satisfies both asset requirements for REIT status. If the Company should fail inadvertently to satisfy the asset requirements at the end of a calendar quarter, such a failure would not cause it to lose its REIT status if (i) it satisfied all of the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of the Company's assets and the standards imposed by the asset requirements either did not exist immediately after the acquisition of any particular asset or was not wholly or partly caused by such an acquisition (i.e., the discrepancy arose from changes in the market values of its assets). If the condition described in clause (ii) of the preceding sentence were not satisfied, the Company still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. 57 59 DISTRIBUTION REQUIREMENTS The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such dividends must be paid in the tax year to which they relate, or in the following tax year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates (in the case of capital gains taxes paid by the Company, each shareholder shall be entitled to claim a tax credit based on the amount of such taxes. See "Taxation of Taxable Domestic Stockholders"). Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. The Company has made, and intends to continue to make, timely distributions sufficient to satisfy all annual distribution requirements. It is possible that, from time to time, the Company may experience timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of that income and deduction of such expenses in arriving at its REIT taxable income. For example, under the Percentage Leases, the Lessee may defer payment of the excess of the Percentage Rent over the Base Rent for a period of up to 90 days after the end of the calendar year in which such payment was due. In that case, the Partnership still would be required to recognize as income the excess of the Percentage Rent over the Base Rent in the calendar quarter to which it relates. Further, it is possible that, from time to time, the Company may be allocated a share of net capital gain attributable to the sale of depreciated property which exceeds its allocable share of cash attributable to that sale. Therefore, the Company may have less cash available for distribution than is necessary to meet its annual distribution requirements to avoid corporate income tax or the excise tax imposed on certain undistributed income. In such a situation, the Company may find it necessary to arrange for short-term (or possibly long-term) borrowings or to raise funds through the issuance of additional shares of common or preferred stock. Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to its stockholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. Although the Company may be able to avoid being taxed on amounts distributed as deficiency dividends, it will be required to pay to the Service interest based upon the amount of any deduction taken for deficiency dividends. RECORDKEEPING REQUIREMENT Pursuant to applicable Treasury Regulations, in order to elect to be taxed as a REIT, the Company must maintain certain records and request on an annual basis certain information from its stockholders designed to disclose the actual ownership of its outstanding stock. The Company intends to comply with such requirements. PARTNERSHIP ANTI-ABUSE RULE The Treasury Department has issued a final regulation ("Anti-Abuse Rule"), under the partnership provisions of the Code ("Partnership Provisions"), that would authorize the Service, in certain abusive transactions involving partnerships, to disregard the form of the transaction and recast it for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule would apply where a partnership is formed or availed of in connection with a transaction (or series of related transactions), a principal purpose of which is to reduce substantially the present value of the partners' aggregate federal tax liability in a manner inconsistent with the intent of the Partnership Provisions. The Anti-Abuse Rule states that the Partnership Provisions are intended to permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement that accurately reflects the partners' economic agreement and clearly reflects the partners' income 58 60 without incurring an entity-level tax. The purposes for structuring a transaction involving a partnership are determined based on all of the facts and circumstances, including a comparison of the purported business purpose for a transaction and the claimed tax benefits resulting from the transaction. A reduction in the present value of the partners' aggregate federal tax liability through the use of a partnership does not, by itself, establish inconsistency with the intent of the Partnership Provisions. The Anti-Abuse Rule is generally effective for all transactions relating to a partnership occurring on and after May 12, 1994. The Anti-Abuse Rule contains an example in which a corporation that elects to be treated as a REIT contributes substantially all of the proceeds from a public offering to a partnership in exchange for a general partner interest. The limited partners of the partnership contribute real property assets to the partnership, subject to liabilities that exceed their respective aggregate bases in such property. In addition, some of the limited partners have the right, beginning two years after the formation of the partnership, to require the redemption of their limited partnership interests in exchange for cash or REIT stock (at the REIT's option) equal to the fair market value of their respective interests in the partnership at the time of the redemption. The example concludes that the use of the partnership is not inconsistent with the intent of the Partnership Provisions and, thus, cannot be recast by the Service. The Company believes that the Anti-Abuse Rule will not have any adverse impact on its ability to qualify as a REIT. However, because the Anti-Abuse Rule is extraordinarily broad in scope and is applied based on an analysis of all of the facts and circumstances, there can be no assurance that the Service will not attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse Rule are met, the Service is authorized to take appropriate enforcement action, including disregarding the Partnership for federal tax purposes or treating one or more of its partners as nonpartners. Any such action potentially could jeopardize the Company's status as a REIT. FAILURE TO QUALIFY If the Company fails to qualify for taxation as REIT in any taxable year, and the relief provisions do not apply, the Company would be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Dividends to the stockholders in any year in which the Company fails to qualify would not be deductible by the Company, nor would they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all dividends to stockholders would be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year during which the Company ceased to qualify as a REIT. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. In addition, President Clinton's 1999 Federal Budget Proposal contains a provision which, if enacted in its present form, would result in the immediate taxation of all gain inherent in a C corporation's assets upon an election by the corporation to become a REIT in taxable years beginning after January 1, 1999, and thus could effectively preclude the Company from re-electing to be taxed as a REIT following a loss of REIT status. TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS Provided the Company qualifies as a REIT, distributions made to the Company's taxable U.S. stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S. stockholders as ordinary income and will not be eligible for the dividends received deduction for corporations. Each year the Company will designate a certain amount of income as capital gains. Such amount will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the stockholder has held its Common Stock and will be subject to a credit if it is not currently distributed to such stockholder. Corporate stockholders, however, may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's stock, but rather such distributions will reduce the adjusted basis of such stock. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a stockholder's stock, they will be included in income as long-term capital gain (or short-term capital gain if the shares have been held for one year or less or mid-term capital gain if the shares of 59 61 Common Stock have been held for more than one year but less than 18 months). Any dividend distribution declared by the Company in October, November, or December of any year payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the dividend distribution is actually paid by the Company during January of the following calendar year. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. The Company is permitted under the Code to elect to retain and pay income tax on its net capital gain for any taxable year. Under the Taxpayer Relief Act of 1997 (the "1997 Act"), however, if the Company so elects, a stockholder must include in income such stockholder's proportionate share of the Company's undistributed capital gain for the taxable year, and will be deemed to have paid such stockholder's proportionate share of the income tax paid by the Company with respect to such undistributed capital gain. Such tax would be credited against the stockholder's tax liability and subject to normal refund procedures. In addition, each stockholder's basis in its shares of Common Stock would be increased by the amount of undistributed capital gain (less the tax paid by the Company) included in the stockholder's income. The 1997 Act also alters the taxation of capital gain income for individuals (and for certain trusts and estates). Gain from the sale or exchange of certain investments held for more than 18 months will be taxed at a maximum capital gain rate of 20%. Gain from the sale or exchange of such investments held for 18 months or less, but for more than one-year, will be taxed at a maximum capital gain rate of 28%. The 1997 Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain" recognized on the sale or exchange of certain real estate assets, introduces special rules for "qualified 5-year gain," and makes certain other changes to prior law. On November 10, 1997, the Service issued Notice 97-64, which provides generally that the Company may classify portions of its designated capital gain dividend as (i) a 20% rate gain distribution (which would be taxed as capital gain in the 20% group), (ii) an unrecaptured Section 1250 gain distribution (which would be taxed as capital gain in the 25% group), or (iii) a 28% rate gain distribution (which would be taxed as capital gain in the 28% group). If no designation is made, the entire designated capital gain dividend will be treated as a 28% rate capital gain distribution. Notice 97-64 provides that a REIT must determine the maximum amounts that it may designate as 20% and 25% rate capital gain dividends by performing the computation required by the Code as if the REIT were an individual whose ordinary income was subject to a marginal tax rate of at least 28%. In general, any loss upon a sale or exchange of Common Shares by a stockholder who has held such Common Shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from the Company required to be treated by that stockholder as long-term capital gain. BACKUP WITHHOLDING The Company will report to its U.S. stockholders and the Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless the holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A stockholder that does not provide the Company with its correct taxpayer identification number may also be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. OTHER TAX CONSEQUENCES The 1997 Act modifies many of the provisions relating to the requirements for qualification as, and the taxation of, a REIT. Among other things, the 1997 Act (i) replaces the rule that disqualifies a REIT for any year in which the REIT fails to comply with Treasury Department regulations that are intended to enable a REIT to ascertain its ownership, with an intermediate penalty for failing to do so; (ii) permits a REIT to render a de minimis amount of impermissible services to tenants, or in connection with the management or operation of 60 62 property, and still treat amounts received with respect to that property as rents from real property; (iii) permits a REIT to elect to retain and pay income tax on net long-term capital gains; (iv) repeals a rule that required that less than 30% of a REIT's gross income be derived from gain from the sale or other disposition of stock or securities held for less than one year, certain real property held for less than four years, and property that is sold or disposed of in a prohibited transaction; (v) lengthens the original grace period for foreclosure property from two years after the REIT acquired the property to a period ending on the last day of the third full taxable year following the tax year in which the property was acquired; (vi) treats income from all hedges that reduce the interest rate risk of REIT liabilities, not just interest rate swaps and caps, as qualifying income under the 95% gross income test; and (vii) permits any corporation wholly-owned by a REIT to be treated as a qualified subsidiary, regardless of whether the corporation has always been owned by a REIT. The changes are effective for taxable years beginning after August 5, 1997. Thus, these changes will apply to the operation of the Company. The Clinton Administration proposals would also eliminate the ability of an existing C corporation which elects REIT status to defer recognition of built-in gain on assets until such assets are disposed of during a 10 year period (under current law, thereafter no gain is recognized). The proposal would limit the availability of that built-in gain deferral provision to small C corporations (i.e., corporations the value of whose stock is $5,000,000 or less). This proposal, if enacted, could adversely affect the ability of the Company to acquire substantially all of the assets of existing C corporations and thus potentially limit the Company's growth. No prediction can be made as to the likelihood of passage into law of the administration's REIT proposals or as to the effective date of any changes. Prospective holders should recognize that the present federal income tax treatment of the Company may be modified by future legislative, judicial or administrative actions or decisions at any time, which may be retroactive in effect, and, as a result, any such action or decision may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Service and the Treasury Department, resulting in statutory changes as well as promulgation of new, or revisions to existing, regulations and revised interpretations of established concepts. No prediction can be made as to the likelihood of passage of any new tax legislation or other provisions either directly or indirectly affecting the Company or its stockholders. Revisions in federal income tax laws and interpretations thereof could adversely affect the tax consequences of an investment in the Common Stock. The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local laws on an investment in the Company. CONSEQUENTLY, PROSPECTIVE HOLDERS OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY. TAX ASPECTS OF THE PARTNERSHIP The following discussion summarizes certain federal income tax considerations applicable to the Company's investment in the Partnership. The partnerships in which the Partnership has made an investment are collectively referred to herein as the "Subsidiary Partnerships." The discussion does not cover state or local tax laws or any federal tax laws other than income tax laws. CLASSIFICATION AS A PARTNERSHIP The Company is entitled to include in its income its distributive share of the Partnership's income (including the Partnership's distributive share of income of a Subsidiary Partnership) and to deduct its distributive share of the Partnership's losses (including the Partnership's distributive share of losses of a Subsidiary Partnership) only if the Partnership (and each Subsidiary Partnership) is classified for federal income tax purposes as a partnership rather than as an association taxable as a corporation. An organization formed as a partnership will be treated as a 61 63 partnership if it (i) is organized under state law as a partnership and (ii) is not a "publicly traded" partnership. The Partnership is organized under Delaware limited partnership law. A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). A publicly traded partnership will not, however, be treated as a corporation for any taxable year if 90% or more of the partnership's gross income for such year consists of certain passive-type income, including real property rents, gains from the sale or other disposition of real property, interest, and dividends. Whether, for any particular period, the Partnership or a Subsidiary Partnership will satisfy this passive income exception will depend upon the fact and circumstance applicable to the Partnership or the Subsidiary Partnership for such period. The Service has issued Notice 88-75, providing limited safe harbors from the definition of a publicly traded partnership in advance of the issuance of Treasury Regulations. Pursuant to one of those safe harbors (the "Private Placement Exclusion"), interests in a partnership will not be treated as readily tradeable on a secondary market or the substantial equivalent thereof if (i) all of the partnership interests are issued in a transaction that is not registered under the Securities Act of 1933, as amended, and (ii) the partnership does not have more than 500 partners (taking into account as a partner each person who indirectly owns an interest in the partnership through a partnership, grantor trust, or S corporation). The Partnership and each Subsidiary Partnership satisfies the Private Placement Exclusion. The Treasury Department recently issued regulations ("PTP Regulations") that limit the Private Placement Exclusion to partnerships that have no more than 100 partners at any time during the taxable year. The Partnership and the Subsidiary Partnerships do not have more than 100 partners (taking into account indirect ownership of such partnerships through partnerships, grantor trusts, and S corporations). Thus, the Partnership and each Subsidiary Partnership should satisfy the Private Placement Exclusion, as modified by the PTP Regulations. If, however, the Partnership or any Subsidiary Partnership were treated as publicly traded and the 90% passive income exception did not apply, the Company would not be able to satisfy the income and assets requirements for REIT status. The Company believes that the Partnership and each Subsidiary Partnership is properly treated as a partnership for federal income tax purposes and is not an association taxable as a corporation. The Partnership has not requested, and does not intend to request, a ruling from the Service that it or any of the Subsidiary Partnership will be classified as a partnership for federal income tax purposes. EFFECT OF FAILURE TO QUALIFY AS A PARTNERSHIP If for any reason the Partnership or a Subsidiary Partnership were taxable as a corporation, rather than as a partnership, for federal income tax purposes, the Company would not be able to satisfy the income and asset requirements for REIT status. See "FEDERAL INCOME TAX CONSIDERATIONS -- Income Tests" and "FEDERAL INCOME TAX CONSIDERATIONS -- Asset Tests." In addition, any change in the Partnership's or a Subsidiary Partnership's status for tax purposes might be treated as a taxable event, in which case the Company might incur a tax liability without any related cash distribution. See "FEDERAL INCOME TAX CONSIDERATIONS -- Distribution Requirements." Further, items of income and deduction of the Partnership and the Subsidiary Partnership would not pass through to its partners, and its partners would be treated as stockholders for tax purposes. Consequently, the Partnership or a Subsidiary Partnership would be required to pay income tax at corporate tax rates on its net income, and distributions to its partners would constitute distributions that would not be deductible in computing the Partnership's or a Subsidiary Partnership's taxable income. INCOME TAXATION OF THE PARTNERSHIP, THE SUBSIDIARY PARTNERSHIPS AND THEIR PARTNERS Partners, Not the Partnership, Subject to Tax. A partnership is not a taxable entity for federal income tax purposes. Rather, the Company is required to take into account its allocable share of the Partnership's income, gains, losses, deductions, and credits for any taxable year of the Partnership ending within or with the taxable year of the Company, without regard to whether the Company has received or will receive any distribution of the Partnership. Such items will include the Partnership's available share of income, gain, loss, deductions and credits of the Subsidiary Partnerships. 62 64 Partnership Allocations. Although a partnership agreement generally will determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes under Section 704(b) of the Code if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Partnership's allocations of taxable income and loss of the Partnership and the Subsidiary Partnerships are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. Tax Allocations With Respect to Contributed Properties. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for federal income tax purposes in a manner such that the contributor is charged with, or benefits from the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. The Treasury Department recently issued regulations requiring partnerships to use a "reasonable method" for allocating items affected by Section 704(c) of the Code and outlining certain two reasonable allocation methods. The Partnership intends to use the "traditional method" of allocation under Section 704(c) of the Code. The traditional method is the least favorable method from the Company's perspective because of certain technical limitations. Under the traditional method, depreciation with respect to a contributed property for which there is a Book-Tax Difference first will be allocated to the Company and other partners who did not have an interest in such property until they have been allocated an amount of depreciation equal to what they would have been allocated if the Partnership had purchased such property for its fair market value at the time of contribution. In addition, if such a property is sold, gain equal to the Book-Tax Difference at the time of sale will be specially allocated to the partner who contributed the property. These allocations will tend to eliminate the Book-Tax Differences with respect to the contributed Hotels over the life of the Partnership. However, they may not always entirely eliminate the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. This could cause the Company (i) to be allocated lower amounts of depreciation deductions for tax purposes than would be allocated to the Company if each of the Hotels were to have a tax basis equal to its fair market value at the time of contribution and (ii) to be allocated lower amounts of taxable loss in the event of a sale of such contributed interests in the Hotels at a book loss than the economic or book loss allocated to the Company as a result of such sale, with a corresponding benefit to the other partners in the Partnership. These allocations might adversely affect the Company's ability to comply with REIT distribution requirements, although the Company does not anticipate that this will occur. These allocations may also affect the earnings and profits of the Company for purposes of determining the portion of distributions taxable as dividend income. See "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of Taxable Domestic Stockholders". The application of these rules over time may result in a higher portion of distributions being taxed as dividends than would have occurred had the Company purchased its interests in the Hotels at their agreed values. Under the Partnership Agreement, depreciation or amortization deductions of the Partnership generally will be allocated among the partners in accordance with their respective interests in the Partnership, except to the extent that Section 704(c) of the Code requires that the Company receive a disproportionately large share of such deductions. In addition, gain on sale of a Hotel will be specially allocated to the Limited Partners to the extent of any built-in gain with respect to such Hotel for federal income tax purposes. The application of Section 704(c) of the Code to the Partnership is not entirely clear, however, and may be affected by Treasury Regulations promulgated in the future. Similar provisions are included in the partnership agreements of the Subsidiary Partnerships. Basis in Partnership Interest. The Company's adjusted tax basis in its partnership interest in the Partnership generally (i) equals the amount of cash and the basis of any other property contributed to the Partnership by the Company, (ii) is increased by (A) its allocable share of the Partnership's income and (B) its allocable share of indebtedness of the Partnership and (iii) is reduced, but not below zero, by the Company's 63 65 allocable share of (A) the Partnership's loss and (B) the amount of cash distributed to the Company and by constructive distributions resulting from a reduction in the Company's share of indebtedness of the Partnership. Similar rules apply to the Partnership's tax basis in the Subsidiary Partnerships. If the allocation of the Company's distributive share of the Partnership's loss would reduce the adjusted tax basis of the Company's partnership interest in the Partnership below zero, the recognition of such loss will be deferred until such time as the recognition of such loss would not reduce the Company's adjusted tax basis below zero. To the extent that the Partnership's distributions, or any decrease in the Company's share of the indebtedness of the Partnership (such decrease being considered a constructive cash distribution to the partners), would reduce the Company's adjusted tax basis below zero, such distributions (including such constructive distributions) constitute taxable income to the Company. Such distributions and constructive distributions normally will be characterized as capital gain, and, if the Company's partnership interest in the Partnership has been held for longer than the long-term capital gain holding periods, the distributions and constructive distributions will be subject to favorable capital gains tax rates. See "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of Taxable Domestic Stockholders". Depreciation Deductions Available to the Partnership. Immediately after the acquisition of the Initial Hotels, the Company made a cash contribution to the Partnership in exchange for a general partner interest in the Partnership. The Partnership's initial basis in the Initial Hotels for federal income tax purposes generally is a carryover of the basis of the previous ownership entities in the Initial Hotels on the date of such merger. Although the law is not entirely clear, the Partnership has depreciated such depreciable hotel property for federal income tax purposes under the same methods used by the transferors. The Partnership's tax depreciation deductions will be allocated among the partners in accordance with their respective interests in the Partnership, except to the extent that Section 704(c) of the Code requires that the Company receive a disproportionately large share of such deductions. The Partnership plans to depreciate, for federal income tax purposes, any depreciable hotel property which it may acquire for cash in the future under either the modified accelerated cost recovery system of depreciation ("MACRS") or the alternative depreciation system of depreciation ("ADS"). The Partnership plans to use MACRS for subsequently acquired furnishings and equipment. Under MACRS, the Partnership generally will depreciate such furnishings and equipment over a seven-year recovery period using a 200% declining balance method and a half-year convention. If, however, the Partnership places more than 40% of its furnishings and equipment in service during the last three months of a taxable year, a mid-quarter depreciation convention must be used for the furnishings and equipment placed in service during that year. The Partnership plans to use ADS for the depreciation of subsequently acquired buildings and improvements. Under ADS, the Partnership generally will depreciate such buildings and improvements over a 40-year recovery period using a straight line method and a mid-month convention. To the extent that the Partnership acquires additional hotels in exchange for Partnership Units, the Partnership's initial basis in each such hotel, for federal income tax purposes, should be the same as the transferor's basis in that hotel on the date of acquisition. SALE OF THE PARTNERSHIP'S PROPERTY Generally, any gain realized by the Partnership or the Subsidiary Partnerships on the sale of property held for more than the applicable holding period will be subject to favorable capital gains tax rates (See "FEDERAL INCOME TAX CONSIDERATIONS-- Taxation of Taxable Domestic Stockholders"), except for any portion of such gain that is treated as depreciation or cost recovery recapture. Any gain recognized by the Partnership on the disposition of the Initial Hotels will be allocated first to the Limited Partners under Section 704(c) of the Code to the extent of their built-in gain on those Hotels. The Limited Partners' built-in gain on the Initial Hotels sold will equal the excess of the Limited Partners' proportionate share of the book value of those Initial Hotels over the Limited Partners' tax basis allocable to those Initial Hotels at the time of sale. Any remaining gain recognized by the Partnership on the disposition of the Initial Hotels will be allocated among the partners in accordance with their respective percentage interests in the Partnership. The Board of Trustees has adopted a policy requiring that any decision to sell the Initial Hotels will be made by a vote of a majority of the independent Trustees. 64 66 The Company's share of any gain realized by the Partnership or a Subsidiary Partnership on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of the Partnership's or a Subsidiary Partnership's trade or business, however, will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See "FEDERAL INCOME TAX CONSIDERATIONS -- Income Tests." Such prohibited transaction income also may have an adverse effect upon the Company's ability to satisfy the income test for REIT status. See "FEDERAL INCOME TAX CONSIDERATIONS -- Income Tests" above. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission ("SEC") a Registration Statement on Form S-2 ("Registration Statement") under the Securities Act with respect to the Shares. This Registration Statement, which constitutes part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits thereto on file with the SEC pursuant to the Securities Act and the rules and regulations of the SEC thereunder. The Registration Statement, including exhibits thereto, may be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at the prescribed rates from the Public Reference Section of the SEC at its principal office in Washington, D.C. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports and proxy statements and other information with the SEC. Such reports, proxy statements and other information can be inspected and copied at the locations described above. Copies of such materials can be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. In addition, certain of such materials can be inspected at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York. Further, the SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. The address of such Web site is http://www.sec.gov. No person is authorized to give any information or to make any representations, other than those contained or incorporated by reference in this Prospectus, in connection with the offering of Shares described herein and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any Selling Stockholder. This Prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, nor shall there be any sale of the Shares by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create an implication that the information contained herein is correct as of any time subsequent to the date hereof. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been previously filed by the Company with the SEC, under the Exchange Act (File No. 1-7062) are incorporated herein by reference: 1. Annual Report on Form 10-K for the year ended January 31, 1998, filed on May 18,1998; 2. Current Report on Form 8-K dated February 17, 1998, as amended by Form 8-K/A filed on April 20, 1998; 3. Current Report on Form 8-K dated March 16, 1998, as amended by Form 8-K/A filed on May 15, 1998; and 65 67 4. Current Report on Form 8-K dated May 14, 1998, as amended by Form 8-K/A filed on May 27, 1998. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Shares made hereby shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained herein, or in any document incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document that also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide, without charge, to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, on the request of any such person, a copy of any or all of the documents incorporated herein by reference, except the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to the Company at 1750 Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44115, Attention: Investor Relations; (216) 622-0046. FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company intends that such forward-looking statements be subject to the safe harbors created by such Acts. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Company, its Trustees or its officers in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Company's financing plans; (v) the Company's position regarding investments, acquisitions, financings, conflicts of interest and other matters; (vi) the Company's continued qualification as a REIT; and (vii) trends affecting the Company's or any Hotel's financial condition or results of operations. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. These forward-looking statements reflect the Company's current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels which may cause the actual results of the Company to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to: fluctuations in hotel occupancy rates; changes in room rental rates which may be charged by the Lessee in response to market rental rate changes or otherwise; interest rate fluctuations, changes in Federal income tax laws and regulations; competition; any changes in the Company's financial condition or operating results due to acquisitions or dispositions of hotel properties; real estate and hospitality market conditions; hospitality industry factors; and local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry, or the markets in which the Company operates or will operate. The Company undertakes no obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Exchange Act, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Prospectus relating to the operations of the Partnership. LEGAL MATTERS The validity of the Shares will be passed upon for the Company by Thompson Hine & Flory LLP, Cleveland, Ohio. In addition, the description of federal income tax consequences contained in the Prospectus under the caption "FEDERAL INCOME TAX CONSIDERATIONS" is based upon the opinion of Thompson Hine & Flory LLP. 66 68 EXPERTS The audited Consolidated Financial Statements and schedule of Realty ReFund Trust incorporated by reference in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated by reference herein upon the authority of said firm as experts in giving said reports. The audited Combined Financial Statements of InnSuites Hotels System incorporated by reference in this Prospectus and elsewhere in the Registration Statement have been audited by Michael Maastricht, C.P.A., independent public accountants, as indicated in their report with respect thereto, and are incorporated by reference herein upon the authority of said firm as experts in giving said reports. Any financial statements and schedules hereafter filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and incorporated by reference in the registration statement, of which this Prospectus is a part, that have been examined and are the subject of a report by independent accountants will be so incorporated by reference in reliance upon such reports given and upon the authority of such firms as experts in accounting and auditing to the extent covered by consents filed with the SEC. 67 69 ====================================================== NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE SELLING STOCKHOLDERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- The Company........................... 2 Risk Factors.......................... 4 Use of Proceeds....................... 12 Selling Stockholders.................. 12 Plan of Distribution.................. 17 Description of Capital Stock.......... 18 Selected Historical and Pro Forma Financial and Operating Data........ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 28 Business and Properties............... 35 Policies and Objectives With Respect to Certain Activities............... 44 Certain Declaration and Statutory Provisions.......................... 46 Partnership Agreement................. 48 Federal Income Tax Considerations..... 50 Tax Aspects of the Partnership........ 61 Available Information................. 65 Incorporation of Certain Documents by Reference........................... 65 Forward-Looking Statements............ 66 Legal Matters......................... 66 Experts............................... 67
====================================================== ====================================================== 2,950,743 SHARES LOGO REALTY REFUND TRUST SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE ------------------------ PROSPECTUS ------------------------ ====================================================== 70 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of the fees and expenses (other than underwriting discounts and commissions) payable by the Registrant in connection with the issuance and distribution of the Shares. Securities and Exchange Commission, registration fee........ $3,725.61 Printing and mailing........................................ * Blue Sky fees and expenses.................................. * Accountant's fees and expenses.............................. * Legal fees and expenses..................................... * Miscellaneous............................................... * --------- Total..................................................... $ * =========
- --------------- * To be provided by amendment. ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS The Declaration of the Company generally limits the liability for money damages of the Company's Trustees and officers to the Company and its stockholders to the fullest extent permitted from time to time by the laws of the State of Ohio. The Declaration also provides generally for the indemnification of Trustees and officers, among others, against judgments, settlements, penalties, fines and reasonable expenses actually incurred by them in connection with any proceeding to which they have been made a party by reason of their service in those or other capacities except in respect of any matter as to which they shall have been adjudicated to have acted in bad faith or with willful misconduct or reckless disregard of their duties or gross negligence or not to have acted in good faith in the reasonable belief that their action was in the best interests of the Company. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Trustees and officers of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. The Company may purchase Trustee and officer liability insurance for the purpose of providing a source of funds to pay any indemnification described above. ITEM 16. EXHIBITS 4.1 -- Form of Common Stock Certificate. 5.1 -- Opinion of Thompson Hine & Flory LLP.** 8.1 -- Opinion of Thompson Hine & Flory LLP as to Tax Matters.** 10.1 -- First Amended and Restated Agreement of Limited Partnership of RRF Limited Partnership dated January 31, 1998. 10.2 -- Advisory Agreement dated as of January 31, 1998, between RRF Limited Partnership and Mid-America ReaFund Advisors, Inc. (incorporated by reference to Exhibit 10(a) of the Registrant's Form 10-K for the year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998).* 10.3 -- Employment Agreement dated as of January 31, 1998, between the Company and James F. Wirth (incorporated by reference to Exhibit 10(b) of the Registrant's Form 10-K for the year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998).*
II-1 71 10.4 -- Formation Agreement among the Company, Mid-America ReaFund Advisors, Inc., Alan M. Krause, James H. Berick, Hospitality Corporation International, InnSuites Hotels, L.L.C., James F. Wirth, Tucson Hospitality Properties, Ltd., Yuma Hospitality Properties, Ltd., Baseline Hospitality Properties, Ltd., Northern Phoenix Investment Limited Partnership, Ontario Hospitality Properties Limited Partnership, Hulsey Hotels Corporation and Buenaventura Properties, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on February 17, 1998). 10.5 -- Contribution Agreement dated as of February 1, 1998, between James F. Wirth, Gail J. Wirth and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on March 16, 1998). 10.6 -- Agreement of Purchase and Sale and Joint Escrow Instructions dated March 20, 1998, between Lafayette Hotel, LLC and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K/A, filed with the Securities and Exchange Commission on May 27, 1998). 23.1 -- Consent of Thompson Hine & Flory LLP (included in Exhibits 5.1 and 8.1).** 23.2 -- Consent of Arthur Andersen LLP. 23.3 -- Consent of Michael Maastricht, CPA. 24.1 -- Power of Attorney. 99.1 -- Form of Percentage Lease.
- --------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. ** To be filed by amendment. ITEM 17. UNDERTAKINGS. Rule 415 Offering. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Filings Incorporating Subsequent Exchange Act Documents by Reference. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, II-2 72 where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Request For Acceleration of Effective Date. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referred to in Item 15 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 73 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, State of Ohio, on the 8th day of June, 1998. REALTY REFUND TRUST an unincorporated Ohio real estate investment trust (Registrant) By: /s/ JAMES F. WIRTH ------------------------------------ James F. Wirth Chairman, President and Chief Executive Officer By: /s/ GREGORY D. BRUHN ------------------------------------ Gregory D. Bruhn Executive Vice President, Chief Financial Officer, Treasurer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES F. WIRTH Trustee, Chairman, President and June 8, 1998 - -------------------------------------- Chief Executive Officer James F. Wirth /s/ GREGORY D. BRUHN Trustee, Executive Vice President, June 8, 1998 - -------------------------------------- Chief Financial Officer, Gregory D. Bruhn Treasurer and Secretary * Trustee June 8, 1998 - -------------------------------------- Marc E. Berg * Trustee June 8, 1998 - -------------------------------------- Lee J. Flory * Trustee June 8, 1998 - -------------------------------------- Edward G. Hill * Trustee June 8, 1998 - -------------------------------------- Mark J. Nasca * Signature by Gregory D. Bruhn as Attorney-in-Fact under Power of June 8, 1998 Attorney-in-Fact under Power of Attorney Attorney /s/ GREGORY D. BRUHN ------------------------------------- Gregory D. Bruhn
II-4 74 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.1 -- Form of Common Stock Certificate. 5.1 -- Opinion of Thompson Hine & Flory LLP.** 8.1 -- Opinion of Thompson Hine & Flory LLP as to Tax Matters.** 10.1 -- First Amended and Restated Agreement of Limited Partnership of RRF Limited Partnership dated January 31, 1998. 10.2 -- Advisory Agreement dated as of January 31, 1998, between RRF Limited Partnership and Mid-America ReaFund Advisors, Inc. (incorporated by reference to Exhibit 10(a) of the Registrant's Form 10-K for the year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998).* 10.3 -- Employment Agreement dated as of January 31, 1998, between the Company and James F. Wirth (incorporated by reference to Exhibit 10(b) of the Registrant's Form 10-K for the year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998).* 10.4 -- Formation Agreement among the Company, Mid-America ReaFund Advisors, Inc., Alan M. Krause, James H. Berick, Hospitality Corporation International, InnSuites Hotels, L.L.C., James F. Wirth, Tucson Hospitality Properties, Ltd., Yuma Hospitality Properties, Ltd., Baseline Hospitality Properties, Ltd., Northern Phoenix Investment Limited Partnership, Ontario Hospitality Properties Limited Partnership, Hulsey Hotels Corporation and Buenaventura Properties, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on February 17, 1998). 10.5 -- Contribution Agreement dated as of February 1, 1998, between James F. Wirth, Gail J. Wirth and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K, filed with the Securities and Exchange Commission on March 16, 1998). 10.6 -- Agreement of Purchase and Sale and Joint Escrow Instructions dated March 20, 1998, between Lafayette Hotel, LLC and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K/A, filed with the Securities and Exchange Commission on May 27, 1998). 23.1 -- Consent of Thompson Hine & Flory LLP (included in Exhibits 5.1 and 8.1).** 23.2 -- Consent of Arthur Andersen LLP. 23.3 -- Consent of Michael Maastricht, CPA. 24.1 -- Power of Attorney. 99.1 -- Form of Percentage Lease.
- --------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. ** To be filed by amendment. EX-4.1 2 EXHIBIT 4.1 1 Exhibit 4.1 Form of Common Stock Certificate [Front of Certificate] CERTIFICATE FOR SHARES SHARES OF BENEFICIAL INTEREST WITHOUT PAR VALUE THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR IN CLEVELAND OR NEW YORK CITY CERTAIN DEFINITIONS AN OHIO UNINCORPORATED ASSOCIATION IN THE FORM OF A BUSINESS TRUST REALTY REFUND TRUST THIS CERTIFIES THAT IS THE REGISTERED HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST WITHOUT PAR VALUE, IN Realty ReFund Trust (the "Trust"), an Ohio unincorporated association in the form of a business trust established by Declaration of Trust dated April 28, 1971, as amended from time to time, a copy of which, together with all amendments thereto, is on file with the Recorder of Cuyahoga County, Ohio. The provisions of the Declaration of Trust are hereby incorporated in and made a part of this certificate as fully as if set forth herein in their entirety, to all of which provisions the holder and every transferee or assignee hereof by accepting or holding the same agrees to be bound. SEE REVERSE FOR EXISTENCE OF REDEMPTION AND PROHIBITION OF TRANSFER PROVISIONS GOVERNING THE SHARES REPRESENTED BY THIS CERTIFICATE. This certificate and the shares represented hereby are negotiable and transferable on the books of the Trust by the registered holder hereof in person or by attorney upon surrender of this certificate properly endorsed or assigned to the same extent as a stock certificate and the shares represented thereby of an Ohio corporation for profit. This certificate is issued by the Trustees of the Trust, acting not individually but as such Trustees, and is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Trust and the facsimile signatures of its duly authorized representatives. Dated: [Seal] COUNTERSIGNED AND REGISTERED NATIONAL CITY BANK, TRANSFER AGENT AND REGISTRAR (CLEVELAND, OHIO) CHAIRMAN BY: SECRETARY Authorized Signature. 2 THE DECLARATION OF TRUST PROVIDES THAT THE NAME "REALTY REFUND TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST, AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND NO TRUSTEE, SHAREHOLDER, OFFICER, EMPLOYEE OR AGENT OF THE TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, NOR SHALL RESORT BE HAD TO THEIR PRIVATE PROPERTY FOR THE SATISFACTION OF ANY OBLIGATION OR CLAIM, IN CONNECTION WITH THIS INSTRUMENT, BUT THE TRUST PROPERTY ONLY IS LIABLE. 3 [Back of Certificate] REALTY REFUND TRUST PROVISIONS RELATING TO REDEMPTION AND PROHIBITION OF TRANSFER OF SHARES If necessary to effect compliance by the Trust with certain requirements of the Internal Revenue Code, the Shares represented by this certificate are subject to redemption by the Trustees of the Trust and the transfer thereof may be prohibited upon the terms and conditions set forth in the Declaration of Trust. The Trust will furnish a copy of such terms and conditions to the registered holder of this certificate upon request and without charge. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT-- Custodian (Cust) (Minor) TEN ENT -- as tenants by the entireties under the Uniform Gifts to Minors JT TEN -- as joint tenants with right of Act _________________________ survivorship and not as tenants (State) in common Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED hereby sell(s), assign(s), and transfer(s) unto - ---------------------------------------------------------------------------------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE. - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Shares of Beneficial - ---------------------------------------------------------------------------- Interest represented by the within Certificate, hereby irrevocably constituting and appointing - --------------------------------------------------------------------------------------- Attorney
4 to transfer the said shares on the books of the within-named Trust with full power of substitution in the premises. Dated, __________________ (Sign here) ------------------------------------------ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERNATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. EX-10.1 3 EXHIBIT 10.1 1 Exhibit 10.1 FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF RRF LIMITED PARTNERSHIP Dated: January 31, 1998 2
TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINED TERMS; EXHIBITS.....................................................................1 Section 1.1 Defined Terms........................................................................1 Section 1.2 Exhibits, Schedules, Etc.............................................................7 ARTICLE II FORMATION; ADMISSION OF LIMITED PARTNERS; NAME; PLACE OF BUSINESS AND REGISTERED AGENT...........................................................7 Section 2.1 Certificate of Limited Partnership; Other Filings..............................7 Section 2.2 Limited Partners; Additional Limited Partners..................................7 Section 2.3 Name; Principal Place of Business..............................................8 Section 2.4 Registered Agent and Registered Office.........................................8 ARTICLE III BUSINESS AND TERM OF PARTNERSHIP..........................................................8 Section 3.1 Business.......................................................................8 Section 3.2 Term...........................................................................9 ARTICLE IV CAPITAL CONTRIBUTIONS......................................................................9 Section 4.1 General Partner................................................................9 Section 4.2 Limited Partners...............................................................9 Section 4.3 Additional Capital Contributions and Issuances of Additional Partnership Interests................................9 Section 4.4 Additional Funding............................................................11 Section 4.5 Equity Plan...................................................................11 Section 4.6 Dividend Reinvestment Plan....................................................12 Section 4.7 Interest......................................................................12 Section 4.8 Return of Capital.............................................................12 ARTICLE V PROFITS, LOSSES AND ACCOUNTING.............................................................13 Section 5.1 Allocation of Profits and Losses..............................................13 Section 5.2 Accounting....................................................................13 Section 5.3 Partners' Accounts............................................................14 Section 5.4 Section 754 Elections.........................................................14 ARTICLE VI POWERS, DUTIES, LIABILITIES, COMPENSATION AND VOTING OF GENERAL PARTNER.................................................15 Section 6.1 Powers of General Partner.....................................................15 Section 6.2 Delegation of Authority.......................................................17 Section 6.3 Duties of General Partner.....................................................17 Section 6.4 Liabilities of General Partner; Indemnification...............................18 Section 6.5 Compensation of General Partner; Reimbursement................................21 Section 6.6 Reliance on Act of General Partner............................................21
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PAGE ---- Section 6.7 Outside Services; Dealings with Affiliates; Outside Activities..................................................................21 Section 6.8 General Partner Participation.................................................22 ARTICLE VII RIGHTS, PROHIBITIONS AND REPRESENTATIONS WITH RESPECT TO LIMITED PARTNERS............................................22 Section 7.1 Rights of Limited Partners....................................................22 Section 7.2 Prohibitions with Respect to the Limited Partners.............................23 Section 7.3 Ownership by Limited Partner of Corporate General Partner or Affiliate................................................23 Section 7.4 Grant of Rights...............................................................24 Section 7.5 Warranties and Representations of the Limited Partners........................24 Section 7.6 Indemnification by Limited Partners...........................................25 Section 7.7 Notice of Sale or Refinancing.................................................25 ARTICLE VIII DISTRIBUTIONS AND PAYMENTS TO PARTNERS..................................................25 Section 8.1 Distributions of Cash Flow....................................................25 Section 8.2 REIT Distribution Requirements................................................26 Section 8.3 No Right to Distributions in Kind.............................................26 Section 8.4 Disposition Proceeds..........................................................26 Section 8.5 Withdrawals...................................................................26 ARTICLE IX TRANSFERS OF INTERESTS....................................................................26 Section 9.1 General Partner...............................................................26 Section 9.2 Admission of a Substitute or Additional General Partner.......................26 Section 9.3 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner............................................27 Section 9.4 Removal of a General Partner..................................................28 Section 9.5 Restrictions on Transfer of Limited Partnership Interests.....................28 Section 9.6 Admission of Substitute Limited Partner.......................................29 Section 9.7 Rights of Assignees of Partnership Interests..................................30 Section 9.8 Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner............................................30 Section 9.9 Joint Ownership of Interests..................................................30 Section 9.10 Transferees...................................................................31 Section 9.11 Absolute Restriction..........................................................31 Section 9.12 Investment Representation.....................................................31 ARTICLE X TERMINATION OF THE PARTNERSHIP.............................................................31 Section 10.1 Termination...................................................................31 Section 10.2 Payment of Debts..............................................................32 Section 10.3 Debts to Partners.............................................................32
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PAGE ---- Section 10.4 Remaining Distribution........................................................32 Section 10.5 Reserve.......................................................................32 Section 10.6 Final Accounting..............................................................32 ARTICLE XI AMENDMENTS................................................................................33 Section 11.1 Authority to Amend............................................................33 Section 11.2 Notice of Amendments..........................................................33 ARTICLE XII POWER OF ATTORNEY........................................................................34 Section 12.1 Power.........................................................................34 Section 12.2 Survival of Power.............................................................34 ARTICLE XIII CONSENTS, APPROVALS, VOTING AND MEETINGS................................................35 Section 13.1 Method of Giving Consent or Approval..........................................35 Section 13.2 Meetings of Limited Partners..................................................35 Section 13.3 Opinion.......................................................................35 Section 13.4 Submissions to Partners.......................................................36 ARTICLE XIV MISCELLANEOUS............................................................................36 Section 14.1 Governing Law.................................................................36 Section 14.2 Agreement for Further Execution...............................................36 Section 14.3 Entire Agreement..............................................................36 Section 14.4 Severability..................................................................36 Section 14.5 Notices.......................................................................37 Section 14.6 Titles and Captions...........................................................37 Section 14.7 Counterparts..................................................................37 Section 14.8 Pronouns......................................................................37 Section 14.9 Survival of Rights............................................................37 Section 14.10 Personal Liability............................................................37 EXHIBIT A LIST OF PARTNERS EXHIBIT B FEDERAL INCOME TAX MATTERS EXHIBIT C INITIAL AND CORPORATE HOTELS EXHIBIT D RIGHTS TERMS
-iii- 5 FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF RRF LIMITED PARTNERSHIP THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP made as of the 31st day of January, 1998, by and among REALTY REFUND TRUST, an unincorporated Ohio business trust, having an address at 1750 Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44114, the general partner ("General Partner"), and the limited partners listed on Exhibit A attached hereto ("Limited Partners"), is intended to evidence the mutual agreement of the General Partner and the Limited Partners to form a limited partnership pursuant to Title 6, Chapter 17 of the Delaware Code (the "Act") for the purposes and upon the terms and conditions hereinafter set forth. ARTICLE I DEFINED TERMS; EXHIBITS ----------------------- Section 1.1 DEFINED TERMS. Whenever used in this Agreement, the following terms shall have the meanings respectively assigned to them in this Article I, unless otherwise expressly provided herein or unless the context otherwise requires: ADDITIONAL FUNDS: "Additional Funds" has the meaning set forth in Section 4.4 hereof. ADDITIONAL LIMITED PARTNER: "Additional Limited Partner" shall mean a Person admitted to this Partnership as a Limited Partner pursuant to and in accordance with Section 2.2(b) of this Agreement. ADDITIONAL SECURITIES: "Additional Securities" means any additional REIT Shares (other than REIT Shares issued in connection with an exchange pursuant to Section 7.4 hereof) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares, as set forth in Section 4.3(a)(ii). AFFILIATE: "Affiliate" of another Person shall mean (a) any Person directly or indirectly owning, controlling or holding with power to vote ten percent (10%) or more of the outstanding voting securities of such other Person; (b) any Person ten percent (10%) or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such other Person; -1- 6 (c) any Person directly or indirectly controlling, controlled by, or under common control with, such other Person; (d) any officer, director, member or partner of such other Person; and (e) if such other Person is an officer, director, member or partner in a company, the company for which such Person acts in any such capacity. AGREED VALUE: "Agreed Value" shall mean the fair market value of Contributed Property as agreed to by the Contributing Partner and the Partnership, using such reasonable method of valuation as they may adopt. AGREEMENT: "Agreement" shall mean this First Amended and Restated Agreement of Limited Partnership of RRF Limited Partnership, as amended, modified, supplemented or restated from time to time, as the context requires. BANKRUPTCY CODE: "Bankruptcy Code" shall mean the United States Bankruptcy Code, as amended, 11 U.S.C. sections 101 ET SEQ., and as hereafter amended from time to time. BUSINESS DAY: "Business Day" shall mean any day when the New York Stock Exchange is open for trading. CAPITAL ACCOUNT: "Capital Account" shall mean, as to any Partner, the account established and maintained for such Partner pursuant to Section 5.3 hereof. CAPITAL CONTRIBUTION: "Capital Contribution" shall mean the amount in cash or the Agreed Value of Contributed Property contributed by each Partner (or his original predecessor in interest) to the capital of the Partnership for his interest in the Partnership. CASH FLOW: "Cash Flow" shall mean the excess of cash revenues actually received by the Partnership in respect of Partnership operations for any period, less Operating Expenses for such period. Cash Flow shall not include Disposition Proceeds. CLASS A LIMITED PARTNERS: "Class A Limited Partners" shall mean those persons listed under the heading "Class A Limited Partners" on the signature pages hereto. CLASS B LIMITED PARTNERS: "Class B Limited Partners" shall mean those persons listed under the heading "Class B Limited Partners" on the signature pages hereto. CODE: "Code" shall mean the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular provision of the Code shall mean that provision in the Code at the date hereof and any succeeding provision of the Code. -2- 7 COMMISSION: "Commission" shall mean the U.S. Securities and Exchange Commission. COMPUTATION DATE: "Computation Date" shall mean the date on which an Exchange Exercise Notice is delivered to the General Partner. CONTRIBUTED PARTNERSHIPS: "Contributed Partnerships" shall mean the various limited partnerships that own the Initial Hotels prior to the formation transaction. CONTRIBUTED PROPERTY: "Contributed Property" shall mean a Partner's interest in property or other consideration (excluding services and cash) contributed to the Partnership by such Partner. CORPORATE HOTEL: "Corporate Hotel" shall mean those Properties identified as such on Exhibit C hereto. DECLARATION OF TRUST: "Declaration of Trust" shall mean that certain Second Amended and Restated Declaration of Trust, dated as of January __, 1998, of the General Partner, as amended, modified, supplemented or restated from time to time, as the context requires. DISPOSITION PROCEEDS: "Disposition Proceeds" shall mean the excess of the proceeds received by the Partnership from the refinancing, sale, exchange or other disposition of all or substantially all of the Partnership's Property less any expenses incurred or paid by the Partnership in connection with such transaction. EQUITY PLAN: "Equity Plan" shall mean the General Partner's 1997 Stock Incentive and Option Plan, as the same may be amended from time to time. EVENT OF BANKRUPTCY: "Event of Bankruptcy" shall mean as to any Person the filing of a petition for relief as to such Person as debtor or bankrupt under the Bankruptcy Code or similar provision of law of any jurisdiction (except if such petition is contested by such Person and has been dismissed within ninety (90) days of the filing thereof); insolvency of such Person as finally determined by a court of competent jurisdiction; filing by such Person of a petition or application to accomplish the same or for the appointment of a receiver or a trustee for such Person or a substantial part of such Person's assets; commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement, insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by another; provided, however, that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within ninety (90) days. The term "Event of Bankruptcy" as defined in this Agreement and as used herein, is intended -3- 8 and shall be deemed to supersede and replace the events of withdrawal described in Sections 17-402(a)(4) and (5) of the Act. GENERAL PARTNER: "General Partner" shall mean Realty ReFund Trust and any Person who becomes a substitute or additional General Partner as provided herein, and any of their successors as General Partner. GENERAL PARTNERSHIP INTEREST: "General Partnership Interest" shall mean the ownership interest of a General Partner in the Partnership. HART SCOTT ACT: "Hart Scott Act" shall mean the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. INDEMNITEE: "Indemnitee" shall mean (i) any Person made a party to a proceeding by reason of its status as (A) the General Partner, or (B) a trustee, director or officer of the General Partner, and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time, in its sole and absolute discretion. INITIAL HOTELS: "Initial Hotels" shall mean those Properties listed on Exhibit C hereto. IRS: "IRS" shall mean the Internal Revenue Service. LIMITED PARTNERS: "Limited Partners" shall mean the Class A Limited Partners and the Class B Limited Partners, in their respective capacities as limited partners of the Partnership, their permitted successors or assigns who have been admitted to the Partnership as limited partners of the Partnership, or any Person who, at the time of reference thereto, is a limited partner of the Partnership. LIMITED PARTNERSHIP INTEREST: "Limited Partnership Interest" shall mean the ownership interest of a Limited Partner in the Partnership at any particular time, including the right of such Limited Partner to any and all benefits to which such Limited Partner may be entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of this Agreement and of the Act. MAJORITY-IN-INTEREST OF THE LIMITED PARTNERS: "Majority-In-Interest of the Limited Partners" shall mean Limited Partner(s) who hold in the aggregate more than fifty percent (50%) of the Percentage Interests then allocable to and held by the Limited Partners, as a class (other than the General Partner if it holds any Partnership Interests allocable to the Limited Partners). OPERATING EXPENSES: "Operating Expenses" shall mean (i) all administrative and operating costs and expenses incurred by the Partnership, (ii) those -4- 9 administrative costs and expenses of the General Partner, including any salaries or other payments to trustees, officers or employees of the General Partner, and any accounting and legal expense of the General Partner, which expenses the Partners have agreed, are expenses of the Partnership and not the General Partner, and (iii) to the extent not included in clause (ii) above, REIT Expenses; PROVIDED, HOWEVER, that Operating Expenses shall not include any administrative costs and expenses incurred by the General Partner that are attributable to properties or partnership interests in a Subsidiary that are owned by the General Partner directly. PARTNER: "Partner" shall mean the General Partner or any Limited Partner. PARTNERSHIP: "Partnership" shall mean RRF Limited Partnership, a Delaware limited partnership. PARTNERSHIP INTEREST: "Partnership Interest" shall mean an ownership interest in the Partnership representing a Capital Contribution by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such an ownership interest may be entitled as provided in this Agreement or the Act, together with all obligations of such Person to comply with the terms and provisions of this Agreement and the Act. PARTNERSHIP RECORD DATE: "Partnership Record Date" shall mean the record date established by the General Partner for the distribution of Cash Flow pursuant to Section 8.1 hereof, which record date shall be the same as the record date established by the General Partner for a distribution to its shareholders of some or all of its portion of such distribution. PARTNERSHIP UNIT: "Partnership Unit" shall mean a fractional, undivided share of the Partnership Interests of all Partners issued hereunder. As of the date of this Agreement, there shall be considered to be Seven Million Eight Hundred Six Thousand One Hundred Fifty (7,806,150) Partnership Units outstanding, with each Partnership Unit representing a .0000128% Percentage Interest in the Partnership. The initial allocation of Partnership Units to each Partner is as set forth on Exhibit A hereto. PERCENTAGE INTEREST: "Percentage Interest" shall mean the percentage ownership interest in the Partnership of each Partner, as determined by dividing the Partnership Units owned by a Partner by the total number of Partnership Units then outstanding. PERSON: "Person" shall mean any individual, partnership, corporation, limited liability company, trust or other entity. -5- 10 PROPERTY: "Property" shall mean any hotel property or other investment in which the Partnership holds an ownership interest. REIT: "REIT" shall mean a real estate investment trust under Sections 856 through 860, inclusive, of the Code. REIT EXPENSES: "REIT Expenses" means (i) costs and expenses relating to the formation and continuity of existence of the General Partner and any Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be included within the definition of General Partner), including taxes, fees and assessments associated therewith, any and all costs, expenses or fees payable to any trustee, director, officer, or employee of the General Partner, (ii) costs and expenses relating to a public offering and registration of securities or private offering of securities by the General Partner and all statements, reports, fees and expenses incidental thereto, including underwriting discounts and selling commissions applicable to any such offering of securities, (iii) costs and expenses associated with the preparation and filing of any periodic reports by the General Partner under federal, state or local laws or regulations, including filings with the Commission, (iv) costs and expenses associated with compliance by the General Partner with laws, rules and regulations promulgated by any regulatory body, including the Commission, and (v) all other operating or administrative costs of the General Partner, including, without limitation, insurance premiums, and legal, accounting and trustees fees, incurred in the ordinary course of its business on behalf of or in connection with the Partnership. REIT SHARE: "REIT Share" shall mean a common share of beneficial interest without par value of the General Partner. SUBSIDIARY: "Subsidiary" shall mean, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities, or (ii) the outstanding equity interests, are owned, directly or indirectly, by such Person. SUBSTITUTE GENERAL PARTNER: "Substitute General Partner" has the meaning set forth in Section 9.2. SUBSTITUTE LIMITED PARTNER: "Substitute Limited Partner" shall mean any Person admitted to the Partnership as a Limited Partner pursuant to Section 9.6 hereof. TRANSFER: "Transfer" has the meaning set forth in Section 9.5(a) hereof. VALUE: "Value" shall mean, with respect to a REIT Share, the average of the daily market price for the ten (10) consecutive trading days immediately preceding the Valuation Date. The market price for each such trading day shall be: (i) if the REIT Shares are listed or admitted to trading on any securities exchange or -6- 11 the NASDAQ-National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day; (ii) if the REIT Shares are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner; or (iii) if the REIT Shares are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the REIT Shares includes rights that a holder of REIT Shares would be entitled to receive, and the General Partner acting in good faith determines that the value of such rights is not reflected in the Value of the REIT Shares determined as aforesaid, then the Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. Section 1.2 EXHIBITS, SCHEDULES, ETC.. References to "Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the Exhibits or Schedules attached to this Agreement, and references to an "Article" or a "Section" are, unless otherwise specified, to one of the Articles or Sections of this Agreement. Each Exhibit and Schedule attached hereto and referred to herein is hereby incorporated herein by reference. ARTICLE II FORMATION; ADMISSION OF LIMITED PARTNERS; NAME; PLACE OF BUSINESS AND REGISTERED AGENT -------------------------------------------- Section 2.1 CERTIFICATE OF LIMITED PARTNERSHIP; OTHER FILINGS. The General Partner shall prepare (or caused to be prepared), execute, acknowledge, record and file at the expense of the Partnership, a Certificate of Limited Partnership and all requisite fictitious name statements and notices in such places and jurisdictions as may be required by the Act or necessary to cause the Partnership to be treated as a limited partnership under, and otherwise to comply with, the laws of each state or other jurisdiction in which the Partnership conducts business. -7- 12 Section 2.2 LIMITED PARTNERS; ADDITIONAL LIMITED PARTNERS. (a) The Limited Partners shall be those Persons identified as Limited Partners on Exhibit A attached hereto, as amended from time to time pursuant to the terms of this Agreement, and such Persons are hereby admitted to the Partnership as Limited Partners. (b) The General Partner shall in timely fashion amend this Agreement and, if required by the Act, the Certificate of Limited Partnership filed for record to reflect the admission pursuant to the terms of this Agreement of a Person as a Limited Partner. Section 2.3 NAME; PRINCIPAL PLACE OF BUSINESS. The name of the Partnership shall be RRF Limited Partnership. The principal place of business of the Partnership shall be at 1615 E. Northern Avenue, Suite 105, Phoenix, Arizona 85020. The General Partner may at any time change the location of such office, provided the General Partner gives notice to the Partners of any such change. Section 2.4 REGISTERED AGENT AND REGISTERED OFFICE. The registered agent of the Partnership shall be The Corporation Trust Company, a Delaware corporation, located at 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, or such other Person as the General Partner may select in its sole discretion. The registered office of the Partnership shall be Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, or such other location as the General Partner may select in its sole and absolute discretion. ARTICLE III BUSINESS AND TERM OF PARTNERSHIP -------------------------------- Section 3.1 BUSINESS. The purpose and nature of the business of the Partnership is to conduct any business that may lawfully be conducted by a limited partnership organized pursuant to the Act, provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to be classified as a REIT, unless the Board of Trustees of the General Partner determines to cease to maintain the qualification of the General Partner as a REIT. To consummate the foregoing and to carry out the obligations of the Partnership in connection therewith or incidental thereto, the General Partner shall have the authority, in accordance with and subject to the limitations set forth elsewhere in this Agreement, to make, enter into, perform and carry out any arrangements, contracts and/or agreements of every kind for any lawful purpose, without limit as to amount or otherwise, with any corporation, association, partnership, limited liability company, firm, trustee, syndicate, individual and/or any political or governmental division, subdivision or agency, domestic or foreign, and generally to make and perform agreements and contracts of every kind and description and to do any and all things necessary or incidental to the foregoing for the protection and enhancement of the assets of the Partnership. -8- 13 Section 3.2 TERM. The Partnership as herein constituted shall continue until December 31, 2047, unless earlier dissolved or terminated pursuant to law or the provisions of this Agreement. ARTICLE IV CAPITAL CONTRIBUTIONS Section 4.1 GENERAL PARTNER. (a) The General Partner has contributed cash and certain other assets to the capital of the Partnership in the amount set forth opposite the name of the General Partner on Exhibit A attached hereto. Section 4.2 LIMITED PARTNERS. The Limited Partners have contributed their respective ownership interests in the Contributed Partnerships to the capital of the Partnership. The Agreed Values of the Limited Partners' proportionate ownership interests in the Contributed Partnerships are set forth on Exhibit A attached hereto. Section 4.3 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS. Except as provided in this Section 4.3 or in Section 4.4, the Partners shall have no right or obligation to make any additional Capital Contributions or loans to the Partnership. The General Partner may contribute additional capital to the Partnership, from time to time, and receive additional Partnership Interests in respect thereof, in the manner contemplated in this Section 4.3. (a) ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS. (i) GENERAL. The General Partner is hereby authorized to cause the Partnership to issue such additional Partnership Interests in the form of Partnership Units for any Partnership purpose at any time or from time to time, to the Partners or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any of the Limited Partners. Any additional Partnership Interest issued thereby may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests, all as shall be determined by the General Partner in its sole and absolute discretion and without the approval of any Limited Partner, subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each class or series of Partnership Interests upon dissolution -9- 14 and liquidation of the Partnership; PROVIDED, HOWEVER, that no additional Partnership Interests shall be issued to the General Partner unless: (1) (A) The additional Partnership Interests are issued in connection with an issuance of Additional Securities as permitted under clause (ii) below, or (2) the additional Partnership Interests are issued to all Partners in proportion to their respective Percentage Interests. Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Interests for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership. (ii) UPON ISSUANCE OF ADDITIONAL SECURITIES. The General Partner shall not issue any additional REIT Shares (other than REIT Shares issued in connection with an exchange pursuant to Section 7.4 hereof) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares (collectively, "Additional Securities") other than to all holders of REIT Shares, unless (A) the General Partner shall cause the Partnership to issue to the General Partner Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights, all such that the economic interests are substantially similar to those of the Additional Securities, and (B) the General Partner contributes the proceeds from the issuance of such Additional Securities and from any exercise of rights contained in such Additional Securities to the Partnership. Without limiting the foregoing, the General Partner is expressly authorized to issue Additional Securities for less than fair market value, and to cause the Partnership to issue to the General Partner corresponding Partnership Interests, so long as (x) the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership, and (y) the General Partner contributes all proceeds from such issuance to the Partnership. For example, in the event the General Partner issues REIT Shares for a cash purchase price and contributes all of the proceeds of such issuance to the Partnership as required hereunder, the General Partner shall be issued a number of additional Partnership Units equal to the product of (A) the number of such REIT Shares issued by the General Partner, the proceeds of which were so contributed, multiplied by (B) a fraction, the numerator of which is 100%, and the denominator of which is the Exchange Factor in effect on the date of such contribution. (b) CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF REIT SHARES. In connection with any and all issuances of REIT Shares, the General -10- 15 Partner shall contribute all of the proceeds raised in connection with such issuance to the Partnership as Capital Contributions, PROVIDED THAT if the proceeds actually received and contributed by the General Partner are less than the gross proceeds of such issuance as a result of any underwriter's discount or other expenses paid or incurred in connection with such issuance, then the General Partner shall be deemed to have made Capital Contributions to the Partnership in the aggregate amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have paid such offering expenses in connection with the required issuance of additional Partnership Units to the General Partner for such Capital Contributions pursuant to Section 4.3(a) hereof. Section 4.4 ADDITIONAL FUNDING. If the General Partner determines that it is in the best interests of the Partnership to provide for additional Partnership funds ("Additional Funds") for any Partnership purpose, the General Partner may (i) cause the Partnership to obtain such funds from outside borrowings, or (ii) elect to have the General Partner provide such Additional Funds to the Partnership through loans or otherwise. Section 4.5 EQUITY PLAN. If at any time or from time to time stock options or other equity compensation granted in connection with the General Partner's Equity Plan or other compensation programs are exercised in accordance with the terms of such agreements: (a) the General Partner shall, as soon as practicable after such exercise, contribute to the capital of the Partnership an amount equal to the exercise price paid to the General Partner by such exercising party in connection with the exercise of the stock option; (b) the Partnership shall issue and the General Partner shall receive the number of Partnership Units corresponding to the number of REIT Shares delivered by the General Partner to such exercising party multiplied by a fraction the numerator of which is one (1) and the denominator of which is the Exchange Factor (as defined in Exhibit D hereto) in effect on the date of such contribution; (c) after the issuance of such Partnership Units to the General Partner, the Percentage Interest of each Limited Partner shall be adjusted such that the Percentage Interest of the Limited Partner shall be equal to a fraction, the numerator of which is the number of Partnership Units owned by such Limited Partner and the denominator of which is the total number of issued and outstanding Partnership Units on such date. The General Partner shall promptly give each Limited Partner written notice of its Percentage Interest, as adjusted; and -11- 16 (d) after the issuance of such Partnership Units to the General Partner, the Percentage Interest of the General Partner shall be adjusted such that it equals 100% minus the sum of the Percentage Interests of all Limited Partners immediately after being adjusted pursuant to paragraph (c) of this Section 4.5. 4.6 DIVIDEND REINVESTMENT PLAN. All amounts received by the General Partner in respect of its dividend reinvestment plan, if any, shall be contributed by the General Partner to the Partnership in exchange for additional Partnership Units as follows: (a) the Partnership shall issue and the General Partner shall receive the number of Partnership Units corresponding to the number of REIT Shares delivered by the General Partner to such exercising party multiplied by a fraction the numerator of which is one (1) and the denominator of which is the Exchange Factor (as defined in Exhibit D hereto) in effect on the date of such contribution; (b) after the issuance of such Partnership Units to the General Partner, the Percentage Interest of each Limited Partner shall be adjusted such that the Percentage Interest of the Limited Partner shall be equal to a fraction, the numerator of which is the number of Partnership Units owned by such Limited Partner and the denominator of which is the total number of issued and outstanding Partnership Units on such date. The General Partner shall promptly give each Limited Partner written notice of its Percentage Interest, as adjusted; and (c) after the issuance of such Partnership Units to the General Partner, the Percentage Interest of the General Partner shall be adjusted such that it equals 100% minus the sum of the Percentage Interests of all Limited Partners immediately after being adjusted pursuant to paragraph (b) of this Section 4.6. Section 4.7 INTEREST. No interest shall be paid on the Capital Contribution or Capital Account of any Partner. Section 4.8 RETURN OF CAPITAL. Except as expressly provided in this Agreement, no Partner shall be entitled to demand or receive the return of his Capital Contribution. -12- 17 ARTICLE V PROFITS, LOSSES AND ACCOUNTING ------------------------------ Section 5.1 ALLOCATION OF PROFITS AND LOSSES. Except as otherwise provided herein or in Exhibit B, profits earned and losses incurred by the Partnership shall be allocated among the Partners in accordance with their respective Percentage Interests. Section 5.2 ACCOUNTING. (a) The books of the Partnership shall be kept on the accrual basis and in accordance with generally accepted accounting principles consistently applied. (b) The fiscal year of the Partnership shall be the calendar year. (c) The terms "profits" and "losses," as used herein, shall mean all items of income, gain, expense or loss as determined utilizing federal income tax accounting principles and shall also include each Partner's share of income described in Section 705(a)(1)(B) of the Code, any expenditures described in Section 705(a)(2)(B) of the Code, any expenditures described in Section 709(a) of the Code which are not deducted or amortized in accordance with Section 709(b) of the Code, losses not deductible pursuant to Sections 267(a) and 707(b) of the Code and adjustments made pursuant to Exhibit B attached hereto. (d) The General Partner shall be the Tax Matters Partner of the Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax Matters Partner, the General Partner shall have the right and obligation to take all actions authorized and required, respectively, by the Code for the Tax Matters Partner. The General Partner shall have the right to retain professional assistance in respect of any audit of the Partnership by the IRS, and all out-of-pocket expenses and fees incurred by the General Partner on behalf of the Partnership as Tax Matters Partner shall constitute Operating Expenses of the Partnership. In the event the General Partner receives notice of a final Partnership adjustment under Section 6223(a)(2) of the Code, the General Partner shall either (i) file a court petition for judicial review of such final adjustment within the period provided under Section 6226(a) of the Code, a copy of which petition shall be mailed to each Limited Partner on the date such petition is filed, or (ii) mail a written notice to each Limited Partner, within such period, that describes the General Partner's reasons for determining not to file such a petition. (e) Except as specifically provided herein, all elections required or permitted to be made by the Partnership under the Code shall be made by the General Partner in its sole discretion. (f) Any Partner shall have the right to a private audit of the books and records of the Partnership, provided such audit is made at the expense of the Partner desiring it, and it is made during normal business hours. -13- 18 Section 5.3 PARTNERS' ACCOUNTS. (a) There shall be maintained a Capital Account for each Partner in accordance with this Section 5.3 and the principles set forth in Exhibit B attached hereto and made a part hereof. The amount of cash and the net fair market value of property contributed to the Partnership by each Partner, net of liabilities assumed by the Partnership, shall be credited to its Capital Account, and from time to time, but not less often than annually, the share of each Partner in profits, losses and fair market value of distributions shall be credited or charged to its Capital Account. The determination of Partners' Capital Accounts, and any adjustments thereto, shall be made consistent with tax accounting and other principles set forth in Section 704(b) of the Code and applicable regulations thereunder and Exhibit B attached hereto. (b) Except as otherwise specifically provided herein or in a guarantee of a Partnership liability, signed by a Limited Partner, no Limited Partner shall be required to make any further contribution to the capital of the Partnership to restore a loss, to discharge any liability of the Partnership or for any other purpose, nor shall any Limited Partner personally be liable for any liabilities of the Partnership or of the General Partner except as provided by law or this Agreement. All Limited Partners hereby waive their right of contribution which they may have against other Partners in respect of any payments made by them under any guarantee of Partnership debt. (c) Immediately following the transfer of any Partnership Interest, the Capital Account of the transferee Partner shall be equal to the Capital Account of the transferor Partner attributable to the transferred interest, and such Capital Account shall not be adjusted to reflect any basis adjustment under Section 743 of the Code. (d) For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes, taking into account any adjustments required pursuant to Section 704(b) of the Code and the applicable regulations thereunder as more fully described in Exhibit B attached hereto. Section 5.4 SECTION 754 ELECTIONS. The General Partner shall elect, pursuant to Section 754 of the Code, to adjust the basis of the Partnership's assets for all transfers of Partnership interests if such election would benefit any Partner or the Partnership. -14- 19 ARTICLE VI POWERS, DUTIES, LIABILITIES, COMPENSATION AND VOTING OF GENERAL PARTNER ------------------------------------------ Section 6.1 POWERS OF GENERAL PARTNER. Notwithstanding any provision of this Agreement to the contrary, the General Partner's discretion and authority are subject to the limitations imposed by law, by the General Partner's Declaration of Trust and its By-Laws. Subject to the foregoing and to other limitations imposed by this Agreement, the General Partner shall have full, complete and exclusive discretion to manage and control the business and affairs of the Partnership and make all decisions affecting the business and assets of the Partnership. Without limiting the generality of the foregoing (but subject to the restrictions specifically contained in this Agreement), the General Partner shall have the power and authority to take the following actions on behalf of the Partnership: (a) to acquire, purchase, own, lease and dispose of any real property and any other property or assets that the General Partner determines are necessary or appropriate or in the best interests of conducting the business of the Partnership; (b) to construct buildings and make other improvements (including renovations) on or to the properties owned or leased by the Partnership; (c) to borrow money for the Partnership, issue evidences of indebtedness in connection therewith, refinance, guarantee, increase the amount of, modify, amend or change the terms of, or extend the time for the payment of, any indebtedness or obligation of or to the Partnership, and secure such indebtedness by mortgage, deed of trust, pledge or other lien on the Partnership's assets; (d) to pay, either directly or by reimbursement, for all Operating Expenses to third parties or to the General Partner (as set forth in this Agreement); (e) to lease all or any portion of any of the Partnership's assets, whether or not the terms of such leases extend beyond the termination date of the Partnership and whether or not any portion of the Partnership's assets so leased are to be occupied by the lessee, or, in turn, subleased in whole or in part to others, for such consideration and on such terms as the General Partner may determine; (f) to prosecute, defend, arbitrate, or compromise any and all claims or liabilities in favor of or against the Partnership, on such terms and in such manner as the General Partner may reasonably -15- 20 determine, and similarly to prosecute, settle or defend litigation with respect to the Partners, the Partnership, or the Partnership's assets; provided, however, that the General Partner may not, without the consent of all of the Partners, confess a judgment against the Partnership; (g) to file applications, communicate, and otherwise deal with any and all governmental agencies having jurisdiction over, or in any way affecting, the Partnership's assets or any other aspect of the Partnership business; (h) to make or revoke any election permitted or required of the Partnership by any taxing authority; (i) to maintain such insurance coverage for public liability, fire and casualty, and any and all other insurance for the protection of the Partnership, for the conservation of Partnership assets, or for any other purpose convenient or beneficial to the Partnership, in such amounts and such types as the General Partner shall determine from time to time; (j) to determine whether or not to apply any insurance proceeds for any Property to the restoration of such Property or to distribute the same; (k) to retain providers of services of any kind or nature in connection with the Partnership business and to pay therefor such reasonable remuneration as the General Partner may deem proper; (l) to negotiate and conclude agreements on behalf of the Partnership with respect to any of the rights, powers and authority conferred upon the General Partner, including, without limitation, management agreements, franchise agreements, agreements with federal, state or local liquor licensing agencies and agreements with operators of restaurants and bars; (m) to maintain accurate accounting records and to file promptly all federal, state and local income tax returns on behalf of the Partnership; (n) to form or acquire an interest in, and contribute property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of -16- 21 property to, its Subsidiaries and any other Person in which it has an equity interest from time to time); (o) to distribute Partnership cash or other Partnership assets in accordance with this Agreement; (p) to establish Partnership reserves for working capital, capital expenditures, contingent liabilities or any other valid Partnership purpose; (q) to take whatever action the General Partner deems appropriate to maintain an equivalency of Partnership Units and REIT Shares; and (r) to take such other action, execute, acknowledge, swear to or deliver such other documents and instruments, and perform any and all other acts the General Partner deems necessary or appropriate for the formation, continuation and conduct of the business and affairs of the Partnership (including, without limitation, all actions consistent with qualification of the General Partner as a REIT) and to possess and enjoy all of the rights and powers of a general partner as provided by the Act. Except as otherwise provided herein, to the extent the duties of the General Partner require expenditures of funds to be paid to third parties, the General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to authorize or require the General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Partnership. Section 6.2 DELEGATION OF AUTHORITY. The General Partner may delegate any or all of its powers, rights and obligations hereunder, and may appoint, employ, contract or otherwise deal with any Person for the transaction of the business of the Partnership, which Person may, under supervision of the General Partner, perform any acts or services for the Partnership as the General Partner may approve. Section 6.3 DUTIES OF GENERAL PARTNER. (a) The General Partner, subject to the limitations contained elsewhere in this Agreement, shall manage or cause to be managed the affairs of the Partnership in a prudent and businesslike manner and shall devote sufficient time and effort to the Partnership affairs. (b) In carrying out its obligations, the General Partner shall: -17- 22 (i) Render annual reports to all Partners with respect to the operations of the Partnership; (ii) On or before April 30th of every year, mail to all persons who were Partners at any time during the Partnership's prior fiscal year an annual report of the Partnership, including all necessary tax information, and any other information regarding the Partnership and its operations during the prior fiscal year deemed by the General Partner to be material; (iii) Maintain complete and accurate records of all business conducted by the Partnership and complete and accurate books of account (containing such information as shall be necessary to record allocations and distributions), and make such records and books of account available for inspection and audit by any Partner or such Partner's duly authorized representative (at the sole expense of such Partner) during regular business hours and at the principal office of the Partnership; and (iv) Cause to be filed such certificates and do such other acts as may be required by law to qualify and maintain the Partnership as a limited partnership under the laws of the State of Delaware. (c) The General Partner shall take such actions as it deems appropriate to maintain an equivalency of Partnership Units and REIT Shares. Section 6.4 LIABILITIES OF GENERAL PARTNER; INDEMNIFICATION. (a) The General Partner shall not be liable for the return of all or any part of the Capital Contributions of the Limited Partners. Any returns shall be made solely from the assets of the Partnership according to the terms of this Agreement. (b) In carrying out its duties hereunder, the General Partner shall not be liable to the Partnership or to any other Partner for any actions taken in good faith and reasonably believed to be in the best interests of the Partnership, or for errors of judgment, but shall be liable only for fraud or gross negligence. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership, the General Partner and the General Partner's shareholders collectively, and that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners) in deciding whether to cause the Partnership to take (or decline to take) any actions. In the event of a conflict between the interests of the shareholders of the General Partner on one hand and the Limited Partners on the other, the General Partner shall endeavor in good faith to resolve the conflict in a manner not adverse to either the shareholders of the General Partner or the Limited Partners; provided, however, that for so long as the General Partner has securities -18- 23 registered pursuant to ss.12 or ss.15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any such conflict that cannot be resolved in a manner not adverse to either the shareholders of the General Partner or the Limited Partners shall be resolved in favor of the shareholders. The General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. Any amendment, modification or repeal of this Section 6.4 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 6.4 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted. (c) The Partnership shall indemnify and defend an Indemnitee to the fullest extent permitted by law, and save and hold it harmless from and against, and in respect of, all: (i) fees, costs and expenses (including reasonable attorney fees) incurred in connection with or resulting from any claim, action or demand against any Indemnitee or the Partnership that arises out of or in any way relates to the Partnership, and (ii) claims, actions and demands arising out of or in any way related to the Partnership, and any losses or damages resulting from such claims, actions and demands, including, without limitation, reasonable costs and expenses of litigation and appeal and amounts paid in settlement or compromise of any such claim, action or demand; provided, however, that this indemnification shall not apply if: (A) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (B) the Indemnitee actually received an improper personal benefit in money, property or services; or (C) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 6.4(c). The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee acted in a manner contrary to that specified in this Section 6.4(c). Any indemnification pursuant to this Section 6.4 shall be made only out of the assets of the Partnership. (d) The Partnership may reimburse an Indemnitee for reasonable expenses incurred by an Indemnitee who is a party to a proceeding in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 6.4 has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. -19- 24 (e) The indemnification provided by this Section 6.4 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity. (f) The Partnership may purchase and maintain insurance on behalf of the Indemnities, and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. (g) For purposes of this Section 6.4, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by the Indemnitee of its duties to the Partnership also imposes duties on, or otherwise involves services by the Indemnitee, to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 6.4; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by the Indemnitee to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. (h) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. (i) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.4 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (j) The provisions of this Section 6.4 are for the benefit of the Indemnities, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other persons. (k) Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the General Partner to continue to qualify as a REIT, or (ii) to prevent the General Partner from incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed -20- 25 approved by all of the Limited Partners. Further, any provision of this Agreement that might jeopardize the General Partner's REIT status shall be (i) void and of no effect, or (ii) reformed, as necessary, to avoid the General Partner's loss of REIT status, unless the Board of Trustees of the General Partner shall determine not to maintain the General Partner's REIT status. Section 6.5 COMPENSATION OF GENERAL PARTNER; REIMBURSEMENT. The General Partner, as such, shall not receive any compensation for services rendered to the Partnership. Notwithstanding the preceding sentence, the General Partner shall be entitled to its allocable share of the profits and distributable Cash Flow of the Partnership and shall be entitled, in accordance with the provisions of Section 6.7 below, to pay reasonable compensation to its Affiliates and other entities with which it may be associated for services performed. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all REIT Expenses. Section 6.6 RELIANCE ON ACT OF GENERAL PARTNER. No financial institution or any other person, firm or corporation dealing with the General Partner or the Partnership shall be required to ascertain whether the General Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm or corporation shall be protected in relying solely upon the assurance of and the execution of any instrument or instruments by the General Partner. Section 6.7 OUTSIDE SERVICES; DEALINGS WITH AFFILIATES; OUTSIDE ACTIVITIES. (a) Notwithstanding any provision of this Article VI to the contrary, the General Partner may employ such agents, accountants, attorneys and others as it shall deem advisable, including its trustees, directors, officers, shareholders, and its Affiliates and entities with which the General Partner, any Limited Partner or their respective Affiliates may be associated, and may pay them reasonable compensation from Partnership funds for services performed, which compensation shall be reasonably believed by the General Partner to be comparable to and competitive with fees charged by unrelated Persons who render comparable services which could reasonably be made available to the Partnership. The General Partner shall not be liable for the neglect, omission or wrongdoing of any such Person so long as it was not grossly negligent in appointing such Person. (b) The Partnership may lend or contribute to its Subsidiaries or other Persons in which it has an equity investment Partnership funds on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. (c) The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes -21- 26 a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law. (d) Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates nor any Limited Partner shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are on terms that are fair and reasonable to the Partnership. (e) Subject to the Declaration of Trust and any agreements entered into by the General Partner or its Affiliates with the Partnership or a Subsidiary, any officer, director, employee, agent, trustee, Affiliate or shareholder of the General Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities substantially similar or identical to those of the Partnership. Neither the Partnership nor any of the Limited Partners shall have any rights by virtue of this Agreement in any business ventures of such person. (f) In the event the General Partner exercises its rights under its Declaration of Trust to redeem REIT Shares, then the General Partner shall cause the Partnership to purchase from it a number of Partnership Units as determined based on the application of the Exchange Factor on the same terms that the General Partner redeemed such REIT Shares. Section 6.8 GENERAL PARTNER PARTICIPATION. The General Partner agrees that all business activities of the General Partner, including activities pertaining to the acquisition, development and ownership of Properties, shall be conducted through the Partnership (other than the General Partner's interest in the Corporate Hotel not owned through the Partnership). Without the Consent of the Limited Partners, the General Partner shall not, directly or indirectly, participate in or otherwise acquire any interest in any real or personal property unless the Partnership participates in, or otherwise acquires an interest in, such real or personal property at least to the extent of 999 times such proposed participation by the General Partner. The General Partner agrees that all borrowings for the purpose of making distributions to its shareholders will be incurred by the Partnership and the proceeds of such indebtedness will be included as Net Financing Proceeds hereunder. ARTICLE VII RIGHTS, PROHIBITIONS AND REPRESENTATIONS WITH RESPECT TO LIMITED PARTNERS -------------------------------- Section 7.1 RIGHTS OF LIMITED PARTNERS. (a) The Partnership may engage the Limited Partners or persons or firms associated with them for specific purposes and may otherwise deal with such Partners on terms and for compensation to -22- 27 be agreed upon by any such Partner and the Partnership; provided, however, that no Limited Partner shall be entitled to participate in the management or control of the business of the Partnership. (b) Each Limited Partner shall be entitled to have the Partnership books kept at the principal place of business of the Partnership and at all times, during reasonable business hours and at such Partner's sole expense, shall be entitled to inspect and copy any of them and have on demand true and full information of all things affecting the Partnership and a formal accounting of Partnership affairs whenever circumstances render it just and reasonable. (c) No Limited Partner shall be liable for any debts, liabilities, contracts or obligations of the Partnership. A Limited Partner shall be liable to the Partnership only to make payments of its Capital Contribution, if any, as and when due hereunder. After its Capital Contribution is fully paid, no Limited Partner shall, except as otherwise required by the Act, be required to make any further Capital Contributions or other payments or lend any funds to the Partnership. Section 7.2 PROHIBITIONS WITH RESPECT TO THE LIMITED PARTNERS. No Limited Partner shall have the right: (a) To take part in the control or management of the Partnership business, to transact business for or on behalf of the Partnership or to sign for or to bind the Partnership, such powers being vested solely in the General Partner as set forth herein; (b) To have such Partner's Capital Contributions repaid except to the extent provided in this Agreement; (c) To require partition of Partnership property or to compel any sale or appraisement of Partnership assets or sale of a deceased Partner's interests therein, notwithstanding any provisions of law to the contrary; or (d) To sell or assign all or any portion of such Partner's Limited Partnership Interest in the Partnership or to constitute the vendee or assignee thereunder a Substitute Limited Partner, except as provided in Article IX hereof. Section 7.3 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR AFFILIATE. No Limited Partner shall at any time, either directly or indirectly, own any shares or other interest in the General Partner or in any Affiliate thereof if such ownership by itself or in conjunction with other shares or other interests owned by other Limited Partners would, in the opinion of counsel for the Partnership, jeopardize the classification of the Partnership as a partnership or the -23- 28 General Partner as a REIT for federal income tax purposes. The General Partner shall be entitled to make such reasonable inquiry of the Limited Partners as is required to establish compliance by the Limited Partners with the provisions of this Section 7.3 and the Limited Partners shall promptly and fully respond to such inquiries. Section 7.4 GRANT OF RIGHTS. (a) The General Partner does hereby grant to the Class A Limited Partners and the Class A Limited Partners do hereby accept the right, but not the obligation (such rights hereinafter sometimes referred to as the "Rights"), to exchange all or a portion of their Partnership Units for REIT Shares and to sell the remainder (or any part thereof) of their Partnership Units to the General Partner (or its designee), at any time or from time to time prior to the time the Partnership is dissolved, on the terms and subject to the conditions and restrictions contained in Exhibit D hereto. The Rights granted hereunder may be exercised by any one or more of the Limited Partners, on the terms and subject and to the conditions and restrictions contained in Exhibit D hereto, upon delivery to the General Partner of an Exercise Notice in the form of Schedule 1 attached to Exhibit D, which notice shall specify the Partnership Units to be converted by such Limited Partner. Once delivered, the Exercise Notice shall be irrevocable, subject to payment by the General Partner of the Purchase Price in respect of such Partnership Units in accordance with the terms hereof. (b) The terms and provisions applicable to the Rights shall be as set forth in attached Exhibit D. (c) Any Partnership Units acquired by the General Partner pursuant to an exercise by any Limited Partner of the Rights shall be deemed to be acquired by and reallocated or reissued to the General Partner. The General Partner shall amend Exhibit A hereto to reflect each such conversion and reallocation or reissuance of Partnership Units and each corresponding recalculation of the Partnership Units of the Partners. (d) The Class B Limited Partners shall not be entitled to the Rights unless and until the Board of Trustees of the General Partner agrees to reclassify any of the Partnership Units held as Class B Units to Class A Units; provided, however, in the event that (a) a Class B Limited Partner pledges any Partnership Units and (b) the secured creditor of such Class B Limited Partner should exercise its rights with respect to such Units, including repossession thereof, then at such secured creditor's option, such Units shall be reclassified as Class A Units and entitle the holder thereof (or other third-party assignee of the secured creditor) to exercise the Rights, in all cases subject to the terms and provisions of this Agreement, including, without limitation, the Ownership Limit. -24- 29 Section 7.5 WARRANTIES AND REPRESENTATIONS OF THE LIMITED PARTNERS. Each Limited Partner hereby warrants and represents to and for the benefit of the General Partner and the Partnership that such Limited Partner owns good, valid and marketable title to the ownership interests in the Contributed Partnerships being contributed to the capital of the Partnership by such Limited Partner (the "Ownership Interests") and that such Ownership Interests are free and clear of all mortgages, pledges, liens, security interests, encumbrances and restrictions of any nature whatsoever. Each Limited Partner further warrants and represents to and for the benefit of the General Partner and the Partnership that such Limited Partner has all necessary power and authority to transfer the Ownership Interests to the Partnership without the consent or authorization of, or notice to, any third party, except those third parties from whom such consents or authorizations have been obtained. The Class B Limited Partners also represent and warrant to and for the benefit of the General Partner and the Partnership those matters set forth on Exhibit E hereto. Section 7.6 INDEMNIFICATION BY LIMITED PARTNERS. Each Limited Partner hereby agrees to indemnify and defend the General Partner and the Partnership and hold the General Partner, its shareholders, officers and trustees and the Partnership and its partners and each of their respective representatives, successors and assigns harmless from and against any and all claims, demands, losses, liabilities, damages and expenses (including reasonable attorneys' fees) arising out of or in connection with (i) the inaccuracy of the warranties and representations made by such Limited Partner under Section 7.5 above, or (ii) the ownership of the Ownership Interests by such Limited Partner. Section 7.7 LIMITED PARTNER GUARANTEES. Upon the request of the General Partner, or upon its own election, a Limited Partner (the "Initiating Limited Partner") from time to time, may, but shall not be required to, guarantee or otherwise provide credit support for Partnership indebtedness as such Limited Partner may elect; provided, however, that the Limited Partner shall be entitled to take such action(s) only if the General Partner determines that any such action would not have a material adverse effect on the tax position of the General Partner. All Partners are entitled to notice of any such guarantee(s) or credit support, and shall have the right to provide guarantees or credit support on the same terms and conditions as the Initiating Limited Partner does, and all Limited Partners interested in providing such guarantee or credit support shall cooperate with the General Partner and each other in considering any guarantee or credit support proposal, and the General Partner will cooperate in permitting or obtaining any consents for such guarantees or credit support. -25- 30 ARTICLE VIII DISTRIBUTIONS AND PAYMENTS TO PARTNERS -------------------------------------- Section 8.1 DISTRIBUTIONS OF CASH FLOW. (a) The General Partner shall distribute on a quarterly basis such portion of the Cash Flow of the Partnership as the General Partner shall determine in its sole discretion. All such distributions of Cash Flow shall be made to Partners who are Partners on the Partnership Record Date in accordance with such Partner's respective Percentage Interests on such Partnership Record Date. (b) In no event may a Partner receive a distribution of Cash Flow with respect to a Partnership Unit if such Partner is entitled to receive a dividend out of the General Partner's share of such Cash Flow with respect to a REIT Share for which all or part of such Partnership Unit has been exchanged. Section 8.2 REIT DISTRIBUTION REQUIREMENTS. Unless the General Partner determines that such a distribution would not be in the best interests of the Partnership, the Partnership shall make a distribution of Cash Flow for each fiscal year of the Partnership to enable the General Partner (i) to meet its distribution requirement for qualification as a REIT as set forth in Section 857(a)(1) of the Code, and (ii) to avoid the excise tax imposed by Section 4981 of the Code. Section 8.3 NO RIGHT TO DISTRIBUTIONS IN KIND. No Partner shall be entitled to demand property other than cash in connection with any distribution by the Partnership. Section 8.4 DISPOSITION PROCEEDS. Disposition Proceeds (less reasonable reserves set aside by the General Partner for reasonably anticipated expenses or needs of the Partnership) shall be distributed to the Partners in accordance with their respective Percentage Interests in the Partnership. Section 8.5 WITHDRAWALS. No Partner shall be entitled to make withdrawals from its Capital Account except as provided herein. ARTICLE IX TRANSFERS OF INTERESTS ---------------------- Section 9.1 GENERAL PARTNER. The General Partner shall not withdraw from the Partnership and shall not sell, assign, pledge, encumber or otherwise dispose of all or any portion of its interest in the Partnership. In the event the General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, or dissolves, terminates or upon an Event of Bankruptcy of the General Partner, then the Partnership shall be dissolved and terminated unless a Majority-In- -26- 31 Interest of the Limited Partners elect to continue the Partnership business by selecting a substitute general partner. Section 9.2 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER. A Person shall be admitted as a Substitute or Additional General Partner of the Partnership only if the transaction giving rise to such substitution or admission is otherwise permitted under this Agreement and the following terms and conditions are satisfied: (a) the Person to be admitted as a Substitute or Additional General Partner shall have accepted and agreed to be bound by all the terms and provisions of this Agreement by executing a counterpart thereof and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner, and a certificate evidencing the admission of such Person as a General Partner shall have been filed for recordation and all other actions required by the Act in connection with such admission shall have been performed; (b) if the Person to be admitted as a Substitute or Additional General Partner is a corporation or a partnership, it shall have provided the Partnership with evidence satisfactory to counsel for the Partnership of such Person's authority to become a General Partner and to be bound by the terms and provisions of this Agreement; and (c) counsel for the Partnership shall have rendered an opinion (relying on such opinions from counsel in the state or any other jurisdiction as may be necessary) that the admission of the Person to be admitted as a Substitute or Additional General Partner is in conformity with the Act and that none of the actions taken in connection with the admission of such Person as a Substitute or Additional General Partner will cause the termination of the Partnership under Section 708 of the Code, or will cause it to be classified other than a partnership for federal income tax purposes, or will result in the loss of any Limited Partner's limited liability status. Section 9.3 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of Bankruptcy as to a General Partner or the withdrawal, removal or dissolution of a General Partner (except that, if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or removal of a partner in such partnership shall be deemed not to be a dissolution of such General Partner if the business of such General Partner is continued within ninety (90) days by the remaining general partners or all remaining members of such partnership), the -27- 32 Partnership shall be dissolved and terminated unless the Partnership is continued pursuant to Section 9.3(b). (b) Following the occurrence of an Event of Bankruptcy as to a General Partner or the withdrawal, removal or dissolution of a General Partner (except that, if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or removal of a partner in such partnership shall be deemed not be a dissolution of such General Partner if the business of such General Partner is continued within ninety (90) days by the remaining general partners or all remaining members of such partnership), persons holding at least a majority of the Limited Partnership Interests, within ninety (90) days after such occurrence, may elect to continue the business of the Partnership for the balance of the term specified in Section 3.2 by selecting, subject to Section 9.2 and any other provisions of this Agreement, a Substitute General Partner. If the Limited Partners elect to reconstitute the Partnership and admit a Substitute General Partner, the relationship between the Partners and any Person who has acquired an interest of a Partner in the Partnership shall be governed by this Agreement. Section 9.4 REMOVAL OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of Bankruptcy as to, or the dissolution of, a General Partner, such General Partner shall be deemed to be removed automatically; provided, however, that if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or removal of a partner in such partnership shall be deemed not to be a dissolution of the General Partner if the business of such General Partner is continued within ninety (90) days by the remaining general partners or all remaining members of such Partnership. (b) If a General Partner has been removed pursuant to this Section 9.4 and the Partnership is not continued pursuant to Section 9.3(b), the Partnership shall be dissolved. Section 9.5 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS. (a) Except as otherwise provided in this Article IX, no Limited Partner may offer, sell, assign or otherwise transfer its Limited Partnership Interest, in whole or in part, whether voluntarily or by operation of law or at judicial sale or otherwise (collectively, a "Transfer"), without the written consent of the General Partner, which consent may be withheld in the sole and absolute discretion of the General Partner. The General Partner may require, as a condition of any Transfer, that the transferor assume all costs incurred by the Partnership in connection therewith. (b) No Limited Partner may effect a Transfer of its Limited Partnership Interest if, in the opinion of legal counsel for the Partnership, such proposed Transfer would require the registration of the Limited Partnership Interest under the Securities Act of 1933, as amended, or would otherwise violate any -28- 33 applicable federal or state securities or "Blue Sky" law (including investment suitability standards). (c) No Transfer by a Limited Partner of its Partnership Interest may be made to any Person if (i) in the opinion of legal counsel for the Partnership, the Transfer would result in the Partnership's being treated as an association taxable as a corporation (other than a qualified REIT subsidiary within the meaning of Section 856(i) of the Code), (ii) such transfer is effectuated through an "established securities market" or a "secondary market" (or the substantial equivalent thereof) within the meaning of Section 7704 of the Code, or (iii) the Transfer would create a risk that the General Partner would not be taxed as a REIT for federal income tax purposes. (d) Section 9.5(a) shall not prevent any donative Transfer by an individual Limited Partner to his immediate family members or any trust in which the individual or his immediate family members own, collectively, one hundred percent (100%) of the beneficial interests, provided that the transferor assumes all costs of the Partnership in connection therewith and any such transferee shall not have the rights of a Substitute Limited Partner (unless and until admitted as a Substitute Limited Partner pursuant to this Section 9.5 and Section 9.6 of this Agreement). (e) Any Transfer in contravention of any of the provisions of this Article IX shall be void and ineffectual and shall not be binding upon, or recognized by, the Partnership. Section 9.6 ADMISSION OF SUBSTITUTE LIMITED PARTNER. (a) Subject to the other provisions of this Article IX (including, without limitation, the provisions of Section 9.5(a) regarding consent of the General Partner), an assignee of the Limited Partnership Interest of a Limited Partner (including, without limitation, any purchaser, transferee, donee, or other recipient of any disposition of such Limited Partnership Interest) shall be deemed admitted as a Limited Partner of the Partnership only upon the satisfactory completion of the following: (i) the assignee shall have accepted and agreed to be bound by the terms and provisions of this Agreement by executing a counterpart or an amendment thereof, including a revised Exhibit A, and such other documents or instruments as the General Partner may require in order to effect the admission of such Person as a Limited Partner; (ii) to the extent required, an amended certificate of limited partnership evidencing the admission of such Person as a Limited Partner shall have been signed, acknowledged and filed for record in accordance with the Act; -29- 34 (iii) the assignee shall have delivered a letter containing the representations and warranties and agreements set forth in Section 9.12; (iv) if the assignee is a corporation, partnership or trust, the assignee shall have provided the General Partner with evidence satisfactory to counsel for the Partnership of the assignee's authority to become a Limited Partner under the terms and provisions of this Agreement; (v) the assignee shall have executed a power of attorney containing the terms and provisions set forth in Article XII; and (vi) the assignee shall have paid all reasonable legal fees of the Partnership and the General Partner and all filing and publication costs incurred in connection with its substitution as a Limited Partner. (b) For the purpose of allocating profits and losses and distributing cash received by the Partnership, a Substitute Limited Partner shall be treated as having become, and appearing in the records of the Partnership as, a Partner upon the filing of the certificate described in Section 9.6(a)(ii) or, if no such filing is required, the later of the date specified in the transfer documents, or the date on which the General Partner has received all necessary instruments of transfer and substitution. (c) The General Partner shall cooperate with the Person seeking to become a Substitute Limited Partner by preparing the documentation required by this Section and making all official filings and publications. The Partnership shall take all such action as promptly as practicable after the satisfaction of the conditions in this Article IX to effectuate the admission of such Person as a Limited Partner of the Partnership. Section 9.7 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS. (a) Subject to the provisions of Sections 9.5 and 9.6 hereof, except as required by operation of law, the Partnership shall not be obligated for any purposes whatsoever to recognize the assignment by any Limited Partner of his Partnership Interest until the Partnership has received notice thereof. (b) Any Person who is the assignee of all or any portion of a Limited Partner's Limited Partnership Interest, but does not become a Substitute Limited Partner and desires to make a further assignment of such Limited Partnership Interest, shall be subject to all the provisions of this Article IX to the same extent and in the same manner as any Limited Partner desiring to make an assignment of its Limited Partnership Interest. -30- 35 Section 9.8 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A LIMITED PARTNER. The occurrence of an Event of Bankruptcy as to a Limited Partner, the death of a Limited Partner or a final adjudication that a Limited Partner is incompetent (which term shall include, but not be limited to, insanity) shall not cause the termination or dissolution of the Partnership, and the business of the Partnership shall continue. If an order for relief in a bankruptcy proceeding is entered against an individual Limited Partner, the trustee or receiver of his estate or, if he dies, his executor, administrator or trustee, or, if he is finally adjudicated incompetent, his committee, guardian or conservator, shall have the rights of such Limited Partner for the purpose of settling or managing his estate property and such power as the bankrupt, deceased or incompetent Limited Partner possessed to assign all or any part of his Partnership Interest and to join with the assignee in satisfying conditions precedent to the admission of the assignee as a Substitute Limited Partner. Section 9.9 JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be acquired by two (2) individuals as joint tenants with right of survivorship (but not as tenants in common), provided that such individuals either are married or are related. The written consent or vote of both owners of any such jointly held Partnership Interest shall be required to constitute the action of the owners of such Partnership Interest; provided, however, that the written consent of only one (1) joint owner will be required if the Partnership has been provided with evidence satisfactory to counsel for the Partnership that the actions of a single joint owner can bind both owners under the applicable laws of the state of residence of such joint owners. Upon the death of one (1) owner of a Partnership Interest held in a joint tenancy with a right of survivorship, the Partnership Interest shall become owned solely by the survivor as a Limited Partner and not as an assignee. The Partnership need not recognize the death of one (1) of the owners of a jointly held Partnership Interest until it shall have received notice of such death. Upon notice to the General Partner from either owner prior to the death of either owner, the General Partner shall cause the Partnership Interest to be divided into two (2) equal Partnership Interests, which shall thereafter be owned separately by each of the former owners. Section 9.10 TRANSFEREES. Any Partnership Interests owned by the Partners and transferred pursuant to this Article IX shall be and remain subject to all of the provisions of this Agreement. Section 9.11 ABSOLUTE RESTRICTION. Notwithstanding any provision of this Agreement to the contrary, the sale or exchange of any interest in the Partnership will not be permitted if the interest sought to be sold or exchanged, when added to the total of all other interests sold or exchanged within the period of twelve (12) consecutive months ending with the proposed date of the sale or exchange, would result in the termination of the Partnership under Section 708 of the Code, if such termination would materially and adversely affect the Partnership or any Partner. -31- 36 Section 9.12 INVESTMENT REPRESENTATION. Each Limited Partner hereby represents and warrants to the General Partner and to the Partnership that the acquisition of his Partnership Interest is made as a principal for his account for investment purposes only and not with a view to the resale or distribution of such Partnership Interest. Each Limited Partner agrees that he will not sell, assign or otherwise transfer his Partnership Interest or any fraction thereof, whether voluntarily or by operation of law or at judicial sale or otherwise, to any Person who does not similarly represent and warrant and similarly agree not to sell, assign or transfer such Partnership Interest or fraction thereof to any Person who does not similarly represent, warrant and agree. ARTICLE X TERMINATION OF THE PARTNERSHIP ------------------------------ Section 10.1 TERMINATION. The Partnership shall be dissolved upon (i) an Event of Bankruptcy as to the General Partner or the dissolution or withdrawal of the General Partner (unless within ninety (90) days thereafter Limited Partners holding more than fifty percent (50%) of the Limited Partnership Interests in the Partnership elect to continue the Partnership and to elect one or more persons to serve as the General Partner or General Partners of the Partnership), (ii) ninety (90) days following the sale of all or substantially all of the Partnership's assets (provided that if the Partnership receives an installment obligation as consideration for such sale or other disposition, the Partnership shall continue, unless sooner dissolved under the provisions of this Agreement, until such time as such note or notes are paid in full), (iii) the expiration of the term specified in Section 3.2, (iv) the redemption of all Limited Partnership Interests (other than any of such interests held by the General Partner), or (v) the election by the General Partner (but only in accordance with and as permitted by applicable law) that the Partnership should be dissolved. Upon dissolution of the Partnership (unless the business of the Partnership is continued as set forth above), the General Partner (or its trustee, receiver, successor or legal representative) shall proceed with the winding up of the Partnership, and its assets shall be applied and distributed as herein provided. Section 10.2 PAYMENT OF DEBTS. The assets shall first be applied to the payment of the liabilities of the Partnership (other than any loans or advances that may have been made by Partners to the Partnership) and the expenses of liquidation. A reasonable time shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to enable the General Partner to minimize any losses resulting from liquidation. Section 10.3 DEBTS TO PARTNERS. The remaining assets shall next be applied to the repayment of any loans made by any Partner to the Partnership. -32- 37 Section 10.4 REMAINING DISTRIBUTION. The remaining assets shall then be distributed to the Partners in accordance with the Partners' positive Capital Account balances, after making the adjustments for allocations under Article V hereof. Section 10.5 RESERVE. Notwithstanding the provisions of Sections 10.3 and 10.4, the General Partner may retain such amount as it deems necessary as a reserve for any contingent liabilities or obligations of the Partnership, which reserve, after the passage of a reasonable period of time, shall be distributed pursuant to the provisions of this Article X. Section 10.6 FINAL ACCOUNTING. Each of the Partners shall be furnished with a statement examined by the Partnership's independent accountants, which shall set forth the assets and liabilities of the Partnership as of the date of the complete liquidation. Upon the compliance by the General Partner with the foregoing distribution plan, the Limited Partners shall cease to be such, and the General Partner, as the sole remaining Partner of the Partnership, shall execute and cause to be filed a Certificate of Cancellation of the Partnership and any and all other documents necessary with respect to termination and cancellation of the Partnership. ARTICLE XI AMENDMENTS ---------- Section 11.1 AUTHORITY TO AMEND. (a) This Agreement may be amended by the General Partner without the approval of any other Partner if such amendment is solely for the purpose of clarification and does not change the substance hereof and the Partnership has obtained an opinion of counsel to that effect. (b) This Agreement may be amended by the General Partner without the approval of any other Partner if such amendment is for the purpose of adding or substituting Limited Partners. (c) This Agreement may be amended by the General Partner without the approval of any other Partner if such amendment is, in the opinion of counsel for the Partnership, necessary or appropriate to satisfy requirements of the Code with respect to partnerships or REITs or of any federal or state securities laws or regulations. Any amendment made pursuant to this Section 11.1(c) may be made effective as of the date of this Agreement. (d) Notwithstanding any contrary provision of this Agreement, any amendment to this Agreement or other act which would (i) adversely affect the limited liabilities of the Limited Partners, (ii) change the method of allocation of profit and loss as provided in Article V or the distribution provisions of Articles VIII and X hereof, (iii) seek to impose personal liability on the Limited Partners, or (iv) affect the -33- 38 operation of the Exchange Factor of the Rights shall require the consent and approval of Limited Partners holding more than sixty-five percent (65%) of the Percentage Interests of the Limited Partners. (e) Except as otherwise specifically provided in this Section 11.1, amendments to this Agreement shall require the approval of the General Partner and Limited Partners holding more than fifty percent (50%) of the Percentage Interests of the Limited Partners. Section 11.2 NOTICE OF AMENDMENTS. A copy of any amendment to be approved by the Partners pursuant to Sections 11.1(d) or 11.1(e) shall be mailed in advance to such Partners. Partners shall be notified as to the substance of any amendment pursuant to Sections 11.1(a), (b) or (c), and upon request shall be furnished a copy thereof. ARTICLE XII POWER OF ATTORNEY ----------------- Section 12.1 POWER. Each of the Limited Partners irrevocably constitutes and appoints the General Partner as such Limited Partner's true and lawful attorney in such Limited Partner's name, place and stead to make, execute, swear to, acknowledge, deliver and file: (a) Any certificates or other instruments which may be required to be filed by the Partnership under the laws of the State of Delaware or of any other state or jurisdiction in which the General Partner shall deem it advisable to file; (b) Any documents, certificates or other instruments, including, but not limited to, any and all amendments and modifications of this Agreement or of the instruments described in Section 12.1(a) which may be required or deemed desirable by the General Partner to effectuate the provisions of any part of this Agreement and, by way of extension and not in limitation, to do all such other things as shall be necessary to continue and to carry on the business of the Partnership; and (c) All documents, certificates or other instruments which may be required to effectuate the dissolution and termination of the Partnership, to the extent such dissolution and termination is authorized hereby. The power of attorney granted hereby shall not constitute a waiver of, or be used to avoid, the rights of the Partners to approve certain amendments to this Agreement pursuant to Sections 11.1 (d) and 11.1 (e) or be used in any other manner -34- 39 inconsistent with the status of the Partnership as a limited partnership or inconsistent with the provisions of this Agreement. Section 12.2 SURVIVAL OF POWER. It is expressly intended by each of the Partners that the foregoing power of attorney is coupled with an interest, is irrevocable and shall survive the death, incompetence, dissolution, liquidation or adjudication of insanity or bankruptcy or insolvency of each such Partner. The foregoing power of attorney shall survive the delivery of an assignment by any of the Partners of such Partner's entire interest in the Partnership, except that where an assignee of such entire interest has become a substitute Limited Partner, then the foregoing power of attorney of the assignor Partner shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any and all instruments necessary to effectuate such substitution. ARTICLE XIII CONSENTS, APPROVALS, VOTING AND MEETINGS ---------------------------------------- Section 13.1 METHOD OF GIVING CONSENT OR APPROVAL. Any consent or approval required by this Agreement may be given as follows: (a) by a written consent given by the consenting Partner and received by the General Partner at or prior to the doing of the act or thing for which the consent is solicited, provided that such consent shall not have been nullified by: (i) Notice to the General Partner of such nullification by the consenting Partner prior to the doing of any act or thing, the doing of which is not subject to approval at a meeting called pursuant to Section 13.2, or (ii) Notice to the General Partner of such nullification by the consenting Partner prior to the time of any meeting called pursuant to Section 13.2 to consider the doing of such act or thing, or (iii) The negative vote by such consenting Partner at any meeting called pursuant to Section 13.2 to consider the doing of such act or thing; (b) by the affirmative vote by the consenting Partner to the doing of the act or thing for which the consent is solicited at any meeting called pursuant to Section 13.2 to consider the doing of such act or thing; or (c) by the failure of the Partner to respond or object to a request from the General Partner for such Partner's consent within thirty (30) days from its receipt of such request (or such shorter period of time as the General Partner may -35- 40 indicate in such request in order to ensure that the General Partner has sufficient time to respond, if required, to any third party with respect to the subject matter of such request). Section 13.2 MEETINGS OF LIMITED PARTNERS. Any matter requiring the consent or vote of all or any of the Partners may be considered at a meeting of the Partners held not less than five (5) nor more than sixty (60) days after notice thereof shall have been given by the General Partner to all Partners. Such notice (i) may be given by the General Partner, in its discretion, at any time, or (ii) shall be given by the General Partner within fifteen (15) days after receipt from Limited Partners holding more than fifty percent (50%) of the Percentage Interests of the Limited Partners of a request for such meeting. Section 13.3 OPINION. Except for Consents obtained pursuant to Sections 13.1 or 13.2, no Limited Partner shall exercise any consent or voting rights unless either (a) at the time of the giving of consent or casting of any vote by the Partners hereunder, counsel for the Partnership or counsel employed by the Limited Partners (and reasonably satisfactory to the General Partner) shall have delivered to the Partnership an opinion satisfactory to the Partners to the effect that such conduct (i) is permitted by the Act, (ii) will not impair the limited liability of the Limited Partners, and (iii) will not adversely affect the classification of the Partnership as a partnership for federal income tax purposes, or (b) irrespective of the delivery or nondelivery of such opinion of counsel, Limited Partners holding more than seventy-five percent (75%) of the Percentage Interests of the Limited Partners determine to exercise their consent and/or voting rights. Section 13.4 SUBMISSIONS TO PARTNERS. The General Partner shall give the Partners notice of any proposal or other matter required by any provision of this Agreement, or by law, to be submitted for consideration and approval of the Partners. Such notice shall include any information required by the relevant provision or by law. ARTICLE XIV MISCELLANEOUS ------------- Section 14.1 GOVERNING LAW. The Partnership and this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. Section 14.2 AGREEMENT FOR FURTHER EXECUTION. At any time or times upon the request of the General Partner, the Limited Partners hereby agree to sign, swear to, acknowledge and deliver all further documents and certificates required by the laws of Delaware, or any other jurisdiction in which the Partnership does, or proposes to do, business, or which may be reasonable, necessary, appropriate -36- 41 or desirable to carry out the provisions of this Agreement or the Act. This Section 14.2 shall not prejudice or affect the rights of the Limited Partners to approve certain amendments to this Agreement pursuant to Sections 11.1(d) and 11.1(e). Section 14.3 ENTIRE AGREEMENT. This Agreement and the exhibits attached hereto contain the entire understanding among the parties and supersede any prior understandings or agreements among them respecting the within subject matter. There are no representations, agreements, arrangements or understandings, oral or written, between or among the parties hereto relating to the subject matter of this Agreement which are not fully expressed herein. Section 14.4 SEVERABILITY. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations of the jurisdictions in which the Partnership does business. If any provision of this Agreement, or the application thereof to any person or circumstance, shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby, but rather shall be enforced to the greatest extent permitted by law. Section 14.5 NOTICES. Notices to Partners or to the Partnership shall be deemed to have been given when personally delivered or mailed, by prepaid registered or certified mail, addressed as set forth in Exhibit A attached hereto, unless a notice of change of address has previously been given in writing by the addressee to the addressor, in which case such notice shall be addressed to the address set forth in such notice of change of address. Section 14.6 TITLES AND CAPTIONS. All titles and captions are for convenience only, do not form a substantive part of this Agreement, and shall not restrict or enlarge any substantive provisions of this Agreement. Section 14.7 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each one of which shall constitute an original executed copy of this Agreement. Section 14.8 PRONOUNS. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons may require. Section 14.9 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting transfers, this Agreement shall be binding upon and inure to the benefit of the Partners and the Partnership and their respective legal representatives, successors, transferees and assigns. -37- 42 Section 14.10 PERSONAL LIABILITY. As provided in the Declaration of Trust establishing the General Partner, no trustee, officer, shareholder, employee or agent of the General Partner shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, the General Partner. IN WITNESS WHEREOF, the parties have hereunto set their hands as of the day and year first above written. GENERAL PARTNER: REALTY REFUND TRUST, an unincorporated Ohio business trust By: ------------------------------------ Gregory D. Bruhn, Executive Vice President LIMITED PARTNERS: (See attached limited partner signature pages) -38- 43 LIMITED PARTNERSHIP SIGNATURE PAGE ---------------------------------- The undersigned, desiring to become a Limited Partner of RRF Limited Partnership, hereby agrees to all of the terms of the Agreement of Limited Partnership of RRF Limited Partnership and agrees to be bound by the terms and provisions thereof. Executed by the undersigned as a Limited Partner of RRF Limited Partnership. LIMITED PARTNER: By -------------------------------- (Signature of Limited Partner) ---------------------------------- (Residence Street Address) ---------------------------------- (City State Zip Code) ----------------------------------- (Taxpayer Identification or Social Security Number) -39- 44 EXHIBIT A LIST OF PARTNERS ---------------- Intentionally Omitted. 45 EXHIBIT B FEDERAL INCOME TAX MATTERS -------------------------- For purposes of interpreting and implementing Article V of the Partnership Agreement, the following rules shall apply and shall be treated as part of the terms of the Partnership Agreement: A. SPECIAL ALLOCATION PROVISIONS. 1. For purposes of determining the amount of gain or loss to be allocated pursuant to Article V of the Partnership Agreement, any basis adjustments permitted pursuant to Section 743 of the Code shall be disregarded. 2. When Partnership Interests are transferred during any taxable year, the General Partner intends to allocate Partnership income, loss, deductions and credits using the closing of the books method. 3. Notwithstanding any other provision of the Partnership Agreement, to the extent required by law, income, gain, loss and deduction attributable to property contributed to the Partnership by a Partner shall be shared among the Partners so as to take into account any variation between the basis of the property and the fair market value of the property at the time of contribution in accordance with the requirements of Section 704(c) of the Code and the applicable regulations thereunder as more fully described in Part B hereof. Treasury regulations under Section 704(c) of the Code allow partnerships to use any reasonable method for accounting for Book-Tax Differences for contributions of property so that a contributing partner receives the tax benefits and burdens of any built-in gain or loss associated with contributed property. The Operating Partnership shall account for Book-Tax Differences using a method specifically approved in the regulations, the traditional method. An allocation of remaining built-in gain under Section 704(c) will be made when Section 704(c) property is sold. 4. Notwithstanding any other provision of the Partnership Agreement, in the event the Partnership is entitled to a deduction for interest imputed under any provision of the Code on any loan or advance from a Partner (whether such interest is currently deducted, capitalized or amortized), such deduction shall be allocated solely to such Partner. 5. Notwithstanding any provision of the Partnership Agreement to the contrary, to the extent any payments in the nature of fees made to a Partner or reimbursements of expenses to any Partner are finally determined by the Internal Revenue Service to be distributions to a Partner for federal income tax purposes, there will be a gross income allocation to such Partner in the amount of such distribution. -1- 46 6. (a) Notwithstanding any provision of the Partnership Agreement to the contrary and subject to the exceptions set forth in Section 1.704-2(f)(2)-(5) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain during any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain determined in accordance with Section 1.704-2(g)(2) of the Treasury Regulations. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(f) of the Treasury Regulations. This paragraph 6(a) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. To the extent permitted by such Section of the Regulations and for purposes of this paragraph 6(a) only, each Partner's Adjusted Capital Account Balance shall be determined prior to any other allocations pursuant to Article V of the Partnership Agreement with respect to such fiscal year and without regard to any net decrease in Partner Minimum Gain during such fiscal year. (b) Notwithstanding any provision of the Partnership Agreement to the contrary, except paragraph 6(a) of this Exhibit and subject to the exceptions set forth in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership fiscal year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain, determined in accordance with Section 1.704-2(i)(3) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(i)(4) of the Treasury Regulations. This paragraph 6(b) is intended to comply with the minimum gain chargeback requirement in such Section of the Treasury Regulations and shall be interpreted consistently therewith. Solely for purposes of this paragraph 6(b), each Partner's Adjusted Capital Account Balance shall be determined prior to any other allocations pursuant to Article V of the Partnership Agreement with respect to such fiscal year, other than allocations pursuant to paragraph 6(a) hereof. 7. Notwithstanding any provision of the Partnership Agreement to the contrary, in the event any Partners unexpectedly receive any adjustments, allocations or distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1 (b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to such Partners in an amount and manner sufficient to eliminate the deficits in their Adjusted Capital -2- 47 Account Balances created by such adjustments, allocations or distributions as quickly as possible. 8. No loss shall be allocated to any Partner to the extent that such allocation would result in a deficit in its Adjusted Capital Account Balance while any other Partner continues to have a positive Adjusted Capital Account Balance; in such event, losses shall first be allocated to any Partners with positive Adjusted Capital Account Balances, and in proportion to such balances, to the extent necessary to reduce their positive Adjusted Capital Account Balances to zero. Any excess shall be allocated to the General Partner. 9. Any special allocations of items pursuant to this Part A shall be taken into account in computing subsequent allocations so that the net amount of any items so allocated and the profits, losses and all other items allocated to each such Partner pursuant to Article V of the Partnership Agreement shall, to the extent possible, be equal to the net amount that would have been allocated to each such Partner pursuant to the provisions of Article V of the Partnership Agreement if such special allocations had not occurred. 10. Notwithstanding any provision of the Partnership Agreement to the contrary, Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partners in the manner and in accordance with the percentages set forth in Section 5.1 of the Partnership Agreement. 11. Notwithstanding any provision of the Partnership Agreement to the contrary, any Partner Nonrecourse Deduction for any fiscal year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Section 1.704-2(i) of the Treasury Regulations. B. CAPITAL ACCOUNT ADJUSTMENTS AND 704(c) TAX ALLOCATIONS. 1. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' capital accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes; provided, however, that: (a) Any income, gain or loss attributable to the taxable disposition of any property shall be determined by the Partnership as if the adjusted basis of such property as of such date of disposition was equal in amount to (i) the Agreed Value less book depreciation in the case of the Initial Hotels or other contributed properties, or (ii) the Carrying Value with respect to property subsequently purchased. -3- 48 (b) The computation of all items of income, gain, loss and deduction shall be made by the Partnership and, as to those items described in Section 705(a)(1)(B) or Section 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalizable for federal income tax purposes. 2. A transferee of a Partnership interest will succeed to the capital account relating to the Partnership interest transferred; provided, however, that if the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, the Partnership properties shall be deemed to have been distributed in liquidation of the Partnership to the Partners (including the transferee of a Partnership interest) and recontributed by such Partners and transferees in reconstitution of the Partnership. The capital accounts of such reconstituted Partnership shall be maintained in accordance with the principles set forth herein. 3. Upon an issuance of additional Partnership interests for cash, the capital accounts of all Partners (and the Agreed Values of all Partnership properties) shall, immediately prior to such issuance, be adjusted (consistent with the provisions hereof) upward or downward to reflect any unrealized gain or unrealized loss attributable to each Partnership property (as if such unrealized gain or unrealized loss had been recognized upon an actual sale of such property at the fair market value thereof, immediately prior to such issuance, and had been allocated to the Partners, at such time, pursuant to Article V of the Partnership Agreement). In determining such unrealized gain or unrealized loss attributable to the properties, the fair market value of Partnership properties shall be determined by the General Partner using such reasonable methods of valuation as it may adopt. 4. Immediately prior to the distribution of any Partnership property in liquidation of the Partnership, the capital accounts of all Partners shall be adjusted (consistent with the provisions hereof and Section 704 of the Code) upward or downward to reflect any unrealized gain or unrealized loss attributable to the Partnership property (as if such unrealized gain or unrealized loss had been recognized upon an actual sale of each such property, immediately prior to such distribution, and had been allocated to the Partners, at such time, pursuant to Article V of the Partnership Agreement). In determining such unrealized gain or unrealized loss attributable to property, the fair market value of Partnership property shall be determined by the General Partner using such reasonable methods of valuation as it may adopt. 5. In accordance with Section 704(c) of the Code and the regulations thereunder, income, gain, loss and deduction with respect to any property shall, solely for tax purposes, and not for capital account purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes. -4- 49 6. In the event the Agreed Value of any Partnership asset is adjusted as described in paragraph 3 above, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Agreed Value in the same manner as under Section 704(c) of the Code and the regulations thereunder. 7. Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. C. DEFINITIONS. For the purposes of this Exhibit, the following terms shall have the meanings indicated unless the context clearly indicates otherwise: "ADJUSTED CAPITAL ACCOUNT BALANCE": means the balance in the capital account of a Partner as of the end of the relevant fiscal year of the Partnership, after giving effect to the following: (i) credit to such capital account any amounts the Partner is obligated to restore, pursuant to the terms of this Agreement or otherwise, or is deemed obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Treasury Regulations, and (ii) debit to such capital account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. "AGREED VALUE": means the net fair market value of Contributed Property as agreed to by the Contributing Partner and the Partnership (or other property subsequently adjusted to reflect contributions), using such reasonable method of valuation as they may adopt. "CARRYING VALUE": means the adjusted basis of such property for federal income tax purposes as of the time of determination. "NONRECOURSE DEDUCTIONS": shall have the meaning set forth in Section 1.704-2(b)(1) of the Treasury Regulations. The amount of Nonrecourse Deductions for a Partnership fiscal year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during that fiscal year over the aggregate amount of any distributions during that fiscal year of proceeds of a Nonrecourse Liability, that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Section 1.704-2(c) of the Treasury Regulations. "NONRECOURSE LIABILITY": shall have the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. -5- 50 "PARTNER NONRECOURSE DEBT MINIMUM GAIN": means an amount, with respect to each Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i) of the Treasury Regulations. "PARTNER NONRECOURSE DEBT": shall have the meaning set forth in Section 1.704-2(b)(4) of the Treasury Regulations. "PARTNER NONRECOURSE DEDUCTIONS": shall have the meaning set forth in Section 1.704-2(i)(2) of the Treasury Regulations. For any Partnership taxable year, the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt equal the net increase during the year, if any, in the amount of Partner Nonrecourse Debt Minimum Gain reduced (but not below zero) by proceeds of the liability that are both attributable to the liability and allocable to an increase in the Partner Nonrecourse Debt Minimum Gain. "PARTNERSHIP AGREEMENT": shall mean this Agreement of Limited Partnership Agreement of RRF Limited Partnership. "PARTNERSHIP MINIMUM GAIN": shall have the meaning set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Treasury Regulations. For purposes of this Exhibit, all other capitalized terms will have the same definition as in the Partnership Agreement. -6- 51 EXHIBIT C INITIAL AND CORPORATE HOTELS ---------------------------- Intentionally omitted. 52 EXHIBIT D RIGHTS TERMS ------------ The Rights granted by the General Partner to the Class A Limited Partners pursuant to SECTION 7.4 hereof shall be subject to the following terms and conditions: 1. DEFINITIONS. The following terms and phrases shall, for purposes of this EXHIBIT D and the Agreement, have the meanings set forth below: "BENEFICIALLY OWN" shall mean the ownership of REIT Shares by a Person who would be treated as an owner of such REIT Shares either directly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. "CASH PURCHASE PRICE" shall have the meaning set forth in Paragraph 4 hereof. "COMPUTATION DATE" shall mean the date on which an Exchange Exercise Notice is delivered to the General Partner. "ELECTION NOTICE" shall mean the written notice to be given by the General Partner to the Exercising Partner(s) in response to the receipt by the General Partner of an Exchange Exercise Notice from such Exercising Partner(s), the form of which Election Notice is attached hereto as Schedule 2. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor statute. "EXCHANGE EXERCISE NOTICE" shall have the meaning set forth in Paragraph 2 hereof. "EXCHANGE FACTOR" shall mean 100%, PROVIDED that such factor shall be adjusted in accordance with the Antidilution Provisions of Paragraph 10 hereof. "EXCHANGE RIGHTS" shall have the meaning set forth in Paragraph 2 hereof. "EXERCISING PARTNERS" shall have the meaning set forth in Paragraph 2 hereof. "OFFERED PARTNERSHIP UNITS" shall mean the Partnership Units of the Exercising Partner(s) identified in an Exchange Exercise Notice which, -1- 53 pursuant to the exercise of Exchange Rights, can be acquired by the General Partner under the terms hereof. "OWNERSHIP LIMIT" shall have the meaning set forth in Paragraph 3 hereof. "PURCHASE PRICE" shall mean the Cash Purchase Price or the Stock Purchase Price, or a combination thereof. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any successor statute. "STOCK PURCHASE PRICE" shall have the meaning set forth in Paragraph 4 hereof. 2. DELIVERY OF EXCHANGE EXERCISE NOTICES. Any one or more Limited Partners ("Exercising Partners") may, subject to the limitations set forth herein, deliver to the General Partner written notice (the "Exchange Exercise Notice") pursuant to which such Exercising Partners elect to exercise their rights to exchange (the "Exchange Rights") all or any portion of their Partnership Units for REIT Shares subject to the limitations contained in Paragraph 3 below. 3. LIMITATION ON EXERCISE OF EXCHANGE RIGHTS. Exchange Rights may be exercised at any time and subject, in all cases, to the limitations contained herein and in Section 8.5 of the General Partner's Declaration of Trust (the "Ownership Limit"). The Exchange Rights shall expire with respect to any Partnership Units for which an Exchange Exercise Notice has not been delivered to the General Partner on or prior to the date that the Partnership is dissolved. If an Exchange Exercise Notice is delivered to the General Partner but, as a result of the Ownership Limit, the Exchange Rights cannot be exercised in full, the Exchange Exercise Notice shall be deemed to be modified such that the Exchange Rights shall be exercised only to the extent permitted under the Ownership Limit; with the remainder of such Exchange Rights being deemed to be an offer to sell such Offered Partnership Units to the General Partner for the Cash Purchase Price. 4. COMPUTATION OF PURCHASE PRICE/FORM OF PAYMENT. The Purchase Price payable by the General Partner to each Exercising Partner for the Offered Partnership Units shall be payable by the issuance by the General Partner of the number of shares of its REIT Shares equal to the product, expressed as a whole number, of (i) the number of Partnership Units being exchanged, multiplied by (ii) the Exchange Factor (the "Stock Purchase Price"). At the time that the Ownership Limit is reached, the Purchase Price to be paid for the Offered Partnership Units shall be paid in cash rather than in REIT Shares (the "Cash Purchase Price"). The Cash Purchase Price shall mean, with respect to the applicable number of Offered Partnership Units upon the exercise of any Exchange Right, an amount of cash (in immediately available funds) equal to (i) the number of shares of the General Partner's -2- 54 REIT Shares that would be issued to the Exercising Partner if the Stock Purchase Price were paid for such Offered Partnership Units (taking into account the adjustments required pursuant to the definition of "Exchange Factor") multiplied by (ii) the REIT Share Value computed as of the Computation Date. The Cash Purchase Price shall be paid in the form of cash, or cashier's check, or by wire transfer of immediately available funds to the Exercising Partner's designated account. 5. CLOSING; DELIVERY OF ELECTION NOTICE. The closing of the acquisition of Offered Partnership Units shall, unless otherwise mutually agreed, be held at the principal office of the General Partner, on the following date(s): (a) With respect to the exercise of Exchange Rights for which the Stock Purchase Price is payable, or for which the General Partner elects to pay the Cash Purchase Price, the closing shall occur no later than the later of (i) ten (10) days after the delivery of the Election Notice and (ii) the expiration or termination of the waiting period applicable to each Exercising Partner, if any, under the Hart-Scott Act; and (b) With respect to the exercise of Exchange Rights for which the General Partner is required to pay the Cash Purchase Price, the General Partner shall, within thirty (30) days after receipt by the General Partner of the Exchange Exercise Notice delivered in accordance with the requirements of Paragraph 2 hereof, deliver to the Exercising Partner(s) an Election Notice, which Election Notice shall (i) specify the General Partner's need to pay the Cash Purchase Price for some or all of the Offered Partnership Units and (ii) set forth the computation of the Cash Purchase Price to be paid by the General Partner to such Exercising Partner(s) and the date, time and location for completion of the purchase and sale of the Offered Partnership Units, which date shall, to the extent required, in no event be more than sixty (60) days after the Computation Date for such Exchange Exercise Notice; PROVIDED, HOWEVER, that such sixty (60) day period may be extended for an additional period to the extent required for the General Partner to cause additional REIT Shares to be issued to provide financing to be used to acquire the Offered Partnership Units. Notwithstanding the foregoing, the General Partner agrees to use its best efforts to cause the closing of the acquisition of Offered Partnership Units hereunder to occur as quickly as is reasonably possible. 6. CLOSING DELIVERIES. At the closing, payment of the Purchase Price shall be accompanied by proper instruments of transfer and assignment and by the delivery of (i) representations and warranties of (A) the Exercising Partner with respect to its due authority to sell all of the right, title and interest in and to such Offered Partnership Units to the General Partner and with respect to the status of the Offered Partnership Units being sold, free and clear of all liens, and (B) the General Partner with respect to due authority for the purchase of such Offered Partnership Units, and (ii) to the extent that REIT Shares are issued in payment of the Stock -3- 55 Purchase Price, (A) an opinion of counsel for the General Partner reasonably satisfactory to the Exercising Partner(s), to the effect that such REIT Shares have been duly authorized, are validly issued, fully-paid and non-assessable, and (following the date on which the a shelf registration has been declared effective by the SEC) have been duly registered under the Securities Act, and (B) a stock certificate or certificates evidencing the REIT Shares to be issued and registered in the name of the Exercising Partner(s) or its (their) designee. 7. TERM OF RIGHTS. Unless sooner terminated, the rights of the parties with respect to the Rights shall commence as of the date hereof and lapse for all purposes and in all respects on the date that the Partnership is dissolved; PROVIDED, HOWEVER, that the parties hereto shall continue to be bound by an Exchange Exercise Notice delivered to the General Partner prior to such date. 8. COVENANTS OF THE GENERAL PARTNER. To facilitate the General Partner's ability to fully perform its obligations hereunder, the General Partner covenants and agrees as follows: (a) At all times during the pendency of the Exchange Rights, the General Partner shall reserve for issuance and keep available, free from preemptive rights, out of its authorized but unissued REIT Shares, such number of REIT Shares as may be necessary to enable the General Partner to issue REIT Shares in full satisfaction of all Exchange Rights which are from time to time outstanding (assuming no Ownership Limit applied and that the General Partner paid the Stock Purchase Price with respect to all such Exchange Rights). (b) As long as the General Partner shall be obligated to file periodic reports under the Exchange Act, the General Partner will timely file such reports in such manner as shall enable any recipient of REIT Shares issued to Limited Partners hereunder in reliance upon an exemption from registration under the Securities Act to continue to be eligible to utilize Rule 144 promulgated by the SEC pursuant to the Securities Act, or any successor rule or regulation or statute thereunder, for the resale thereof. (c) During the pendency of the Exchange Rights, the Limited Partners shall receive in a timely manner all reports filed by the General Partner with the SEC and all other communications transmitted from time to time by the General Partner to its shareholders generally. (d) All REIT Shares which may be issued upon exchange of Offered Partnership Units will upon issue be fully paid and non-assessable. (e) Except as provided in Section 4.3(a)(iii) of the Agreement, the General Partner shall not issue or sell any REIT Shares or other equity securities or -4- 56 any instrument convertible into any equity security for a consideration less than the fair value of such REIT Shares or other equity security, as determined in each case by the Board of Trustees of the General Partner, in consultation with the General Partner's professional advisors, and under no circumstances shall the General Partner declare any stock dividend, stock split, stock distribution or the like, unless fair and equitable arrangements are provided, to the extent necessary, to fully adjust, and to avoid any dilution in, the Exchange Rights of the Limited Partners under this Agreement, as provided in paragraph 10 below. 9. LIMITED PARTNERS' COVENANTS. Each Limited Partner covenants and agrees with the General Partner that all Offered Partnership Units tendered to the General Partner in accordance with the exercise of Exchange Rights herein provided shall be delivered to the General Partner free and clear of all liens and should any liens exist or arise with respect to such Offered Partnership Units, the General Partner shall be under no obligation to acquire the same unless, in connection with such acquisition, the General Partner has elected to pay a portion of the purchase price in the form of the Cash Purchase Price in circumstances where such Cash Purchase Price will be sufficient to cause such existing lien to be discharged in full upon application of all or a part of the Cash Purchase Price and the General Partner is expressly authorized to apply such portion of the Cash Purchase Price as may be necessary to satisfy any indebtedness in full and to discharge such lien in full. Each Limited Partner further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Offered Partnership Units to the General Partner (or its designee), such Limited Partner shall assume and pay such transfer tax. 10. ANTIDILUTION PROVISIONS. (a) The Exchange Factor shall be subject to adjustment from time to time effective upon the occurrence of the following events and shall be expressed as a percentage, calculated to the nearest one-thousandth of one percent (.001%): (i) In case the General Partner shall pay or make a dividend or other distribution on any class of shares of the General Partner in REIT Shares, the Exchange Factor in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be increased in proportion to the increase in outstanding REIT Shares resulting from such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following the record date fixed for such dividend or other distribution. (ii) In case outstanding REIT Shares shall be subdivided into a greater number of shares, the Exchange Factor in effect at the opening of business on -5- 57 the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case the outstanding REIT Shares shall be combined into a smaller number of shares, the Exchange Factor in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (b) In case the General Partner shall issue rights, options or warrants to all holders of its REIT Shares entitling them to subscribe for or purchase REIT Shares at a price per share less than the current market price per share (as determined in the next sentence), each holder of a Partnership Unit shall be entitled to receive such number of rights or warrants, as the case may be, as he would have been entitled to receive had he exchanged his Partnership Units immediately prior to the record date for such issuance by the General Partner. For the purpose of any computation pursuant to the next sentence, the current market price per share of REIT Shares on any date shall be deemed to be the average of the daily closing prices for the five consecutive Trading Days selected by the General Partner commencing not more than twenty (20) Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this EXHIBIT D, the term "Trading Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day which securities are not traded on such exchange or in such market and the term "'ex' date", when used in respect of any issuance or distribution, shall mean the first date on which the shares trade regular way on such exchange or in such market without the right to receive such issuance or distribution. (c) In case the REIT Shares shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than subdivision or combination of shares or a stock dividend described in subparagraph (a)(ii) of this Paragraph) then and in each such event the Limited Partners shall have the right thereafter to exchange their Partnership Units for the kind and amount of shares and other securities and property which would have been received upon such reorganization, reclassification or other change by holders of the number of shares into which the Partnership Units might have been exchanged immediately prior to such reorganization, reclassification or change. (d) The General Partner may, but shall not be required to, make such adjustments to the number of REIT Shares issuable upon exchange of a Partnership Unit, in addition to those required by this Paragraph 10, as the General Partner's board of trustees considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. The General Partner's board of trustees shall have the power to -6- 58 resolve any ambiguity or correct any error in the adjustments made pursuant to this Paragraph and its actions in so doing shall be final and conclusive. 11. FRACTIONS OF SHARES. No fractional REIT Shares shall be issued upon exchange of Partnership Units. If more than one Partnership Unit shall be surrendered for exchange at one time by the same Exercising Partner, the number of full REIT Shares which shall be issuable upon exchange thereof (or the cash equivalent amount thereof if the Cash Purchase Price is paid) shall be computed on the basis of the aggregate amount of Partnership Units so surrendered. Instead of any fractional REIT Share which would otherwise be issuable upon exchange of any Partnership Unit or Partnership Units, the General Partner shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Value of a REIT Share at the close of business on the day of closing specified in Paragraph 5 of this EXHIBIT D (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day). 12. NOTICE OF ADJUSTMENTS OF EXCHANGE FACTOR. Whenever the Exchange Factor is adjusted as herein provided: (a) the General Partner shall compute the adjusted Exchange Factor in accordance with Paragraph 10 hereof and shall prepare a certificate signed by the chief financial officer or the Treasurer of the General Partner setting forth the adjusted Exchange Factor and showing in reasonable detail the facts upon which such adjustment is based; and (b) a notice stating that the Exchange Factor has been adjusted and setting forth the adjusted Exchange Factor shall forthwith be mailed by the General Partner to all holders of Exchange Rights at their last addresses on record under this Agreement. 13. NOTICE OF CERTAIN CORPORATE ACTIONS. In case: (a) the General Partner shall declare a dividend (or any other distribution) on its REIT Shares payable otherwise than in cash; or (b) the General Partner shall authorize the granting to holders of its REIT Shares of rights, options or warrants to subscribe for or purchase any shares of stock of any class or of any other rights; or (c) of any reclassification of the REIT Shares (other than a subdivision or combination of its outstanding REIT Shares, or of any consolidation, merger or share exchange to which the General Partner is a party and for which approval of any shareholders of the General Partner is required), or of the -7- 59 sale or transfer of all or substantially all of the assets of the General Partner; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the General Partner; then the General Partner shall cause to be mailed to all holders of Exchange Rights at their last addresses on record under this Agreement, at least twenty (20) days (or twelve (12) days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of REIT Shares of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined, or (ii) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of REIT Shares of record shall be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. 14. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any consolidation of the General Partner with, or merger of the General Partner into, any other Persons, any merger or consolidation of another Person into the General Partner (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding REIT Shares of the General Partner), or any sale or transfer of all or substantially all of the assets of the General Partner, the Person formed by such consolidation or resulting from such merger or which acquires such assets of the General Partner, as the case may be, shall execute and deliver to each holder of Exchange Rights an agreement providing that such holder shall have the right thereafter, during the period such Exchange Rights shall be exercisable as specified herein, to require the exchange of Partnership Units for the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of REIT Shares, for which such Partnership Unit might have been exchanged immediately prior to such consolidation, merger, sale or transfer, assuming such holder of REIT Shares is not a Person with which the General Partner consolidated or into which the General Partner merged or which merged into the General Partner, or to which such sale or transfer, was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person, and failed to exercise his right of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, sale or transfer (PROVIDED that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each Common Share in respect of which such rights of -8- 60 election shall not have been exercised ("non-electing Share"), then for the purpose of this Paragraph 14 the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by each non-electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing Shares). Such agreement shall provide for adjustments which, for events subsequent to the effective date of such agreement, shall be as nearly equivalent as may be practicable to the adjustments provided for in this EXHIBIT D. The above provisions of this Paragraph 14 shall similarly apply to successive consolidations, mergers, sales or transfers. -9- 61 SCHEDULE 1 ---------- EXCHANGE EXERCISE NOTICE ------------------------ To: REALTY REFUND TRUST Reference is made to that certain Agreement of Limited Partnership, dated as of January __, 1998 (the "Partnership Agreement"), pursuant to which Realty ReFund Trust, an unincorporated Ohio business trust, and certain other persons, including the undersigned, formed a Delaware limited partnership known as RRF Limited Partnership (the "Partnership"). Capitalized terms used but not defined herein shall have the meanings set forth in the Partnership Agreement. Pursuant to SECTION 7.4 and Paragraph 2 of EXHIBIT D of the Partnership Agreement, each of the undersigned, being a limited partner of the Partnership (an "Exercising Partner"), hereby elects to exercise its Exchange Rights as to the number of Offered Partnership Units specified opposite its name below: Dated: ___________________________ =================== =================== ========================== EXERCISING PARTNER PARTNERSHIP UNITS NUMBER OF OFFERED =================== =================== ========================== Exercising Partners: - ------------------------------------- - -------------------------------------- -1- 62 SCHEDULE 2 ---------- ELECTION NOTICE --------------- To: Exercising Partner(s) Reference is made to that certain Agreement of Limited Partnership of RRF Limited Partnership, dated as of January __, 1998 (the "Partnership Agreement"), pursuant to which the undersigned and certain other persons, including the Exercising Partners, formed a Delaware limited partnership known as RRF Limited Partnership (the "Partnership"). All capitalized terms used but not defined herein shall have the meanings set forth in the Partnership Agreement. Pursuant to subsection (b) of Paragraph 5 of EXHIBIT D to the Partnership Agreement, the undersigned, being the general partner of the Partnership, hereby notifies the Exercising Partner(s) that [(a) the Stock Purchase Price is payable by issuance of the number of Common Shares to the Existing Partner(s), as set forth below,] [(b) it has elected to pay the Cash Purchase Price by payment of cash to the Exercising Partner(s) for the number of Offered Partnership Units, as set forth below,] (c) the computation of the [Stock Purchase Price and Cash Purchase Price] as set forth on an attachment hereto, (d) the closing of the purchase and sale of the Offered Partnership Units by payment of the [Stock Purchase Price shall take place at the offices of ________________________ on [date]] and [(e) the closing of the payment of the Cash Purchase Price shall take place at the offices of ________________________ on [date]. EXERCISING NUMBER OF OFFERED STOCK CASH PURCHASE PARTNER(S) PARTNERSHIP UNITS PURCHASE PRICE PRICE - ---------- ----------------- ------------- --------------- REALTY REFUND TRUST, an unincorporated Ohio business trust By: ____________________________ Its: ____________________________ Dated: ______________________ -1- 63 EXHIBIT E REPRESENTATIONS AND WARRANTIES OF WARRANTING PARTNERS ----------------------------------------------------- Each of Hospitality Corporation International and InnSuites Innternational Hotels and Resorts, Inc. (collectively, the "Warranting Partners"), jointly and severally, represents to the Partnership that, except as set forth on the Disclosure Schedule delivered to the General Partner in connection with the execution of this Agreement, as follows: (a) ORGANIZATION: AUTHORITY. Each of the Contributed Partnerships is a Partnership duly formed, validly existing and in good standing (to the extent applicable) under the laws of its jurisdiction of formation. Each Warranting Partner has the requisite power and authority to enter into and perform this Agreement. (b) AUTHORIZATION: BINDING AGREEMENT. The execution, delivery and performance of this Agreement by each Warranting Partner has been duly and validly authorized by all necessary action of such Warranting Partner. This Agreement has been duly executed and delivered by each Warranting Partner and constitutes the legal, valid and binding obligation of such Warranting Partner, enforceable against such Warranting Partner in accordance with the terms hereof. (c) CONSENTS AND APPROVALS. Except for those obtained prior to the date hereof, no consent, waiver, approval or authorization of, or filing, registration or qualification with or notice to, any governmental unit or any other person is required to be made, obtained or given by any of the Warranting Partners or the Contributed Partnerships in connection with the execution, delivery and performance of this Agreement. (d) NO VIOLATION. None of the execution, delivery or performance of this Agreement by any Warranting Partner does, or with the giving of notice, lapse of time or both, will (1) violate, conflict with or constitute a default under any term or condition of (A) the organizational documents of such Warranting Partner or any of the Contributed Partnerships, or (B) any term or provision of any judgment, decree, order, statute, injunction, rule or regulation of a governmental unit applicable to such Warranting Partner or any of the Contributed Partnerships, or (C) any agreement, instrument or document to which such Warranting Partner or any of the Contributed Partnerships is a party or by which any of them is bound or to which their assets or properties is subject or bound or (2) result in the creation of any lien, claim, equity, security interest or other encumbrance ("Lien") upon the Contributed Property of such Warranting Partner or the assets or properties of such Warranting Partner or the Contributed Partnerships. -1- 64 (e) COMPLIANCE WITH LAWS. To the Warranting Partners' best knowledge, each of the Contributed Partnerships is in compliance in all material respects with all private restrictions and laws, ordinances and regulations applicable to the conduct of the business of such Contributed Partnership and the ownership, use and operation of its properties (including the Initial Hotels and Corporate Hotel) and each has obtained all licenses, permits and other governmental approvals for the conduct thereof, which licenses and permits are in full force and effect, and the Contributed Partnerships have not taken (or failed to take) any action that would result in the revocation of such licenses or permits nor have the Contributed Partnerships received any notice of violation from any federal, state or municipal or other governmental or quasi-governmental authority or notice of an intention by any such authority to revoke any certificate of occupancy or other certificate, license or permit issued by it in connection with the use of any such Contributed Partnership's properties. (f) ENVIRONMENTAL MATTERS. To the Warranting Partners' best knowledge, (1) the Contributed Partnerships and their respective properties (including the Initial Hotels and the Corporate Hotels) are in compliance, and heretofore have complied, with all Environmental Laws (as hereinafter defined); (2) none of the Contributed Partnerships has received any written notice from any governmental or quasi-governmental authority or other person that it, its current or former operations, or its properties now or heretofore owned, leased or used by it or any of its predecessors, are not or have not been in compliance with any Environmental Laws or that it has any material liability in respect thereof; and (3) there are no administrative, regulatory or judicial proceedings pending or threatened against any Contributed Partnership pursuant to, or alleging any violation of or liability under, any Environmental Laws. To the Warranting Partners' best knowledge, except as set forth in the ESA's previously delivered to the General Partner, all of the properties now or heretofore owned, leased or used by any of the Contributed Partnerships are free of all Hazardous Materials, and, to the best knowledge of Warranting Partners, no Hazardous Materials have ever been located on any of the properties now or heretofore owned, leased or used by any of the Contributed Partnerships. The term "Hazardous Materials" shall mean any substance, material, waste, gas or particulate matter which is regulated by any local governmental authority, the state in which any real property of the Contributed Partnerships is situated, or the United States Government, including but not limited to, any material or substance which is (i) defined as a "hazardous waste", "hazardous material", "hazardous substance", "extremely hazardous waste" or "restricted hazardous waste" under any provision of law of the state in which any real property of the Contributed Partnerships is situated, (ii) petroleum or petroleum based, (iii) asbestos, (iv) polychlorinated biphenyl, (v) radioactive material, (vi) designed a "hazardous substance" pursuant to Section 311 of the CLEAN WATER ACT, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1317), (vii) defined as a "hazardous waste" pursuant to Section 1004 of the RESOURCE CONVERSATION AND RECOVERY ACT, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903) or (viii) defined as a "hazardous substance" pursuant to -2- 65 Section 101 of the COMPREHENSIVE ENVIRONMENTAL RESPONSE. COMPENSATION. AND LIABILITY ACT, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). The term "Environmental Laws" shall mean all statutes specifically described in the foregoing sentence and all federal, state and local environmental health and safety statutes, ordinances, codes, rules, regulations, orders and decrees regulating, relating to or imposing liability or standards concerning or in connection with Hazardous Materials. (g) OWNERSHIP OF PROPERTIES. Each of the Contributed Partnerships (i) is the sole owner of its respective properties and (ii) has good, valid and marketable title to such properties, free and clear of all Liens other than Permitted Exceptions (as hereafter defined). The term "Permitted Exceptions" shall mean in respect of real property or any interest or estate therein: (1) zoning laws and ordinances; (2) any deeds of trust or mortgages listed as exceptions to title in the most recent title commitments to insure title issued by TransNation Title Insurance Company relating to the properties of the Contributed Partnerships and delivered to the General Partner in connection with the execution of this Agreement (the "Title Commitments"); (3) any laws, ordinances, Liens, easements, rights of way, restrictions, exemptions, reservations, conditions, limitations, covenants, adverse rights or interests described as exceptions on Schedule B (or any other applicable Schedule) of the Title Commitments; provided that any Contributed Partnership's property is not in violation thereof or, if in violation, provided that the same do not require the demolition, vacation or cessation of the present use of nay portion of the improvements material to such property or require the discontinuance of the use of all or any material portion of such property for its present use; (4) any other easements, restrictions, reservations and encumbrances which do not individually or in the aggregate (A) impair the use of any such property in the operation of the business of the respective Contributed Partnership or (B) detract from the value of such property for the purpose of such business; and (5) taxes and assessments, both general and special, which are a lien but not yet due and payable. (h) ABSENCE OF UNDISCLOSED LIABILITIES AND CONTRACTUAL OBLIGATIONS. Except for liabilities arising in the ordinary course of business since the date of the Contributed Partnerships' financial statements as of and for the period ended December 31, 1996, the Contributed Partnerships have no liabilities of any nature, whether matured or unmatured, fixed or contingent (regardless of whether the disclosure thereof otherwise would be required by generally accepted accounting principles) which could have, individually or in the aggregate, a material adverse effect upon such Contributed Partnership or the Partnership. There are no Significant Agreements (as hereinafter defined) of a Contributed Partnership other than as previously disclosed to the General Partner. For purposes hereof, "Significant Agreement" of a Contributed Partnership means and includes any of the following to which such entity is a party or by which it or any of its assets or properties may be subject or bound: (1) all -3- 66 agreements, instruments and documents evidencing, securing or pertaining to con tractual obligations of a Contributed Partnership that involve annual payments or receipts in excess of $50,000.00; (2) all leases involving real property; and (3) all mortgages and deeds of trust encumbering any real property. (i) SIGNIFICANT AGREEMENTS: BINDING AGREEMENTS. Each of the Significant Agreements is valid and binding and in full force and effect, enforceable against the Contributed Partnership which is a party thereto in accordance with its terms, subject to the bankruptcy or insolvency of such parties, similar laws of general applicability relating to or affecting creditors' rights generally, to general equity principles and to the discretion of any court in granting any relief or issuing any order and to the unenforceability of attorneys' fees provisions. Such Contributed Partnership is not in default in the performance of any obligation thereunder, and no event has occurred which, with the giving of notice or lapse of time or both, would constitute a default thereunder or permit the other party to terminate the rights of such Contributed Partnership thereunder. (j) LITIGATION. There are no claims, actions, suits, proceedings or investigations pending, or, to the Warranting Partners' knowledge, threatened, before any court, governmental unit or any arbitrator in respect of any Contributed Partnership or its assets. (k) TRANSFER TAXES. There are no transfer taxes payable, accruing or otherwise arising out of the transfer of the Contributed Partnership Interests or the Contributed Property to the Partnership, the admission of the General Partner to this Partnership or arising out of any of the transactions specified in this Agreement that are expected to occur contemporaneously or concurrent with or immediately after the execution hereof, which shall not have been paid by the Limited Partners. (l) PROJECT IMPROVEMENTS. To the Warranting Partners' best knowledge, all buildings and improvements on the property owned by each Contributed Partnership, and all tangible personal property, equipment and fixtures constituting a part thereof, are in good condition and repair, and the roofs, walls and foundations of the buildings are free from leaks and seepage of moisture. To the best knowledge of the Warranting Partners, there is no defective condition (latent or otherwise) in respect of the buildings and improvements on the property owned by any Contributed Partnership. (m) PROJECT EQUIPMENT: UTILITIES. The equipment located at the property owned by each Contributed Partnership is sufficient to permit the full operation of the improvements for their respective intended purposes. All water, sewer, gas, electric, telephone and drainage facilities and all of the utilities required by law for the normal operation of the property owned by the Contributed Partnerships are installed to the property line and are connected with valid permits, are in good working order and are adequate to serve such property in full compliance with law. -4- 67 (n) CONDEMNATION PROCEEDINGS. No proceedings have been commenced or threatened by any authority having the power of eminent domain to condemn any part of the land or improvements relating to any of the properties owned by the Contributed Partnerships. (o) INSURANCE. The Warranting Partners have not received any notices from any insurance company of any defects or inadequacies in any property owned by a Contributed Partnership or any part thereof which would affect adversely the insurability of such property, and each such property complies with the require ments of all insurance carriers providing insurance therefor. For the purposes of the representations and warranties made pursuant to this Exhibit E, a statement that a fact is true to "the Warranting Partner's best knowledge" means that, after due investigation, none of the following Persons actually knows such statement to be untrue: James F. Wirth. -5- EX-23.2 4 EXHIBIT 23.2 1 Exhibit 23.2 Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference in this Registration Statement of our report dated May 13, 1998 included in Realty ReFund Trust's Form 10-K for the year ended January 31, 1998 and to all references to our Firm in this Registration Statement. ARTHUR ANDERSEN LLP Cleveland, Ohio June 8, 1998 EX-23.3 5 EXHIBIT 23.3 1 Exhibit 23.3 Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference in this Registration Statement of our report dated February 19, 1998 included in Realty ReFund Trust's Form 10-K for the year ended January 31, 1998 and to all references to our Firm in this Registration Statement. Michael Maastricht, C.P.A. Phoenix, Arizona June 8, 1998 EX-24.1 6 EXHIBIT 24.1 1 EXHIBIT 24.1 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints each of James F. Wirth and Gregory D. Bruhn, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including post-effective amendments) to this Registration Statement, to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any and all applications, registration statements, notices and other documents necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, full power and authority to perform and do each and every act and thing necessary and advisable as fully to all intents and purposes as he might or could perform and do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES F. WIRTH Trustee, Chairman, President and June 3, 1998 - -------------------------------------- Chief Executive Officer James F. Wirth /s/ GREGORY D. BRUHN Trustee, Executive Vice President, June 4, 1998 - -------------------------------------- Chief Financial Officer, Gregory D. Bruhn Treasurer and Secretary /s/ MARC E. BERG Trustee June 3, 1998 - -------------------------------------- Marc E. Berg /s/ LEE J. FLORY Trustee June 4, 1998 - -------------------------------------- Lee J. Flory /s/ EDWARD G. HILL Trustee June 3, 1998 - -------------------------------------- Edward G. Hill /s/ MARK J. NASCA Trustee June 4, 1998 - -------------------------------------- Mark J. Nasca
EX-99.1 7 EXHIBIT 99.1 1 Exhibit 99.1 FORM OF PERCENTAGE LEASE AGREEMENT DATED AS OF , 1997 BETWEEN ---------------------------------------------------- AS LESSOR AND REALTY HOTEL LESSEE CORP. AS LESSEE 2
Page ---- TABLE OF CONTENTS ----------------- PAGE ---- ARTICLE I............................................................................................ 1 1.1 Leased Property................................................................ 1 1.2 Term........................................................................... 2 1.3 Building Contracts.............................................................. 3 1.4 Assignment and Assumption...................................................... 3 ARTICLE II........................................................................................... 3 ARTICLE III.......................................................................................... 13 3.1 Rent........................................................................... 13 3.2 Payment of Percentage Rent..................................................... 14 3.3 Confirmation of Percentage Rent................................................ 15 3.4 Additional Charges............................................................. 16 3.5 Annual Revenue Projections..................................................... 16 3.6 Annual Capital Expenditures Budget............................................. 17 3.7 Capital Expenditure Fund....................................................... 17 3.8 Application of Capital Expenditure Fund........................................ 18 3.9 Unbudgeted Capital Expenditures................................................ 18 3.10 Agent Method for Purchases of Capital Expenditures........................................................ 18 ARTICLE IV........................................................................................... 20 4.1 Payment of Taxes and Impositions............................................... 20 4.2 Utility Charges................................................................ 21 4.3 Insurance Premiums............................................................. 21 ARTICLE V............................................................................................ 21 ARTICLE VI........................................................................................... 22 6.1 Ownership of the Leased Property............................................... 22 6.2 Lessee's Personal Property..................................................... 22 ARTICLE VII.......................................................................................... 23 7.1 Condition of the Leased Property............................................... 23
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Page ---- 7.2 Use of the Leased Property..................................................... 24 7.3 Lessor to Grant Easements, Etc................................................. 25 7.4 Compliance with Ground Lease................................................... 25 ARTICLE VIII......................................................................................... 25 8.1 Compliance with Legal, Insurance Requirements, Lessor's Insurance and Tax Obligations.............................................................. 25 8.2 Legal Requirements Covenants....................................................26 8.3 Environmental Covenants........................................................ 26 ARTICLE IX........................................................................................... 29 9.1 Maintenance and Repair......................................................... 29 9.2 Encroachments, Restrictions, Etc............................................... 29 ARTICLE X............................................................................................ 30 10.1 Alterations.................................................................... 30 10.2 Salvage........................................................................ 30 10.3 Joint Use Agreements........................................................... 31 ARTICLE XI........................................................................................... 31 11.1 Liens.......................................................................... 31 ARTICLE XII.......................................................................................... 31 12.1 Permitted Contests............................................................. 31 ARTICLE XIII......................................................................................... 32 13.1 General Insurance Requirements................................................. 32 13.2 Full Replacement Cost.......................................................... 34 13.3 Waiver of Subrogation.......................................................... 34 13.4 Waiver of Coinsurance.......................................................... 34 13.5 Form Satisfactory, Etc......................................................... 34 13.6 Increase in Limits............................................................. 35 13.7 Blanket Policy................................................................. 35 13.8 No Separate Insurance.......................................................... 35 13.9 Reports of Insurance Claims.................................................... 35 13.10 Failure to Obtain Insurance.................................................... 36
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Page ---- ARTICLE XIV.......................................................................................... 36 14.1 Insurance Proceeds............................................................. 36 14.2 Reconstruction in the Event of Damage or Destruction Covered By Insurance............................................. 36 14.3 Reconstruction in the Event Of Damage or Destruction Not Covered By Insurance......................................... 37 14.4 Lessee's Personal Property..................................................... 37 14.5 Abatement of Rent.............................................................. 37 14.6 Damage Near End of Term. ...................................................... 38 14.7 Waiver......................................................................... 38 ARTICLE XV........................................................................................... 38 15.1 Parties' Rights and Obligations................................................ 38 15.2 Total Taking................................................................... 38 15.3 Allocation of Award............................................................ 38 15.4 Partial Taking................................................................. 39 15.5 Temporary Taking............................................................... 39 ARTICLE XVI.......................................................................................... 40 16.1 Events of Default.............................................................. 40 16.2 Remedies....................................................................... 41 16.3 Waiver......................................................................... 44 16.4 Application of Funds........................................................... 45 16.5 Surrender...................................................................... 45 ARTICLE XVII......................................................................................... 45 17.1 Lessor's Right to Cure Lessee's Default.........................................45 ARTICLE XVIII........................................................................................ 46 18.1 Exculpation.....................................................................46 ARTICLE XIX.......................................................................................... 46 19.1 Reit Compliance................................................................ 46 19.2 Sublease Lessee Limitation..................................................... 47 19.3 Lessee Ownership Limitation.................................................... 47 19.4 Lessee Officer and Employee Limitation......................................... 47
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Page ---- ARTICLE XX........................................................................................... 47 20.1 Holding Over....................................................................47 ARTICLE XXI.......................................................................................... 48 21.1 Risk of Loss....................................................................48 ARTICLE XXII......................................................................................... 48 22.1 Indemnification.................................................................48 ARTICLE XXIII........................................................................................ 49 23.1 Subletting and Assignment...................................................... 49 23.2 Attornment..................................................................... 49 23.3 Management Agreement........................................................... 50 ARTICLE XXIV......................................................................................... 50 24.1 Officers' Certificates; Financial Statements; Lessor's Estoppel Certificates and Covenants................................................... 50 ARTICLE XXV.......................................................................................... 51 25.1 Books and Records; Lessor's Right to Inspect....................................51 ARTICLE XXVI......................................................................................... 51 26.1 No Waiver.......................................................................51 ARTICLE XXVII........................................................................................ 52 27.1 Remedies Cumulative.............................................................52 ARTICLE XXVIII....................................................................................... 52 28.1 Acceptance of Surrender.........................................................52 ARTICLE XXIX......................................................................................... 52 29.1 No Merger of Title..............................................................52
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Page ---- ARTICLE XXX.......................................................................................... 52 30.1 Conveyance by Lessor............................................................52 ARTICLE XXXI......................................................................................... 53 31.1 Quiet Enjoyment.................................................................53 ARTICLE XXXII........................................................................................ 53 32.1 Notices.........................................................................53 ARTICLE XXXIII....................................................................................... 53 33.1 Lessor May Grant Liens, Subordination.......................................... 53 33.2 Lessee's Right to Cure......................................................... 55 33.3 Breach by Lessor............................................................... 56 33.4 Lessee's Cooperation........................................................... 56 ARTICLE XXXIV........................................................................................ 56 34.1 Miscellaneous.................................................................. 56 34.2 Transition Procedures.......................................................... 56 34.3 Change of Franchise............................................................ 57 34.4 Waiver of Presentment, Etc..................................................... 57 ARTICLE XXXV......................................................................................... 58 35.1 Memorandum of Lease.............................................................58 ARTICLE XXXVI........................................................................................ 58 36.1 Lessor's Option to Terminate Lease..............................................58 ARTICLE XXXVII....................................................................................... 58 37.1 Compliance with Franchise Agreement.............................................58
(v) 7 PERCENTAGE LEASE AGREEMENT -------------------------- THIS PERCENTAGE LEASE AGREEMENT (this "Lease"), made as of the ____ day of ______________, 199_, by and between _______________________, a ___________________________ ("Lessor") and Realty Hotel Lessee Corp., a Nevada corporation ("Lessee"), provides as follows: ARTICLE I --------- 1.1 GRANT. Lessor, in consideration of the payment of rent by Lessee to Lessor, the covenants and agreements to be performed by Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased Property (as hereinafter defined). 1.2 LEASED PROPERTY. The "Leased Property" is comprised of Lessor's interest in the following: (a) the ground leasehold interest described in Exhibit A attached hereto and incorporated herein by reference (the "Land"); (b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), parking areas and roadways appurtenant to such buildings, structures and other improvements presently situated upon the Land (collectively, the "Leased Improvements"), including the Facility; (c) all easements, rights and appurtenances relating to the Land and to the Leased Improvements; (d) all equipment, machinery, fixtures, and other items of property required or incidental to the use of the Leased Improvements as a hotel, including all components thereof, now and hereafter permanently affixed to or incorporated in the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (collectively, the "Fixtures"); -1- 8 (e) all existing leases of space within the Leased Property (including any security deposits or collateral held by Lessor pursuant thereto), which space leases, if any, are listed on Exhibit B attached hereto and incorporated by reference; and (f) all contract rights, trade names, logos and other intangible property of Lessor with respect to the operation of the existing hotel business conducted on the Leased Property, including without limitation, all rights relating to the Franchise Agreement. (g) the furniture, fixtures and equipment listed or referred to on Exhibit C attached hereto and incorporated by reference. THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL CURRENT AND FUTURE COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS (NOT LIMITED TO ITEMS OF RECORD) INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF. 1.3 TERM. (a) The term of the Lease (the "Term") shall commence on the date that Lessor acquires the Leased Premises (the "Commencement Date") and shall end on December 31, 2006, unless sooner terminated in accordance with the provisions hereof. (b) Subject to the conditions set forth below, Lessee shall have the right, exercisable by delivering written notice to Sublessor at any time during the last twelve (12) months of the Term but in no event later than ninety (90) days prior to the expiration of the Term, to elect to extend the term of this Lease for a period of five (5) years on the same terms and conditions set forth herein except (i) that Lessee shall have no further right to extend the term hereof, and (ii) Base Rent and Percentage Rent shall be adjusted as the parties may agree, and if the parties do not, in the sole discretion of each party, reach agreement on such adjustment in such rent by the expiration of the Term, then the Base Rent for such extended term shall be equal to the greater of (x) the then current Base Rent and (y) one hundred forty percent (140%) of the initial Base Rent set forth above. The parties agree that any adjusted rent calculation shall not be based on the net income or net profits of Lessee. 1.4 BUILDING CONTRACTS. Lessee acknowledges and agrees that the Leased Property is subject to the following contracts relating to the use, operation and maintenance thereof: -2- 9 (a) Laundry Equipment Lease; and (b) those certain service and other contracts identified on EXHIBIT B attached hereto and made a part hereof (collectively the "Service Contracts"). 1.5 MANAGEMENT AGREEMENT; ASSIGNMENT AND ASSUMPTION. Upon the execution and delivery of this Lease, (a) Lessee shall enter into the Hotel Management Agreement in the form of EXHIBIT D attached hereto and made a part hereof; (b) all of Lessor's right, title and interest in the Leases shall be assigned to, and assumed by, Lessee, pursuant to an Assignment and Assumption of Leases in the form of EXHIBIT E attached hereto and made a part hereof; and (c) all of Lessor's rights and interests in the Service Contracts shall be assigned to, and assumed by, Lessee pursuant to an Assignment and Assumption of Service Contracts in the form of EXHIBIT F attached hereto and made a part hereof. ARTICLE II ---------- DEFINITIONS. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as are at the time applicable, (c) all references in this Lease to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease and (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision. "Additional Charges". As defined in Section 3.4. "Affiliate". As used in this Lease the term "Affiliate" of a Person shall mean (a) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any other Person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of such Person, or (c) any officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. -3- 10 "Audited Consolidated Financials". Consolidated Financials audited by a firm of independent certified public accountants acceptable to Lessor in its sole discretion. "Award". Compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. "Base Rent". The annual sum of $1,000,000, payable in advance in monthly installments as provided in Section 3.1(a), on or before the tenth (10th) day of each calendar month of the Term; provided however, that the first monthly payment of Base Rent shall be payable on the Commencement Date and that the first and last monthly payments of Base Rent shall be prorated as to any partial month (subject to adjustment as provided in Sections 14.5, 15.2, 15.4, and 15.5). "Business Day". Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the City of Phoenix, Arizona, or in the municipality wherein the Leased Property is located, are closed. "Capital Expenditures". As defined in Section 3.7. "CERCLA". The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Code". The Internal Revenue Code of 1986, as amended. "Commencement Date". As defined in Section 1.2. "Condemnation". A Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. "Condemnor". Any public or quasi-public authority, or private corporation or individual, having the power of Condemnation. "Consolidated Financials". For any fiscal year (or other period for which such statements are prepared) for Lessee and its consolidated subsidiaries, a statement of financial position as of such fiscal year (or other period) end date and statements of operations, cash flows and retained earnings for the fiscal year (or other period) then ended, all in comparative form, together with notes thereto, prepared in accordance with generally accepted accounting principles. "Consolidated Net Worth". The sum of consolidated shareholders' equity of Lessee and any consolidated subsidiaries as shown on the most recent Audited Consolidated Financials. -4- 11 "Consumer Price Index". The "U.S. City Average, All Items" Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor (Base: 1982-1984=100), or any successor index thereto. If (i) a significant change is made in the number or nature (or both) of items used in determining the Consumer Price Index, or (ii) the Consumer Price Index shall be discontinued for any reason, the Lessor shall request that the Bureau of Labor Statistics furnish a new index comparable to the Consumer Price Index, together with information which will make possible a conversion to the new index in computing the adjusted Base Rent hereunder. If for any reason the Bureau of Labor Statistics does not furnish an index and such information, the parties will instead mutually select, accept and use such other index or comparable statistic on the cost of living in Washington, D.C. that is computed and published by an agency of the United States or a responsible financial periodical of recognized authority. "Date of Taking". The date the condemnor has the right to possession of the Property being condemned. "Encumbrance". As defined in Article XXXIV. "Environmental Authority". Any federal, state, local or foreign department, agency or other body or component of any Government that administers, oversees or enforces any Environmental Laws. "Environmental Laws". All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees, injunctions and duties under the common law relating to occupational health and safety, the protection of human health, and pollution of the indoor and outdoor environment (including without limitation, ambient air, surface water, ground water, (and surface or subsurface strata), including without limitation laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include, but are not limited to, CERCLA, EPCRA, FIFRA, RCRA, SARA and TSCA. "Environmental Liabilities". Any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or fine or criminal fine, and any court costs and reasonable amounts for attorney's fees, fees for witnesses, consultants and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of: -5- 12 (a) Failure of Lessee, any Predecessor or the Leased Property to comply at any time with all Environmental Laws; (b) Presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property; (c) A Release at any time of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property or any off-site property or facility; (d) Identification of Lessee, or any Predecessor as potentially responsible party under CERCLA or under any Environmental Law similar to CERCLA; (e) Presence at any time of any above ground and/or underground storage tanks as defined in RCRA or in any applicable Environmental Law on, in at or under the Leased Property or any off-site property or facility; or (f) Any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof. "Environmental Liability". Either of an Identified Environmental Liability or an Unidentified Environmental Liability. "EPCRA". The Emergency Planning and Community Right to Know Act, as amended. "Event of Default". As defined in Section 16.1. "Facility". The hotel and/or other facility offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property which shall be included in the Leased Improvements. The Facility is more particularly described on Exhibit D attached hereto and incorporated by reference. "FIFRA". The Federal Insecticide, Fungicide, and Rodenticide Act as amended. "Fiscal Year". The 12-month period from January 1 to December 31. "Fixtures". As defined in Section 1.1. "Food and Beverage Revenues". Gross revenues, receipts and income of any kind (whether on a cash or credit basis) paid, collected or accrued and -6- 13 derived directly or indirectly by Lessee from: (i) the sale, for on-site consumption at the Leased Property or through off-site catering services, of food and nonalcoholic beverages, including sales attributable to guest rooms, banquet rooms, meeting rooms, the restaurant, the lounge, the bar and other similar rooms; (ii) the sale of wine, beer, liquor or other alcoholic beverages, including sales attributable to the restaurant, the bar, the lounge, guest rooms, meeting rooms, banquet rooms, off-site catering or any location at the Leased Property; (iii) cover charges and audio-visual rental charges related to banquet, ballroom or meeting room events, and (iv) banquet and meeting room revenues, including room rental charges from such banquet and meeting rooms. Such revenues shall not include the following: (a) Room and Other Revenues as defined below; (b) Any gratuities or service charges added to a customer's bill or statement in lieu of a gratuity, which gratuity or charge Lessee is obligated to pay to or which was paid directly to an employee; (c) Customary and reasonable credits, rebates, refunds or negative adjustments to guests; (d) Sales taxes and any additional taxes imposed on the sale of alcoholic beverages; and (e) Amounts attributable to customary and reasonable allowances, give aways and promotions. "Franchise Agreement". The franchise agreements or license agreements currently in effect with Franchisor, and any amendments, replacements or extensions thereof or other agreements relating thereto hereafter implemented with the prior approval of Lessor, under which the Facility is operated. "Franchisor". Best Western International, Inc., InnSuites Licensing Corp. or such other national hotel franchisor approved by Lessor in accordance with Section 34.3. "Government". The United States of America, any state, county, municipality, local government, district or territory thereof, any foreign nation, any state, district, department, territory or other political division thereof, or any administrative agency, board, commission, bureau or political subdivision of any of the foregoing. "Ground Lease". The ground lease between Lessor and _______________________ dated as of ________________, as amended, executed with respect to the Land. -7- 14 "Ground Rent". All rent payable by Lessor as sublessee with respect to the Ground Lease. "Hazardous Materials". All chemicals, pollutants, contaminants, wastes and toxic substances, including without limitation: (a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law; (b) Hazardous substances, as defined in CERCLA or in any Environmental Law; (c) Toxic substances, as defined in TSCA or in any Environmental Law; (d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law; and (e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenyls, asbestos, radon and urea formaldehyde. "Impositions". Collectively, all taxes (including, without limitation, all personal property, sales and use (including sales, rent or occupancy taxes on Rent), single business, gross receipts, transaction, privilege, rent or similar taxes as the same relate to or are imposed upon Lessee, its personal property or its business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Lessee (including all interest and penalties thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term may be assessed or imposed on or with respect to or be a lien upon (a) Lessor's interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee. Notwithstanding the foregoing, Impositions shall not include (1) any Real Estate Taxes on the Leased Property, (2) any personal property taxes on Lessor's personal property, (3) any tax based on net income (whether denominated as an income, franchise or capital stock or other tax) imposed on Lessor or any other Person other than Lessee and Affiliates of Lessee, (4) any net revenue tax of Lessor or any other Person (other than Lessee or an Affiliate of Lessee), (5) any -8- 15 tax imposed with respect to the sale, exchange or other disposition by Lessor of any Leased Property or the proceeds thereof, or (6) any single business, gross receipts (other than a tax on any rent received by Lessor from Lessee), transaction, privilege or similar taxes as the same relate to or are imposed upon Lessor, except to the extent that any tax, assessment, tax levy or charge that Lessee is obligated to pay pursuant to the first sentence of this definition, and that is in effect any time during the Term hereof, is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) through (6) is levied, assessed or imposed expressly in lieu thereof. "Indemnified Environmental Liability". As defined in Section 8.3. "Indemnified Party; Indemnitee". Either of a Lessee Indemnified Party or a Lessor Indemnified Party. "Indemnifying Party". Any party obligated to indemnify an Indemnified Party pursuant to Section 8.3 or Article XXII. "Insurance Requirements". All terms of any insurance policy required by this Lease, any Franchisor or any Legal Requirement, and all requirements of the issuer of any such policy as to such policy and/or the Leased Property. "Inventory". All inventories, supplies, guest supplies, food and beverage inventory, and consumable merchandise used in connection with the operation of the Facility, but excluding all such items to the extent owned by concessionaires, tenants, subtenants, licensees or other Persons occupying all or a portion of the Leased Property as permitted by this Lease. "Land". As defined in Section 1.1(a). "Lease". This Lease. "Leased Improvements; Leased Property". Each as defined in Section 1.1. "Legal Requirements". All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use or alteration thereof (whether by Lessee or otherwise), whether or not hereafter enacted and in force, including (a) all Environmental Laws, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations and regulations relating thereto and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than -9- 16 encumbrances hereafter created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property. "Lending Institution". Any insurance company, investment banking company, credit company, federally insured commercial or savings bank, national banking association, savings and loan association, employees welfare, pension or retirement fund or system, corporate profit sharing or pension trust, college or university, or real estate investment trust, including any corporation qualified to be treated for federal tax purposes as a real estate investment trust, such trust having a net worth of at least $10,000,000 and REMIC, conduit lenders. "Lessee". The Lessee designated on this Lease and its permitted successors and assigns. "Lessee Indemnified Party". Lessee and (i) any Affiliate of Lessee; (ii) any Person against whom any liability may be asserted as a result of a direct or indirect ownership interest (including a shareholder's interest) in Lessee; (iii) the officers, directors, shareholders, employees, agents and representatives of Lessee; and (iv) the respective heirs, personal representatives, successors and assigns of any of the foregoing Persons. "Lessee's Personal Property". As defined in Section 6.2. "Lessor". The Lessor designated on this Lease and its successors and assigns. "Lessor Indemnified Party". Lessor and (i) any Affiliate of Lessor; (ii) any Person against whom any liability may be asserted as a result of a direct or indirect ownership interest (including an interest as a partner) in Lessor; (iii) the employees, agents and representatives of Lessor; (iv) Realty ReFund Trust, its officers, trustees, shareholders, employees and agents; and (v) the respective heirs, personal representatives, successors and assigns of any of the foregoing Persons. "Notice". A notice given pursuant to Article XXXII. "Officer's Certificate". A certificate of Lessee in form and substance reasonably acceptable to Lessor signed by the chief operating officer and the chief financial officer or another officer authorized so to sign by the board of directors or by-laws of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any such officer. "Overdue Rate". On any date, a rate equal to 1% per month, but in no event greater than the maximum rate then permitted under applicable law. "Partial Fiscal Year". Any portion of a Fiscal Year which falls during the Term hereof. -10- 17 "Payment Date". Any due date for the payment of any installment of Rent. "Percentage Rent". As defined in Section 3.1(b). "Person". Any individual, corporation, general or limited partnership, limited liability company, limited liability partnership, stock company or association, joint venture, association, company, trust, bank, trust company, land trust, real estate investment trust, business trust, or other entity and government and agency and political subdivision thereof. "Predecessor". Any Person whose liabilities arising under any Environmental Law relating to the Leased Property have or may have been retained or assumed by Lessee, either contractually or by operation of law. "Primary Intended Use". As defined in Section 7.2(b). "Prime Rate". The rate of interest announced publicly by Citibank N.A., in New York, New York from time to time, as such bank's base rate. If no such rate is announced or if such rate is discontinued, then such other rate as Lessor may reasonably designate. "Proceeding". Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution. "RCRA". The Resource Conservation and Recovery Act, as amended. "Real Estate Taxes". All real estate taxes (including any applicable interest and penalties thereon), including general and special assessments, if any, and possessory interest taxes which are imposed upon the Land and/or the Leased Property. "Release". A "Release" as defined in CERCLA or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits. "Rent". Collectively, the Base Rent, Percentage Rent and Additional Charges. "Room and Other Revenues". All gross revenues, receipts and income of any kind (whether on a cash or credit basis) paid, collected or accrued and derived directly or indirectly by Lessee from: (i) the rental of guest rooms; (ii) gift -11- 18 shop operations; (iii) fees collected from telephone, game room and guest laundry services; and (iv) guaranteed no show reservations, space rentals (excluding banquet and meeting room space rentals), discounts earned, vending machines (but only to the extent of the net proceeds therefrom), valet services, movie services (but only to the extent of the net proceeds therefrom), and commissions earned; and (v) all other revenues in connection with the use or operation of the Leased Property and all services or activities provided thereon, including revenue derived from subtenants, concessionaires, and licensees, all as determined in accordance with generally accepted accounting principles. Notwithstanding the previous sentence, Room and Other Revenues shall not include: (a) The amount of any credits, rebates, refunds or adjustments to customers, guests or patrons; (b) Sales or use taxes; (c) Interest income; (d) Gratuities paid or payable to Persons other than Lessee or its Affiliate; (e) Gains from the sale of assets out of the ordinary course of business; and (f) Food and Beverage Revenues as defined above. "SARA". The Superfund Amendments and Reauthorization Act of 1985, as amended. "State". The State or Commonwealth of the United States in which the Leased Property is located. "Subsidiaries". Corporations in which Lessee owns, directly or indirectly, more than fifty percent (50%) of the voting stock or control, as applicable. "Taking". A taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced. "Term". As defined in Section 1.3. "TSCA". The Toxic Substances Control Act, as amended. "Unavoidable Delay". A delay due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental -12- 19 restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto unless such lack of funds is caused by the failure of the other party hereto to perform any obligations of such party under this Lease. "Uneconomic For Its Primary Intended Use". A state or condition of the Facility such that in the good faith judgment of Lessor it is uneconomic to operate the Facility for its Primary Intended Use, taking into account, among other relevant factors, the number of usable rooms and projected revenues. "Uniform System". The Uniform System of Accounts for Hotels (8th Revised Edition, 1986) as published by the Hotel Association of New York City, Inc. as same may hereafter be revised. "Unsuitable For Its Primary Intended Use". A state or condition of the Facility such that, in the good faith judgment of Lessor, due to casualty damage or loss through Condemnation, the Facility cannot be operated or cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel. ARTICLE III ----------- 3.1 RENT. Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, in immediately available funds, at Lessor's address set forth in Article XXXII hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, (A) the higher of (i) Base Rent or (ii) Percentage Rent and (B) Additional Charges, during the Term, as follows: (a) BASE RENT: The annual sum of $____________, payable in advance in consecutive monthly installments, on or before the tenth (10th) day of each calendar month of the Term ("Base Rent") in an amount equal to the product of the Base Rent multiplied by the applicable Monthly Factor, provided, however, that the first monthly payment of Base Rent shall be payable on the Commencement Date and that the first and last monthly payments of Base Rent shall be prorated as to any partial month (subject to adjustment as provided in Sections 14.5, 15.2, 15.4, and 15.5); and provided, further, that Base Rent shall be increased by increases in CPI as set forth in Subsection (c) below. (b) PERCENTAGE RENT: For each Fiscal Year and Partial Fiscal Year during the Term commencing with the Fiscal Year or Partial Fiscal Year ending December 31, 1997, Lessee shall pay percentage rent ("Percentage Rent"), if such Percentage Rent is in excess of Base Rent for such Fiscal Year or Partial Fiscal Year, in an amount calculated as follows: -13- 20 (i) The sum of (A) __% of the first $_________ in Room and Other Revenues for such Fiscal Year or Partial Fiscal Year, (B) __% of all amounts above $_________ up to $_________ in Room and Other Revenues for such Fiscal Year or Partial Fiscal Year, and (C) __% of all Room and Other Revenues in excess of $_________ for such Fiscal Year or Partial Fiscal Year (the preceding dollar figures being referred to hereinafter as the "Threshold Amounts", such Threshold Amounts to be prorated on a per diem basis for any Partial Fiscal Year), plus (ii) 5% of all Food and Beverage Revenues in excess of $200,000 for such Fiscal Year or Partial Fiscal Years. (c) CPI ADJUSTMENTS TO THE THRESHOLD AMOUNTS AND BASE RENT. For each Fiscal Year of the Term beginning on or after January 1, 1998, the Threshold Amounts and Base Rent shall be adjusted from time to time as follows: If the most recently published Consumer Price Index as of the last day of the last month (the "Comparison Month") of any Fiscal Year is different than the average Consumer Price Index for the twelve (12) month period prior thereto, each of Base Rent and the Threshold Amount for the next Fiscal Year shall be adjusted by the percentage change in the Consumer Price Index calculated by multiplying the Base Rent and each Threshold Amount by the quotient obtained by dividing the Consumer Price Index for the most recent Comparison Month by the Consumer Price Index for the month which is exactly twelve (12) months prior thereto. Adjustments in the Threshold Amounts and Base Rent shall be effective on the first day of the first calendar month of the Fiscal Year to which such adjusted Threshold Amounts apply. In the event of casualty and corresponding payment of rent out of the proceeds of rental interruption insurance provided pursuant to Section 13.1(c), the Percentage Rent shall be based upon the higher of (i) actual revenues, (ii) revenues for the same period in the previous Fiscal Year (whether or not during the Term), or (iii) projected revenues used in computing the final insurance settlement. (d) MONTHLY FACTORS. For purposes of this Section 3.1, the applicable Monthly Factors shall be as follows: January - .___ April - .___ July - .___ October - .___ February - .___ May - .___ August - .___ November - .___ March - .___ June - .___ September - .___ December - .___ 3.2 PAYMENT OF PERCENTAGE RENT. Percentage Rent shall be due and payable quarterly on or before the thirtieth (30th) day after the last day of each quarter during the Term. Additionally, an Officer's Certificate, setting forth the -14- 21 calculation of such rent payment for such quarter, shall be delivered to Lessor quarterly, together with such quarterly Percentage Rent payment after each quarter of each Fiscal Year (or part thereof) during the Term. Such quarterly payment shall be based on the formula set forth in Section 3.1(b), but, in calculating the Revenue Computations for each quarter, gross Room and Other Revenues for the year to date shall be annualized by dividing such sum by the number of months which have passed year to date (including the current month) and multiplying the result by 12. The resulting Percentage Rent amount shall be multiplied by the number of months that have passed year-to-date (including the current month) and divided by twelve (12). Payments of Base Rent and Percentage Rent for the year to date shall be subtracted from the result to arrive at the Percentage Rent payment due for that quarter. In no event, however, shall the Percentage Rent for any quarter exceed the amount arrived at by applying the sum of the Monthly Factors for the months that comprise the particular quarter to the Annualized Revenue. The Revenue Computations shall be appropriately adjusted to calculate Percentage Rent for partial years. There shall be no reduction in the Base Rent regardless of the result of the Revenue Computations. In addition, on or before March 1 of each year, commencing with March 1, 1998, Lessee shall deliver to Lessor an Officer's Certificate reasonably acceptable to Lessor setting forth the computation (based on audited financial statements of Lessee) of the actual Percentage Rent that accrued for each quarter of the Fiscal Year that ended on the immediately preceding December 31 and shall pay to Lessor, with the delivery of the Officer's Certificate, the amount of Percentage Rent due and payable for the Fiscal Year then ended as shown in the Officer's Certificate, if any, that exceeds the amount actually paid as Percentage Rent by Lessee for such Fiscal Year. If the Percentage Rent actually due and payable for such Fiscal Year is shown by such certificate to be less than the amount actually paid as Percentage Rent for the applicable Fiscal Year, Lessor, at its option, shall reimburse such amount to Lessee or credit such amount against the next quarter's Percentage Rent payments; provided, however, that no Event of Default exists. The obligation to pay Percentage Rent shall survive the expiration or earlier termination of the Term. A final reconciliation, taking into account, among other relevant adjustments, any adjustments which are accrued after such expiration or termination date but which related to Percentage Rent accrued prior to such termination date and Lessee's computation of Percentage Rent due and payable, shall be made not later than ninety (90) days after such expiration or termination date. Within such ninety (90) day period, Lessee shall deliver to Lessor an Officer's Certificate setting forth the final Percentage Rent amount payable to Lessor and payment of the amount due, if any. 3.3 CONFIRMATION OF PERCENTAGE RENT. Lessee shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with generally accepted accounting principles consistently applied and the Uniform System, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain for at least four years after the expiration of each Fiscal Year (and in any -15- 22 event until the reconciliation described in Section 3.2 for such Fiscal Year has been made), reasonably adequate records conforming to such accounting system showing all data necessary to compute Percentage Rent for the applicable Fiscal Years. In the event of a conflict between generally accepted accounting principles and the Uniform System, the Uniform System shall prevail. Lessor (or its accountants or representatives), at its expense (except as provided herein), shall have the right from time to time to audit the information that formed the basis for the data set forth in any Officer's Certificate provided under Section 3.2 and, in connection with such audits, to examine all Lessee's records (including supporting data and sales and excise tax returns) reasonably required to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under Legal Requirements. If any such audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of such audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest calculated at the Overdue Rate from the due date for the last quarterly payment of Percentage Rent for the Fiscal Year to the date of payment thereof; provided, however, that as to any audit that is commenced more than two (2) years after the date Percentage Rent for any Fiscal Year is reported by Lessee to Lessor, the deficiency, if any, with respect to such Percentage Rent, shall bear interest at the Overdue Rate only from the date such determination of deficiency is made unless such deficiency is the result of gross negligence or willful misconduct on the part of Lessee. If any such audit discloses that the Percentage Rent actually due from Lessee for any Fiscal Year exceed those reported by Lessee by more than three percent (3%), Lessee shall pay the cost of such audit and examination. Any proprietary information obtained by Lessor pursuant to the provisions of this Section shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation between the parties, and except further that Lessor may disclose such information to prospective lenders or purchasers, their respective attorneys, accountants and other representatives, or pursuant to any Legal Requirements. The obligations of Lessee contained in this Section shall survive the expiration or earlier termination of this Lease. 3.4 ADDITIONAL CHARGES. In addition to the Base Rent and Percentage Rent, (a) Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations, costs and expenses necessary to perform its obligations hereunder and under the Franchise Agreement, and (b) in the event of any failure on the part of Lessee to timely pay any of those items referred to in clause (a) of this Section 3.4, Lessee also will promptly pay and discharge every fine, penalty, interest and cost that may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) of this Section 3.4 being additional rent hereunder and being referred to herein collectively as the "Additional Charges"), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Base Rent. If any installment of Base Rent, Percentage Rent or Additional Charges (but only as to those -16- 23 Additional Charges that are payable directly to Lessor) shall not be paid on its due date, Lessee will pay Lessor on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease (which charges are not payable to Lessor), Lessee shall be relieved of its obligation to pay such Additional Charges to the entity to which they would otherwise be due and Lessor shall pay same from monies received from Lessee. 3.5 ANNUAL REVENUE PROJECTIONS. No later than thirty (30) days prior to the commencement of each Fiscal Year, Lessee shall submit Annual Revenue Projections for such Fiscal Year to Lessor. The Annual Revenue Projections shall be subject to Lessor's prior approval as to form and content and shall be in such form and shall contain such information as Lessee included in its annual revenue projections in accordance with its past practice, and shall, in any event, include the following: (a) Lessee's reasonable estimate of Room and Other Revenues for the Fiscal Year itemized on a monthly basis, as such estimates may be revised or replaced from time to time by Lessee; and (b) A projection of the Percentage Rent payable for such Fiscal Year. 3.6 ANNUAL CAPITAL EXPENDITURES BUDGET. Subject to the provisions of Sections 8.1, 9.2 and 19.1(a), Lessor, at its sole expense, shall be responsible for all Capital Expenditures as defined in this Section 3.6, provided, however, Lessor shall not be obligated to make any Capital Expenditure the need for which Lessor disputes or objects to in good faith. Not later than forty-five (45) days prior to the commencement of each Fiscal Year or Partial Fiscal Year, Lessee shall submit to Lessor for Lessor's approval, Lessee's proposed Annual Capital Expenditures Budget. The Annual Capital Expenditures Budget (the "Capital Expenditures Budget") shall be subject to Lessor's approval and shall contain the following: (a) Lessee's estimate of the amounts to be expended during the upcoming Fiscal Year to renew, replace or refurbish FF&E, and a reasonably detailed description of the expenses to be incurred, and Lessee's estimate of the amount that will be expended during the upcoming Fiscal Year on capital repairs, replacements and improvements to the Leased Improvements, together with a reasonably detailed description of the capital repairs, replacements and improvements that will be undertaken. The expenditures referred to in this Section 3.6 are referred to in this Lease as "Capital Expenditures". (b) A capital renewal program showing the major anticipated Capital Expenditures and that will be incurred over the ensuing three (3) year and five (5) year periods. If Lessor shall not give its approval to the Annual Capital -17- 24 Expenditures Budget, Lessee shall revise the Annual Capital Expenditures Budget, as may be required to obtain Lessor's consent thereto. 3.7 CAPITAL EXPENDITURE FUND. Lessor shall establish and maintain an account to provide a reserve for the Capital Expenditures costs at the Facility and each other facility covered by a Percentage Lease. Such Account shall be funded with an initial balance of _____________________ and 00/100 Dollars ($_________) upon or prior to the execution of this Percentage Lease Agreement. In addition, Lessor shall deposit in such account a quarterly amount equal to four percent (4%) of the Room and Other Revenues for each such Facility. 3.8 APPLICATION OF CAPITAL EXPENDITURE FUND. When amounts are budgeted and agreed to be spent for Capital Expenditures, Lessee shall be responsible for the implementation of the Capital Expenditure program and shall make periodic draws on the Capital Expenditure Fund by the presentation to Lessor of appropriate documentation establishing the amounts to be paid in accordance with the Capital Expenditure Budget, and including such supporting documentation as Lessor may reasonably require. Lessor and Lessee shall cooperate in good faith to accomplish such implementation as quickly as practicable in accordance with sound business practices. 3.9 UNBUDGETED CAPITAL EXPENDITURES. No disbursements shall be made from the Capital Expenditure Fund which are not in accordance with the Capital Expenditure Budget. However, Lessor and Lessee recognize that, in certain circumstances, Capital Expenditures which were not budgeted may be necessary. In the following circumstances, disbursements shall be made for Capital Expenditures from the Capital Expenditures Fund even though such expenditures were not included in the Capital Expenditure Budget: (i) When Lessor and Lessee agree to an addition to the Capital Expenditure Budget; (ii) When, due to circumstances beyond the control of Lessee or Lessor, expenditures for a project exceed the budgeted amount; (iii) When the Capital Expenditure is necessary on an emergency basis for any reason including the comfort and safety of guests or employees; and (iv) For DE MINIMIS Capital Expenditures not in excess of $10,000 per item and not in excess, on an aggregate basis, of $25,000 per year. 3.10 AGENT METHOD FOR PURCHASES OF CAPITAL EXPENDITURES. (a) Lessor hereby retains Lessee as an independent contractor on the terms contained -18- 25 in this Agreement to act for and on behalf of Lessor as Lessor's agent in connection with the implementation of the Capital Expenditure program for the Facility. Lessee's cost analysis shall be based upon the plans and furnishings set forth in the specifications and other written information agreed to be implemented under the Capital Expenditure Budget. Lessee will be responsible for negotiating purchases of Capital Expenditures on Lessor's behalf. All purchases will be based on Lessee's actual cost, net of trade discounts (including cash discounts, where applicable). (b) Lessor acknowledges and agrees that purchase orders relating to any Capital Expenditure for the Project will be executed by Lessee as agent for and on behalf of Lessor. Lessor further acknowledges and agrees that Lessee shall have no liability under this Agreement or otherwise for payment of the Capital Expenditure or for freight or storage related to the Capital Expenditure provided that no expenditures shall be made except in accordance with the Budget and as provided above. All down payments as well as payment of all vendor invoices are the responsibility and obligation of Lessor. Lessor acknowledges that a delay on the part of Lessor relating to any required deposits or payments can result in delivery delays of the Capital Expenditure. The timing of the making of all purchase orders and delivery schedules will be established by mutual agreement of Lessor and Lessee. (c) Lessee shall not be obligated under any circumstances to (but in its discretion may) use its own funds for the purpose of making down payments (either at the time purchase orders are processed or otherwise) or making progress or final payments to Capital Expenditure vendors. Taxes, warehouse, delivery, redelivery, restocking, installation and similar charge, including, but not limited to delivery and storage costs, shall be obligations of Lessor and Lessor agrees to perform such obligations in a timely manner. All vendor invoices shall be addressed to and issued directly to Lessor. (d) Lessor shall designate a representative authorized to act on its behalf with respect to the Leased Property. (e) Lessor agrees to reimburse Lessee for all out-of-pocket expenses (including long distance and messenger fees) incurred by Lessee on behalf of or in connection with the Capital Expenditures for the Facility. All such reimbursements shall be paid monthly as incurred upon receipt of bills or other evidence reasonably satisfactory to Lessor. (f) Lessor shall furnish to Lessee from time to time all information, take such actions and process such draws as may be reasonably requested by Lessee or otherwise required under this Agreement in a timely manner as reasonably necessary for the orderly progress of work under this Agreement. Lessee shall have no responsibility or be liable in any manner whatsoever for any delay caused by information to be supplied or actions to be taken by Lessor, its agents or other independent contractors working on or at the Facility or caused by Lessor's failure to timely pay vendors. -19- 26 (g) If Lessor desires to change, modify or alter the quantity or specifications of any Capital Expenditure purchased by Lessee in writing, Lessee will endeavor to satisfy any such request. Lessor acknowledges and understands that Lessee's ability to comply with requested changes, modifications or alterations is subject to acceptance and performance on the part of the vendors and supplier with whom Lessee has entered into agreements for and on behalf of Lessor. Lessee assumes no liability or responsibility for its inability to comply with Lessor's request for changes, modifications or alterations under this paragraph. (h) Lessor acknowledges and agrees that Lessee shall not be responsible or liable to Lessor for any losses incurred or damages suffered by Lessor due to delays, failures or omissions of third party vendors in delivery of Capital Expenditure. Lessor agrees to hold Lessee harmless for any such losses or damages. Lessor assumes ownership of Capital Expenditure at the time of shipment of Capital Expenditure from any third party vendor or manufacturer and any claims Lessor may have against any freight company in connection with the delivery or shipment of the Capital Expenditure are the responsibility of Lessor. (i) LESSOR ACKNOWLEDGES AND AGREES THAT LESSEE MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, RELATING TO QUALITY, FITNESS OR CAPACITY OF THE WORK DONE PURSUANT TO CAPITAL EXPENDITURES. Lessor, as purchaser of the Capital Expenditure, shall have the benefit of any guarantees and warranties, either express or implied, from vendors and suppliers of the Capital Expenditure, but Lessee shall have no liability for any such third party guarantees or warranties. Lessee will use its best efforts on Lessor's behalf to obtain proper service for the replacement or correction of unsatisfactory Capital Expenditure, but Lessee does not warrant its ability to obtain such service and Lessee shall have no obligation or responsibility to replace or correct any such unsatisfactory Capital Expenditure. (j) Except with respect to matters arising from Lessee's misconduct or Lessee's negligence, Lessor agrees to indemnify and hold Lessee, its directors and officers harmless from and against any and all claims, suits, costs, liabilities, obligations, losses and damages whatsoever arising out of or in connection with the work done pursuant to Capital Expenditures, the use of results of Capital Expenditures in or at the Project and the payment of any and all sales, use or other taxes (excepting federal, state and local income taxes relating to Lessee's business). (k) Lessor shall be responsible for and shall pay all applicable sales and use taxes arising as a result of the purchase or use of the Capital Expenditures or Lessor shall deliver appropriate exemption certificates. -20- 27 ARTICLE IV ---------- 4.1 PAYMENT OF TAXES AND IMPOSITIONS. Lessor shall pay all property taxes (including the items in clauses (1) through (6) of the definition of "Impositions" set forth in Article II). Subject to Article XII relating to permitted contests, each party will pay, or cause to be paid, all Impositions imposed on each of them, respectively, before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing or other authorities where feasible, and will promptly furnish to the other party copies of official receipts or other satisfactory proof evidencing such payments; provided, however, Lessee shall pay all Impositions in respect of the Leased Property and this Lease (other than fees, property taxes and taxes imposed on Lessor's income from the Leased Property). Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. Lessee shall file all personal property tax returns in such jurisdictions where it is legally required to so file. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property. Where Lessor is legally required to file personal property tax returns, Lessor shall provide Lessee with copies of assessment notices in sufficient time for Lessee to file a protest. Lessee may, upon notice to Lessor, at Lessee's option and at Lessee's sole expense, protest, appeal, or institute such other proceedings (in its or Lessor's name) as Lessee may deem appropriate to effect a reduction of real estate or personal property assessments for those Impositions to be paid by Lessee, and Lessor shall fully cooperate with Lessee in such protest, appeal, or other action. Lessee hereby agrees to indemnify, defend, and hold harmless Lessor from and against any claims, obligations, and liabilities against or incurred by Lessor in connection with such cooperation, although Lessee is not liable for the amount of any (i) Real Estate Taxes or (ii) personal property taxes attributable to personal property owned by Lessor. Lessor, however, reserves the right to effect any such protest, appeal or other action and, upon notice to Lessee, shall control any such activity, which shall then go forward at Lessor's sole expense. Upon such notice, Lessee, at Lessor's expense, shall cooperate fully with such activities. 4.2 UTILITY CHARGES. Lessee will be solely responsible for obtaining utility services to the Leased Property and will pay, or cause to be paid, all charges for electricity, gas, oil, water, sewer and other utilities attributable to, or used on, under or in the Leased Property during the Term as such charges become due. 4.3 INSURANCE PREMIUMS. Lessee will pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article XIII. Lessor shall pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article VIII. -21- 28 ARTICLE V --------- NO TERMINATION, ABATEMENT, ETC. Except as otherwise specifically provided in this Lease, Lessee, to the extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the written consent of Lessor to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of the Rent, or setoff against the Rent, nor shall the obligations of Lessee be otherwise affected by reason of (a) any damage to, or destruction of, any Leased Property or any portion thereof from whatever cause or any Taking of the Leased Property or any portion thereof, (b) any claim which Lessee has or might have against Lessor by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (c) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, (d) any lawful or unlawful prohibition of, or restriction upon, Lessee's use of Leased Property, or interference with such use, or (e) for any other cause whether similar or dissimilar to any of the foregoing. Lessee hereby specifically waives all rights arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (1) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (2) abate, reduce, suspend or defer Rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or by termination of this Lease other than by reason of an Event of Default. ARTICLE VI ---------- 6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease. 6.2 LESSEE'S PERSONAL PROPERTY. Throughout the Term, Lessee will acquire, own, maintain and replace such personal property (other than Capital Expenditures) and Inventory as is required to operate the Leased Property as a hotel and, otherwise, in the manner contemplated by this Lease. At all times during the Term Lessee shall maintain an adequate and customary supply of inventory. Lessee may (and shall as provided herein below), at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements, any items of personal property (including Inventory) owned by Lessee (collectively, the "Lessee's Personal Property"). Lessee, at the commencement of the Term, and from time to -22- 29 time thereafter, shall provide Lessor with an accurate list of all such items of the Lessee's Personal Property. Lessee may, subject to the conditions set forth in this Section 6.2 and Section 6.3, remove any of Lessee's Personal Property set forth on such list at any time during the Term or upon the expiration or any prior termination of the Term. All of Lessee's Personal Property not removed by Lessee within ten (10) days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving Notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 9.1(d), including repair of all damage to the Leased Property caused by the removal of Lessee's Personal Property, whether effected by Lessee or Lessor. Lessee may make such financing arrangements, title retention agreements, leases or other agreements with respect to the Lessee's Personal Property as it sees fit provided that Lessee first advises Lessor of any such arrangement and such arrangement expressly provides that in the event of Lessee's default thereunder, Lessor may assume Lessee's obligations and rights under such arrangement. ARTICLE VII ----------- 7.1 CONDITION OF THE LEASED PROPERTY. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Lessee is leasing the Leased Property "as is," "where is" and with "all faults," in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL CURRENT AND FUTURE COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS (NOT LIMITED TO ITEMS OF RECORD) INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Notwithstanding the foregoing, -23- 30 however, to the extent permitted by law, Lessor hereby assigns to Lessee all of Lessor's rights to proceed against any predecessor in title other than Lessee (or an Affiliate of Lessee which conveyed the Leased Property to Lessor) for breaches of warranties or representations or for latent defects in the Leased Property. Lessor shall fully cooperate with Lessee in the prosecution of any such claim, in Lessor's or Lessee's name, all at Lessee's sole cost and expense. Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and against any claims, obligations and liabilities against or incurred by Lessor in connection with such cooperation. All amounts recovered that are attributable to the period after the Term shall belong to Lessor. 7.2 USE OF THE LEASED PROPERTY. (a) Lessee covenants that it will proceed with all due diligence and will exercise its best efforts to obtain and to maintain all approvals needed to use and operate the Leased Property and the Facility under applicable local, state and federal law. (b) Lessee shall use or cause to be used the Leased Property only as a hotel facility (including food and beverage operations) of a caliber consistent with its present use, and for such other uses as may be necessary or incidental to such use or such other use as otherwise approved by Lessor (the "Primary Intended Use"). Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Lessor, which consent may be granted, denied or conditioned in Lessor's sole discretion. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by law or fire underwriter's regulations. Lessee shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee's Personal Property. (c) Subject to the provisions of Articles XIV and XV Lessee covenants and agrees that during the Term it will (1) maintain, operate continuously the Leased Property as a hotel facility of the class currently operated at the Leased Property, (2) keep in full force and effect and comply with all the provisions of the Franchise Agreement, (3) not terminate or amend the Franchise Agreement without the consent of Lessor, (4) maintain appropriate certifications and licenses for such use and otherwise comply with all Legal Requirements and (5) seek to maximize the gross revenues generated therefrom consistent with sound business practices. (d) Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Lessee cause or permit any nuisance thereon. -24- 31 (e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Lessee's Personal Property, to be used in such a manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, subject to Lessor's prior consent. (f) Lessee shall not use, generate, handle, dispose or store Hazardous Materials on the Leased Property, except in the normal course of operations of the Leased Property as a hotel and in compliance with all Environmental Laws. (g) Lessee shall not enter into any collective bargaining agreements with respect to any of the employees at the Leased Property without the prior consent of Lessor, which shall not be unreasonably withheld or delayed, unless required by law. (h) Lessee hereby assumes and agrees to perform all of the obligations of Lessor under all leases in effect at the Leased Property as of the date of commencement of the Term. 7.3 LESSOR TO GRANT EASEMENTS, ETC. Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Lessee and at Lessee's cost and expense (but subject to the approval of Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute amendments or additions to any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any Person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Leased Property), but only upon delivery to Lessor of an Officer's Certificate stating that such grant, release, dedication, transfer, petition or amendment is beneficial to the proper conduct of the business of Lessee on the Leased Property and does not materially reduce the value of the Leased Property. 7.4 COMPLIANCE WITH GROUND LEASE. Lessee shall comply with the provisions of the Ground Lease and shall take no action, or omit to take any action, that would cause or result in any default thereunder. -25- 32 ARTICLE VIII ------------ 8.1 COMPLIANCE WITH LEGAL, INSURANCE REQUIREMENTS, LESSOR'S INSURANCE AND TAX OBLIGATIONS. Subject to Article XII relating to permitted contests, Lessee, at its expense, will promptly (a) comply and cause the Leased Property to comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property; provided, however, that Lessor shall be responsible for the cost of compliance with Insurance Requirements presented to Lessor in writing including Franchisor requirements which are related to the leased real and personal property, as more fully set forth in Article XIII, and shall be responsible for all Capital Expenditures and the items in clauses (1) through (6) of the definition of "Impositions" set forth in Article II, unless the need for such Capital Expenditure is the result of Lessee's negligence, misconduct or an Alteration made by or commenced by Lessee other than Alterations contained in the Capital Expenditure Budget, and (b) procure, maintain and comply with all appropriate licenses and other authorizations required for any use of the Leased Property and Lessee's Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof. 8.2 LEGAL REQUIREMENTS COVENANTS. Lessee covenants and agrees that the Leased Property and Lessee's Personal Property shall not be used for any unlawful purpose, and that Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others. Lessee shall acquire and maintain all appropriate licenses, certifications, Permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder. Lessee further covenants and agrees that Lessee's use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Lessee shall cause all such subtenants, invitees or others to so comply with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor, and subject to the provisions of Article XII, contest the legality or applicability of any such Legal Requirement or any licensure or certification decision if Lessee maintains such action in good faith, with due diligence, without prejudice to Lessor's rights hereunder, and at Lessee's sole expense. If by the terms of any such Legal Requirement compliance therewith pending the prosecution of any such proceeding may legally be delayed without the incurrence of any lien, charge or liability of any kind against the Facility or Lessee's leasehold interest therein and without subjecting Lessee or Lessor to any liability, civil or criminal, for failure so to comply therewith, Lessee may delay compliance therewith until the final determination of such proceeding. If any lien, charge or civil or criminal liability would be incurred by reason of any such delay, Lessee, on the prior written consent of Lessor, which consent shall not be unreasonably withheld, may nonetheless contest as aforesaid and delay as aforesaid provided that such delay would not subject Lessor to criminal -26- 33 liability and Lessee both (a) furnishes to Lessor security reasonably satisfactory to Lessor against any loss or injury to Lessor by reason of such contest or delay and (b) prosecutes the contest with due diligence and in good faith. 8.3 ENVIRONMENTAL COVENANTS. In addition to, and not in diminution of, Lessee's covenants and undertakings in Sections 8.1 and 8.2 hereof, Lessee covenants and undertakes with Lessor as follows: (a) At all times hereafter until such time as all liabilities, duties or obligations of Lessee to the Lessor under the Lease have been satisfied in full, Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon, subject to Lessor's obligation to pay for Capital Expenditures, Lessee agrees to give Lessor prompt written notice of (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release known by Lessee at, on, in or under any property adjacent to or near the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters. (b) Lessor hereby agrees to defend, indemnify and save harmless any and all Lessee Indemnified Parties from and against any and all Environmental Liabilities, other than Environmental Liabilities which were caused by the acts or negligent failures to act of Lessee. (c) Lessee hereby agrees to defend, indemnify and save harmless any and all Lessor Indemnified Parties from and against any and all Environmental Liabilities caused by the acts or negligent failures to act of Lessee. (d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification under either Section 8.3(b) or (c) (an "Indemnified Environmental Liability"), the Indemnifying Party, upon request, shall at its sole expense resist and defend such Proceeding, or cause the same to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless such counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall -27- 34 not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, nonappealable judgment for an adversarial party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgment. For purposes of this Section 8.3, all amounts for which any Indemnitee seeks indemnification shall be computed net of (a) any actual income tax benefit resulting therefrom to such Indemnitee, (b) any insurance proceeds received (net of tax effects) with respect thereto, and (c) any amounts recovered (net of tax effects) from any third parties based on claims the Indemnitee has against such third parties which reduce the damages that would otherwise be sustained; provided that in all cases, the timing of the receipt or realization of insurance proceeds or income tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of damages. Each Indemnitee agrees to use its reasonable efforts to pursue, or assign to Lessee, any claims or rights it may have against any third party which would materially reduce the amount of damages otherwise incurred by such Indemnitee. Notwithstanding anything to the contrary contained in this Lease, if Lessor shall become entitled to the possession of the Leased Property by virtue of the termination of this Lease or repossession of the Leased Property, then Lessor may assign its indemnification rights under Section 8.3 of this Lease (but not any other rights hereunder) to any Person to whom the Lessor subsequently transfers the Leased Property, subject to the following conditions and limitations, each of which shall be deemed to be incorporated into the terms of such assignment, whether or not specifically referred to therein; (1) The indemnification rights referred to in this section may be assigned only if a known Environmental Liability then exists or if a Proceeding is then pending or, to the knowledge of Lessee or Lessor, then threatened with respect to the Leased Property; (2) Such indemnification rights shall be limited to Indemnified Environmental Liabilities relating to or specifically affecting the Leased Property; and (3) Any assignment of such indemnification rights shall be limited to the immediate transferee of Lessor, and shall not extend to any such transferee's successors or assigns. (e) At any time any Indemnitee has reason to believe circumstances exist which could reasonably result in an Indemnified Environmental Liability, upon reasonable prior written notice to Lessee stating such Indemnitee's basis for such belief, an Indemnitee shall be given immediate access to the Leased -28- 35 Property (including, but not limited to, the right to enter upon, investigate, drill wells, take soil borings, excavate, monitor, test, cap and use available land for the testing of remedial technologies), Lessee's employees, and to all relevant documents and records regarding the matter as to which a responsibility, liability or obligation is asserted or which is the subject of any Proceeding; provided that such access may be conditioned or restricted as may be reasonably necessary to ensure compliance with Legal Requirements and the safety of personnel and facilities or to protect confidential or privileged information. All Indemnitees requesting such immediate access and cooperation shall endeavor to coordinate such efforts to result in as minimal interruption of the operation of the Leased Property as practicable. ARTICLE IX ---------- 9.1 MAINTENANCE AND REPAIR. (a) Subject to Lessor's obligation to make Capital Expenditures and performance of Lessor's obligations under Subsection 9.1(c), Lessee, at its sole expense, shall keep the Leased Property in good order and repair, except for ordinary wear and tear (whether or not the need for such repairs occurred as a result of Lessee's use, any prior use, the elements or the age of the Leased Property, or any portion thereof). Except as otherwise provided in Section 9.1(b), Article XIV or Article XV, and subject to Lessor's obligation to make Capital Expenditures, Lessee shall, with reasonable promptness, make all necessary and appropriate repairs, replacements, and improvements thereto of every kind and nature, whether interior or exterior ordinary or extraordinary, foreseen or unforeseen, or arising by reason of a condition existing prior to the commencement of the Term of this Lease (concealed or otherwise), or required by any governmental agency having jurisdiction over the Leased Property. Lessee, however, shall be permitted upon prior written notice to Lessor to prosecute claims against Lessor's predecessors in title for breach of any representation or warranty or for any latent defects in the Leased Property to be maintained by Lessee unless Lessor is already diligently pursuing or elects to diligently pursue such a claim. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work. Lessee will not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of the Leased Property or any part thereof for its Primary Intended Use. (b) Lessee shall, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of the Lease and except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in good order and repair, as provided in Subsection 9.1(a)), damage by casualty or Condemnation, and Lessor's obligations with respect to Capital Expenditures. -29- 36 (c) Lessor shall be responsible for and pay for items of a capital nature and to make Capital Expenditures, all as required by and provided in Section 3.6. 9.2 ENCROACHMENTS, RESTRICTIONS, ETC. If, as a result of any act or omission by Lessee, any of the Leased Improvements, at any time, materially encroach upon any property, street or right-of-way adjacent to the Leased Property, or violate the agreements or conditions contained in any lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof, or impair the rights of others under any easement or right-of-way to which the Leased Property is subject (each of the foregoing conditions being referred to herein as an "Encroachment"), then promptly upon the request of Lessor or at the behest of any person affected by any such encroachment, violation or impairment, Lessee shall, at its expense, subject to its right to contest the existence of any encroachment, violation or impairment and in such case, in the event of an adverse final determination, either (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Lessor or Lessee or (b) make such changes in the Leased Improvements, and take such other actions, as Lessee in the good faith exercise of its judgment deems reasonably practicable to remove such encroachment, and to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Leased Improvements for the Primary Intended Use substantially in the manner and to the extent of the Leased Improvements were operated prior to the assertion of such violation, impairment or encroachment. If any such alteration is required for any reason other than Lessee's willful misconduct or gross negligence, the cost of such alterations shall be treated as Capital Expenditures and be performed pursuant to Section 3.6. Any such alteration shall be made in conformity with the applicable requirements of Article X. Nothing contained herein shall be construed as imposing on Lessee any liability for, or responsibility for remedying the effects of, any Encroachment occurring other than as a result of any willful misconduct or gross negligence of Lessee. Lessee's obligations under this Section 9.2 shall be in addition to and shall in no way discharge or diminish any obligation of any insurer under any policy of title or other insurance held by Lessor. ARTICLE X --------- 10.1 ALTERATIONS. Lessee shall have the right, but not the obligation, with the prior approval of Lessor (which approval may not be unreasonably withheld) to make additions, modifications or improvements to the Leased Property in connection with the Primary Intended Use (collectively "Alterations"), provided that such action shall not significantly alter the character or purposes or significantly detract from the value or operating efficiency thereof and will not impair the revenue-producing capability of the Leased Property or adversely -30- 37 affect the ability of Lessee to comply with the provisions of this Lease. As a condition of its approval, Lessor may retain the right to separately approve all plans and specifications related to any additions, modifications or improvements. Lessor may further require Lessee to obtain appropriate completion bonds and to provide for the removal of any improvements upon the termination of this Lease. The cost of such Alterations shall, subject to Lessor's obligations to make Capital Expenditures, be paid by Lessee, and all such Alterations shall be included under the terms of this Lease and upon expiration or earlier termination of the Lease shall pass to and become the property of Lessor. 10.2 SALVAGE. All materials which are scrapped or removed in connection with the making of repairs or alterations required or permitted by Article IX or X shall be or become the property of Lessor or Lessee depending on which party is paying for or providing the financing for such work. 10.3 JOINT USE AGREEMENTS. If Lessee constructs additional improvements that are connected to the Leased Property or share maintenance facilities, HVAC (as defined in Section 13.1(b)), electrical, plumbing or other systems, utilities, parking or other amenities, the parties shall enter into a mutually agreeable cross-easement or joint use agreement to make available necessary services and facilities in connection with such additional improvements, to protect each of their respective interests in the properties affected, and to provide for separate ownership, use, and/or financing of such improvements. ARTICLE XI ---------- 11.1 LIENS. Subject to the provision of Article XII relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including, however, (a) this Lease, (b) the matters, if any, included as exceptions in the title policy insuring Lessor's interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor or any easements granted pursuant to the provisions of Section 7.3 of this Lease, (d) liens for those Impositions upon Lessor which Lessee is not required to pay hereunder, (e) subleases permitted by Article XXIII hereof, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (1) the same are not yet payable or are payable without the addition of any fine or penalty or (2) such liens are in the process of being contested as permitted by Article XII, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due provided that (1) the payment of such sums shall not be postponed under any related contract for more than sixty (60) days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor or (2) any such liens are -31- 38 in the process of being contested as permitted by Article XII hereof, and (h) any liens which are the responsibility of Lessor pursuant to the provisions of Article XXXIV of this Lease, or result from Lessor's wrongful failure to pay for Capital Expenditures. ARTICLE XII ----------- 12.1 PERMITTED CONTESTS. Lessee shall have the right to contest the amount or validity of any Imposition to be paid by Lessee or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim ("Claims") not otherwise permitted by Article XI, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Lessee's covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale or risk the loss of the Leased Property, or any part thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of trust or security deed encumbering the Leased Property or any interest therein. Upon the request of Lessor, Lessee shall either (a) provide a bond or other assurance reasonably satisfactory to Lessor that all Claims which may be assessed against the Leased Property together with interest and penalties, if any, thereon will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company as trustee upon terms reasonably satisfactory to Lessor, as security for the payment of such Claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith, as to all Claims which may be assessed against or become a Claim on the Leased Property, or any part thereof, in said legal proceedings. Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of such deposit within five days of the same. Lessor agrees to join in any such proceedings if the same be required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor from any such costs or expenses. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In the event that Lessee fails to pay any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay such charges together with any interest and penalties and the same shall be repayable by Lessee to Lessor as Additional Charges at the next Payment Date provided for in this Lease. Provided, however, that should Lessor reasonably determine that the giving of such Notice would risk loss to the Leased Property or cause damage to Lessor, then Lessor shall give such Notice as is practical under the circumstances. Lessor reserves the right to contest any of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the contest of any claims. -32- 39 ARTICLE XIII ------------ 13.1 GENERAL INSURANCE REQUIREMENTS. Lessee shall at all times keep the Leased Property and the Facility (including all personal property) insured with the kinds and amounts of insurance described below and in compliance with any Franchise requirements; provided, however, that as to both Lessor's and Lessee's insurance requirements, the kinds and amounts of insurance required are reasonably available for purchase from insurance companies (i) authorized to write insurance in the State and (ii) with a minimum financial stability rating (A.M. Bests Rating) of ["A minus 7"] (or as otherwise reasonably acceptable to Lessor). The insurance shall be maintained in the amounts set forth below with deductibles in amounts reasonably acceptable to Lessor. The policies shall name Lessor and Lessee as insureds or as additional named insureds, as the case may be. Losses shall be payable to Lessor and/or its lenders except that Lessee's Business Interruption Insurance and Personal Property Insurance shall name Lessor as loss payee. Any loss adjustment shall require the written mutual consent of Lessor and Lessee, each acting reasonably and in good faith. Evidence of insurance shall be provided to each party on the date hereof, and evidence of renewal shall be provided, no later than thirty (30) days prior to expiration of any policy required hereunder. The policies on the Leased Property, including the Leased Improvements, Fixtures and all personal property shall include: (a) Lessor shall provide building insurance on the "Special Form" (formerly "All Risk" form) in an amount and carry such risks as are reasonably acceptable to Lessor, and personal property insurance on its property as is reasonably acceptable to it; (b) Lessor shall provide insurance on the "Comprehensive Coverage Form" for loss or damage (direct and indirect) from steam boilers, pressure vessels, electrical and mechanical systems, heating, ventilation and air conditioning ("HVAC") systems or similar apparatus, now or hereafter installed in the Facility, in an amount reasonably determined by Lessor from time to time; (c) Lessee shall provide loss of income/business interruption insurance/rent insurance on the "Special Form", with proceeds to be in an amount not less than one year of gross rent and other charges hereunder; (d) Lessee shall provide commercial general liability insurance, with amounts not less than [$1,000,000], together with excess liability coverage of not less than [$3,000,000], covering each of the following: bodily injury, death, or property damage liability per occurrence, personal and advertising injury, general aggregate, products and completed operations, and "all risk legal liability" -33- 40 (including, but not limited to, liquor law or "dram shop" liability), all with respect to Lessor, Lessee and the Leased Property; (e) Except to the extent Lessee is required to pay for the same, or otherwise required to be provided by Lessor hereunder, Lessor shall provide insurance covering such other hazards and in such amounts as may be customary for comparable properties in the vicinity of the Leased Property and reasonably acceptable to Lessor and is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the State, and each with a minimum financial stability rating (A.M. Bests Rating) of ["A minus 7,"] at rates which are economically practicable in relation to the risks covered as may be reasonably requested by Lessee; (f) Lessee shall provide fidelity bonds with limits and deductibles as may be reasonably requested by Lessor, covering Lessee's employees and other crime insurance as may be reasonably required by Lessor; (g) Lessee shall provide workmen's compensation insurance to the extent required by law; (h) Lessee shall provide vehicle liability and physical damage insurance for owned, non-owned, and hired vehicles, in the amount of $1,000,000; and (i) Lessee shall provide such other insurance as Lessor may reasonably request for facilities such as the Leased Property and the operation thereof, consistent with Lessee's and Lessor's obligations hereunder. 13.2 FULL REPLACEMENT COST. The term "full replacement cost" as used herein shall mean the actual replacement cost of the Leased Property requiring replacement from time to time including an increased cost of construction endorsement, if available, and the cost of debris removal in an amount not to exceed twenty-five percent (25%) of the cost of construction. In the event either party believes that full replacement cost has increased or decreased at any time during the Lease Term, it shall have the right to have such full replacement cost redetermined. Lessee shall obtain such additional insurance as may be required as a result of such redetermination as full replacement cost. 13.3 WAIVER OF SUBROGATION. All insurance policies covering the Leased Property, the Fixtures, the Facility or any personal property, including, without limitation, contents, fire, property and "special perils" insurance shall expressly waive any right of subrogation on the part of the insurer of one party to this Lease against the other party to this Lease. Such policies will include such waiver -34- 41 clause or endorsement so long as the same are obtainable without unreasonable extra cost, and in the event of such an extra charge the other party, at its election, may pay the same, but shall not be obligated to do so. 13.4 WAIVER OF COINSURANCE. All insurance policies covering the Leased Property, the Fixtures, the Facility or any personal property, and all insurance covering loss of income and business interruption, shall expressly waive any coinsurance penalty and resulting reduction in insurance proceeds, provided that a waiver of coinsurance is applicable with respect to a given insurance policy. 13.5 FORM SATISFACTORY, ETC. All of the policies of insurance referred to in this Article XIII shall be written in a form satisfactory to Lessor and Lessee and by insurance companies satisfactory to Lessor and Lessee. Each party agrees that it will not unreasonably withhold its approval as to the form of the policies of insurance or as to the insurance companies selected. All premiums therefor, shall be paid and such policies or binders delivered and followed with duplicate policies as issued thereof to the other party prior to their effective date (and, with respect to any renewal policy, thirty (30) days prior to the expiration of the existing policy), and in the event of the failure of the party required to provide such insurance either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof at the times required, the other party shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, which premiums shall be repayable upon written demand therefor. Each insurer mentioned in this Article XIII shall agree, by endorsement to the policy or policies issued by it, or by independent instrument, that it will give thirty (30) days' written notice before the policy or policies in question shall be materially altered, not renewed or cancelled. 13.6 INCREASE IN LIMITS. If either Lessor or Lessee at any time deems the limits of bodily injury or property damage under the comprehensive public liability insurance then carried to be either excessive or insufficient, Lessor or Lessee shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried; provided, however, that such limits shall not be reduced below a minimum aggregate limit of $3,000,000. Thereafter, such insurance shall be carried with the limits thus agreed on until further change pursuant to the provisions of this Section. 13.7 BLANKET POLICY. Notwithstanding anything to the contrary contained in this Article XIII, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance; provided, however, that the coverage afforded will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article XIII are otherwise satisfied. -35- 42 13.8 NO SEPARATE INSURANCE. Neither Lessee nor Lessor on its own initiative, or pursuant to the request or requirement of any third party, shall (i) take out separate insurance concurrent in form or contributing in the event of loss, with that required in this Article, or (ii) increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, are included therein as additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. The party obtaining such separate insurance shall immediately notify the other party of the obtaining of any such separate insurance or of the increasing of any of the amounts of the then existing insurance. 13.9 REPORTS OF INSURANCE CLAIMS. Lessee shall promptly investigate and make a written report to the appropriate insurance company as to all accidents, claims for damage relating to the ownership, operation, and maintenance of the Leased Improvements, any damage or destruction to the Leased Improvements and the estimated cost of repair thereof and shall prepare any and all reports required by any insurance company in connection therewith. Lessee shall submit such proposed filings and reports relating to such claims to Lessor for its review and approval, which approval shall not be unreasonably withheld or delayed, prior to submitting same to the appropriate insurance company. All other adjustments, settlements and compromises shall be made only with the prior written consent of Lessor. 13.10 FAILURE TO OBTAIN INSURANCE. In the event that Lessee shall fail to obtain or maintain any such insurance, Lessor shall have the right but not the obligation, to obtain such insurance and to charge the premium cost of such to Lessee as Additional Charges. ARTICLE XIV ----------- 14.1 INSURANCE PROCEEDS. All proceeds payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article XIII of this Lease shall be paid by the payor to Lessor. If for any reason such proceeds are paid to any Person other than Lessor, the recipient shall surrender all proceeds to Lessor to be held in trust by Lessor in an interest-bearing account (subject to the provisions of Section 14.6). The net proceeds shall be made available for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and shall be paid out by Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be paid to Lessor. If Lessor is not required to, and elects not to, repair and restore, and the Lease is terminated as described in Section 14.2(a), all such insurance proceeds shall be retained by Lessor. All salvage resulting from any risk covered by insurance shall belong to Lessor. -36- 43 14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED BY INSURANCE. (a) If during the Term the Leased Property is totally or partially damaged or destroyed by a risk covered by the insurance described in Article XIII and the Facility thereby is rendered Unsuitable for its Primary Intended Use or following such casualty the Facility is Uneconomic for its Primary Intended Use, Lessor shall, at Lessor's option, either (1) restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease, or (2) terminate this Lease by Notice to Lessee given within ninety (90) days of the date of such damage or destruction. If Lessor determines to terminate this Lease, the Lease will terminate as of the date specified in Lessor's notice not later than sixty (60) days after such notice without further liability hereunder (other than liability stated to survive the expiration or termination hereof) and Lessor shall be entitled to retain all insurance proceeds. (b) Except as provided in Section 14.6, if during the Term the Leased Property is partially damaged or destroyed by a risk covered by the insurance described in Article XIII, but the Facility is not thereby rendered Unsuitable for its Primary Intended Use, provided the Facility is not unecomonic for its Primary Intended Use, Lessor shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of this Lease to the extent it can reasonably do so with the net insurance proceeds actually received in respect to such damage or destruction. Such damage or destruction shall not terminate this Lease; provided, however, that if Lessor cannot within a reasonable time, obtain all necessary government approvals, including building permits licenses and conditional use permits, after diligent efforts to do so, in order to be able to perform all required repair and restoration work and to operate the Facility for its Primary Intended Use in substantially the same manner as that existing immediately prior to such damage or destruction and otherwise in accordance with the terms of this Lease, this Lease shall terminate on the date which is thirty (30) days after Lessor shall have notified the Lessee of the passage in such Lessor's reasonable determination of such reasonable period of time. (c) If Lessor elects to repair or restore the Leased Property, and the cost of the repair or restoration exceeds the net amount of proceeds received by Lessor from the insurance required under Article XIII, Lessor shall be obligated to contribute any excess amounts needed to restore the Leased Property. 14.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT COVERED BY INSURANCE. Except as provided in Section 14.6 below, if during the Term the Facility is totally or materially destroyed by a risk not covered by the insurance described in Article XIII (whether or not actually obtained or in full force), whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, Lessor at its option shall either (a) repair, rebuild or restore the Facility at Lessor's sole expense to substantially the same condition it was in immediately before such damage or destruction and such damage or destruction shall not terminate this Lease, or (b) terminate this Lease by Notice to Lessee given within -37- 44 ninety (90) days of the date of such destruction and this Lease will terminate as of the date specified in Lessor's notice not later than sixty (60) days after such notice. If such damage or destruction is not material, Lessor shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease. 14.4 LESSEE'S PERSONAL PROPERTY. All insurance proceeds payable by reason of any loss of or damage to any of Lessee's Personal Property shall be paid to Lessee. 14.5 ABATEMENT OF RENT. In the event of a casualty, except as otherwise provided herein, this Lease shall remain in full force and effect and Lessee's obligation to make rental payments and to pay all other charges required by this Lease (whether through the payment of insurance proceeds to Lessor or otherwise) shall remain unabated. 14.6 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of Section 14.2 or 14.3 to the contrary, if damage to or destruction of the Facility occurs during the last twenty-four (24) months of the Term, and such damage or destruction cannot be repaired or restored within the earlier of (i) twelve (12) months, or (ii) the expiration of the Term, then Lessee shall have the right to terminate this Lease by giving written notice to Lessor within 60 days after the date of damage or destruction, whereupon all accrued Rent shall be paid immediately. 14.7 WAIVER. Lessee hereby waives any statutory rights of termination that may arise by reason of any damage or destruction of the Facility that Lessor is obligated to restore or may restore under any of the provisions of this Lease. ARTICLE XV ---------- 15.1 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any Condemnation of all or any part of the Leased Property or any interest in this Lease, the rights and obligations of Lessor and Lessee shall be determined by this Article XV. 15.2 TOTAL TAKING. If (i) title to the fee of the whole of the Leased Property or (ii) the entire ground lease is condemned by any Condemnor, this Lease shall cease and terminate as of the Date of Taking by the Condemnor. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have the option, by notice to the other, at any time prior to the date that is thirty (30) days after the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Rent paid or payable by Lessee -38- 45 hereunder shall be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts. In the event of any such termination, the provisions of Section 15.6 shall apply. 15.3 ALLOCATION OF AWARD. The total Award made with respect to the Leased Property or for loss of rent, or for Lessor's loss of business beyond the Term of this Lease, shall be solely the property of and payable to Lessor. Any Award made for the taking of Lessee's Personal Property, or for removal and relocation expenses of Lessee in any such proceedings shall be the sole property of and payable to Lessee. In any Condemnation proceedings, Lessor and Lessee shall each seek its Award in conformity herewith, at its respective expense; provided, however, Lessee shall not initiate, prosecute or acquiesce in any proceedings that may result in a diminution of any Award payable to Lessor. 15.4 PARTIAL TAKING. If title to less than the whole of the Leased Property is condemned, and the Leased Property is still suitable for its Primary Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or Lessor is entitled but each fails to timely elect to terminate this Lease as provided in Section 15.3 hereof, Lessor at its cost (not to exceed the net Condemnation Award) shall with all reasonable dispatch after the payment of such award to Lessor restore the untaken portion of any Leased Improvements so that such Leased Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to the Condemnation. During and after the restoration of the untaken portion of the Leased Property, Base Rent shall be abated in the manner and to the extent that is fair, just and equitable to both Lessee and Lessor, taking into consideration, among other relevant factors, the number of usable rooms the amount of square footage, and the revenues affected by such partial Taking. In the event Base Rent is abated, the Threshold Amounts shall also be reduced accordingly. If Lessor and Lessee are unable to agree upon the amount of such abatement and for reduction within thirty (30) days after such partial Taking, the matter may be submitted by either party to a court of competent jurisdiction for resolution. 15.5 TEMPORARY TAKING. If the whole or any part of the Leased Property or of Lessee's interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, and Lessee shall continue to pay, in the manner and at the terms herein specified, the full amounts of Rent and Additional Charges, but, if the entire Leased Property is so condemned, only to the extent of net proceeds of condemnation awards. Except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Lessee to be performed and observed, as though such Condemnation had not occurred. In the event of any Condemnation as in this Section 15.5 described, the entire amount of any Award made for such Condemnation allocable to the Term, whether paid by way of damages, rent or otherwise, shall be paid to Lessee. Lessor -39- 46 covenants that upon the termination of any such period of temporary use or occupancy it will, at its sole expense, restore the Leased Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Condemnation, unless such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Lessor shall not be required to make such restoration. ARTICLE XVI ----------- 16.1 EVENTS OF DEFAULT. If any one or more of the following events (individually, an "Event of Default") occurs: (a) Lessee fails to make payment of the Base Rent when the same becomes due and payable and such condition continues for a period of ten (10) days after receipt by the Lessee of Notice thereof from Lessor; or (b) Lessee fails to make payment of Percentage Rent when the same becomes due and payable and such condition continues for a period of ten (10) days after receipt by the Lessee of Notice thereof from Lessor; or (c) Lessee fails to observe or perform any other term, covenant or condition of this Lease and such failure is not cured by Lessee within a period of thirty (30) days after receipt by the Lessee of Notice thereof from Lessor, unless such failure cannot with due diligence be cured within a Period of thirty (30) days, in which case it shall not be deemed an Event of Default if Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof; provided, however, in no event shall such cure period extend beyond one hundred eighty (180) days after such Notice; or (d) Lessee shall file a petition in bankruptcy or reorganization for an arrangement pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessee shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within sixty (60) days after the entry of an order in respect thereof, or if a receiver of the Lessee or of the whole or substantially all of the assets of the Lessee shall be appointed in any proceeding -40- 47 brought by the Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessee and shall not be vacated or set aside or stayed within sixty (60) days after such appointment; or (e) without Lessor's consent, Lessee is liquidated or dissolved or begins proceedings toward such liquidation or dissolution, or, in any manner, permits the sale or divestiture of substantially all of its assets; or (f) the estate or interest of Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in an proceeding (unless Lessee is contesting such lien or attachment in good faith in accordance with Article XII hereof); or (g) except as a result of damage, destruction or a partial or complete Condemnation, Lessee voluntarily ceases operation of the Leased Property for a period in excess of ten (10) consecutive days; (h) the Franchise Agreement with respect to the Facility on the Leased Premises is terminated by the Franchisor as a result of any action or failure to act by the Lessee; or (i) Lessee shall breach the terms of Section 7.2(f), Article 19, Section 23.1. or Section 24.2; then, and in any such event, Lessor may, so long as such Event of Default continues, exercise one or more remedies available to it herein or at law or in equity including, but not limited to, its right to terminate this Lease by giving Lessee the shortest Notice of such termination permitted by law. If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, such sum as the court shall determine as its reasonable attorneys' fees, and all costs and expenses incurred in connection therewith. No Event of Default (other than a failure to make a payment of money) shall be deemed to exist under clause (c) during any time the curing thereof is prevented by an Unavoidable Delay, provided that upon the cessation of such unavoidable Delay, Lessee remedies such default or Event of Default without further delay. 16.2 REMEDIES. (a) If any one or more Events of Default shall occur and be continuing, then Lessor shall have the right, in addition to all other rights or remedies available at law or in equity, at its election: -41- 48 (i) To give Lessee written notice of Lessor's intention to terminate this Lease on the earliest date permitted by law or on any later date specified in such notice, in which case Lessee's right to possession of the Leased Property shall cease and this Lease will be terminated on such date, except as to liability of Lessee expressly, stated herein to survive the termination of this Lease, including, without limitation, liability pursuant to Section 16.2(d); or (ii) Without further demand or notice, to reenter and take possession of the Leased Property or any part of the Leased Property, repossess the same, expel Lessee and those claiming through or under Lessee, and remove the effects of both or either, using such force for such purposes as may be Lawful and necessary, without being liable for prosecution, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears or future payments of Base Rent, Percentage Rent, Additional Charges or other amounts payable under this Lease or as a result of any preceding breach of covenants or conditions; or (iii) To cure any Event of Default and to charge Lessee for the cost of effecting such cure, including, without limitation, reasonable attorneys fees and interest on the amount so advanced at the overdue Rate, provided that Lessor shall have no obligation to cure any such Event of Default. (b) Should Lessor elect to reenter as provided in Section 16.2(a)(ii), or should Lessor take possession pursuant to legal proceedings or pursuant to any notice provided by law while an Event of Default is continuing, Lessor may, from time to time, without terminating this Lease, relet the Leased Property or any part of the Leased Property in Lessor's or Lessee's name, but for the account of Lessee, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term of this Lease) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Leased Improvements) as Lessor, in its reasonable discretion, may determine and Lessor may collect and receive the rent. No such reentry or taking possession of the Leased Property by Lessor will be construed as an election on Lessor's part to terminate this Lease unless a written notice of such intention is given to Lessee. No notice from Lessor under this Article 16 or under a forcible or unlawful entry and detainer statute or similar law will constitute an election by Lessor to terminate this Lease unless such notice specifically so states. Lessor reserves the right following any such reentry or reletting to exercise its right to terminate this Lease by giving Lessee such written notice, in which event this Lease will terminate as specified in such notice. (c) In the event that Lessor does not elect to terminate this Lease as permitted in Section 16.2(a)(i), but elects instead to take possession as -42- 49 provided in Section 16.2(a)(ii), Lessee shall pay to Lessor Base Rent, Percentage Rent, Additional Charges and other sums as provided in this Lease which would be payable under this Lease if such repossession had not occurred, less the net proceeds, if any, of any reletting of the Leased Property, after deducting all of Lessor's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, attorneys fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing Term of this Lease, or the premises covered by such new lease include other premises not part of the Leased Property, a fair apportionment of the rent received from such reletting and the expenses incurred in connection with such reletting as provided in this Paragraph will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Lessee shall pay such rent and other sums to Lessor monthly on the date on which the Base Rent and Additional Charges, and, in the case of Percentage Rent, quarterly on the day on which Percentage Rent, would have been payable under this Lease if possession had not been retaken, and Lessor shall be entitled to receive such rent and other sums from Lessee on each such day. (d) If an Event of Default has occurred and this Lease is terminated by Lessor, Lessee shall remain liable to Lessor for damages in an amount equal to Base Rent, Percentage Rent, Additional Charges and other amounts which would have been owing by Lessee for the balance of the Term of this Lease had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Leased Property by Lessor subsequent to such termination, after deducting all of Lessor's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Section 16.2(c) (which expenses, if the reletting is for a term that will extend beyond the existing Term, will be apportioned as described in Section 16.2(c)). Lessor shall be entitled to collect such damages from Lessee monthly on the day on which Base Rent or Additional Changes, and quarterly on the day on which Percentage Rent would have been payable under this Lease if this Lease had not been terminated, and Lessor shall be entitled to receive such Base Rent and other amounts from Lessee on each such day. Alternatively, at the option of Lessor, in the event this Lease is so terminated, Lessor shall be entitled to recover against Lessee as damages for loss of the bargain and not as a penalty: (i) The worth at the time of award of the unpaid Base Rent and Percentage Rent which had been earned at the time of termination; (ii) The worth at the time of award of the amount, if any, by which the unpaid Base Rent, Percentage Rent and all Additional Charges which would have been earned after termination until the time of award exceeds the amount of rental loss that Lessee proves could have been reasonable avoided; -43- 50 (iii) The worth at the time of award of the amount, if any, by which the unpaid Base Rent, Percentage Rent and Additional Charges for the balance of the Term (had the same not been so terminated by Lessor) after the time of award exceeds the amount of such rental loss during such period that Lessee proves could be reasonably avoided; and (iv) Any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of events would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in clauses (i) and (ii) above shall be computed by adding interest from the date of termination until the time of the award computed at the Overdue Rate on the date on which this Lease is terminated. The worth at the time of award of the amount referred to in clause (iii) above shall be computed by using a discount rate of the Federal Reserve Bank of New York at the time of the award plus one percent (1%). (e) Percentage Rent for the purposes of this Section 16.2 shall be a sum equal to (i) the average of the annual amounts of the Percentage Rent for the three (3) Fiscal Years immediately preceding the Fiscal Year in which the termination, re-entry or repossession takes place, or (ii) if three (3) Fiscal Years shall not have elapsed, the average of the Percentage Rent during the preceding Fiscal Years during which the Lease was in effect, or (iii) if one (1) Fiscal Year has not elapsed, the amount derived by analyzing the Percentage Rent from the effective date of this Lease. (f) Any suit or suits for the recovery of the amounts and damages set forth in Sections 16.2(c) or (d) may be brought by, Lessor, from time to time, at Lessor, a election, and nothing in this Lease will be deemed to require Lessor to await the date upon which this Lease or the Term of this Lease would have expired had there occurred no Event of Default. Each right and remedy provided for in this Lease as a result of the occurrence of a default is cumulative and is in addition to every other right or remedy provided for in this Lease or now or after the date of the commencement of the Term existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Lessor of any one or more of the rights or remedies provided for in this Lease or now or after the date of the commencement of the Term existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Lessor of any or all other rights or remedies provided for in this Lease or now or after the date of the commencement of the Term existing at law or in equity or by statute or otherwise. All costs incurred by Lessor in collecting any amounts and damages owing by Lessee pursuant to the provisions of this Lease or to enforce any provision of this Lease, including, but not limited to, reasonable attorneys' fees and related costs, whether or -44- 51 not one or more actions are commenced by Lessor, shall also be recoverable by Lessor from Lessee. (g) Lessor shall have no obligation to mitigate damage following the occurrence of an Event of Default. 16.3 WAIVER. Lessee hereby waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article 16; (b) the benefit of any laws now or hereafter in any force exempting property from liability for rent or for debt; (c) any equity of redemption; and (d) except as provided herein, any presentations, demands for payment or for performance, or notice of non-performance. 16.4 APPLICATION OF FUNDS. Any payments received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall, to the extent permitted by applicable law, be applied to Lessee's obligations in the order that Lessor may determine, in Lessor's discretion. 16.5 SURRENDER. If an Event of Default occurs (and the event giving rise to such Event of Default has not been cured within the curative period relating thereto as set forth in Section 16.1) and is continuing, whether or not this Lease has been terminated pursuant to Section 16.1, Lessee shall, if requested by Lessor to do so, immediately surrender to Lessor the Leased Property including, without limitation, any and all books, records, files, licenses, permits and keys relating thereto, and quit the same and Lessor may enter upon and repossess the Leased Property by reasonable force, summary proceedings, ejectment or otherwise and may remove Lessee and all other persons and any and all personal property from the Leased Property, subject to rights of any hotel guests and to any requirement of law. Lessee hereby waives any and all requirements of applicable law for service of notice to reenter the Leased Property. Lessor shall be under no obligation to, but may if it so chooses, relet the Leased Property or otherwise mitigate Lessor's damages. ARTICLE XVII ------------ 17.1 LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including, without limitation, Lessee's failure to comply with the terms of the Franchise Agreement, and fails to cure the same within the relevant time periods provided in Section 16.1, Lessor, without waiving or releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 16.2, take all such action thereon as, in Lessor's opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and -45- 52 all costs and expenses (including, without limitation, reasonable attorney's fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease. ARTICLE XVIII ------------- 18.1 EXCULPATION. In the event of (a) a sale or transfer of all or any part of the Leased Property (by operation of law or otherwise), (b) the making of a lease of all or substantially all of the Leased Property or (c) a sale or transfer (by operation of Law or otherwise) of the leasehold estate under any such lease, (i) the seller, transferor or lessor, as the case may be, shall be and hereby is automatically and entirely released and discharged, from and after the date of such sale, transfer or lease, of all liability in respect of the performance of any of the terms of this Lease on the part of Lessor thereafter to be performed and (ii) the term "Lessor" shall thereafter mean only the purchaser, transferee or lessee, as the case may be, and the covenants and agreements of Lessor shall thereafter be binding upon such purchaser, transferee or lessee. Lessee shall look solely to Lessor's estate and interest in the Leased Property for the satisfaction of any right of Lessee for the collection of a judgment or other judicial process or arbitration award requiring the payment of money by Lessor, and no other property or assets of Lessor. Lessor's agents, incorporators, subscribers, shareholders, officers, directors, members, partners, principals (disclosed or undisclosed) an affiliates, whether directly or through Lessor or through any receiver, assignee, trustee in bankruptcy or through anyone else, shall not be subject to levy, lien, execution, attachment, or other enforcement procedure for the satisfaction of Lessee's rights and remedies under of with respect to or arising from or in connection with this Lease. ARTICLE XIX ----------- 19.1 REIT COMPLIANCE. Lessee acknowledges that the general partner of the general partner of Lessor (the "REIT") intends to continue to qualify as a real estate investment trust under the Code, and that pursuant to Lessor's limited partnership agreement, Lessor may not take or omit to take any action, or engage in any business or business transaction or relationship, that would or could result in the REIT being disqualified from treatment as a real estate investment trust. As a material inducement to Lessor to enter into this Lease, Lessee hereby agrees that it shall not take or omit to take any action, or engage in any business or business transaction or relationship, that would or could result in the REIT being disqualified from treatment as a real estate investment trust under the Code. Without limiting the generality of the foregoing, Lessee agrees that: -46- 53 (A) PERSONAL PROPERTY LIMITATION. Anything contained in this Lease to the contrary notwithstanding, the average of the adjusted tax bases of the items of personal property that are leased to Lessee under this Lease at the beginning and at the end of any Fiscal Year shall not exceed 15% of the average of the aggregate adjusted tax bases of the Leased Property at the beginning and at the end of such Fiscal Year. This Section 19.1(a) is intended to ensure that the Rent qualifies as "rents from real property," within the meaning of Section 856(d) of the Code, or any similar or successor provisions thereto, and shall be interpreted in a manner consistent with such intent. (B) SUBLEASE RENT LIMITATION. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublet the Leased Property on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either (i) the income or profits derived by the business activities of the sublessee, or (ii) any other formula such that any portion of the Rent would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto. 19.2 SUBLEASE LESSEE LIMITATION. Anything contained in this Lease to the contrary notwithstanding, Lessee shall not sublease the Leased Property to any Person in which Realty ReFund Trust, owns, directly or indirectly a ten percent (10%) or more interest, within the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor provisions thereto. 19.3 LESSEE OWNERSHIP LIMITATION. Anything contained in this Lease to the contrary notwithstanding, neither Lessee or an Affiliate of Lessee shall acquire, directly or indirectly, a 10% or more interest in Realty ReFund Trust, within the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor provision thereto. 19.4 LESSEE OFFICER AND EMPLOYEE LIMITATION. If a Person serves as both (a) a director of Lessee (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property) and (b) a trustee and officer (or employee) of the REIT, that Person shall not receive any compensation for serving as a director of Lessee (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property). Furthermore, if a Person serves as both (a) a trustee of the REIT and (b) a director and officer (or employee) of Lessee (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property), that Person shall not receive any compensation for serving as a director of Lessee (or any Person who furnishes or renders services to the tenants of the Leased Property, or manages or operates the Leased Property). -47- 54 ARTICLE XX ---------- 20.1 HOLDING OVER. If Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month the aggregate of 105% of (a) one-twelfth of the aggregate Base Rent and Percentage Rent payable with respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing during the applicable month and (c) all other sums, if any, payable by Lessee under this Lease with respect to the Leased Property. During such period, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continued occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease. ARTICLE XXI ----------- 21.1 RISK OF LOSS. During the Term, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequences of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequences of foreclosures, attachments, levies or executions is retained by Lessor, and, in the absence of negligence, misconduct or breach of this Lease by Lessee, Lessee shall in no event be answerable or accountable therefor. ARTICLE XXII ------------ 22.1 INDEMNIFICATION. Notwithstanding the existence of any insurance provided for in Article XIII, and without regard to the policy limits of any such insurance, Lessee will protect, indemnify, hold harmless and defend any Lessor Indemnified Party from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against any Lessor Indemnified Party by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, including without limitation any claims under liquor liability, "dram shop" or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair or negligence by Lessee, its agents, invitees, employees or guests, or any other person other than Lessor, of the Leased Property or Lessee's Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which Lessor is made a party or participant related to such use, misuse, non-use, condition, management, maintenance, or repair thereof by Lessee, including Lessee's failure to -48- 55 perform obligations (other than Condemnation proceedings), (c) any Impositions that are the obligations of Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, (e) the nonperformance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the landlord thereunder, and (f) the sale of or consumption of alcoholic beverages on or in the Leased Property, (g) claims of Franchisor and Managers. Any amounts that become payable by Lessee under this Article shall be paid within ten days after demand therefor by Lessor, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the expiration of such ten (10) day period date of such determination to the date of payment. Lessee, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against any Lessor Indemnified Party or may compromise or otherwise dispose of the same as Lessee sees fit. Nothing herein shall be construed as indemnifying any Lessor Indemnified Party against its own grossly negligent acts or omissions or willful misconduct. Lessor shall indemnify and hold any Lessee Indemnified Party from and against any and all liabilities, losses, interest, damages, costs or expenses (including, without limitation, reasonable attorneys' fees) assessed against, levied upon or collected from any Lessee Indemnified Party arising out of the negligence, misconduct or breach of this Lease by Lessor. Lessee's and Lessor's liability under the provisions of this Article shall survive any termination of this Lease. -49- 56 ARTICLE XXIII ------------- 23.1 SUBLETTING AND ASSIGNMENT. Except as expressly permitted herein, Lessee shall not mortgage, assign, sublet, or otherwise transfer its interest in the Facility and, subject to the provisions of Article XIX and Section 23.2 and any other express conditions or limitations set forth herein, Lessee may, but only with the prior written consent of Lessor, which may be granted or withheld in Lessor's sole and absolute discretion, (a) assign this Lease, (b) sublet all or any part of the Leased Property, or (c) sublet any retail or restaurant portion of the Leased Improvements in the normal course of the Primary Intended Use; provided that any subletting to any party other than an Affiliate of Lessee shall not individually as to any one such subletting, or in the aggregate, materially diminish the actual or potential Rent payable under this Lease. In the case of a subletting, the sublessee shall comply with the provisions of Section 23.2, and in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be, and become, jointly and severally liable with Lessee for the performance thereof. An original counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Lessor, shall be delivered promptly to Lessor. In case of either an assignment or subletting made during the Term, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. 23.2 ATTORNMENT. Lessee shall insert in each sublease permitted under Section 23.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Lessor or Lessor's assignees, if any, stating that an uncured Event of Default exists under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor's assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Lease. 23.3 MANAGEMENT AGREEMENT. Notwithstanding anything contained in this Article XXIII to the contrary, Lessee may, with the prior written consent of Lessor (which consent may be withheld in the sole and absolute direction of Lessor), enter into an agreement (a "Management Agreement") with any third party to assign responsibility for the management and/or operation of all or any part of the Leased Property, including any retail or restaurant portion of the Leased Improvements, provided, however, that Lessee shall not enter into any Management Agreement which will materially diminish the actual or potential Rent payable under -50- 57 this Lease. Notwithstanding the above, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. Lessor hereby consents to Lessee's entering into a Management Agreement with InnSuites Innternational Hotels, Inc. ARTICLE XXIV ------------ 24.1 OFFICERS' CERTIFICATES; FINANCIAL STATEMENTS; LESSOR'S ESTOPPEL CERTIFICATES AND COVENANTS. (a) At any time and from time to time upon not less than twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an Officer's Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Lessee there is any existing default or Event of Default thereunder by Lessor or Lessee, and such other information as may be reasonably requested by Lessor or Lessor's lender. Any such certificate furnished pursuant to this Article may be relied upon by Lessor, any lender and any prospective purchaser of the Leased Property. (b) Lessee will furnish the following statements to Lessor: (1) on or before the twentieth (20th) day of each month, a detailed profit and loss statement for the Leased Property for the preceding month, a balance sheet for the Leased Property as of the end of the preceding month, and a detailed accounting of revenues for the Leased Property for the preceding month, and such other information as may be requested by Lessor or required by Lessor's lender, each in form acceptable to Lessor; and (2) the most recent Consolidated Financials of Lessee within forty-five (45) days after each quarter of any Fiscal Year (or, in the case of the final quarter in any Fiscal Year, the most recent Audited Consolidated Financials of Lessee within ninety (90) days) after such final quarter; and (3) with reasonable promptness, such information respecting the financial condition and affairs of Lessee as may be requested by Lessor. (c) At any time and from time to time upon not less than twenty (20) days notice by Lessee, Lessor will furnish to Lessee or to any person designated by Lessee an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which Rent has been paid, whether to the -51- 58 knowledge of Lessor there is any existing default or Event of Default on Lessee's part hereunder, and such other information as may be reasonably requested by Lessee. ARTICLE XXV ----------- 25.1 BOOKS AND RECORDS; LESSOR'S RIGHT TO INSPECT. Lessee shall keep full and adequate books of account and other records reflecting the results of operation of the Facility on an accrual basis, all in accordance with the Uniform System and generally accepted accounting principles. The books of account and all other records relating to or reflecting the operation of the Facility shall be available to Lessor and its representatives and its auditors or accountants, at all reasonable times for examination, audit, inspection and transcription. All of such books and records pertaining to the Facility including, without limitation, books of account, guest records and front office records, at all times shall be the property of Lessee, (subject to the terms of Section 35.2) but shall not be removed from the Facility or Lessee's offices by Lessee without Lessor approval. Lessee shall permit Lessor and its authorized representatives as frequently as reasonably requested by Lessor to inspect the Leased Property and Lessee's accounts and records pertaining thereto and make copies thereof, during usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Lessee. ARTICLE XXVI ------------ 26.1 NO WAIVER. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach. ARTICLE XXVII ------------- 27.1 REMEDIES CUMULATIVE. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies. -52- 59 ARTICLE XXVIII -------------- 28.1 ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender. ARTICLE XXIX ------------ 29.1 NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property. ARTICLE XXX ----------- 30.1 CONVEYANCE BY LESSOR. If Lessor or any successor owner of the Leased Property conveys the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of the Leased Property expressly assumes all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Lessor or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner. ARTICLE XXXI ------------ 31.1 QUIET ENJOYMENT. So long as Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs its obligations hereunder, in each case within the applicable grace periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Lessor or hereafter consented to by Lessee or provided for herein. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Section. -53- 60 ARTICLE XXXII ------------- 32.1 NOTICES. All notices, demands, requests, consents, approvals and other communications ("Notice" or "Notices") hereunder shall be in writing and personally served, mailed (by registered or certified mail, return receipt requested and postage prepaid) or sent by facsimile transmission, addressed to Lessor at c/o Realty ReFund Trust, 1750 Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44115, Attention: Mr. Gregory D. Bruhn, with copy to James B. Aronoff, Esq., Thompson Hine & Flory LLP, 3900 Key Center, 127 Public Square, Cleveland, Ohio 44114-1216, and addressed to Lessee at 1615 E. Northern Avenue, Suite 105, Phoenix, Arizona 85020, Attention: Mr. J.R. Chase and Mr. Kevin Fell, with a copy to Mr. James F. Wirth at the same address, or to such other address or addresses as either party may hereafter designate, Notice by personal delivery or facsimile transmission shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five days. ARTICLE XXXIII -------------- 33.1 LESSOR MAY GRANT LIENS, SUBORDINATION. Without the consent of Lessee, Lessor may, from time to time, directly or indirectly, create or otherwise cause to exist, modify or extend any lien, encumbrance, superior lease or title retention agreement ("Encumbrance") upon the Leased Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing. This Lease and Lessee's interest herein shall be subordinate to each and every Encumbrance unless the holder thereof elects otherwise. (a) The subordination provisions herein contained shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Lessee shall execute and deliver promptly any certificate that Lessor or its successors in interest may request. Lessee hereby constitutes and appoints Lessor or its successors in interest as Lessee's attorney-in-fact to execute and deliver any such certificate or certificates for and on behalf of Lessee. Notwithstanding any provision in this Lease or any separate agreement with Lessee, Lessee covenants and agrees that Lessee shall not do any act, or refrain from doing any act, if doing such act, or refraining from doing such act, would constitute a default or breach of any Encumbrance. (b) This Lease has been, or may be, assigned as collateral security. After Lessee receives notice of such assignment and so long as the obligations secured by such assignment remain outstanding, Lessee (i) will not pay any Rent under this Lease more than thirty (30) days in advance of its due date without the prior written consent of the holder of any such assignment (the -54- 61 "Assignee"), (ii) will not surrender or consent to the modification of any of the terms of the Lease nor to the termination hereof by Lessor without the Assignee's prior written consent, (iii) will continue to pay Rent under this Lease to the Lessor or as directed by Lessor in accordance with the terms of this Lease (unless and until notified otherwise in writing by the Assignee in case of an event of default under the Assignee's mortgage or other Encumbrance, in which event Lessee will pay the rent due under this Lease directly to the Assignee or the Assignee's designee) and (iv) will not seek to terminate this Lease or seek or assert any set-off or counterclaim against Rent by reason of any act or omission of the Lessor, until Lessee shall have given written notice of such act or omission to the Assignee (at the Assignee's last address furnished to Lessee) and until a reasonable period of time shall have elapsed following the giving of such notice, during which period the Assignee shall have the right, but shall not be obligated, to remedy such act or omission. Any payments made to the Assignee by Lessee shall not affect or impair the other rights and remedies the Assignee may have under said mortgage or Encumbrance or otherwise against the Lessor. (c) Lessee agrees, at the election of the holder of any interest superior to this Lease pursuant to the terms hereof ("Holder") to fully and completely attorn to, from time to time, and to recognize Holder or any person, or such person's successors or assigns, who acquires the interest of Lessor under the Lease as Lessee's lessor under this Lease (collectively, "Successor Landlord") upon the then executory terms of this Lease. The foregoing provisions of this paragraph shall inure to the benefit of any such Successor Landlord, shall apply notwithstanding that, as a matter of law, the Lease may automatically terminate, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Lessee however, upon demand of any such Successor Landlord agrees to execute, from time to time, lessor or any instruments to evidence and confirm the provisions of this paragraph, satisfactory to lessor or any such Successor Landlord. Upon such attornment and the acceptance thereof in writing by such Successor Landlord, this Lease shall continue in full force and effect as a direct lease between such Successor Landlord and Lessee upon all of the then executory terms of the Lease, except that such Successor Landlord shall not be: (i) liable for any act or omission of any prior lessor (including Lessor); or (ii) liable for the return of any security deposit (unless actually received by such Successor Lessor); or (iii) bound by any waiver or forbearance of any prior lessor (including Lessor); or (iv) be liable for any damages or other relief attributable to any latent or patent defects in construction; or -55- 62 (v) bound by any covenant to perform or complete any construction or to pay any sum to Lessee; or (vi) subject to any offsets or defenses which might have against any prior Lessor (including Lessor); or (vii) bound by any Rent which Lessee might have paid for more than the current quarter to any prior lessor (including Lessor); or (viii) bound by any amendment or modification of the Lease made without its consent. (d) Lessor shall request of each Holder that such Holder enter into a so-called "non-disturbance agreement" with Lessee on such Holder's standard form, and Lessor shall use best efforts to obtain such non-disturbance agreement. 33.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of Section 33.3, if Lessor breaches any covenant to be performed by it under this Lease, Lessee, after Notice to and demand upon Lessor, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Lessee, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Lessor. All sums so paid by Lessee and all costs and expenses (including, without limitation, reasonable attorneys' fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or, following entry of a final, nonappealable judgment against Lessor for such sums, may be offset by Lessee against the Base Rent payments next accruing or coming due. The rights of Lessee hereunder to cure and to secure payment from Lessor in accordance with this Section 34.2 shall survive the termination of this Lease with respect to the Leased Property. 33.3 BREACH BY LESSOR. It shall be a breach of this Lease if Lessor: [(i)] fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of thirty (30) days after Notice thereof from Lessee, unless such failure cannot with due diligence be cured without a period of thirty (30) days, in which case such failure shall not be deemed to continue if Lessor, within such thirty (30) day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof, or [(ii) defaults under the Ground Lease if such default is not cured within thirty (30) days after Notice thereof from the ground lessor of the Ground Lease.] The time within which Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay. 33.4 LESSEE'S COOPERATION. In connection with the termination of this Lease due to the expiration of the Term or otherwise, Lessee shall cooperate -56- 63 with Lessor in transferring possession of the Leased Property to a new tenant, including, without limitation, cooperating with the transfer of any licenses or permits necessary for the operation of the Facility. ARTICLE XXXIV ------------- 34.1 MISCELLANEOUS. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to any date of termination of this Lease shall survive such termination. If any term or provision of this Lease or any application thereof is invalid or unenforceable, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated except by a written instrument in recordable form signed by Lessor and Lessee. All the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of the State but not including its conflicts of laws rules. 34.2 TRANSITION PROCEDURES. Upon the expiration or termination of the Term of this Lease, for whatever reason, Lessor and Lessee shall do the following (and the provisions of this Section 35.2 shall survive the expiration or termination of this Lease until they have been fully performed) and, in general, shall cooperate in good faith to effect an orderly transition of the management of the Facility. (a) TRANSFER OF LICENSES. Upon the expiration or earlier termination of the Term, Lessee shall use its best efforts (i) to transfer to Lessor or Lessor's nominee, to the extent assignable or transferable, the Franchise Agreement, any liquor licenses, and all other licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, that may be necessary for the operation of the Facility (collectively, "Licenses"), or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or Lessor's nominee in connection with the processing by Lessor of Lessor's nominee of any applications for, all Licenses; provided, in either case, except in the case of a termination resulting from an Event of Default by Lessee, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Lessor or Lessor's nominee. (b) LEASES AND CONCESSIONS. Lessee shall assign to Lessor or Lessor's nominee simultaneously with the termination of this Lease, and the assignee -57- 64 shall assume any and all subleases and concession agreements in effect with respect to the Facility which Lessor elects to have assigned and to assume. (c) BOOKS AND RECORDS. Any and all books, records files and keys for the Facility kept by Lessee pursuant to this Lease or otherwise shall be delivered promptly to Lessor or Lessor's nominee, simultaneously with the termination of this Agreement, but such books and records shall thereafter be available to Lessee at all reasonable times for inspection, audit, examination, and transcription for a period of three (3) years and Lessee may retain (on a confidential basis) copies or computer records thereof. (d) TRANSITION ADJUSTMENTS. Lessee shall pay all accounts payable and accrued expenses relating to the Leased Property as of the date of termination of this Lease, to the extent such accounts payable and accrued expenses are required to be paid by Lessee under this Lease, and Lessee shall be entitled to receive and retain all accounts receivable, and an amount equal to all prepaid expenses paid by Lessee, as of the date of this termination. All advance bookings deposits and credits shall be paid to Lessor. (e) The provisions of this Section 34.2 shall survive the termination or expiration of this Lease. 34.3 CHANGE OF FRANCHISE. Lessee may not change the existing franchise covering the Leased Property with the prior written consent of Lessor, which consent may be given or withheld at Lessor's sole discretion. 34.4 WAIVER OF PRESENTMENT, ETC. Lessee waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation or incurring of new or additional obligations, except as expressly granted herein. ARTICLE XXXV ------------ 35.1 MEMORANDUM OF LEASE. Lessor and Lessee shall promptly upon the request of either enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State in which reference to this Lease, and all options contained herein, shall be made. Lessee shall pay all costs and expenses of recording such memorandum of this Lease. ARTICLE XXXVI ------------- 36.1 LESSOR'S OPTION TO TERMINATE LEASE. In the event Lessor enters into a bona fide contract to sell the Leased Property to a non-Affiliate, Lessor -58- 65 may terminate the Lease by giving not less than thirty (30) days' prior Notice to Lessee of Lessor's election to terminate this Lease effective upon the closing under such contract. In the event a closing under such contract does not occur, this Lease shall continue to be in full force and effect. Effective upon such closing, this Lease shall terminate and be of no further force and effect except as to any obligations of the parties existing as of such date that survive termination of this Lease. As compensation for the early termination of its leasehold estate under this Article XXXVI, Lessor shall within ninety (90) days of such closing pay to Lessee the fair market value of Lessee's leasehold estate hereunder as of the closing of the sale of the Leased Property. For the purposes of this Article, fair market value of the leasehold estate means, as applicable, an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for Lessee's leasehold estate under this Lease provided, however, that such amount shall not be less than six percent (6%) of the total of Room and Other Revenues for the twelve (12) months immediately preceding such termination nor more than $300,000.00. ARTICLE XXXVII -------------- 37.1 COMPLIANCE WITH FRANCHISE AGREEMENT. To the extent any of the provisions of the Franchise Agreement impose a greater obligation on Lessee than the corresponding provisions of this Lease, then Lessee shall be obligated to comply with, and the provisions of this Lease are deemed modified to the extent necessary to comply with, the provisions of the Franchise Agreement, it being the intent of the parties hereto that Lessee comply in every respect with the provisions of the Franchise Agreement so as to avoid any default thereunder. In addition, and notwithstanding any other provisions to the contrary contained in this Lease, in the event that Franchisor terminates the Franchise Agreement for any reason Lessor shall have the right to terminate this Lease in which case neither party shall thereafter have any liability to the other, provided, however, should Lessor elect to terminate this Lease, due to a termination of the Franchise Agreement for other than a default by Lessee under Section 16.1(h) of this Lease, then Lessor shall pay a termination fee equal to two and one-half percent (2.50%) of the total of Room and Other Revenues for the twelve (12) months immediately preceding such termination. -59- 66 IN WITNESS WHEREOF, the parties have executed this Lease under seal by their duly authorized officers as of the date first above written. "LESSOR" ___________________________, a ________ By: --------------------------------------------- Name: ------------------------------------- Title: ------------------------------------- "LESSEE" REALTY HOTEL LESSEE CORP., a Nevada corporation By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- [CORPORATE SEAL] -60- 67 SCHEDULE OF EXHIBITS -------------------- A. Description of Land B. Schedule of Leases and Service Contracts C. Inventory of Furniture, Fixtures and Equipment D. Hotel Management Agreement E. Assignment and Assumption of Leases F. Assignment and Assumption of Service Contracts G. Memorandum of Lease -61- 68 EXHIBIT A --------- DESCRIPTION OF LAND ------------------- -1- 69 EXHIBIT B --------- SCHEDULE OF LEASES AND SERVICE CONTRACTS ---------------------------------------- -1- 70 EXHIBIT C --------- INVENTORY OF FURNITURE, FIXTURES AND EQUIPMENT ---------------------------------------------- -1- 71 EXHIBIT D --------- HOTEL MANAGEMENT AGREEMENT -------------------------- -1- 72 EXHIBIT E --------- ASSIGNMENT AND ASSUMPTION OF LEASES ----------------------------------- THIS ASSIGNMENT AND ASSUMPTION OF LEASES is made as of the ____ day of ____________, 199_, by and between ____________________, a ____________________________ ("Assignor"), and REALTY HOTEL LESSEE CORP., a Nevada corporation ("Assignee"). W I T N E S S E T H: ------------------- WHEREAS, Assignor, as Lessor, and Assignee, as Lessee, entered into that certain Percentage Lease Agreement of even date herewith (the "Lease Agreement"), relating to that certain hotel building known as the ______________________________ (the "Hotel Building"), situated on certain real property located in _______________, ______________ as described on EXHIBIT A attached hereto and made a part hereof (the "Land"); and WHEREAS, the Lease Agreement contemplates that Assignor shall assign to Assignee all its right, title and interest in the certain leases and other instruments relating to the Hotel Building; NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by each of the parties hereto, Assignor and Assignee do hereby agree as follows: 1. ASSIGNMENT. Assignor hereby gives, grants, bargains, sells, conveys, transfers and sets over unto Assignee, its successors and assigns, as of the Effective Date (as hereinafter defined), all of Assignor's right, title and interest in and to the following instruments (collectively the "Lease Instruments"): (a) [List Leases] 2. ASSUMPTION. Assignee hereby accepts the foregoing assignment and, in consideration thereof, Assignee hereby covenants and agrees that, on and after the Effective Date, Assignee will assume, observe, perform, fulfill and be bound by all terms, covenants, conditions and obligations under each of the Lease Instruments which arise on and after the Effective Date and are to be observed, performed and fulfilled by the sublessor named therein on and after the Effective Date in the same manner and to the same extent as if Assignee were the sublessor named therein. 3. INDEMNIFICATION. (a) Assignor hereby indemnifies Assignee, and agrees to defend and hold harmless Assignee from and against any and all liability, loss, damage and expense, including, without limitation, reasonable -1- 73 attorneys fees, which Assignee may or shall incur under the Lease Instruments by reason of any failure or alleged failure of Assignor to have complied with or to have performed, before the Effective Date, the obligations of the sublessor thereunder which were to be performed before the Effective Date. (b) Assignee hereby indemnifies Assignor, and agrees to defend and hold harmless Assignor from and against any and all liability, loss, damage and expense, including without limitation reasonable attorneys' fees, which Assignor may or shall incur under the Lease Instruments by reason of any failure or alleged failure of Assignee to comply with or to perform, on or after the Effective Date, all the obligations of the sublessor thereunder which are to be performed on or after the Effective Date. 4. EFFECTIVE DATE. The "Effective Date", as used herein, shall mean the date upon which this document is fully executed and delivered. 5. SUCCESSORS AND ASSIGNS. The terms and conditions of this agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. -2- 74 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date set forth above. "ASSIGNOR" _________________________, a ____________ By: -------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- "ASSIGNEE" REALTY HOTEL LESSEE CORP., a Nevada corporation By: -------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- [CORPORATE SEAL] -3- 75 STATE OF _______________ ) ) SS: COUNTY OF _____________ ) BEFORE me, a Notary Public in and for said County and State, personally appeared __________________, ____________ of ____________, who acknowledged that he did sign the foregoing instrument for and on behalf of ___________________ and that the same is his free act and deed individually and as such officer and the free act and deed of ________________. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at ______________, _________________ this ____ day of ______________, 199_. -------------------------------- Notary Public (Seal) STATE OF _______________ ) ) SS: COUNTY OF ______________ ) BEFORE me, a Notary Public in and for said County and State, personally appeared ___________________, _____________ of REALTY HOTEL LESSEE CORP., a Nevada corporation, who acknowledged that he did sign the foregoing instrument on behalf of such corporation and that the same is his free act and deed individually and as such officer and the free act and deed of such corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at ______________, ________________ this ____ day of ____________, 199_. -------------------------------- Notary Public (Seal) This instrument prepared by: James B. Aronoff, Esq. Thompson Hine & Flory LLP 3900 Key Center 127 Public Square Cleveland, Ohio 44114-1216 -4- 76 EXHIBIT F --------- ASSIGNMENT AND ASSUMPTION ------------------------- OF -- SERVICE AND OTHER CONTRACTS --------------------------- THIS ASSIGNMENT AND ASSUMPTION OF SERVICE AND OTHER CONTRACTS is made as of the ____ day of _______________, 199_, by and between _________________________________________________, a ___________________ ___________ ("Assignor"), and REALTY HOTEL LESSEE CORP., a Nevada corporation ("Assignee"). W I T N E S S E T H: WHEREAS, Assignor, as Lessor, and Assignee, as Lessee, entered into that certain Percentage Lease Agreement of even date herewith (the "Lease Agreement"), relating to that certain hotel building known as the ______________________________ (the "Hotel Building"), situated on certain real property located in _______________, ______________ as described on EXHIBIT A attached hereto and made a part hereof (the "Land"); and WHEREAS, the Lease Agreement contemplates that Assignor shall assign and convey to Assignee all its right, title and interest in certain service and other contracts upon the consummation of the transactions set forth in the Lease Agreement; NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by each of the parties hereto, Assignor and Assignee do hereby agree as follows: 1. ASSIGNMENT. Assignor hereby assigns to Assignee, its successors and assigns, as of the Effective Date (as hereinafter defined), all of Assignor's right, title and interest in and to each of the service and other contracts relating to the Hotel Building as set forth on EXHIBIT A attached hereto and made a part hereof (the "Contracts"). 2. ASSUMPTION. Assignee hereby accepts the foregoing assignment and, in consideration thereof, Assignee hereby covenants and agrees that, on and after the Effective Date, Assignee will assume, observe, perform, fulfill and be bound by all terms, covenants, conditions and obligations of each of the Contracts which arise on and after the Effective Date and are to be observed, performed and fulfilled by Assignor on and after the Effective Date, in the same manner and to the same extent as if Assignee, instead of Assignor, were originally named therein. -1- 77 3. INDEMNIFICATION. (a) Assignor hereby indemnifies Assignee, and agrees to defend and hold harmless Assignee from and against any and all liability, loss, damage and expense, including without limitation reasonable attorneys fees, which Assignee may or shall incur under any of the Contracts by reason of any failure or alleged failure of Assignor to have complied with or to have fully performed, before the Effective Date, all obligations on its part to have been performed, complied with or discharged under any of the terms and conditions contained in any of the Contracts which were to be performed before the Effective Date. (b) Assignee hereby indemnifies Assignor, and agrees to defend and hold harmless Assignor from and against any and all liability, loss, damage and expense, including without limitation reasonable attorneys' fees, which Assignor may or shall incur under any of the Contracts by reason of any failure or alleged failure of Assignee to comply with or to perform, on or after the Effective Date, all obligations on its part to be performed or complied with under any of the terms and conditions contained in any of the Contracts which are to be performed on or after the Effective Date. 4. EFFECTIVE DATE. The "Effective Date", as used herein, shall mean the date upon which this document is fully executed and delivered. -2- 78 5. SUCCESSORS AND ASSIGNS. The terms and conditions of this agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the day and year first set forth above. "ASSIGNOR" __________________________, a ___________________ By: --------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- "ASSIGNEE" REALTY HOTEL LESSEE CORP., a Nevada corporation By: --------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- [CORPORATE SEAL] -3- 79 EXHIBIT A --------- Schedule of Service and Other Contracts -4- 80 EXHIBIT G --------- MEMORANDUM OF LEASE ------------------- -1- -----END PRIVACY-ENHANCED MESSAGE-----