-----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, Cfs9ClcgzaCxk4jAyyr9mZM/cEhTpUhAjDYG8RU5kfX8vEGnUIUdrcFbxENMRfuB oOiMMAYDhK4aDpyTePwhqg== 0000950109-98-000502.txt : 19980130 0000950109-98-000502.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950109-98-000502 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRFIELD INN BY MARRIOTT LTD PARTNERSHIP CENTRAL INDEX KEY: 0000855103 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521638296 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-23685 FILM NUMBER: 98515775 BUSINESS ADDRESS: STREET 1: 10400 FERNWOOD RD CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 3013809000 MAIL ADDRESS: STREET 1: 10400 FERNWOOD ROAD STREET 2: DEPT. 908 CITY: BETHESDA STATE: MD ZIP: 20817 10-12G 1 FORM 10 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(g) of The Securities Exchange Act of 1934 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP --------------------------------------------- 10400 FERNWOOD ROAD BETHESDA, MARYLAND 20817 (301) 380-2070 Delaware 52-1638296 ----------------------- --------------------------------------- (STATE OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 10400 Fernwood Road Bethesda, Maryland 20817 ---------------------------------------- (Address of principal executive offices) (301) 380-9000 ------------------------------ (Registrant's telephone number including area code) Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP INTERESTS ----------------------------- (TITLE OF CLASS) ================================================================================ 1 Table of Contents -----------------
Page No. -------- ITEM 1. Business....................................................... 3 ITEM 2. Financial Information.......................................... 8 ITEM 3. Properties..................................................... 11 ITEM 4. Security Ownership of Certain Beneficial Owners and Management. 12 ITEM 5. Directors and Executive Officer................................ 12 ITEM 6. Executive Compensation......................................... 13 ITEM 7. Certain Relationships and Related Transactions................. 13 ITEM 8. Legal Proceedings.............................................. 14 ITEM 9. Market for and Distributions on Limited Partnership Units and Related Security Holder Matters................................ 14 ITEM 10. Recent Sales of Unregistered Securities........................ 15 ITEM 11. Description of Registrant's Securities to be Registered........ 15 ITEM 12. Indemnification of Directors and Officers...................... 19 ITEM 13. Financial Statements........................................... 20 ITEM 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 34 ITEM 15. Financial Statements, Supplementary Schedules and Exhibits..... 34
2 ITEM 1. BUSINESS Description of the Partnership Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed to acquire, own and operate 50 Fairfield Inn by Marriott properties (the "Inns") located in sixteen states and the land on which 18 of the Inns are situated. The Partnership leases the land underlying 32 of the Inns from Marriott International, Inc. (AMII@) and certain of its affiliates (the "Land Leases"). Of the Partnership's 50 Inns, seven are located in each of Georgia and North Carolina; six in Michigan; four in each of Florida, Illinois, and Ohio; and three or less in each of the other ten states. On October 8, 1993, Marriott Corporation's operations were divided into two separate companies: Host Marriott Corporation ("Host Marriott"), which continued Marriott Corporation's business of owning lodging properties and concession operations at airports and tollroads, and Marriott International, Inc. ("MII"), which continued Marriott Corporation's business of lodging and senior living services management, timeshare resort development and operation, food service and facilities management and other contract services businesses. The sole general partner of the Partnership, with a 1% interest, is Marriott FIBM One Corporation (the "General Partner"), a Delaware corporation and a wholly-owned subsidiary of Host Marriott. The Partnership is engaged solely in the business of owning and operating the Inns and therefore is engaged in one industry segment. The principal offices of the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817. The Inns are managed by Fairfield FMC Corporation (the "Manager"), a wholly- owned subsidiary of MII, as part of the Fairfield Inn by Marriott hotel system under a long-term management agreement. The Inns have the right to use the Fairfield Inn by Marriott name pursuant to the management agreement and, if this agreement is terminated, the Partnership will lose that right for all purposes (except as part of the Partnership's name). See Item 7 "Certain Relationships and Related Transactions". The Fairfield Inn by Marriott system is a leading brand in the rapidly growing but increasingly competitive economy segment of the lodging industry. The Inns provide business and pleasure travelers with quality lodging at an economical price. The Partnership has no plans to acquire any new properties or sell any of the existing properties. See "Competition". Organization of the Partnership The Partnership was formed on August 23, 1989, and operations commenced on July 31, 1990 (the "Closing Date"). Between November 17, 1989, and the Closing Date, 83,337 limited partnership interests (the "Units") were sold in a public offering. The offering price per unit was $1,000. The General Partner contributed $841,788 for its 1% general partnership interest and $1.1 million to establish the initial working capital reserve of the Partnership at $1.5 million (as required in the partnership agreement). In addition, the General Partner has a 10% limited partnership interest through the purchase of Units on the Closing Date. On November 17, 1989, the Partnership executed a purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the Inns and the land on which 18 Inns are situated for $235.5 million. The total purchase price was paid from proceeds of the mortgage financing and sale of the Units. 3 DEBT FINANCING Mortgage Debt - ------------- On July 31, 1990, the Partnership borrowed $164.9 million, bearing a fixed interest rate of 9.67%, pursuant to the terms of a non-recourse mortgage loan agreement (the "Mortgage Debt") to finance a portion of the purchase price of the Inns. The Mortgage Debt required semi-annual interest payments with no principal payments required through maturity. Although the Mortgage Debt matured on December 31, 1996, the Partnership was unable to refinance the debt until January 13, 1997. During the period of December 31, 1996 through January 13, 1997, the existing Mortgage Debt bore interest at a default rate of 12.67%. On January 13, 1997 (the "Refinancing Date") the Mortgage Debt was successfully refinanced with a new third party lender. The principal amount of the Partnership's refinanced debt was increased from $164.8 million to $165.4 million. Proceeds from the new loan were used to repay the existing mortgage debt and pay refinancing costs. The refinanced debt continues to be non- recourse, bears interest at a fixed rate of 8.40% and requires monthly payments of principal and interest based upon a 20-year amortization schedule for a 10- year term expiring January 11, 2007. Thereafter, until the final maturity date of January 11, 2017, interest is payable at an adjusted rate, as defined, and all excess cash flow is applied toward principal amortization. The refinanced mortgage debt is secured by first mortgages on all of the Inns, the land on which they are located, or an assignment of the Partnership's interest under the Land Leases, including ownership interest in all improvements thereon, fixtures and personal property related thereto. As part of the refinancing, the Partnership was required to establish various reserves for capital expenditures, working capital, debt service and insurance needs. On the Refinancing Date, the Partnership established reserves totaling $3.9 million for certain capital expenditure items. The funds will be expended during 1997 for various renewals and replacements, site improvements, Americans with Disabilities Act of 1990 modifications and environmental studies undertaken in conjunction with the refinancing. The Partnership was required to deposit two months' debt service payments, or $2,850,000, into a debt service reserve payable in 12 equal consecutive monthly installments commencing on March 11, 1997. As of December 5, 1997, 10 monthly installments have been funded totaling $2,374,880. The Partnership was also required to deposit $161,000 into a ground rent reserve payable in six equal monthly installments commencing on March 11, 1997. This reserve has been fully funded as of December 5, 1997. The Partnership was also obligated to fund $300,000 into an earthquake restoration reserve account, payable in 3 consecutive monthly installments commencing on January 31, 1997. This also has been fully funded. Transfers from this fund are to be made in conjunction with any damages (not covered by insurance) suffered from earthquakes to the two Inns located in California. The Partnership's loan agreement requires that if a single downgrade of MII's debt occurs, the Partnership is required to establish an additional debt service reserve of $1.4 million. In March 1997, MII acquired the Renaissance Hotel Group N.V. The assumption of additional debt associated with this transaction resulted in a single downgrade of MII's long-term senior unsecured debt effective April 7, 1997. This reserve has been fully funded as of December 5, 1997. In addition, pursuant to the terms of the mortgage debt subsequent to a downgrade of MII's debt, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes ("Tax and Insurance Escrow Reserve") for each mortgaged property. As of December 5, 1997, the balance in the Tax and Insurance Escrow Reserve is $1.7 million. As of December 5, 1997, reserves totaled $9.9 million. In addition, the Partnership entered into a Working Capital Maintenance and Supplemental Debt Service Agreement ("Agreement") with the Manager, effective January 13, 1997. As part of this Agreement, the Partnership agreed to furnish the Manager additional working capital to be deposited into a segregated interest bearing account (the "Working Capital Reserve"). The Working Capital Reserve is to be funded from Operating Profit, as defined, retained by or distributed to the Partnership as such amounts become available, until the Working Capital Reserve reaches $670,000. This Agreement also requires the funding of another segregated account for debt service shortfalls 4 (the "Supplemental Debt Service Reserve"). This reserve is also to be funded out of Operating Profit retained or distributed to the Partnership as such amounts become available, until the Supplemental Debt Service Reserve reaches $1,425,000. These reserves have not been funded as of December 5, 1997. MATERIAL CONTRACTS Management Agreement - -------------------- The Manager operates the Inns pursuant to a long-term management agreement (the "Management Agreement"). In conjunction with the mortgage refinancing, the initial term of the Management Agreement was extended ten years from December 31, 2009 to December 31, 2019. However, the renewal period was shortened. The Manager may renew the Management Agreement, as to one or more of the Inns at its option, for up to four additional 10-year terms plus one five-year term. The Management Agreement provides the Manager with a base management fee equal to 1% of gross sales from Inn operations for each fiscal year through 1994 and 2% of gross sales from Inn operations for each fiscal year thereafter. The Management Agreement also provides for payment of a Fairfield Inn system fee equal to 3% of gross sales from Inn operations. In addition, the Manager is entitled to an incentive management fee equal to 15% of operating profit, as defined, increasing to 20% after the Inns have achieved total operating profit during any 12 month period equal to or greater than $33.9 million. This has not been met as of December, 1997. For additional information see Item 7, "Certain Relationships and Related Transactions." Pursuant to the Management Agreement, the Inns are operated as part of the Fairfield Inn by Marriott hotel system. At December 31, 1996, the Fairfield Inn by Marriott hotel system included 284 Inns with a total of 27,300 guest rooms. Fairfield Inns typically contain approximately 135 rooms. Room rates generally range between $45 and $55 per night depending on location. Fairfield Inns have limited public space and do not include restaurants; however they do offer a complimentary continental breakfast. Ground Leases - ------------- The land on which 32 of the Inns are situated is leased by the Partnership from MII or its affiliates. The Land Leases expire on November 30, 2088 and provide that the Partnership will pay annual rents equal to the greater of a specified minimum rent for each property or a percentage rent based on gross sales of the Inn operated thereon. The minimum rentals are adjusted at various anniversary dates through 1999, as defined in the agreements. The minimum rentals are adjusted annually for the remaining life of the leases based on changes in the Consumer Price Index. The percentage rent, which also varies from property to property, is fixed at predetermined percentages of gross sales that increase over time. Under the leases, the Partnership pays all costs, expenses, taxes and assessments relating to the Inns and the underlying land, including real estate taxes. Each Land Lease provides that the Partnership has a first right of refusal in the event the applicable ground lessor decides to sell the leased premises. Upon expiration or termination of a Land Lease, title to the applicable Inn and all improvements reverts to the ground lessor. COMPETITION The United States lodging industry generally is comprised of two broad segments: full service hotels and limited service hotels. Full service hotels generally offer restaurant and lounge facilities and meeting spaces, as well as a wide range of services, typically including bell service and room service. Limited service hotels generally offer accommodations with limited or no services and amenities. As economy hotels, the Inns compete effectively with limited service hotels in their respective markets by providing streamlined services and amenities exceeding those 5 provided by typical limited service hotels at prices that are significantly lower than those available at full service hotels. The lodging industry in general, and the limited service segment in particular, is highly competitive, but the degree of competition varies from location to location and over time. The Inns compete with several other major lodging brands. Competition in the industry is based primarily on the level of service, quality of accommodations, convenience of locations and room rates. The following list presents key participants in the economy segment of the lodging industry in which the Inns compete: Segment Representative Participants ------- --------------------------- Economy Fairfield Inn, Comfort Inn and Suites, Best Western, Holiday Inn Express, Days Inn, Hampton Inn and Suites The Manager believes that by emphasizing management and personnel development and maintaining a competitive price structure, the Partnership's share of the market will be maintained or increased. The inclusion of the Inns within the nationwide Fairfield Inn by Marriott hotel system provides advantages of name, recognition, centralized reservations and advertising, system-wide marketing and promotion, centralized purchasing and training and support services. CONFLICTS OF INTEREST Because Host Marriott and its affiliates own and/or operate hotels other than those owned by the Partnership, potential conflicts of interest exist. With respect to these potential conflicts of interest, Host Marriott and its affiliates retain a free right to compete with the Partnership's Inns, including the right to develop competing hotels now and in the future, in addition to those existing hotels which may compete directly or indirectly. Under Delaware law, the General Partner has unlimited liability for obligations of the Partnership unless those obligations are, by contract, without recourse to the partners thereof. Since the General Partner is entitled to manage and control the business and operations of the Partnership, and because certain actions taken by the General Partner or the Partnership could expose the General Partner or its parent, Host Marriott, to liability that is not shared by the limited partners (for example, tort liability or environmental liability), this control could lead to a conflict of interest. Under Delaware law, the General Partner has a fiduciary duty to the Partnership and is required to exercise good faith and loyalty in all its dealings with respect to Partnership affairs. POLICIES WITH RESPECT TO CONFLICTS OF INTEREST It is the policy of the General Partner that the Partnership's relationship with the General Partner or any affiliate, or persons employed by the General Partner are conducted on terms which are fair to the Partnership and which are commercially reasonable. Agreements and relationships involving the General Partner or its affiliate and the Partnership are on terms consistent with the terms on which the General Partner or its affiliates have dealt with unrelated partners. The Partnership Agreement provides that agreements, contracts or arrangements between the Partnership and the General Partner, other than arrangements for rendering legal, tax, accounting, financial, engineering, and procurement services to the Partnership by the General Partner or its affiliates, which agreements will be on commercially reasonable terms, will be subject to the following conditions: (a) the services, goods or materials must be reasonably necessary to the operation of the business of the Partnership; 6 (b) the General Partner or any affiliate must have the ability to render such services or to sell or lease such goods; (c) any such agreement, contract or arrangement must be fair to the Partnership and reflect commercially reasonable terms and shall be embodied in a written contract which precisely describes the subject matter thereof and all compensation to be paid therefor; (d) no rebates or give-ups may be received by the General Partner or any affiliate, nor may the General Partner or any affiliate participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Partnership Agreement; (e) no such agreement, contract or arrangement as to which the limited partners had previously given approval may be amended in such manner as to increase the fees or other compensation payable to the General Partner or any affiliate or to decrease the responsibilities or duties of the General Partner or any affiliate in the absence of the consent of the limited partners holding a majority of the Units (excluding those Units held by the General Partner or certain of its affiliates); (f) any such agreement, contract or arrangement which relates to or secures any funds advanced or loaned to the Partnership by the General Partner or any affiliate must reflect commercially reasonable terms; and (g) any such agreement, contract or arrangement which relates to the performance of services or the sale or lease of goods or materials (other than the Management Agreement) shall contain a clause allowing termination without penalty on 60 days notice. EMPLOYEES The Partnership has no employees; however, employees of the General Partner are available to perform administrative services for the Partnership. The Partnership reimburses the General Partner for the cost of providing such services. See Item 6, "Executive Compensation", for information regarding payments made to the General Partner for the cost of providing administrative services to the Partnership. CONSOLIDATION The General Partner has undertaken, on behalf of the Partnership, to pursue, subject to further approval of the partners, a potential transaction (the "Consolidation") in which (i) subsidiaries of CRF Lodging Company, L.P. (the "Company"), a newly formed Delaware limited partnership, would merge with and into the Partnership and up to five other limited partnerships, with the Partnership and the other limited partnerships being the surviving entities (each, a "Merger" and collectively, the "Mergers"), subject to the satisfaction or waiver of certain conditions, (ii) CRF Lodging Trust ("CRFLT"), a Maryland real estate investment trust, the sole general partner of the Company, would offer its common shares of beneficial interest, par value $0.01 per share (the "Common Shares") to investors in an underwritten public offering and would invest the proceeds of such offering in the Company in exchange for units of limited partnership interests in the Company ("Units") and (iii) the Partnership would enter into a Lease for the operation of its Hotels pursuant to which a Lessee would pay rent to the Partnership based upon the greater of a fixed dollar amount of base rent or specified percentages of gross sales, as specified in the Lease. If the partners approve the transaction and other conditions are satisfied, the partners of the Partnership would receive Units in the Merger in exchange for their interests in the Partnership. A preliminary Prospectus/Consent Solicitation was filed as part of a Registration Statement on Form S-4 with the Securities and Exchange Commission and which describes the potential transaction in greater detail. Any offer of Units in connection with the Consolidation will be made solely by a final Prospectus/Consent Solicitation. 7 ITEM 2. FINANCIAL INFORMATION The following selected financial data presents historical operating information for the Partnership for each of the five years ended December 31, 1996: FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Year Ended December 31 1996 1995 1994 1993 1992 -------- --------- --------- --------- --------- (in thousands, except per unit amounts) Inn revenues (1)............................ $ 47,065 $ 45,262 $ 40,854 $ 37,641 $ 36,240 ======== ======== ======== ======== ======== Net income (loss)........................... $ 1,420 $ (951) $ (4,174) $ (6,295) $ (3,410) ======== ======== ======== ======== ======== Net income (loss) per limited partner unit.. $ 17 $ (11) $ (50) $ (76) $ (41) ======== ======== ======== ======== ======== Total assets................................ $184,992 $185,481 $191,939 $200,882 $211,112 ======== ======== ======== ======== ======== Total liabilities........................... $183,226 $176,717 $173,805 $170,157 $165,780 ======== ======== ======== ======== ======== Cash distributions per limited partnership unit (2)...................... $ 85 $ 100 $ 100 $ 100 $ 95 ======== ======== ======== ======== ========
(1) Inn revenues represent house profit of the Partnership's Inns since the Partnership has delegated substantially all of the operating decisions related to the generation of house profit of the Inns to the Manager. (2) Includes quarterly distributions made in May, July and October of each fiscal year and in February of the subsequent fiscal year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY The Partnership is required to maintain the Inns in good condition. Under the Management Agreement, the Partnership is required to make annual contributions to the property improvement fund which provides funding for capital expenditures and replacement of furniture, fixtures and equipment. Contributions to the fund equaled 6% of gross sales in 1996, 1995 and 1994. In 1997 and thereafter, the Partnership is required to contribute 7% of gross sales to the fund. For 1996, the Partnership paid a base management fee equal to 2% of gross sales and a Fairfield Inn system fee equal to 3% of gross sales to the Manager. In addition, the Partnership paid an incentive management fee of $2.4 million payable from 50% of cash flow remaining after payment of ground rent, debt service, partnership administrative expenses and an owner's priority return of $8.4 million. The remaining $2.5 million of incentive management fees earned were deferred. 8 Cash provided by operations was $17.5 million in 1996, $16.4 million in 1995 and $14.7 million in 1994. The increase in cash provided by operations can primarily be attributed to improved lodging results. Cash used in investing activities was $5.8 million, $5.7 million and $5.2 million in 1996, 1995 and 1994, respectively. The Partnership's cash investing activities consists primarily of contributions to the property improvement fund and capital expenditures for improvements to existing hotels. Cash used in financing activities was $8.8 million in 1996 and $8.4 million in each of 1995 and 1994. The Partnership's cash financing activities consisted primarily of capital distributions to partners and payments of financing costs discussed below. On January 13, 1997, the Partnership successfully refinanced its non-recourse mortgage debt with an investment banking firm. The principal amount of the refinanced debt was increased from $164.8 million to $165.4 million. Proceeds from the new loan were used to repay the existing mortgage debt and pay refinancing costs. The refinanced debt continues to be non-recourse, bears interest at a fixed rate of 8.40% and requires monthly payments of principal and interest based upon a 20-year amortization schedule for a 10-year term expiring January 11, 2007. Thereafter, until the final maturity date of January 11, 2017, interest is payable at an adjusted rate, as defined, and all excess cash flow is applied toward principal amortization. The lender required that the Partnership establish several reserves for debt service, capital expenditure and working capital needs. The lender securitized this loan through the issuance and sale of commercial-mortgage backed securities. RESULTS OF OPERATIONS 1996 COMPARED TO 1995 Revenues. Revenues increased $1.8 million, or 4%, to $47.1 million in 1996 from $45.3 million in 1995 as a result of strong growth in REVPAR, or revenue per available room, of 4%. Inn sales increased $5.7 million, or 6%, to $97.4 million in 1996 also reflecting improvements in REVPAR for the year. The increase in REVPAR was the result of an increase in average room rates of nearly 10%, while average occupancy decreased four percentage points. The decrease in occupancy was primarily the result of efforts to maximize the average room rate and ultimately increase REVPAR, but was also impacted by market conditions and increased competition. Operating Costs and Expenses. Operating costs and expenses decreased $.5 million to $29.7 million in 1996 from $30.3 million in 1995. As a percentage of Inn revenues, Inn operating costs and expenses represented 63% of revenues for 1996 and 67% in 1995. Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, operating profit increased $2.3 million to $17.3 million, or 37% of total revenues, in 1996 from $15 million, or 33% of revenues in 1995. Interest Expense. Interest expense remained at $16.6 million for 1996 and 1995. Net Income. Net loss decreased to net income of $1.4 million in 1996, from a net loss of $1 million in 1995 due to the items discussed above. 1995 COMPARED TO 1994 Revenues. Revenues increased $4.4 million, or 11%, to $45.3 million in 1995 from $40.9 million in 1994 as a result of strong growth in REVPAR of 8%. The increase in REVPAR was primarily the result of a 9% increase in average room rates and a one percentage point decrease in average occupancy. Operating Costs and Expenses. Operating costs and expenses increased to $1.4 million to $30.3 million, or 67% of Inn revenues, in 1995 from $28.9 million, or 71% of Inn revenues, in 1994. 9 Operating Profit. Operating profit increased $3 million to $15 million, or 33% of Inn revenues, in 1995 from $12 million, or 29% of Inn revenues, in 1994 due to the changes in Inn revenues and Inn operating costs discussed above. Interest Expense. Interest expense increased $.1 million to $16.6 million in 1995. Net Loss. Net loss decreased to $1 million in 1995, from a net loss of $4.2 million in 1994 due to the items discussed above. 10 ITEM 3. PROPERTIES The following table sets forth certain information relating to each of the Partnership's Inns. All of the properties are operated under the Fairfield Inn by Marriott Brand and managed by Marriott International. The Land on which the Inns are located is owned, unless otherwise specified.
Number of Date Rooms Opened --------- ------ Alabama Birmingham - Homewood (1)......... 132 1988 Montgomery ....................... 133 1988 California Los Angeles - Buena Park (1)...... 135 1990 Los Angeles - Placentia........... 135 1990 Florida Gainesville (1)................... 135 1990 Miami - West (1).................. 135 1989 Orlando - International Drive (1) 135 1989 Orlando - South (1) 133 1988 Georgia Atlanta - Airport (1)............. 132 1987 Atlanta - Gwinnett Mall........... 135 1988 Atlanta - Northlake (1)........... 133 1988 Atlanta - Northwest (1)........... 130 1987 Atlanta - Peachtree Corners....... 135 1989 Atlanta - Southlake............... 134 1989 Atlanta - Savannah (1)............ 135 1990 Iowa Des Moines - West (1)............. 135 1990 Illinois Bloomington - Normal (1).......... 132 1988 Chicago - Lansing (1)............. 135 1989 Peoria............................ 135 1989 Rockford.......................... 135 1989 Indiana Indianapolis - Castleton (1)...... 132 1988 Indianapolis - College Park....... 132 1988 Kansas Kansas City - Merriam............. 135 1989 Kansas City - Overland Park....... 134 1988 Michigan Detroit - Airport (1)............. 133 1988 Detroit - Auburn Hills (1)........ 134 1989 Detroit - Madison Heights (1)..... 134 1989 Detroit - Warren (1).............. 131 1988 Detroit - West (Canton) (1)....... 133 1988 Kalamazoo (1)..................... 133 1988 Number of Date Rooms Opened --------- ------ Missouri St. Louis - Hazelwood............. 135 1989 North Carolina Charlotte - Airport (1)........... 135 1989 Charlotte - Northeast (1)......... 133 1988 Durham (1)........................ 135 1990 Fayetteville (1).................. 135 1989 Greensboro (1).................... 135 1989 Raleigh - Northeast (1)........... 132 1988 Wilmington........................ 134 1989 Ohio Cleveland - Airport............... 135 1989 Columbus - North (1).............. 135 1989 Dayton - North (1)................ 135 1989 Toledo - Holland.................. 135 1989 South Carolina Florence.......................... 135 1989 Greenville........................ 132 1989 Hilton Head (1)................... 120 1989 Tennessee Johnson City (1).................. 132 1988 Virginia Hampton........................... 134 1989 Virginia Beach (1)................ 134 1990 Wisconsin Madison (1)....................... 135 1988 Milwaukee - Brookfield............ 135 1989
(1) The land on which the Inn is built is leased by the Partnership under a long-term lease agreement with Marriott International, Inc. or an affiliate. 11 The following table shows selected combined operating statistics for the Inns:
Year Ended December 31, 1996 1995 1994 -------- ------- ------- Combined average occupancy........ 76.6% 80.6% 81.5% Combined average daily room rate.. $49.57 $45.26 $41.51 REVPAR............................ $37.98 $36.47 $33.83 REVPAR percentage change.......... 4.1% 7.8%
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1996, Nihon Building Project USA, Inc. owned 12% of the total number of limited partnership units. No other person owned of record, or to the Partnership's knowledge owned beneficially, more than 5% of the total number of limited partnership Units other than the General Partner. The General Partner owns 8,379 Units as of December 31, 1996, which represent 10% of the total Units. These Units were purchased by the General Partner on the Closing Date of the public offering. See Item 11, "Description of Registrants Securities to be Registered", regarding restrictions on the voting rights of Units owned by the General Partner. There are 15 Units owned by the executive officers and directors of the General Partner, as a group. The Partnership is not aware of any arrangements which may, at a subsequent date, result in a change in control of the Partnership, other than the Consolidation described in Item 1. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS Marriott FIBM One Corporation, the General Partner, was incorporated in Delaware in 1990 and is a wholly owned subsidiary of Host Marriott. The General Partner was organized solely for the purpose of acting as general partner of Fairfield Inn by Marriott Limited Partnership. The Partnership has no directors, officers or employees. The business policy making functions of the Partnership are carried out through the directors and executive officers of the General Partner, who are listed below:
Age at Name Current Position in Marriott FIBM One Corporation December 31, 1996 - ------------------------- ------------------------------------------------- ----------------- Bruce F. Stemerman President and Director 41 Christopher G. Townsend Vice President and Director 49 Earla L. Stowe Vice President and Chief 35 Accounting Officer Bruce D. Wardinski Treasurer 36
Bruce F. Stemerman was elected President of the General Partner in November 1995. He has been a Director of the General Partner since October 1993. Mr. Stemerman joined Host Marriott in 1989 as Director, Partnership Services. He was promoted to Vice President, Lodging Partnerships in 1994 and to Senior Vice President, Asset Management in 1996. Prior to joining Host Marriott, Mr. Stemerman spent ten years with Price Waterhouse. He also serves as a director and an officer of numerous Host Marriott subsidiaries. Christopher G. Townsend has been Vice President and Director of the General Partner since May 1987. Mr. Townsend joined Host Marriott's Law Department in 1982 as a Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary of Host Marriott and in 1986 was made Assistant General Counsel. In 1993, he was made Senior Vice President, Corporate Secretary and Deputy General Counsel of Host Marriott. In January 1997, Mr. Townsend was named General Counsel of Host Marriott. He also serves as a director and an officer of numerous Host Marriott subsidiaries. Earla L. Stowe was appointed to Vice President and Chief Accounting Officer of the General Partner on October 8, 1996. Ms. Stowe joined Host Marriott Corporation in 1982 and held various positions in the tax department until 1988. She joined the Partnership Services department as an accountant in 1988 and in 1989 she became an Assistant Manager, Partnership Services. She was promoted to Manager, Partnership Services in 1991 and to Director, Asset Management in 1996. She also serves as an officer of numerous Host Marriott subsidiaries. 12 Bruce D. Wardinski was elected Treasurer of the General Partner in 1996. Mr. Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of Financial Planning & Analysis, and was named Manager in June 1988. He was appointed Director, Financial Planning & Analysis in 1989, Director of Project Finance in January 1990, Senior Director of Project Finance in June 1993, Vice President, Project Finance in June 1994, and Senior Vice President of International Development in October 1995. In June 1996, Mr. Wardinski was named Senior Vice President and Treasurer of Host Marriott. He also serves as an officer of numerous Host Marriott subsidiaries. ITEM 6. EXECUTIVE COMPENSATION The General Partner is required to devote to the Partnership such time as may be necessary for the proper performance of its duties, but the officers and the directors of the General Partner are not required to devote their full time to Partnership matters. To the extent that any officer or director of the General Partner or employee of Host Marriott does devote time to the Partnership, the General Partner is entitled to reimbursement for the cost of providing such services. Any such costs may include a charge for overhead, but without a profit to the General Partner. For the fiscal years ended December 31, 1996, 1995 and 1994, administrative expenses reimbursed by the Partnership to the General Partner totalled $102,000, $92,000 and $94,000, respectively. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As described below, the Partnership is a party to an ongoing agreement with MII pursuant to which the Inns are managed by MII. Prior to October 8, 1993, MII was a wholly-owned subsidiary of Host Marriott, which was then named Marriott Corporation. On October 8, 1993, Marriott Corporation's operations were divided into two separate companies, Host Marriott and MII. MII now conducts its management business as a separate publicly-traded company and is not a parent or subsidiary of Host Marriott, although the two corporations have various business and other relationships. The Partnership entered into a management agreement (the "Management Agreement") with MII to manage and operate the Inns. In conjunction with the mortgage refinancing, the initial term of the Management Agreement was extended ten years from December 31, 2009 to December 31, 2019. However, the renewal period was shortened. The Manager has the option to renew the Management Agreement as to one or more of the Inns at its option, for up to four additional 10-year terms plus one five-year term. The Manager is paid a base management fee equal to 2% of gross hotel sales. In addition, the Manager is entitled to an incentive management fee equal to 15% of Operating Profit as defined, increasing to 20% after the Inns have achieved total Operating Profit during any 12 month period equal or greater than $33.9 million. The incentive management fee with respect to each Hotel is payable only out of 50% of cash flow from operations remaining after payment of ground rent, debt service, partnership administrative expenses and the owner's priority return, as defined. In accordance with the Management Agreement, incentive management fees through 1992 were waived by the Manager, as cash flow available for incentive management fees, as defined, was insufficient to pay the fees. Incentive management fees earned after 1992 accrue and are payable as outlined above or from Capital Receipts, as defined in the Management Agreement. During 1996, 1995 and 1994, the Manager deferred $2,470,000, $2,857,000 and $3,429,000 of incentive management fees, respectively. Cumulative deferred incentive management fees at December 31, 1996 and 1995 were $12,786,000 and $10,316,000, respectively. The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all managed or owned Inns in the Fairfield Inn by Marriott hotel system. The major cost components included in Chain Services are computer, reservations, advertising, training and sales costs. Costs and expenses incurred in providing such services are allocated among all domestic Fairfield Inn by Marriott hotels managed, owned or leased by MII or its subsidiaries with no profit to MII. The methods of allocating the costs and expenses are based upon one or a combination of the following: (i) percent of sales, (ii) total number of hotel rooms, (iii) total number of reservations booked, and (iv) total number of management employees. In addition, the Manager maintains a marketing fund to pay the costs associated with certain system-wide advertising, marketing, sales, promotional and public relations materials and programs. Each Inn within the system contributes 2.5% of gross Inn sales to the marketing fund. The Manager has no ownership interest in the marketing fund. 13 The following table sets forth the amount paid to MII and affiliates for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994 ------- ------- ------ Fairfield Inn system fee.................. $ 2,923 $ 2,751 $2,555 Ground rent............................... 2,845 2,788 2,253 Marketing fund contribution............... 2,436 2,292 2,129 Incentive management fee.................. 2,428 1,809 875 Base management fee....................... 1,949 1,834 851 Chain services allocation................. 1,267 1,192 1,004 ------- ------- ------ $13,848 $12,666 $9,667 ======= ======= ======
Pursuant to the Management Agreement, the Partnership provided the Manager with working capital and supplies to meet the operating needs of the Inns. This advance bears no interest and remains the property of the Partnership throughout the term of the Management Agreement. The Partnership is required to advance upon request of the Manager any additional funds necessary to satisfy the needs of the Inns as their operations may require from time to time. Upon termination of the Management Agreement, the Manager will return to the Partnership any unused working capital and supplies. At the inception of the Partnership, $1,000,000 was advanced to the Manager for working capital and supplies. The Management Agreement provides for the establishment of a property improvement fund for the Inns to cover (a) the cost of certain non-routine repairs and maintenance to the Inns which are normally capitalized; and (b) the cost of replacements and renewals to the Inns' property and equipment. Contributions to the property improvement fund are based on a percentage of gross sales of each Inn. In 1996, 1995 and 1994 the Partnership contributed 6% of gross sales to the fund. In 1997 and thereafter, the Management Agreement requires the Partnership to contribute 7% of gross revenues to the fund. The Management Agreement provides that the Partnership may terminate the Management Agreement and remove the Manager if, after December 1995 specified minimum operating results are not achieved. The Manager may, however, prevent termination by paying to the Partnership such amount as is necessary to achieve the above performance standard. ITEM 8. LEGAL PROCEEDINGS. None. ITEM 9. MARKET FOR AND DISTRIBUTIONS ON LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS There is currently no public market for the Units. Transfers of Units are limited to the first day of a fiscal quarter, and are subject to approval by the General Partner and certain other restrictions described in Item 11, "Description of Registrant's Securities to be Registered". As of December 31, 1996, there were 3,148 holders of record of the 83,337 limited partnership Units. The ability of the Partnership to make cash distributions to the limited partners is subject to limitations contained in the Partnership Agreement that are described in Item 11, "Description of Registrant's Securities to be Registered -Distributions and Allocations". In addition, the Partnership is making payments to reserves established by the lender, as described in Item 1, "Business - Debt Financing - Mortgage Debt", that limit the funds available for cash distributions. The Partnership made quarterly cash distributions to its partners from 1996 operations in the amount of $7,155,198 as follows: $71,553 to the General Partner and $7,083,641 to the limited partners ($85 per Unit). The Partnership made quarterly cash distributions to its partners from 1995 operations in the amount of $8,417,880 as follows: $84,180 to the General Partner and $8,333,700 to the limited partners ($100 per Unit). The Partnership made quarterly cash distributions to its partners from 1994 operations in the amount of $8,417,880 as follows: $84,180 to the General Partner and $8,333,700 to the limited partners ($100 per Unit). 14 Units held by non-affiliates of the Partnership for at least three years may be sold without registration in accordance with the exemptions provided by Rule 144 under the Securities Act of 1933, as amended the (the "Act"). For a discussion of the restrictions on assignment contained in the Partnership Agreement, see Item 11, "Description of Registrant's Securities to be Registered". ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES There have been no sales of unregistered securities by the Partnership within the past three years. On July 31, 1990, 83,337 limited partnership interests (the "Units") were sold in a public offering. See Item 1, "Business - Organization of the Partnership" for additional information regarding the Partnership's sale of Units in 1990. As of December 31, 1996, there were 3,148 limited partners. Since the inception of the Partnership, there have been 416 sales by limited partners involving 6,997 Units. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED The 83,337 limited partnership interests to be registered, which include the 8,379 Units owned by the General Partner, represent 99% of the interests in the Partnership. The General Partner holds the remaining 1% interest. Distributions and Allocations - ----------------------------- Partnership allocations and distributions are generally made as follows: a. Cash available for distribution for each fiscal year will be distributed quarterly as follows: (i) 99% to the limited partners and 1% to the General Partner (collectively, the "Partners") until the Partners have received, with respect to such fiscal year, an amount equal to the Partners' Preferred Distribution (9% of the excess of original cash contributions over cumulative distributions of net refinancing and sales proceeds ("Capital Receipts") on an annualized basis in 1990, 9.5% in 1991 and 1992 and 10% for each year thereafter); (ii) remaining cash available for distribution will be distributed as follows, depending on the amount of Capital Receipts previously distributed: 1) 99% to the limited partners and 1% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts of less than 50% of their original capital contributions; or 2) 90% to the limited partners and 10% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts equal to or greater than 50% but less than 100% of their original capital contributions; or 3) 80% to the limited partners and 20% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts equal to 100% or more of their original capital contributions. b. Refinancing proceeds and sale proceeds from the sale or other disposition of less than substantially all of the assets of the Partnership will be distributed (i) 99% to the limited partners and 1% to the General Partner until the Partners have received the then outstanding Partners' 12% Preferred Distribution, as defined, and cumulative distributions of Capital Receipts equal to 100% of their original capital contributions; and (ii) thereafter, 80% to the limited partners and 20% to the General Partner. c. Sale proceeds from the sale of substantially all of the assets of the Partnership will be distributed to the Partners pro-rata in accordance with their capital account balances as adjusted to take into account gain or loss resulting from such sale. d. Net profits for each fiscal year generally will be allocated in the same manner in which cash available for distribution is distributed. Net losses for each fiscal year generally will be allocated 99% to the limited partners and 1% to the General Partner. e. Gains recognized by the Partnership generally will be allocated in the following order of priority: (i) to those Partners whose capital accounts have negative balances until such negative balances are brought to zero; (ii) to all Partners up to the amount necessary to bring the Partners' capital account balances to an amount equal to their pro-rata share of the 15 Partners' 12% Preferred Distribution, as defined, plus their Net Invested Capital, as defined; and (iii) thereafter, 80% to the limited partners and 20% to the General Partner. f. For financial reporting purposes, profits and losses are allocated among the Partners based on their stated interests in cash available for distribution. Upon dissolution of the Partnership, the General Partner shall liquidate the assets of the Partnership. The proceeds of such liquidation shall be applied and distributed in the following order of priority: (i) to the payment of the expenses of the liquidation (ii) to the payment of Partnership debt, and other liabilities; (iii) to the payment of any loans or advances that may have been made by any of the partners to the Partnership; and (iv) to the General Partner and limited partners in proportion to the net balances in their respective capital accounts. Authority of the General Partner - -------------------------------- Under the Partnership Agreement, the General Partner has broad management discretion over the business of the Partnership and with regard to the operation of the Inns. No limited partner may take any part in the conduct or control of the Partnership's business. The authority of the General Partner is limited in certain respects. Without an amendment to the Partnership Agreement, which requires the unanimous consent of all the limited partners, the General Partner does not have authority to: (i) do any act in contravention of the Partnership Agreement; (ii) except as otherwise provided in the Partnership Agreement, do any act which would make it impossible to carry on the ordinary business of the Partnership; (iii) confess a judgment in an amount in excess of $100,000 against the Partnership; (iv) convert property of the Partnership to its own use, or possess or assign any rights in specific Partnership property for other than a Partnership purpose; (v) admit a person as either a General Partner or a limited partner except as otherwise provided in the Partnership Agreement; (vi) perform any act that would subject any limited partner to liability as a General Partner in any jurisdiction or to any other liability except as provided in the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") or the Partnership Agreement; or (vii) list, recognize, or facilitate the trading of Units on any established securities market, or create for the Units a secondary market or the substantial equivalent thereof, or permit, recognize, or facilitate trading of Units on any such market, or permit any of its affiliates to take such action, if as a result thereof the Partnership would be taxed for Federal income tax purposes as an association taxable as a corporation. Without an amendment to the Partnership Agreement, which requires the vote of limited partners holding a majority of the Units, the General Partner does not have authority on behalf of the Partnership to: (i) have the Partnership acquire an interest in other hotel properties or other partnerships; (ii) sell or otherwise dispose of or consent to the sale or disposition of any of the Inns; (iii) effect any amendment to any agreement, contract or arrangement with the General Partner or any affiliate thereof which would reduce the responsibility or duties or would increase the compensation payable to the General Partner or any of its affiliates or which would otherwise adversely affect the rights of the limited partners; (iv) incur debt of the Partnership except as set forth in the Partnership Agreement; 16 (v) agree to the addition of transient guest rooms at any Inn unless (a) the Inn has had an average occupancy rate of at least 70% for a consecutive period of at least 12 months immediately prior to commencement of construction of the addition; (vi) make any election to continue beyond its term, discontinue or dissolve the Partnership; (vii) voluntarily withdraw as a General Partner; (viii) cause the Partnership to incur any debt in excess of $250,000; (ix) cause the Partnership to merge or consolidate with any other entity; (x) accept the substitution of more than five Inns under the Purchase Agreement; (xi) cause the Partnership to sell all or substantially all of the assets of the Partnership, except upon dissolution and liquidation in accordance with the Partnership Agreement; or (xii) cause the Partnership to incur any debt that would result in refinancing proceeds, unless such refinancing proceeds are distributed to the partners in the same taxable year in which the Partnership incurred such liability. Restrictions on Assignments of Units - ------------------------------------ A limited partner generally has the right to assign a Unit to another person or entity, subject to certain conditions and restrictions. An assignment of a Unit is subject to the following restrictions: (i) no assignment may be made other than on the first day of a fiscal quarter of the Partnership; (ii) no assignment may be made if, when added to all other prior assignments and transfers of interests in the Partnership within the preceding 12 months, such assignment would cause the Partnership, in the opinion of legal counsel, to be considered to have terminated for Federal income tax purposes; (iii) the General Partner may prohibit any assignment that, in the opinion of legal counsel, would require the filing of a registration statement under the Securities Act of 1933 or otherwise would violate any Federal or state securities laws or regulations (including investor suitability standards) applicable to the Partnership or the Units; (iv) no assignment may be made that would result in either the transfer or the transferee owning a fraction of a Unit but less than five Units, except for assignment by gift, inheritance, or family dissolution or assignments to affiliates of the assignor; (v) no assignment may be made if, in the opinion of legal counsel, it would result in the Partnership being treated as an association taxable as a corporation for Federal income tax purposes; (vi) no transfer may be made if 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; (vii) no assignment may be made if, in the opinion of legal counsel, it would preclude the Partnership from either obtaining or retaining a liquor beverage license for any of the Hotels; (viii) no assignment may be made unless the transferee agrees in writing that it will not, directly or indirectly, create for the Units a secondary market (or the substantial equivalent thereof) within the meaning of section 7704 of the Code or facilitate the trading of the Units on such a market; and (ix) no assignment may be made to nonresident aliens, foreign entities, or tax-exempt entities; (x) no assignment may be made to any person exempt from Federal income tax; (xi) no transfer or assignment may be made unless the proposed assignee has provided the General Partner the required information under the Partnership Agreement; or (xii) no assignment may be made to any person or any person who is related to any outside lender to the Partnership. The General Partner is also authorized to impose any other restrictions on the transfer of Units to the extent that it, in the exercise of its reasonable discretion and based upon the advice of counsel to the Partnership, determines such further limitations are necessary or advisable to protect the Partnership from being considered a publicly traded partnership within the meaning of the 1987 Revenue Act. The Partnership will not recognize for any purpose any assignment of any Units unless (i) an instrument is executed making such assignment, signed by both the assignor and the assignee, and a duly executed application for assignment and admission as substituted limited partner is executed indicating the written acceptance by the assignee of all the terms and provisions of the Partnership Agreement, (ii) the General Partner has determined that such as assignment is permitted under the Partnership Agreement. No assignee of a limited partner's Units will be entitled to become a substituted limited partner unless: (i) the General Partner gives consent, (ii) the transferring limited partner and the assignee have executed instruments that the General Partner deems necessary to effect such admission, (iii) the assignee has accepted, adopted, and approved in writing all of the terms of the Partnership Agreement and executed a power of attorney similar to the power of attorney granted in the Partnership Agreement, 17 and (iv) the assignee pays all reasonable expenses incurred in connection with his admission as a substituted limited partner. As assignee only becomes a substituted limited partner when the General Partner has reflected the admission of such person as a limited partner in the books and records of the Partnership. Any person who is the assignee of any of the Units of a limited partner, but who does not become a substituted limited partner is entitled to all the rights of an assignee of a limited partner interest under the Act, including the right to receive distributions from the Partnership and the share of net profits, net losses, gain, loss and recapture income attributable to the Units assigned to the person, but shall not be deemed to be a holder of Units for any other purpose under the partnership agreement. Amendments - ---------- Amendments to the Partnership Agreement may be made by the General Partner with the consent of the limited partners holding a majority of the outstanding Units (excluding those Units held by the General Partner and certain of its affiliates). No amendment to the Partnership Agreement may be made, however, without the approval of all of the limited partners which would (i) convert a limited partner's interest into a general partner's interest; (ii) adversely affect the liability of a limited partner; (iii) alter the interest of a partner in net profits, net losses, or gain or loss or distributions of cash available for distribution or capital receipts or reduce the percentage of partners which is required to consent to any action hereunder; (iv) limit in any manner the liability of the General Partner; (v) permit the General Partner to take any action otherwise prohibited by the Partnership Agreement; (vi) cause the Partnership to be taxed for Federal income tax purposes as an association taxable as a corporation; or (vii) reduce the percentage of Units required to approve any amendment to the Partnership Agreement. The General Partner may make an amendment to the Partnership Agreement, without the consent of the limited partners, if such amendment is necessary solely to clarify the provisions of the Partnership Agreement so long as such amendment does not adversely affect the rights of the limited partners under the Partnership Agreement. Meetings and Voting - ------------------- The limited partners cannot participate in the management or control of the Partnership or its business. The Partnership Agreement, however, extends to the limited partners the right under certain conditions to vote on or approve certain Partnership matters. Any action that is required or permitted to be taken by the limited partners may be taken either at a meeting of the limited partners or without a meeting if approvals in writing setting forth the action so taken are signed by limited partners owning not less than the minimum number of Units that would be necessary to authorize or take such action at a meeting at which all of the limited partners were present and voted. Meetings of the limited partners may be called by the General Partner and shall be called by the General Partner upon receipt of a request in writing signed by holders of 10% or more of the Units held by the limited partners. Limited partners may vote either in person or by proxy at meetings. Limited partners holding more than 50% of the total number of all outstanding Units constitute a quorum at a meeting of the limited partners. Matters submitted to the limited partners for determination will be determined by the affirmative vote of the limited partners holding a majority of the outstanding Units (excluding those Units held by the General Partner and certain of its affiliates), except that a unanimous vote of the limited partners will be required for certain action referred to above. The Partnership Agreement does not provide for annual meetings of the limited partners and none have been held, nor does the General Partner anticipate calling such meetings. Other Matters - ------------- If at any time any agreement (including the Management Agreement) pursuant to which operating management of any of the Inns is vested in the General Partner or an affiliate of the General Partner provides that the Partnership has a right to terminate such agreement as a result of the failure of the operation of such Inn to attain economic objectives, as specifically defined, the limited partners, without the consent of the General Partner, may, upon the affirmative vote of the holders of a majority of the Units, take action to exercise the right of the Partnership to terminate such agreements. The limited partners may also, by a vote of the holders of a majority of the Units, remove the General Partner (but only if a new general partner is elected) if the General Partner has committed and not remedied any act of fraud, bad faith, gross negligence or breach of fiduciary duties in carrying out its duties as the General Partner. Notwithstanding the foregoing, however, such a removal of the General Partner or the Manager, if exercised, would be an event of default under the loan documentation evidencing the Mortgage Debt, and would permit the lender or its assignee to accelerate the maturity of the loan. Thus, the termination right could only be exercised with the consent of the lender or its assignee. 18 The Partnership Agreement provides that limited partners will not be personally liable for the losses of the Partnership beyond the amount committed by them to the capital of the Partnership. In the event that the Partnership is unable otherwise to meet its obligations, the limited partners might, under applicable law, be obligated under some circumstances to return distributions previously received by them, with interest, to the extent such distributions constituted a return of the capital contributions at the time when creditors had valid claims outstanding against the Partnership. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS Except as specifically provided in the Delaware Act, the General Partner is liable for the obligations of the Partnership in the same manner as a partner would be liable in a partnership without limited partners to persons other than the Partnership and the other partners. Generally speaking, any such partner is fully liable for any and all of the debts or other obligations of the partnership as and to the extent the partnership is either unable or fails to meet such obligations. Thus, the assets of the General Partner may be reached by creditors of the Partnership to satisfy obligations or other liabilities of the Partnership, other than nonrecourse liabilities, to the extent the assets of the Partnership are insufficient to satisfy such obligations or liabilities. The Delaware Act provides that: "Subject to such standards and restrictions, if any, as set forth in its partnership agreement, a limited partnership may, and shall have the power to, indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever." The Partnership Agreement provides that the General Partner and its affiliates who perform services for the Partnership on behalf of the General Partner (within the scope of its authority as the General Partner of the Partnership) will not be liable to the Partnership or the limited partners for liabilities, costs and expenses incurred as a result of any act or omission of the General Partner or such person provided (i) such acts or omissions were determined by the General Partner or such person, in good faith, to be in the best interest of the Partnership and such acts or omissions were within the General Partner's authority; and (ii) the conduct of the General Partner or such person did not constitute negligence, fraud, misconduct or breach of fiduciary duty to the Partnership or any partner. The Partnership Agreement also provides that the General Partner and such persons will be indemnified out of Partnership assets against any loss, liability or expense arising out of any act or omission determined by the General Partner or such person, in good faith, to be in the best interest of the Partnership and such act or omission within the General Partner's authority so long as such conduct did not constitute negligence, misconduct, fraud or a breach of a fiduciary duty. The Partnership, however, may indemnify the General Partner or any other person for losses, costs and expenses incurred in successfully defending or settling claims arising out of alleged securities laws violations only if certain specific additional requirements are met. The Partnership Agreement provides that any indemnification obligation shall be paid solely out of the assets of the Partnership. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to partners and controlling persons of the registrant pursuant to the foregoing provisions 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 in the successful defense or any action, suit or proceeding) is asserted against the registrant by such a person in connection with the securities registered hereby, and if the Securities and Exchange Commission is still of the same opinion, 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. 19 ITEM 13. FINANCIAL STATEMENTS
INDEX PAGE - ----- ---- Financial Statements of the Fairfield Inn By Marriott Limited Partnership as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994: Report of Independent Public Accountants..................... 21 Statement of Operations...................................... 22 Balance Sheet................................................ 23 Statement of Changes in Partners' Capital.................... 24 Statement of Cash Flows...................................... 25 Notes to Financial Statements................................ 26
20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE PARTNERS OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP We have audited the accompanying balance sheet of Fairfield Inn by Marriott Limited Partnership (a Delaware limited partnership) as of December 31, 1996 and 1995 (as restated - see Note 2), and the related statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1996 (as restated - see Note 2). These financial statements and the schedule referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fairfield Inn by Marriott Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basis financial statements taken as a whole. The schedule listed in the index at Item 15(a) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Washington, D.C. February 28, 1997 21 STATEMENT OF OPERATIONS FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1996 1995 1994 --------- --------- --------- REVENUES Inn (Note 3).............................................. $ 47,065 $ 45,262 $ 40,854 -------- -------- -------- OPERATING COSTS AND EXPENSES Depreciation and amortization............................. 13,239 13,338 14,639 Incentive management fee.................................. 4,898 4,666 4,304 Property taxes............................................ 3,270 3,528 3,542 Fairfield Inn system fee.................................. 2,923 2,751 2,555 Ground rent............................................... 2,627 2,570 2,499 Base management fee....................................... 1,949 1,834 851 Insurance and other....................................... 843 1,560 487 -------- -------- -------- 29,749 30,247 28,877 -------- -------- -------- OPERATING PROFIT........................................... 17,316 15,015 11,977 Interest expense........................................... (16,645) (16,585) (16,464) Interest income............................................ 749 619 313 -------- -------- -------- NET INCOME/(LOSS).......................................... $ 1,420 $ (951) $ (4,174) ======== ======== ======== ALLOCATION OF NET INCOME/(LOSS) General Partner........................................... $ 14 $ (10) $ (42) Limited Partners.......................................... 1,406 (941) (4,132) -------- -------- -------- $ 1,420 $ (951) $ (4,174) ======== ======== ======== NET INCOME/(LOSS) PER LIMITED PARTNER UNIT (83,337 UNITS).. $ 17 $ (11) $ (50) ======== ======== ========
The accompanying notes are an integral part of these financial statements. 22 BALANCE SHEET FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
1996 1995 --------- --------- ASSETS Property and equipment, net................................................. $164,148 $172,099 Deferred financing and organization costs, net of accumulated amortization.. 4,622 644 Property improvement fund................................................... 3,115 2,641 Due from Marriott International, Inc. and affiliates........................ 3,079 3,057 Cash and cash equivalents................................................... 10,028 7,040 -------- -------- Total Assets............................................................... $184,992 $185,481 ======== ======== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Mortgage debt............................................................... $164,847 $164,850 Due to Marriott International, Inc. and affiliates.......................... 13,451 11,199 Accounts payable and accrued liabilities.................................... 4,928 668 -------- -------- Total Liabilities.......................................................... 183,226 176,717 -------- -------- PARTNERS' CAPITAL General Partner Capital contribution, net of offering costs of $1,109...................... 813 813 Capital distributions...................................................... (509) (425) Cumulative net losses...................................................... (236) (250) -------- -------- 68 138 -------- -------- Limited Partners Capital contributions, net of offering costs of $7,250..................... 75,479 75,479 Capital distributions...................................................... (50,436) (42,102) Cumulative net losses...................................................... (23,345) (24,751) -------- -------- 1,698 8,626 -------- -------- Total Partners' Capital.................................................... 1,766 8,764 -------- -------- $184,992 $185,481 ======== ========
The accompanying notes are an integral part of these financial statements. 23 STATEMENT OF CHANGES IN PARTNERS' CAPITAL FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
General Limited Partner Partners Total -------- --------- -------- Balance, December 31, 1993............................................... $358 $30,367 $30,725 Capital distributions.................................................. (84) (8,334) (8,418) Net loss............................................................... (42) (4,132) (4,174) ---- ------- ------- Balance, December 31, 1994............................................... 232 17,901 18,133 Capital distributions.................................................. (84) (8,334) (8,418) Net loss............................................................... (10) (941) (951) ---- ------- ------- Balance, December 31, 1995............................................... 138 8,626 8,764 Capital distributions.................................................. (84) (8,334) (8,418) Net income............................................................. 14 1,406 1,420 ---- ------- ------- Balance, December 31, 1996............................................... $ 68 $ 1,698 $ 1,766 ==== ======= =======
The accompanying notes are an integral part of these financial statements. 24 STATEMENT OF CASH FLOWS FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 -------- -------- -------- OPERATING ACTIVITIES Net income (loss).............................................. $ 1,420 $ (951) $(4,174) Noncash items: Depreciation and amortization................................. 13,239 13,338 14,639 Deferred management fee....................................... 2,470 2,857 3,429 Amortization of deferred financing costs as interest expense.. 646 644 523 Loss on disposal of equipment................................. - 591 301 Straight-line ground rent adjustment.......................... - - 246 Changes in operating accounts: Accounts payable and accrued liabilities...................... (27) 279 (16) Due to/from Marriott International, Inc. and affiliates....... (240) (401) (278) ------- ------- ------- Cash provided by operations................................ 17,508 16,357 14,670 ------- ------- ------- INVESTING ACTIVITIES Additions to property and equipment, net....................... (5,288) (4,495) (5,552) Change in property improvement fund............................ (474) (1,203) 389 ------- ------- ------- Cash used in investing activities.......................... (5,762) (5,698) (5,163) ------- ------- ------- FINANCING ACTIVITIES Capital distributions.......................................... (8,418) (8,418) (8,418) Payment of financing costs..................................... (337) - - Repayment of mortgage debt..................................... (3) - - ------- ------- ------- Cash used in financing activities.......................... (8,758) (8,418) (8,418) ------- ------- ------- INCREASE IN CASH AND CASH EQUIVALENTS........................... 2,988 2,241 1,089 CASH AND CASH EQUIVALENTS at beginning of year.................. 7,040 4,799 3,710 ------- ------- ------- CASH AND CASH EQUIVALENTS at end of year........................ $10,028 $ 7,040 $ 4,799 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage interest................................ $15,941 $15,941 $15,941 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 25 NOTES TO FINANCIAL STATEMENTS FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP DECEMBER 31, 1996 AND 1995 NOTE 1. THE PARTNERSHIP Description of the Partnership Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed to acquire, own and operate 50 Fairfield Inn by Marriott properties (the "Inns") located in sixteen states and the land on which 18 of the Inns are situated. The Partnership leases the land underlying 32 of the Inns from Marriott International, Inc. ("MII") and certain of its affiliates (the "Land Leases"). Of the Partnership's 50 Inns, seven are located in each of Georgia and North Carolina; six in Michigan; four in each of Florida, Illinois, and Ohio; and three or less in each of the other ten states. On December 29, 1995, Host Marriott Corporation's operations were divided into two separate companies: Host Marriott Corporation ("Host Marriott") and Host Marriott Services Corporation. The sole general partner of the Partnership, with a 1% interest, is Marriott FIBM One Corporation (the "General Partner"), a Delaware corporation and a wholly-owned subsidiary of Host Marriott. The Inns are managed by Fairfield FMC Corporation (the "Manager"), a wholly-owned subsidiary of MII, as part of the Fairfield Inn by Marriott hotel system. The Partnership was formed on August 23, 1989, and operations commenced on July 31, 1990 (the "Closing Date"). Between November 17, 1989, and the Closing Date, 83,337 limited partnership interests (the "Units") were sold in a public offering. The offering price per unit was $1,000. The General Partner contributed $841,788 for its 1% general partnership interest and $1.1 million to establish the initial working capital reserve of the Partnership at $1.5 million (as required in the partnership agreement). In addition, the General Partner has a 10% limited partnership interest through the purchase of Units on the Closing Date. On November 17, 1989, the Partnership executed a purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the Inns and the land on which 18 Inns are situated for $235.5 million. The total purchase price was paid from proceeds of the mortgage financing and sale of the Units. Partnership Allocations and Distributions Partnership allocations and distributions are generally made as follows: a. Cash available for distribution for each fiscal year will be distributed quarterly as follows: (i) 99% to the limited partners and 1% to the General Partner (collectively, the "Partners") until the Partners have received, with respect to such fiscal year, an amount equal to the Partners' Preferred Distribution (9% of the excess of original cash contributions over cumulative distributions of net refinancing and sales proceeds ("Capital Receipts") on an annualized basis in 1990, 9.5% in 1991 and 1992 and 10% for each year thereafter); (ii) remaining cash available for distribution will be distributed as follows, depending on the amount of Capital Receipts previously distributed: 1) 99% to the limited partners and 1% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts of less than 50% of their original capital contributions; or 2) 90% to the limited partners and 10% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts equal to or greater than 50% but less than 100% of their original capital contributions; or 3) 80% to the limited partners and 20% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts equal to 100% or more of their original capital contributions. b. Refinancing proceeds and sale proceeds from the sale or other disposition of less than substantially all of the assets of the Partnership will be distributed (i) 99% to the limited partners and 1% to the General Partner until the Partners have 26 received the then outstanding Partners' 12% Preferred Distribution, as defined, and cumulative distributions of Capital Receipts equal to 100% of their original capital contributions; and (ii) thereafter, 80% to the limited partners and 20% to the General Partner. c. Sale proceeds from the sale of substantially all of the assets of the Partnership will be distributed to the Partners pro-rata in accordance with their capital account balances as adjusted to take into account gain or loss resulting from such sale. d. Net profits for each fiscal year generally will be allocated in the same manner in which cash available for distribution is distributed. Net losses for each fiscal year generally will be allocated 99% to the limited partners and 1% to the General Partner. e. Gains recognized by the Partnership generally will be allocated in the following order of priority: (i) to those Partners whose capital accounts have negative balances until such negative balances are brought to zero; (ii) to all Partners up to the amount necessary to bring the Partners' capital account balances to an amount equal to their pro-rata share of the Partners' 12% Preferred Distribution, as defined, plus their Net Invested Capital, as defined; and (iii) thereafter, 80% to the limited partners and 20% to the General Partner. f. For financial reporting purposes, profits and losses are allocated among the Partners based on their stated interests in cash available for distribution. Fiscal Year The Company's fiscal year ends on the Friday nearest to December 31. Fiscal year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and 1994. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Restatement Subsequent to the issuance of its 1995 financial statements, the Partnership discovered a computational error in the amount of incentive management fees recorded in 1993, 1994 and 1995. The 1996 financial statements have been restated to correct this error, the effect of which increased the previously reported losses by $337,000, $338,000 and $418,000 to $6,295,000, $4,174,000 and $951,000 in 1993, 1994 and 1995, respectively. Reclassifications Certain reclassifications were made to prior year financial statements to conform to the 1996 presentation. Basis of Accounting The Partnership records are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Working Capital and Supplies Pursuant to the terms of the Partnership's management agreement discussed in Note 8, the Partnership is required to provide the Manager with working capital and supplies to meet the operating needs of the Inns. The Manager converts cash advanced by the Partnership into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon the termination of the management agreement, the Manager is required to convert working capital and supplies into cash and return it to the Partnership. As a result of these 27 conditions, the individual components of working capital and supplies controlled by the Manager are not reflected in the accompanying balance sheet. Revenues and Expenses Inn revenues represent house profit of the Partnership's Inns since the Partnership has delegated substantially all of the operating decisions related to the generation of house profit of the Inns to the Manager. House profit reflects Inn operating results which flow to the Partnership as property owner and represents gross Inn sales less property-level expenses, excluding depreciation and amortization, Fairfield Inn system, base and incentive management fees, real and personal property taxes, ground and equipment rent, insurance and certain other costs, which are disclosed separately in the statement of operations (see Note 3). Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Land improvements 30 years Leasehold improvements 30 years Building and improvements 30 years Furniture and equipment 4 to 10 years All property and equipment is pledged as security for the mortgage debt described in Note 6. The Partnership assesses impairment of its real estate properties based on whether estimated future undiscounted cash flows from such properties on an individual property basis will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value. Deferred Financing and Organization Costs Deferred financing costs represent the costs incurred in connection with obtaining the mortgage debt (see Note 6) and are amortized over the term thereof. Organization costs incurred in the formation of the Partnership were amortized using the straight-line method over five years and were fully amortized as of December 31, 1995. As of December 31, 1996, the Partnership incurred approximately $4,622,000 of costs in connection with the proposed refinancing (see Note 6). At December 31, 1996 and 1995, accumulated amortization of deferred financing costs totaled $3,513,000 and $2,867,000, respectively. Cash and Cash Equivalents The Partnership considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Ground Rent The Land Leases with MII or affiliates (see Note 7) include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by the Partnership on a straight-line basis over the 99 year term of the leases. The adjustment included in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis was a decrease of $218,000 for each of the years ended December 31, 1996 and 1995, and was an increase of $246,000 for the year ended December 31, 1994. Deferred ground rent as of December 31, 1996 and 1995 was $665,000 and $883,000, respectively. Income Taxes Provision for Federal and state income taxes has not been made in the accompanying financial statements since the Partnership does not pay income taxes, but rather, allocates profits and losses to the individual Partners. Significant differences exist between the net income (loss) for financial reporting purposes and the net income (loss) as reported in the Partnership's tax 28 return. These differences are due primarily to the use for income tax purposes of accelerated depreciation methods, shorter depreciable lives of the assets and differences in the timing of recognition of certain fees and straight-line rent adjustments. As a result of these differences, the excess of the net assets reported in the accompanying financial statements over the Partnership's tax basis in net assets is $2,013,000 and $9,588,000 as of December 31, 1996 and 1995, respectively. New Statement of Financial Accounting Standards In the first quarter of 1996, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an effect on its financial statements. NOTE 3. REVENUES Partnership revenues consist of Inn operating results for the three years ended December 31 (in thousands):
1996 1995 1994 -------- -------- -------- SALES................................... $ 97,441 $ 91,693 $ 85,153 -------- -------- -------- EXPENSES Departmental Direct Costs Rooms................................ 49,109 45,239 43,295 Chain Services....................... 1,267 1,192 1,004 -------- -------- -------- 50,376 46,431 44,299 -------- -------- -------- REVENUES................................ $ 47,065 $ 45,262 $ 40,854 ======== ======== ========
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31 (in thousands):
1996 1995 --------- --------- Land and improvements................................. $ 37,134 $ 36,958 Leasehold improvements................................ 89,056 89,056 Building and improvements............................. 57,247 52,957 Furniture and equipment............................... 67,007 66,185 --------- --------- 250,444 245,156 Less accumulated depreciation and amortization........ (86,296) (73,057) --------- --------- $ 164,148 $ 172,099 ========= =========
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments are shown below. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts.
As of December 31, 1996 As of December 31, 1995 ----------------------- ----------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ---------- ----------- ---------- ----------- (in thousands) (in thousands) Mortgage debt..................................... $164,847 $164,847 $164,850 $164,850 Management fees due to Fairfield FMC Corporation.. $ 12,786 $ 843 $ 10,316 $ 1,017
29 The estimated fair value of the mortgage debt is based on the expected future debt service payments discounted at estimated market rates. Management fees due to Fairfield FMC Corporation (included in Due to Marriott International, Inc. and affiliates on the accompanying balance sheet) are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates. NOTE 6. DEBT Mortgage Debt On July 31, 1990, the Partnership borrowed $164.9 million, bearing a fixed interest rate of 9.67%, pursuant to the terms of a non-recourse mortgage loan agreement (the "Mortgage Debt") to finance a portion of the purchase price of the Inns. The Mortgage Debt required semi-annual interest payments with no principal payments required through maturity. Although the Mortgage Debt matured on December 31, 1996, the Partnership was unable to refinance the debt until January 13, 1997 (see Note 9). During the period of December 31, 1996 through January 13, 1997, the existing Mortgage Debt bore interest at a default rate of 12.67%. The Mortgage Debt was secured by a first mortgage on the Partnership's fee or leasehold interest in each Inn, a security interest in all personal property associated with the Inns and a security interest in the Partnership's rights under the management agreement, the Purchase Agreement, and the Land Leases. NOTE 7. LAND LEASES The land on which 32 of the Inns are situated is leased by the Partnership from MII or its affiliates. The Land Leases expire on November 30, 2088 and provide that the Partnership will pay annual rents equal to the greater of a specified minimum rent for each property or a percentage rent based on gross sales of the Inn operated thereon. The minimum rentals are adjusted at various anniversary dates through 1999, as defined in the agreements. The minimum rentals are adjusted annually for the remaining life of the leases based on changes in the Consumer Price Index. The percentage rent, which also varies from property to property, is fixed at predetermined percentages of gross sales that increase over time. Minimum future rental payments during the term of the Land Leases are as follows (in thousands):
Lease Year Minimum Rental ------------ -------------- 1997 $ 2,659 1998 2,659 1999 2,659 2000 2,659 2001 2,659 Thereafter 231,333 -------- $244,628 ========
Total rental expense on the Land Leases was $2,627,000 for 1996, $2,570,000 for 1995 and $2,499,000 for 1994. Under the terms of the Land Leases, during any fiscal year from 1993 through 1996, the payment of rental expense was subordinate to an $8.4 million annual return to the Partnership. Any rent that was not paid currently as a result of such subordination was payable out of Capital Receipts remaining after the Partnership's payment or retention of certain priority returns and other amounts. No rental expense was subordinated for 1993 through 1996. Subsequent to year-end, the Land Leases were amended (see Note 9). 30 NOTE 8. MANAGEMENT AGREEMENT The Manager operates the Inns pursuant to a long-term management agreement (the "Management Agreement") with an initial term expiring on December 31, 2009. The Manager may renew the Management Agreement, as to one or more of the Inns at its option, for up to five additional 10-year terms plus one five-year term. The Partnership may terminate the Management Agreement after December 1995 if specified minimum operating results are not achieved. However, the Manager may prevent termination by paying the Partnership the amount by which the minimum operating results were not achieved. The Manager earns a base management fee equal to 1% of gross sales from Inn operations for each fiscal year through 1994 and 2% of gross sales from Inn operations for each fiscal year thereafter. For the years 1993 through 1996, payment of the base management fee was subordinate to an $8.4 million annual return to the Partnership subject to certain aggregate limitations when combined with ground rent deferrals for the same period. The maximum amount of base management fees and ground rent to be subordinated during this four-year period was limited to $8,000,000. Any base management fees that were not paid currently as a result of such subordination were payable out of Capital Receipts subject to the Partnership payment or retention of certain priority returns and other amounts. As of December 31, 1996, no base management fees or ground rent were deferred. The Management Agreement also provides for payment of a Fairfield Inn system fee equal to 3% of gross sales from Inn operations. In addition, the Manager is entitled to an incentive management fee equal to 15% of Operating Profit, as defined, increasing to 20% after the Inns have achieved total Operating Profit during any 12 month period equal to or greater than $33.9 million. The incentive management fee is payable out of 50% of cash flow from operations remaining after payment of ground rent, debt service, partnership administrative expenses and the owner's priority return, as defined. In accordance with the Management Agreement, incentive management fees through 1992 were waived by the Manager, as cash flow available for incentive management fees, as defined, was insufficient to pay the fees. Incentive management fees earned after 1992 accrue and are payable as outlined above or from Capital Receipts. During 1996, 1995 and 1994, the Manager deferred $2,470,000, $2,857,000 and $3,429,000 of incentive management fees, respectively. Cumulative deferred incentive management fees at December 31, 1996 and 1995 were $12,786,000 and $10,316,000, respectively. The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all managed or owned Inns in the Fairfield Inn by Marriott hotel system. The total amount of Chain Services allocated to the Partnership for the years ended December 31, 1996, 1995 and 1994 was $1,267,000, $1,192,000 and $1,004,000, respectively. In addition, the Manager maintains a marketing fund to pay the costs associated with certain system-wide advertising, marketing, sales, promotional and public relations materials and programs. Each Inn within the system contributes 2.5% of gross Inn sales to the marketing fund. The Manager has no ownership interest in the marketing fund. For the years ended December 31, 1996, 1995 and 1994, the Partnership contributed $2,436,000, $2,292,000 and $2,129,000, respectively, to the marketing fund. The Partnership is required to provide the Manager with working capital to meet the operating needs of the Inns. Upon termination of the Management Agreement, the working capital will be returned to the Partnership. As of December 31, 1996 and 1995, $1,000,000 had been advanced to the Manager for working capital and is included in Due from Fairfield FMC Corporation on the accompanying balance sheet. The Management Agreement provides for the establishment of a property improvement fund for the Inns to cover (a) the cost of certain non-routine repairs and maintenance to the Inns which are normally capitalized; and (b) the cost of replacements and renewals to the Inns' property and improvements. Contributions to the property improvement fund are based on a percentage of gross sales of each Inn equal to 6% for 1996, 1995 and 1994. For the years ended December 31, 1996, 1995 and 1994, the Partnership contributed $5,846,000, $5,502,000 and $5,109,000, respectively, to the property improvement fund. Subsequent to year-end, the Management Agreement was amended (see Note 9). 31 NOTE 9. SUBSEQUENT EVENT Mortgage Debt On January 13, 1997 (the "Refinancing Date") the Mortgage Debt was successfully refinanced with a new third party lender. The principal amount of the Partnership's refinanced debt was increased from $164.8 million to $165.4 million. Proceeds from the new loan were used to repay the existing mortgage debt and pay refinancing costs. The refinanced debt continues to be non- recourse, bears interest at a fixed rate of 8.40% and requires monthly payments of principal and interest based upon a 20-year amortization schedule for a 10- year term expiring January 11, 2007. Thereafter, until the final maturity date of January 11, 2017, interest is payable at an adjusted rate, as defined, and all excess cash flow is applied toward principal amortization. Debt maturities under the refinanced mortgage are as follows (in thousands): 1997 $ 3,002 1998 3,639 1999 3,912 2000 4,253 2001 4,625 Thereafter 145,969 -------- $165,400 ========
The refinanced mortgage debt is secured by first mortgages on all of the Inns, the land on which they are located, or an assignment of the Partnership's interest under the Land Leases, including ownership interest in all improvements thereon, fixtures and personal property related thereto. As part of the refinancing, the Partnership is required to establish various reserves for capital expenditures, working capital, debt service and insurance needs. On the Refinancing Date, the Partnership established reserves totalling $3.9 million for certain capital expenditure items. The funds will be expended during 1997 for various renewals and replacements, site improvements, Americans with Disabilities Act of 1990 modifications and environmental studies undertaken in conjunction with the refinancing. Additionally, the Partnership is required to deposit two months' debt service payments, or $2,850,000, into a debt service reserve payable in 12 equal consecutive monthly installments commencing on March 11, 1997. The Partnership is also required to deposit $161,000 into a ground rent reserve payable in six equal monthly installments commencing on March 11, 1997. The Partnership is also obligated to fund $300,000 into an earthquake restoration reserve account, payable in 3 consecutive monthly installments commencing on January 31, 1997. Transfers from this fund are to be made in conjunction with any damages (not covered by insurance) suffered from earthquakes to the two Inns located in California. In addition, the Partnership has entered into a Working Capital Maintenance and Supplemental Debt Service Agreement ("Agreement") with the Manager, effective January 13, 1997. As part of this Agreement, the Partnership has agreed to furnish the Manager additional working capital to be deposited into a segregated interest bearing account (the "Working Capital Reserve"). The Working Capital Reserve is to be funded from Operating Profit, as defined, retained by or distributed to the Partnership as such amounts become available, until the Working Capital Reserve reaches $670,000. This Agreement also requires the funding of another segregated account for debt service shortfalls (the "Supplemental Debt Service Reserve"). This reserve is also to be funded out of Operating Profit retained or distributed to the Partnership as such amounts become available, until the Supplemental Debt Service Reserve reaches $1,425,000. The lender is currently working on the securitization of the mortgage debt through the issuance and sale of commercial mortgage-backed securities. In connection with the securitization, the Partnership may be required to establish additional reserves. 32 Management Agreement The Management Agreement (see Note 8) has also been amended in conjunction with the refinancing, effective January 13, 1997. Per the amendment, the initial term of the Management Agreement has been extended ten years from December 31, 2009 to December 31, 2019. However, the renewal period has been shortened. The Manager may renew the Management Agreement, as to one or more of the Inns at its option, for up to four successive periods of ten years and one period of five years. The amendment also reduces the owner's priority return, as defined, by the amount of any outstanding advances by the Manager for working capital needs or funding of shortfalls in the debt service reserve account. These loans bear interest at 1% above the prime rate. Additionally, the amendment increases the amount of the contribution to the property improvement fund by 1% of gross sales of each Inn. Commencing in 1997 and for all fiscal years thereafter, the Partnership will contribute 7% of gross sales of each Inn. However, if the Manager determines 7% exceeds the amount needed for making capital expenditures, then the Manager can adjust the incentive management fee calculation to exclude as a deduction in calculating incentive fees up to 1 percentage point of contributions to the property improvement fund. Land Leases Additionally, the Land Leases (see Note 7) have also been amended beginning in 1997. Until the refinanced mortgage debt is repaid, the payment of rental expense exceeding 3% of gross sales from the 32 leased Inns in the aggregate shall be deferred in any fiscal year that cash flow is less than regularly scheduled principal and interest payments on the mortgage debt. 33 ITEM 14. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) The financial statements filed as a part of this Form 10 are listed in Item 13 on Page 20. Supplementary Financial Statement Schedules - Page ---- Fairfield Inn By Marriott Limited Partnership III. Real Estate and Accumulated Depreciation 35 Schedules I through V inclusive, other than those listed above, are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto. (b) Exhibits 2.a Amended and Restated Agreement of Limited Partnership of Fairfield Inn by Marriott Limited Partnership by and among Marriott FIBM One Corporation (General Partner), Christopher, G. Townsend (Organizational Limited Partner), and those persons who become Limited Partners (Limited Partners) dated July 31, 1990. 10.a Management Agreement by and between Fairfield Inn by Marriott Limited Partnership (Owner) and Fairfield FMC Corporation (Management Company) dated November 17, 1989. 10.b First Amendment to Management Agreement by and between Fairfield Inn by Marriott Limited Partnership (Owner), Fairfield FMC Corporation (Management Company) dated July 31, 1990. 10.c Second Amendment to Management Agreement by and between Fairfield Inn by Marriott Limited Partnership (Owner) and Fairfield FMC Corporation (Manager) dated January 13, 1997. 10.d Master Indenture of Mortgage, Deed of Trust, Deed to Secure Debt, Assignment of Rents and Fixture Filing from Fairfield Inn by Marriott Limited Partnership (Borrower) to Sumitomo Trust & Banking Co., Ltd., New York Branch (Bank) dated July 31, 1990. 10.e Debt Service Guaranty Agreement by Marriott Corporation (Guarantor) to Sumitomo Trust & Banking Co., Ltd., New York Branch dated July 31, 1990. 10.f Modification of Credit Agreement and Guaranty of Management Agreement between The Sumitomo Trust & Banking Co., Ltd. (Bank) and Fairfield Inn by Marriott Limited Partnership (Borrower) dated February 1, 1995. 10.g Loan Agreement between Fairfield Inn by Marriott Limited Partnership and Nomura Asset Capital Corporation dated January 13, 1997. 10.h Secured Promissory Note made by Fairfield Inn by Marriott Limited Partnership (the "Maker") to Nomura Asset Capital Corporation (the "Payee") dated January 13, 1997. 27 Financial Data Schedule 34 SCHEDULE III FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (IN THOUSANDS)
Initial Costs Gross Amount at December 31, 1996 --------------------- --------------------------------------------- Subsequent Buildings & Costs Buildings & Accumulated Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation - ------------------ ------------ ------- ------------ ----------- ------- ------------ -------- ------------ 50 Fairfield Inn By Marriott Inns each less than 5% of total $ 164,847 $36,754 $ 137,734 $ 8,949 $37,134 $ 146,303 $183,437 $ 39,888 ============ ======= ============ =========== ======= ============ ======== ============
Date of Completion of Date Depreciation Construction Acquired Life ------------- ---------- ------------ 50 Fairfield Inn by 1987 - 1990 1987- 1990 30 years Marriott Inns
Notes: - ------ 1994 1995 1996 -------- -------- -------- (a) Reconciliation of Real Estate: Balance at beginning of year................. $175,331 $177,862 $178,971 Capital Expenditures......................... 2,531 1,109 4,466 Dispositions................................. -- -- -- -------- -------- -------- Balance at end of year....................... $177,862 $178,971 $183,437 ======== ======== ======== (b) Reconciliation of Accumulated Depreciation: Balance at beginning of year................. $ 20,044 $ 26,387 $ 32,988 Depreciation................................. 6,343 6,601 6,900 -------- -------- -------- Balance at end of year....................... $ 26,387 $ 32,988 $ 39,888 ======== ======== ======== (c) The aggregate cost of land, buildings and improvements for Federal income tax purposes is approximately $180.6 million at December 31, 1996. (d) The Debt balance is $164.8 million as of December 31, 1996.
35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized, on this 29 of January, 1998. FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP By: FIBM ONE CORPORATION General Partner /s/ Bruce F. Stemerman ------------------------------------------ Bruce F. Stemerman President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated above. Signature Title - --------- ----- (FIBM ONE CORPORATION) /s/ Bruce F. Stemerman President and Director - -------------------------------- (Principal Executive Officer) Bruce F. Stemerman /s/ Christopher G. Townsend Vice President, Secretary and Director - -------------------------------- Christopher G. Townsend /s/ Earla L. Stowe Vice President and Chief Accounting Officer - -------------------------------- Earla L. Stowe /s/ Bruce Wardinski Treasurer - -------------------------------- Bruce Wardinski 36 EX-2.A 2 EXHIBIT 2.A EXHIBIT 2.a AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP TABLE OF CONTENTS
Page ---- ARTICLE ONE DEFINED TERMS...........................................................................1 ARTICLE TWO FORMATION, NAME, PLACE OF BUSINESS, PURPOSE AND TERM....................................8 2.01. Formation................................................................................8 2.02. Name and Offices.........................................................................8 2.03. Purposes.................................................................................8 2.04. Term.....................................................................................8 2.05. Registered Agent for Service of Process..................................................8 2.06. Certificate of Limited Partnership.......................................................8 ARTICLE THREE PARTNERS AND CAPITAL..................................................................9 3.01. General Partner..........................................................................9 3.02. Organizational Limited Partner...........................................................9 3.03. Limited Partners.........................................................................9 3.04. Capital Contribution by General Partner..................................................9 3.05. Capital Contributions by Limited Partners; Withholding Taxes.............................10 3.06. Additional Issuances of Units and Capital Contributions; Fractional Units................11 3.07. Capital Accounts.........................................................................11 3.08. Liability of the Limited Partners........................................................11 3.09. Liability of the General Partner.........................................................11 3.10. Unit Certificates........................................................................11 3.11. Initial Working Capital Reserve..........................................................12 ARTICLE FOUR ALLOCATIONS OF PROFITS AND LOSSES: DISTRIBUTIONS OF CASH AND CERTAIN PROCEEDS..........12 4.01. Allocation of Net Profits................................................................12 4.02. Allocation of Net Losses.................................................................13 4.03. Allocations of Gain and Loss.............................................................13 4.04. Allocation Among Limited Partners of Net Profits, Gains, Net Losses, and Losses..........13 4.05. Distribution of Cash Available for Distribution..........................................14 4.06. Distribution of Refinancing Proceeds.....................................................14 4.07. Distribution of Sale Proceeds............................................................15 4.08. Distribution Among Limited Partners of Cash Available for Distribution, Refinancing Proceeds, and Sale Proceeds............................................................15 4.09. Section 754 Adjustments..................................................................15 4.10. Special Allocations......................................................................16 4.11. Operating Rules..........................................................................18 ARTICLE FIVE RIGHTS, POWERS, AND DUTIES OF THE GENERAL PARTNER......................................19 5.01. Authority of the General Partner to Manage the Partnership...............................19 5.02. Restrictions on Authority of the General Partner.........................................23 5.03. Duties and Obligations of the General Partner............................................26 5.04. Compensation of General Partner..........................................................28 5.05. Other Business of Partners...............................................................29 5.06. Limitation on Liability of General Partner; Indemnification..............................29 5.07. Designation of Tax Matters Partner and Designated Person for Purposes of Investor List...30 5.08. Other Limitations........................................................................32 ARTICLE SIX WITHDRAWAL AND REMOVAL OF GENERAL PARTNER...............................................34 6.01. Limitation on Voluntary Withdrawal.......................................................34 6.02. Bankruptcy or Dissolution of the General Partner.........................................34
-i- 6.03. Liability of Withdrawn General Partner...................................................35 6.04. Removal of General Partner...............................................................35 6.05. Continuation and Reconstitution..........................................................36 ARTICLE SEVEN ASSIGNABILITY OF UNITS................................................................37 7.01. Restrictions on Assignments..............................................................37 7.02. Assignees and Substituted Limited Partners...............................................39 ARTICLE EIGHT DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP........................................40 8.01. Events Causing Dissolution...............................................................40 8.02. Liquidation..............................................................................41 8.03. Constructive Termination.................................................................42 ARTICLE NINE BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS, ETC.............................42 9.01. Books and Records........................................................................42 9.02. Accounting and Fiscal Year...............................................................43 9.03. Bank Accounts and Investments............................................................43 9.04. Reports..................................................................................43 9.05. Tax Depreciation and Elections...........................................................45 9.06. Interim Closing of the Books.............................................................45 9.07. Information from Limited Partners........................................................45 ARTICLE TEN MEETING AND VOTING RIGHTS OF LIMITED PARTNERS...........................................45 10.01. Meetings................................................................................45 10.02. Special Voting Rights of Limited Partners...............................................46 ARTICLE ELEVEN MISCELLANEOUS PROVISIONS.............................................................48 11.01. Appointment of General Partner as Attorney-in-Fact......................................48 11.02. Amendments..............................................................................48 11.03. General Partner Representations and Warranties..........................................49 11.04. Binding Provisions......................................................................49 11.05. Applicable Law..........................................................................49 11.06. Counterparts............................................................................50 11.07. Separability of Provisions..............................................................50 11.08. Article and Section Titles..............................................................50 11.09. Short Form Filings......................................................................50 11.10. Submissions to State Securities Law Administrators......................................50
-ii- Exhibit 2.a FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP This Amended and Restated Agreement of Limited Partnership dated as of July 31, 1990 and effective as of 12:01 a.m. on the date hereof is made and entered into by and among Marriott FIBM One Corporation, a Delaware corporation, as general partner (the "General Partner"), Christopher G. Townsend, as organizational limited partner (the "Organizational Limited Partner"), and those Persons who become limited partners of this limited partnership in accordance with the provisions hereof and are identified as such in the books and records of the Partnership (the "Limited Partner"). Fairfield Inn by Marriott Limited Partnership (the "Partnership") was formed pursuant to a Certificate of Limited Partnership dated as of July 21, 1989 filed with the Secretary of State of the State of Delaware on August 23, 1989 and an Agreement of Limited Partnership dated as of July 21, 1989. The General Partner (in its own capacity and as attorney-in-fact for the Limited Partners) and Christopher G. Townsend, as organizational limited partner, amended and restated the Agreement of Limited Partnership in its entirety as of November 17, 1989 and April 17, 1990, and the parties desire to further amend and restate such Amended and Restated Agreement of Limited Partnership in its entirety as hereinafter set forth. In consideration of the mutual agreements made herein, the parties hereby agree to continue the Partnership as a limited partnership under the Delaware Revised Uniform Limited Partnership Act (6 Del. C. (S)(S) 17-101, et seq.), as amended from time to time (the "Act") as follows: ARTICLE ONE DEFINED TERMS Section 1.01. The defined terms used in this Agreement shall, unless the context otherwise requires, have the respective meanings specified in this Section 1.01 "Accounting Period" means the four-week accounting periods having the same beginning and ending dates as the General Partner's four-week accounting periods, except that an Accounting Period may occasionally contain five weeks when necessary to conform the accounting system to the calendar. "Acquisition Expenses" means expenses related to the selection and acquisition of properties, whether or not acquired, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, costs of engineering and environmental reports with respect to the Inns, non-refundable option payments on property not acquired, accounting fees and expenses, Permanent Loan fees and expenses, title insurance, and miscellaneous expenses related thereto. "Acquisition Fee" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, including, without limitation, any real estate commission, selection fee, development fee (including the Development Fee), nonrecurring management fee, or any fee of a similar nature, however designated; provided, however, that no development fee paid to a Person that is not the General Partner or an Affiliate in connection with the actual development of a project after acquisition of the land by the Partnership shall be included. "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts that such Partner is obligated to restore pursuant to any provision of this Agreement, is otherwise treated as being obligated to restore under Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations, or is deemed to be obligated to restore pursuant to the penultimate sentences of sections 1.704-1T(b)(4)(iv)(f) and 1.704- 1T(b)(4)(iv)(h)(5) of the Treasury Regulations (determined after taking into account any changes during such year in Minimum Gain); 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 Treasury Regulations. "Affiliate" or "Affiliated Persons" means, when used with reference to a specified Person, (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person, (ii) any Person that is an officer or director of, general partner in or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, director, general partner or trustee, or with respect to which the specified Person serves in a similar capacity, (iii) any Person for which an officer or director of, general partner in or trustee of, or individual serving in a similar capacity with respect to, the specified Person serves in any such capacity, (iv) any Person that, directly or indirectly, is the beneficial owner of 10% or more of any class of equity securities (whether voting or nonvoting) of the specified Person or of which the specified Person is directly or indirectly the owner of 10% or more of any class of equity securities (whether voting or nonvoting), and (v) any relative or spouse of the specified Person who makes his or her home with that of the specified Person. "Agency Agreement" means the agency agreement, as amended to the date hereof, among the Partnership, the General Partner, Marriott, and the Selling Agent, providing for the offering of the Units by the Selling Agent on a best efforts, all or none basis. "Agreement" means this Amended and Restated Agreement of Limited Partnership, as originally executed and as hereafter amended or modified from time to time. "Capital Account" or "Capital Accounts" means, with respect to a Partner, the account maintained for such Partner which is determined and maintained in the manner provided for in Section 3.07. "Capital Contribution" or "Capital Contributions" means, with respect to any Partner, the total amount of money contributed to the Partnership (prior to the deduction of any selling commissions or expenses) by such Partner. For purposes of determining Net Invested Capital and amounts described in Sections 4.06(ii) and 4.07A(ii) only, Capital Contributions shall be deemed to be equal to $84,178,788 ($83,337,000 with respect to the Limited Partners and $841,788 with respect to the General Partner). "Capital Priority Amount" means an amount equal to the sum of (i) the Net Invested Capital of the Partners at the time of determination plus (ii) the Partners 12% Preferred Distribution at the time of determination. "Capital Receipts" means Sale Proceeds and/or Refinancing Proceeds. "Cash Available for Distribution" means, with respect to any fiscal period, the cash revenues of the Partnership from all sources (other than Capital Receipts) during such fiscal period (including amounts received pursuant to the Development Fee Adjustments and borrowings -2- pursuant to the parenthetical contained in Section 5.01C(ii)(c)) plus such reserves as may be determined by the General Partner, in its reasonable discretion, as no longer necessary to provide for the foreseeable needs of the Partnership, less (i) all cash expenditures of the Partnership during such fiscal period, including, without limitation, operating expenses, ground rent, debt service, repayment of advances made by the General Partner (or Marriott under the Limited Debt Service Guarantee) as and when such repayments are required, any fees for management services, and administrative expenses but excluding expenditures incurred by the Partnership in connection with a capital transaction, and (ii) such reserves as may be determined by the General Partner, in its reasonable discretion, to be necessary to provide for the foreseeable needs of the Partnership, including, without limitation, for the maintenance, repair, or restoration of the Inns. "Certificate of Limited Partnership" means the Certificate of Limited Partnership, and any and all amendments thereto, filed on behalf of the Partnership with the Secretary of State of the State of Delaware as required under the Act. "Code" means the Internal Revenue Code of 1986, as amended (or any corresponding provision or provisions of succeeding law). "Consent" means either (a) the approval given by vote at a meeting called and held in accordance with the provisions of Section 10.01, prior to the taking of any action with respect to which such Consent is given, or (b) a prior written approval required or permitted to be given pursuant to this Agreement or the Act, as the context may require. Unless otherwise specified, "Consent of the Limited Partners" shall mean Consent of Limited Partners holding, in their capacity as Limited Partners and not as assignees, a majority of the outstanding Units; provided, however, if the General Partner or any Affiliate of the General Partner (other than an individual who acquires Units for his own account or a trust or other similar entity that acquires Units for the direct benefit of an individual) owns any Units, then in the case of each matter in which the General Partner or an Affiliate thereof has an interest, such Units shall not be voted on any such matter presented to the Limited Partners for a vote, except that in connection with a decision to continue the business of the Partnership and to appoint one or more general partners as provided in Section 6.05A, the General Partner agrees that it will consent in writing to such action. "Designated Person" means the General Partner. "Development Fee" means the development fee payable to Marriott pursuant to the Purchase Agreement in connection with Marriott's development of the Inns, including concept development, site selection, feasibility studies, design analysis, development and construction supervision and planning, market research, and financing of the construction and development of the Inns. "Development Fee Adjustments" means any reductions of the aggregate Development Fee payable to Marriott with respect to the Inns pursuant to the Purchase Agreement. "Escrow Agreement" means the escrow deposit agreement, dated as of November 17, 1989, among the Partnership, the General Partner, the Selling Agent, and Bankers Trust Company, New York, New York, as escrow agent, providing for the deposit of funds of subscribers in connection with the offering of Units. "FF&E" means (i) furniture, fixtures, furnishings, vehicles, carpeting, and equipment and (ii) routine repairs and maintenance undertaken subsequent to the opening date of an Inn or addition thereto, the cost of which would not be expensed under generally accepted accounting principles. -3- "Fiscal Quarter" means, for the respective fiscal periods in any Fiscal Year, (i) the period beginning on January 1, and having the same ending date as the General Partner's 12-week fiscal first quarter, (ii) the same period of time as the General Partners' second fiscal quarter, (iii) the same period of time as the General Partner's third fiscal quarter, and (iv) the period from the end of the General Partner's third fiscal quarter through December 31 in such Fiscal Year. "Fiscal Year" means the fiscal year of the Partnership as established in Section 9.02. "Front-end Fees" means fees and expenses paid by any party for any services rendered during the Partnership's organizational or acquisition phase, including Organization and Offering Expenses, Acquisition Fees, Acquisition Expenses, and any other similar fees, however designated. "Gain" or "Gains" means the gain or gains recognized by the Partnership for Federal income tax purposes upon the sale or disposition of Partnership property (plus any Section 267(d) Gain) (other than the routine sale or disposition of used FF&E being replaced at an Inn), as reduced by the costs of such sale or disposition. "General Partner" means Marriott FIBM One Corporation, a Delaware corporation and wholly owned subsidiary of Host, in its capacity as general partner of the Partnership and its permitted successors or assigns and any Person admitted as a substitute general partner pursuant to Section 6.01 or 10.02B. "Ground Leases" means the leases between the Partnership, as tenant, and Marriott and certain of its affiliates, as landlords, by which the Partnership will lease the land on which the Inns described in Schedule II to this Agreement are situated. "Host" means Host International, Inc., a Delaware corporation and wholly owned subsidiary of Marriott. "Inns" means the Fairfield Inn by Marriott hotel properties as described in Schedule I to this Agreement (or, in lieu thereof, the Fairfield Inn by Marriott properties substituted therefor in certain circumstances in accordance with the Purchase Agreement) and the land on which the Inns are located (or, in the case of the Inns described in Schedule II to this Agreement, the tenant's interest in the Ground Leases). "Initial Limited Partners" means each Person purchasing Units in the Initial Public Offering. "Initial Public Offering" means the initial public offering of the Units, as more fully described in the Prospectus and the registration statement in which the Prospectus is included. "Interest" means the entire interest of a Partner in the Partnership at any particular time, including the right of such Partner to any and all rights and benefits to which a Partner may be entitled as provided in this Agreement, together with the obligations of such Partner to comply with all the terms and provisions of this Agreement. "Investment in Properties" means the amount of Capital Contributions actually paid or allocated to the purchase, development, construction, or improvement of properties acquired by the Partnership, including, without limitation, the purchase of properties, working capital reserves allocable thereto (except that working capital reserves in excess of 5% of Capital Contributions shall not be included for this purpose), and other cash payments such as interest and taxes but excluding Front-end Fees. -4- "Investor List" means that list, required by section 6112 of the Code, identifying Persons to whom Interests in the Partnership were sold, such Persons' addresses and taxpayer identification numbers, the dates on which the Interests were acquired, the name and tax shelter registration number of the Partnership, and such other information as may be required by Treasury Regulations to be included therein. "IRS" means the Internal Revenue Service. "Limited Debt Service Guarantee" means the guarantee by Marriott in an amount not exceeding $16.5 million of interest and principal due and unpaid by the Partnership under the Loan Agreement. "Limited Partner" means the Organizational Limited Partner, the Initial Limited Partners, or any Substituted Limited Partner. "Loan Agreement" means the credit agreement to be entered into between the Partnership, as borrower, and Sumitomo Trust & Banking Co., Ltd., New York Branch, as lender, to provide financing for the Inns. "Loss or "Losses" means the loss or losses recognized by the Partnership for Federal income tax purposes upon the sale or disposition of Partnership property (other than the routine sale or disposition of used FF&E being replaced at an Inn) taking into account costs of such sale or disposition. "Management Agreement" means that certain management agreement, dated as of November 17, 1989, between the Partnership and the Manager pursuant to which the Manager will manage the Inns for the Partnership, as the same may be amended or supplemented from time to time. "Manager" means Fairfield FMC Corporation, a Delaware corporation and wholly owned subsidiary of Marriott, as manager of the Inns. "Marriott" means Marriott Corporation, a Delaware corporation. "Minimum Gain" means the amount determined by computing, with respect to each Nonrecourse Debt, the amount of Gain, if any, that would be realized by the Partnership if it disposed of (in a taxable transaction) the Partnership property subject to such liability in full satisfaction thereof (and for no other consideration), and by then aggregating the amounts so computed. It is the intent that Minimum Gain be determined in accordance with the provisions of sections 1.704-1T(b)(4)(iv)(c) of the Treasury Regulations. "Net Invested Capital" means Capital Contributions reduced by cumulative distributions of Capital Receipts to the Partners pursuant to Sections 4.06(ii) and 4.07A(ii). For purposes of determining the average daily outstanding Net Invested Capital under this Agreement, the Capital Contributions of the Partners shall be deemed to have been made on July 22, 1990. "Net Profits" or Net Losses" means, for any period, the net profits or net losses of the Partnership for Federal income tax purposes during such period as determined under section 702 of the Code, including gain or loss on the routine sale or disposition of used FF&E not in connection with the sale of an Inn and excluding Gains and Losses and items specially allocated under Section 4.10. "Nonrecourse Debt" means any Partnership liability that is considered nonrecourse for purposes of section 1.1001-2 of the Treasury Regulations (without regard to whether such liability -5- is a recourse liability under section 1.752-1T(d)(2) of the Treasury Regulations) and any Partnership liability for which the creditor's right to repayment is limited to one or more assets of the Partnership (within the meaning of section 1.752-1T(d)(3)(ii)(B)(4)(ii) of the Treasury Regulations). "Nonrecourse Liability" means any Nonrecourse Debt (or portion thereof) for which no Partner bears (or is deemed to bear) the economic risk of loss within the meaning of section 1.704-1T(b)(4)(iv)(k)(3) of the Treasury Regulations. "Notification" means a written notice, containing the information required by this Agreement to be communicated to any Person, sent by registered, certified, or regular mail to such Person; provided, however, that any communication containing such information sent to such Person and actually received by such Person shall constitute Notification for all purposes of this Agreement. "Organizational Limited Partner" means Christopher G. Townsend. "Organization and Offering Expenses" means those expenses incurred by the Partnership in connection with preparing the Partnership for registration and subsequently offering and distributing the Units to the public, including, without limitation, sales commission paid to broker-dealers in connection with the distribution of the Units, the financial advisory fee payable pursuant to the Agency Agreement, and all advertising expenses. "Partner Nonrecourse Debt" means any Nonrecourse Debt (or portion thereof) for which a Partner bears (or is deemed to bear) the economic risk of loss within the meaning of section 1.704-1T(b)(4)(iv)(k)(1) of the Treasury Regulations. "Partners" means, collectively, the Limited Partners as constituted from time to time and the General Partner. "Partners' Preferred Distribution" means, with respect to each Fiscal Year, an annual, non-cumulative amount equal to 9% of the average daily outstanding Net Invested Capital during 1990 (for the period July 22, 1990 through December 31, 1990), 9.5% in 1991 and 1992, and 10% in each Fiscal Year thereafter. "Partners' 12% Preferred Distribution" means the excess of (a) the product of (x) 12% per annum (applied using the simple interest method for the period from July 22, 1990 through the date for which the determination is being made on the basis of a 365/366-day year and the actual number of day elapsed) multiplied by (y) the average daily outstanding Net Invested Capital over (b) the sum of (i) all previous distributions made to the Partners pursuant to Sections 4.05(A)(i), 4.05A(ii), 4.06(i), and 4.07A(i) and (ii) 101.01% of all previous distributions made to the Limited Partners pursuant to Sections 4.05(A)(iii) and 4.05A(iv). "Partnership" means the limited partnership formed under the Act and continued by this Agreement by the parties hereto, as said Partnership may from time to time be constituted. "Partnership Debt" means any indebtedness for borrowed money incurred by the Partnership. "Permanent Loan" means the $164,850,000 term loan maturing on or after December 31, 1996 that the lender has agreed to provide pursuant to the terms of the Loan Agreement. "Person" means any individual, partnership, corporation, trust or other legal entity. "Prime Rate" means the prime rate announced from time to time by The First National Bank of Chicago, Chicago, Illinois. -6- "Prospectus" means the Partnership's prospectus included in the registration statement on file with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933 for the registration of the offering and sale of the Units in the Initial Public Offering at the time such registration statement becomes effective, as supplemented. "Purchase Agreement" means the purchase agreement, dated as of November 17, 1989, between the Partnership, as purchaser, and Marriott and certain of its affiliates, as sellers, providing for the purchase by the Partnership of the Inns, and certain related materials and personal property, including FF&E, as the same may be amended or supplemented to the date hereof. "Refinancing Proceeds" means the net proceeds from any refinancing or borrowing by the Partnership, the proceeds of which are applied to the repayment of previously incurred Partnership obligations, or borrowed for distributions to the Partners (other than borrowings pursuant to the parenthetical contained in Section 5.01C(ii)(c)), including the proceeds of a sale and leaseback on which no taxable gain is recognized for Federal income tax purposes, after deducting (i) any expenses incurred in connection therewith, (ii) any amounts applied by the General Partner toward the payment of any indebtedness, other obligation, or expense of the Partnership or the creation of any reserves deemed necessary by the General Partner in its reasonable discretion, and (iii) all amounts then payable therefrom pursuant to the Management Agreement. "Safe Harbors" has the meaning set forth in Section 5.03J. "Sale Proceeds" means any net proceeds received by the Partnership from (i) the exchange, condemnation, eminent domain taking, casualty, sale, or other disposition of all or a portion of the Partnership's assets, or (ii) the liquidation of the Partnership's property in connection with a dissolution of the Partnership, after deducting (A) any expenses incurred in connection therewith, (B) any amounts applied by the General Partner toward the payment of any indebtedness, other obligation, or expense of the Partnership or the creation of any reserves deemed necessary by the General Partner in its reasonable discretion, (C) any amounts payable pursuant to exercise by the Partnership of the Site Purchase Options (as defined in the Ground Leases) with respect to one or more of the Inns subject to the Ground Leases, and (D) all amounts payable therefrom pursuant to the Management Agreement. Sale Proceeds shall not include the proceeds from the routine sale or disposition of used FF&E not in connection with the sale of an Inn. "Section 267(d) Gain" means gain realized by the Partnership but not recognized solely by reason of section 267(d) of the Code. "Selling Agent" means Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Sponsor" means any Person directly or indirectly instrumental in organizing, wholly or in part, the Partnership or any Person who will manage or participate in the management of the Partnership, and any Affiliate of any such Person, but does not mean (i) a Person whose only relation with the Partnership is as that of an independent property manager, whose only compensation is as such, or (ii) wholly independent third parties such as attorneys, accountants, and underwriters, whose only compensation is for professional services rendered in connection with the offering of Units. "Substituted Limited Partner" means any Person admitted to the Partnership as a Limited Partner pursuant to the provisions of Section 7.02 and who is listed as such in the books and records of the Partnership. "Tax Matters Partner" means the General Partner. -7- "Total Partnership Distributions" means the total amount of cash and the fair market value of any property (net of any associated liabilities) distributed to the Partners pursuant to Sections 4.05 through 4.08. "Treasury Regulations" means the income tax regulations promulgated by the Department of Treasury. "Unit" means a unit of limited partnership interest represented by a Capital Contribution of $1,000 (determined without reduction for purchase of a Unit in circumstances where the Selling Agent foregoes all or a portion of the fees and commissions payable to it) sold in the Initial Public Offering pursuant to the Prospectus. "Unit Certificate" means a non-negotiable certificate issued by the Partnership, substantially in the form of Exhibit A hereto, evidencing the ownership of one or more Units. ARTICLE TWO FORMATION, NAME, PLACE OF BUSINESS, PURPOSE AND TERM Section 2.01. Formation. The parties have formed and do hereby continue the Partnership formed as of August 23, 1989 pursuant to the provision of the Act. Section 2.02. Name and Offices. The name of the Partnership is and shall be Fairfield Inn by Marriott Limited Partnership. The principal offices of the Partnership shall be located at 10400 Fernwood Road, Bethesda, Maryland 20058 or at such other place or places as the General Partner may from time to time determine, provided that the General Partner shall give the Limited Partners written notice thereof not later than 60 days after the effective date of such change of address and shall, if required, amend the Certificate of Limited Partnership in accordance with the requirements of the Act. The address of the registered office of the Partnership in the State of Delaware is at 229 South State Street, Dover, County of Kent, Delaware 19901. Section 2.03. Purposes. The purposes of the Partnership are to invest in, acquire, own, use, operate or manage the Inns, either as part of the Fairfield Inn by Marriott system or otherwise, sell, lease, sublease, exchange, or otherwise dispose of the Inns, and to engage in any other activities related or incidental thereto. Section 2.04. Term. The term of the Partnership shall continue in full force and effect from the date of the filing of the original Certificate of Limited Partnership until December 31, 2088, or until dissolution and termination prior thereto pursuant to the provisions of Article Eight. Section 2.05. Registered Agent for Service of Process. The name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Prentice Hall Corporation System, Inc., 229 South State Street, Dover, County of Kent, Delaware 19901. Section 2.06. Certificate of Limited Partnership. On August 23, 1989, the General Partner, in accordance with the Act, filed with the Secretary of State of the State of Delaware a Certificate of Limited Partnership for the Partnership. If the laws of any jurisdiction in which the Partnership transacts business so require, the General Partner also shall file with the appropriate office in that jurisdiction a copy of the Certificate of Limited Partnership and any other documents necessary for the Partnership to qualify to transact business in such jurisdiction and shall use its best efforts to file with the appropriate office in that jurisdiction a copy of other documents necessary to establish and maintain the Limited Partners' limited liability in such jurisdiction. The Partners further agree and obligate themselves to execute, acknowledge, and cause to be filed, in the place or -8- places and in the manner prescribed by law, any amendments to the Certificate of Limited Partnership as may be required, either by the Act, by the laws of a jurisdiction in which the partnership transacts business, or by this Agreement, to reflect changes in the information contained therein or otherwise to comply with the requirements of law for the continuation, preservation, and operation of the Partnership as a limited partnership under the Act. ARTICLE THREE PARTNERS AND CAPITAL Section 3.01. General Partner. The General Partner of the Partnership is Marriott FIBM One Corporation, a Delaware corporation and wholly owned subsidiary of Host, having its principal executive offices at 10400 Fernwood Road, Bethesda, Maryland 20058, and any Person admitted as a substitute general partner in accordance with Sections 6.01 or 10.02B. Section 3.02. Organizational Limited Partner. The Organizational Limited Partner who is hereby admitted as the organizational limited partner of the Partnership is Christopher G. Townsend, 10 Paramus Court, North Potomac, Maryland 20878. Upon admission to the Partnership of the Initial Limited Partners, the Organizational Limited Partner will withdraw from the Partnership and receive a return of his Capital Contribution. Section 3.03. Limited Partners. The names and addresses of the Limited Partners, the amount of their Capital Contributions, and the number of Units held by them are set forth in the books and records of the Partnership. A Person (other than a Person described in Section 7.01(I) or (J)) may be admitted as an Initial Limited Partner, and shall become bound by this Agreement, if such Person (or a representative authorized by such Person orally, in writing, or by other action such as payment for an Interest) executes this Agreement or any other writing evidencing the intent of such Person to become an Initial Limited Partner. A Person (including a Person described above) shall be deemed to be admitted as a Limited Partner when the General Partner has accepted such Person as a Limited Partner of the Partnership, and the books and records reflect such Person as admitted to the Partnership as a Limited Partner. Section 3.04. Capital Contribution by General Partner. A. The General Partner has made a Capital Contribution in the amount of $1 in cash. Immediately prior to the contributions of the Initial Limited Partners pursuant to Section 3.05B, the General Partner shall make an additional Capital Contribution in the amount of $841,788 in cash. B. In the event that the Partnership makes any tax payment on behalf of or with respect to the General Partner, except to the extent (i) the Partnership withholds such payment from a distribution which would otherwise be made to the General Partner or (ii) the General Partner determines, in its reasonable discretion, that such payment may be satisfied out of the available funds of the partnership which would, but for such payment, be distributed to the General Partner, the General Partner shall contribute to the Partnership an amount equal to such tax payment within five days of the date such payment is made. Section 3.05. Capital Contributions by Limited Partners; Withholding Taxes. A. The Organizational Limited Partner heretofore has made a Capital Contribution in the amount of $99 in cash, which Capital Contribution shall be returned to the Organizational Limited Partner upon the admission of the Initial Limited Partners, and the -9- Organizational Limited Partner, as such, thereafter shall have no further rights, claims, or interest as a partner in and to the Partnership. B. The Partnership intends to make the Initial Public Offering of 83,337 Units for cash and will admit as Initial Limited Partners the Persons whose subscriptions for such Units are accepted by the General Partner (who may refuse to accept the subscription of any Person or Persons for any reason whatsoever). Each such Person shall become a Limited Partner in the Partnership when (a) such Person has contributed to the capital of the Partnership $1,000 in cash for each Unit (less any amounts attributable to selling commissions which the Selling Agent has agreed to forego), each Initial Limited Partner being required to make an initial purchase of at least five Units ($5,000) (less any amounts attributable to selling commissions which the Selling Agent has agreed to forego); (b) such Person or his authorized representative has executed and filed with the Partnership the subscription documents specified in the Prospectus, together with such other documents and instruments as the General Partner may deem necessary or desirable to effect such admission; and (c) the General Partner has accepted such Person's subscription for Units. C. Each Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Limited Partner any amount of Federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within 45 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its reasonable discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner who is a nonresident alien, foreign partnership, foreign corporation, or foreign trust or estate (a "Foreign Investor") hereby unconditionally and irrevocably grants to the Partnership a security interest in such Foreign Investor's Interest to secure such Foreign Investor's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 3.05C. In the event that a Foreign Investor fails to pay any amounts owed to the Partnership pursuant to this Section 3.05C when due, the General Partner shall make the payment to the Partnership on behalf of such defaulting Foreign Investor, shall be deemed to have loaned such amount to such defaulting Foreign Investor, and shall succeed to all rights and remedies of the Partnership as against such defaulting Foreign Investor. Any amounts payable by a Foreign Investor hereunder shall bear interest at the Prime Rate plus four percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., 45 days after demand) until such amount is paid in full. Each Foreign Investor shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. Section 3.06. Additional Issuances of Units and Capital Contributions; Fractional Units. A. No Units except those Units issued by the Partnership pursuant to the Initial Public Offering shall be offered for sale or issued by the Partnership without the written consent of the General partner and the Consent of the Limited Partners. B. No Partner shall be required or allowed to make any Capital Contribution, except as specifically set forth in Sections 3.04, 3.05, 3.11, and 8.02E or in connection with an issuance of additional Units permitted under Section 3.06A. All Capital Contributions provided for -10- in Section 3.05B shall be paid upon the admission of the Initial Limited Partners to the Partnership and shall not be deferred for any reason. C. No fractional Units shall be issued by the partnership. Section 3.07. Capital Accounts. A. The Capital Contribution of each Limited Partner and the General Partner shall be credited to each such Partner's Capital Account. A Partner's Capital Account shall also be credited with the amount of Net Profits or Gain allocable to the Partner, and shall be debited with (x) such Partner's share of Total Partnership Distributions and (y) the amount of Net Losses, Losses, deductions or other items allocated to such Partner. Capital Accounts shall be maintained and adjusted in accordance with the provisions of section 1.704- 1(b)(2)(iv) of the Treasury Regulations. B. No Partner shall be entitled to receive any interest on his outstanding Capital Account balance. Except upon the dissolution and termination of the Partnership or as otherwise specifically provided in this Agreement, no Partner shall have the right to demand or to receive the return of all or any part of the Capital Account of Such Partner. Section 3.08. Liability of the Limited Partners. Except as otherwise described in the Act, no Limited Partner shall be liable for any debts, liabilities, contracts, or any other obligations of the Partnership. Except as otherwise described in the Act, a Limited Partner has no liability in excess of his Capital Contribution and his share of the Partnership's assets and undistributed profits, and shall not be required to lend any funds to the Partnership or, after his Capital Contribution has been paid, to make any further Capital Contributions to the Partnership or to pay to the Partnership, any Partner, or any creditor of the Partnership any portion or all of any negative balance of his Capital Account. Section 3.09. Liability of the General Partner. Except as provided in the Act, the General Partner has the liabilities of a partner in a partnership without limited partners to Persons other than the Partnership and the other Partners. Except as provided in the Act or herein, the General Partner has the liabilities of a general partner in a partnership without limited partners to the Partnership and to the other Partners. This Agreement shall not be amended to limit such liability of the General Partner. Section 3.10. Unit Certificates. A. As soon as practicable after the issuance of the Units in connection with the Initial Public Offering, the General Partner shall cause the Partnership to issue one or more Unit Certificates in the name of each of the Initial Limited Partners. Each such Unit Certificate shall be denominated in terms of the number of Units evidenced by such Certificate. Upon the transfer of a Unit permitted by Article Seven hereof, the General Partner shall cause the Partnership to issue replacement Unit Certificates in accordance with such procedures as the General Partner, in its sole and absolute discretion, may establish. No Unit Certificate shall be issued representing a fraction of a Unit. B. The Partnership shall issue a new Unit Certificate in place of any Unit Certificate previously issued if the owner of the Units represented by such Unit Certificate, as reflected on the books and records of the Partnership: (i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that such previously issued Unit Certificate has been lost, destroyed, or stolen; -11- (ii) requests the issuance of a new Unit Certificate before the Partnership has notice that such previously issued Unit Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) if requested by the General Partner, delivers to the Partnership a bond, in form and substance satisfactory to the General Partner, with such surety or sureties and with fixed or open penalty, as the General Partner may direct, to indemnify the Partnership against any claim that may be made on account of the alleged loss, destruction, or theft of such previously issued Unit Certificate; and (iv) satisfies any other reasonable requirements imposed by the General Partner. When a previously issued Unit Certificate has been lost, destroyed, or stolen, and the Partner fails to notify the Partnership within a reasonable time after he has notice of such event, and a transfer of Units represented by the Unit Certificate is registered on the books and records of the Partnership before the Partnership receives such notification, the Partner shall be precluded from making any claim against the Partnership with respect to such transfer or for a new Unit Certificate. Section 3.11. Initial Working Capital Reserve. In the event that the initial working capital reserve of the Partnership following the admission of the Initial Limited Partners, determined after the payment of all Organization and Offering Expenses, Acquisition Fees, and Acquisition Expenses (the "Initial Working Capital Reserve"), is less than $1,500,000, the General Partner shall make a capital contribution in the amount of such difference to the Partnership in cash. Contributions pursuant to this Section 3.11 shall be reflected in the Capital Account of the General Partner. ARTICLE FOUR ALLOCATIONS OF PROFITS AND LOSSES: DISTRIBUTIONS OF CASH AND CERTAIN PROCEEDS Section 4.01. Allocation of Net Profits. Subject to the provisions of Section 4.10, Net Profits with respect to each Fiscal Year will be allocated among the Partners, pro rata, in proportion to the distributions of Cash Available for Distribution to the Partners with respect to such Fiscal Year (including distributions of Cash Available for Distribution made in a subsequent Fiscal Year with respect to the immediately preceding Fiscal Year for which Net Profits are being allocated); provided, however, that if Net Profits with respect to a Fiscal Year exceed distributions of Cash Available for Distribution with respect to such Fiscal Year, Net Profits with respect to such Fiscal Year shall be allocated in accordance with the ratio in which Cash Available for Distribution would have been distributed had an amount of cash equal to such Net Profits been available for distribution. Section 4.02. Allocation of Net Losses. Subject to the provisions of Section 4.10, Net Losses for each Fiscal Year shall be allocated 1% to the General Partner and 99% to the Limited Partners. Section 4.03. Allocations of Gain and Loss. A. Subject to the provisions of Section 4.10, Gain recognized by the Partnership shall be allocated (after giving effect to the allocations referred to in Sections 4.01 and 4.02 and all distributions other than distributions pursuant to Section 4.07B) with respect to any Fiscal Year in the following order of priority: -12- (i) first, to all Partners whose Capital Accounts have negative balances, in the ratio of such negative balances until such negative balances are brought to zero; (ii) second, to the Limited Partners in the amount necessary to bring the aggregate of their Capital Account balances to an amount equal to 99% of the Capital Priority Amount and to the General Partner in the amount necessary to bring its Capital Account balance to an amount equal to 1% of the Capital Priority Amount; provided, however, that if there is insufficient Gain to bring such balances to such levels, then (a) Gain first shall be allocated so as to cause the ratio of the aggregate balance in the Capital Account of the Limited Partners to the General Partner's Capital Account balance to be 99 to 1 and (b) any remaining Gain allocable pursuant to this subsection (ii) shall be allocated 99% to the Limited Partners and 1% to the General Partner; and (iii) thereafter, any remaining Gain shall be allocated among the Partners so that, to the extent possible, the ratio of (A) the aggregate balance in the Capital Accounts of the Limited Partners in excess of 99% of the Capital Priority Amount to (B) the balance in the General Partner's Capital Account in excess of 1% of the Capital Priority Amount, is 80 to 20. B. Subject to the provisions of Section 4.10, Losses recognized by the Partnership shall be allocated (after giving effect to the allocations referred to in Sections 4.01 and 4.02 and all distributions other than distributions pursuant to Section 4.07B) with respect to any Fiscal Year in the following order of priority; (i) first, Losses shall be allocated to the Partners with positive Capital Account balances until all positive balances in the Partners' Capital Accounts shall have been eliminated, with such allocation being made in proportion to the outstanding positive Capital Account balances; and (ii) second, all remaining Losses shall be allocated 100% to the General Partner. Section 4.04. Allocation Among Limited Partners of Net Profits, Gains, Net Losses, and Losses. Subject to the provisions of Section 4.10, any Net Profits, Gains, Net Losses, or Losses for any Fiscal Year allocable to the Limited Partners shall be allocated among the Limited Partners pro rata in accordance with the number of Units owned by each as of the end of such Fiscal Year; provided that if any Unit is assigned during the Fiscal Year in accordance with this Agreement, (a) the Net Profits or Net Losses that are so allocable to such Unit shall be allocated between the assignor and assignee of such Unit according to the number of Accounting Periods in such Fiscal Year each owned such Unit, and (b) any Gains or Losses allocable to the Limited Partners shall be allocated among the Limited Partners who held Units on the last day of the Fiscal Quarter in which the sale or disposition giving rise to such Gains or Losses occurred, pro rata in accordance with the number of Units owned by each such Limited Partner. If any Unit is purported to be assigned by a Limited Partner other than on the first day of a Fiscal Quarter (in contravention of this Agreement), then the Partnership shall not recognize such assignment for the purposes of allocating Net Profits, Gains, Net Losses, or Losses or for any other purpose unless the assignment is permitted by Section 7.01 hereof and then only as of the first day of the next Fiscal Quarter commencing after the expiration of 15 days from the receipt by the Partnership of an application for such assignment. Section 4.05. Distribution of Cash Available for Distribution. A. Cash Available for Distribution with respect to each Fiscal Year shall be distributed quarterly as follows: -13- (i) first, until the Partners shall have received with respect to such Fiscal Year an amount equal to the Partners' Preferred Distribution, 1% to the General Partner and 99% to the Limited Partners; (ii) second, through and including the end of the Accounting Period during which the Partners have received cumulative distributions of Capital Receipts pursuant to Sections 4.06(ii) and 4.07A(ii) equal to $42,089,394, 1% to the General Partner and 99% to the Limited Partners; (iii) third, through and including the end of the Accounting Period during which the Partners have received cumulative distributions of Capital Receipts pursuant to Sections 4.06(ii) and 4.07A(ii) equal to $84,178,788, 10% to the General Partner and 90% to the Limited Partners; and (iv) thereafter, 20% to the General Partner and 80% to the Limited Partners. B. Cash Available for Distribution shall be distributed to the Partners within 45 days after the end of each Fiscal Quarter. For purposes of Section 4.05A(i) above, distributions made in a subsequent Fiscal Year with respect to the last Fiscal Quarter of the immediately prior Fiscal Year shall be considered made with respect to such prior Fiscal Year. C. The partners' Preferred Distribution for 1990 will be prorated, based upon the number of days in each Fiscal Quarter (assuming for purposes hereof that the third Fiscal Quarter commenced on July 22, 1990). Section 4.06. Distribution of Refinancing Proceeds. Refinancing Proceeds from a refinancing or borrowing shall, unless the General Partner, in its reasonable discretion, shall determine to retain any such amounts in the Partnership in accordance with Section 5.08, be distributed, as soon as is reasonably practicable after the transaction occurs, as follows: (i) first, until the Partners shall have received distributions pursuant to this Section 4.06(i) of Refinancing Proceeds from such refinancing or borrowing equal to the then outstanding Partners' 12% Preferred Distribution, 1% to the General Partner and 99% to the Limited Partners; (ii) second, until the Partners shall have received cumulative distributions of Capital Receipts pursuant to this Section 4.06(ii) and Section 4.07A(ii) equal to the Partners' Capital Contributions, 1% to the General Partner and 99% to the Limited Partners; and (iii) thereafter, 20% to the General Partner and 80% to the Limited Partners. Section 4.07. Distribution of Sale Proceeds. A. Sale Proceeds from the sale or other disposition of less than substantially all of the assets of the Partnership shall, unless the General Partner, in its reasonable discretion, shall determine to retain any such amounts in the Partnership in accordance with Section 5.08, be distributed, as soon as is reasonably practicable after the transaction occurs, as follows: (i) first, until the Partners shall have received distributions pursuant to this Section 4.07A(i) of Sale Proceeds from such sale or other disposition equal to the then outstanding Partners' 12% Preferred Distribution, 1% to the General Partner and 99% to the Limited Partners; -14- (ii) second, until the Partners shall have received cumulative distributions of Capital Receipts pursuant to this Section 4.07A(ii) and Section 4.06(ii) equal to the Partners' Capital Contributions, 1% to the General Partner and 99% to the Limited Partners; and (iii) thereafter, 20% to the General Partner and 80% to the Limited Partners. B. As provided in Section 8.02, Sale Proceeds from the sale of all or substantially all of the assets of the Partnership, or from a related series of Inn sales that, taken together, result in the sale of substantially all of the assets of the Partnership, will be distributed to the Partners in accordance with their Capital Account balances, as adjusted to take into account Gain or Loss resulting from such sale or sales. Section 4.08. Distribution Among Limited Partners of Cash Available for Distribution, Refinancing Proceeds, and Sale Proceeds. Cash Available for Distribution distributable with respect to any Fiscal Quarter to the Limited Partners pursuant to Section 4.05 shall be distributed to the Limited Partners pro rata in accordance with the number of Units owned by each as of the end of such Fiscal Quarter. Capital Receipts distributable to the Limited Partners pursuant to Section 4.06 or Section 4.07A shall be distributed to the Limited Partners pro rata in accordance with the number of Units owned by each such Limited Partner on the last day of the Fiscal Quarter in which the transaction giving rise to such proceeds was completed. If a Unit is purported to be assigned by a Limited Partner other than on the first day of a Fiscal Quarter (in contravention of this Agreement), then the Partnership shall not recognize such assignment for the purpose of distributing amounts pursuant to Sections 4.05, 4.06, and 4.07 or for any other purpose unless the assignment is permitted by Section 7.01 hereof, and then only as of the first day of the next Fiscal Quarter commencing after the expiration of 15 days from the receipt by the Partnership of an application for such assignment. Section 4.09. Section 754 Adjustments. For income tax purposes (but not for purposes of adjusting the Capital Accounts of the Partnership, except as otherwise provided in section 1.704-1(b)(2)(iv) of the Treasury Regulations), appropriate adjustments shall be made in the information furnished to affected Limited Partners with respect to allocations under this Article Four in order to reflect adjustments in the basis of Partnership property permitted pursuant to any election under section 754 of the Code if the General Partner, in its sole discretion, makes such election. If such an election is made, the Partnership shall make the basis adjustments and calculate depreciation deductions in accordance with such adjustments for those transferee Limited Partners who advise the Partnership of this obligation and provide sufficient information to enable the Partnership to determine when, and at what price, such transferee Limited Partners acquired Units. In the case of a transferee Limited Partner who does not advise the Partnership of such information, the Partnership shall attempt to supply such Limited Partner with reasonably available information that will permit such Limited Partner to make the required basis adjustment calculation. Section 4.10. Special Allocations. The following provisions shall apply notwithstanding the provisions of Sections 4.01, 4.02, 4.03, and 4.04. In the event that there is a conflict between any of the following provisions, the earlier listed provision shall govern. A. If there is a net decrease in the Minimum Gain attributable to Nonrecourse Liabilities during any Fiscal Year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, for subsequent years) in proportion to, and to the extent of, an amount equal to the greater of the following: (i) the portion of such Partner's share of the net decrease in such Minimum Gain during such year (as such share is determined pursuant to section 1.704-1T(b)(4)(iv)(f) of the Treasury Regulations) that is allocable to the disposition of -15- Partnership property subject to one or more Nonrecourse Liabilities (as such allocable portion is determined pursuant to section 1.704- 1T(b)(4)(iv)(e)(2) of the Treasury Regulations); or (ii) such Partner's Adjusted Capital Account Deficit at the end of such year (determined, for this purpose, before any allocation for such year of any items of income, gain, loss, or deduction or items described in section 705(a)(2)(B) of the Code). It is intended that items to be so allocated shall be determined and the allocations made in accordance with the minimum gain chargeback requirement of section 1.704-1T(b)(4)(iv)(e) of the Treasury Regulations, and this Section 4.10A shall be interpreted consistently therewith. B. If there is a net decrease in the Minimum Gain attributable to Partner Nonrecourse Debts during any Fiscal Year, each Partner who has a share of the Minimum Gain attributable to such Partner Nonrecourse Debts shall be specially allocated items of Partnership income and gain for such year (and, if necessary, for subsequent years) to the extent of an amount equal to the greater of the following: (i) the portion of such Partner's share of the net decrease in such Minimum Gain during such year that is allocable to the disposition of Partnership property subject to one or more Partner Nonrecourse Debts (as such allocable portion is determined pursuant to section 1.704-1T(b)(4)(iv)(h) of the Treasury Regulations); or (ii) such Partner's Adjusted Capital Account Deficit at the end of such year (determined, for this purpose, before any allocation for such year of any items of income, gain, loss or deduction or items described in section 705(a)(2)(B) of the Code). It is intended that items to be so allocated shall be determined and the allocations made in accordance with the minimum gain chargeback requirement of section 1.704-1T(b)(4)(iv)(h) of the Treasury Regulations, and this Section 4.10B shall be interpreted consistently therewith. C. In the event a Partner unexpectedly receives in any taxable year any adjustments, allocations, or distributions described in section 1.704- 1(b)(2)(ii)(d)(4), (5), or (6) of the Treasury Regulations that cause or increase an Adjusted Capital Account Deficit of such Partner, items of Partnership income and gain shall be specially allocated to such Partner in such taxable year (and, if necessary, in subsequent taxable years) in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible. It is intended that items to be so allocated shall be determined and the allocations made in accordance with the "qualified income offset" requirement of section 1.704-1(b)(ii)(d) and this Section 4.10C shall be interpreted consistently therewith. D. No Net Losses, Losses, or Partnership deductions for any Fiscal Year shall be allocated to any Limited partner to the extent such allocation would cause or increase an Adjusted Capital Account Deficit with respect to such Partner, and such Net Losses, Losses, or Partnership deductions shall be instead be allocated to the General Partner. E. If in any Fiscal Year there is a net increase during such year in the amount of Minimum Gain attributable to a Partner Nonrecourse Debt, any Partner bearing the economic risk of loss with respect to such debt (within the meaning of section 1.752-1T(d)(3) of the Treasury Regulations) shall be specially allocated items of Partnership loss or deduction in an amount equal to the excess of (i) such Partner's share of the amount of such net increase, over (ii) the aggregate amount of any distributions during such year to such Partner of the proceeds of such debt that are allocable to such increase in Minimum Gain. It is intended that items to be so allocated shall be -16- determined and the allocations made in accordance with the required allocations of "partner nonrecourse deductions" pursuant to section 1.704-1T(b)(4)(iv)(h) of the Treasury Regulations and this Section 4.10E shall be interpreted consistently therewith. F. Selling commissions and similar fees that are "syndication expenses," as described in the Treasury Regulations under section 709 of the Code, paid or incurred by the Partnership in any Fiscal Quarter in respect of any Unit shall be specially allocated to and charged to the Capital Account of the Limited Partner owning such Unit during such Fiscal Quarter. Any other such syndication expenses shall be allocated and charged to the Capital Accounts of the Partners in the following manner: first, to the General Partner to the extent of Capital Contributions made by it pursuant to Section 3.11A and thereafter, 99% to the Limited Partners and 1% to the General Partner. G. "Recapture income," if any, realized by the Partnership pursuant to section 1245 or section 1250 of the Code allocated to the Partners under Sections 4.01, 4.02, or 4.03 shall be allocated, to the extent possible, to the Partners to whom (or to whose predecessors in interest) the prior corresponding depreciation deductions were allocated, such allocations to be made pro rata to the Partners in accordance with the manner in which such depreciation deductions were allocated. H. In the event that any fees, interest, or other amounts paid to a Partner or an Affiliate of a Partner pursuant to this Agreement, the Ground Leases, the Management Agreement, or any other agreement between the Partnership and such Partner or Affiliate providing for the payment of such amounts, and deducted by the Partnership, whether in reliance upon section 162, 163, 707(a), or 707(c) of the Code or otherwise, are disallowed as deductions to the Partnership on its federal income tax return for the Fiscal Year in or with respect to which such amounts are paid and are treated instead as Partnership distributions, then: (i) the Net Profits or Net Losses, as the case may be, for the Fiscal Year in or with respect to which such fees, interest, or other amounts were paid shall be increased or decreased, as the case may be, by the amount of such fees, interest, or other amounts that are disallowed and treated as Partnership distributions; and (ii) there shall be allocated to the Partner who received (or whose Affiliate received) such payments an amount of gross income for the Fiscal Year in or with respect to which such fees, interest or other amounts were paid equal to the amount of such fees, interest or other amounts that are so disallowed and treated as Partnership distributions. I. If the Partnership acquires property by purchase or exchange from a transferor who, on the transaction, sustained a loss not allowable in whole or in part as a deduction by reason of section 267(a)(1) of the Code, and the Partnership subsequently realizes an amount of gain on the sale or other disposition of the property which is not recognized by reason of section 267(d), then (i) the amount of Gain allocated under Section 4.03A to the Partner or Partners related to such transfer shall be deemed to consist of the Section 267(d) Gain to the extent of the lesser of the amount of the Section 267(d) Gain or the amount of Gain allocated to such Partner(s) pursuant to Section 4.03A; and (ii) if the amount of the Section 267(d) Gain exceeds the amount of Gain allocated to the Partner or Partners related to such transferor pursuant to Section 4.03A, the amounts of Gain allocated to the other Partners under Section 4.03A shall be deemed to consist pro rata of such excess Section 267(d) Gain. -17- J. If the closing with respect to the Initial Public Offering occurs in 1989, any Net Losses and Net Profits for the Fiscal Year of the Partnership ending on December 31, 1989 will be allocated to the General Partner. Section 4.11. Operating Rules. A. Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Section 1.752-1T(e)(3)(ii) of the Treasury Regulations, the General Partner's interest in Partnership profits shall equal 1% and the Limited Partners' aggregate interest in Partnership profits shall equal 99%. Each Limited Partner's share of Partnership profits shall be the product of 99% times a fraction, the numerator of which is the total number of Units owned by such Limited Partner as of the time as of which the determination of such Limited Partner's share is being made and the denominator of which is the total number of Units as of such time. B. Except as otherwise specifically provided in this Agreement, the distributive share of a Partner of each specific deduction and item of income, loss, and credit of the Partnership for Federal income tax purposes shall be the same as such Partner's share of Net Profits, Gains, Net Losses, or Losses, as the case may be, for such Fiscal Year. C. For purposes of this Agreement, any amount of taxes required to be withheld by the Partnership with respect to any Partner or required to be paid by the Partnership in respect of any Partner's tax obligation shall be deemed to be a distribution or payment to such Partner and shall reduce the amount otherwise distributable to such Partner pursuant to this Agreement. D. In the event of a sale or other disposition of less than substantially all of the assets of the Partnership, (i) for purposes of determining the balances in the Capital Accounts of the Partners in order to allocate Gain or Loss recognized from such sale or disposition pursuant to Section 4.03, each Partner's Capital Account balance shall be deemed to include any amount that such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of sections 1.704-1T(b)(4)(iv)(f) and 1.704- 1T(b)(4)(iv)(h)(5) of the Treasury Regulations (determined after taking into account any changes during such year in Minimum Gain, including changes in Minimum Gain resulting from such sale or other disposition); and (ii) for purposes of determining the Capital Accounts order to allocate loss recognized from such sale or disposition pursuant to Section 4.03B, each Partner's Capital Account shall be reduced by the items described in sections 1.704- 1(b)(2)(ii)(d)(4), (5), and (6). ARTICLE FIVE RIGHTS, POWERS, AND DUTIES OF THE GENERAL PARTNER Section 5.01. Authority of the General Partner to Manage the Partnership. A. The General Partner shall have the exclusive right and power to conduct the business and affairs of the Partnership and to do all things necessary to carry on the business of the Partnership in accordance with the provisions of this Agreement and applicable law, and is hereby authorized to take any action of any kind and to do anything and everything it deems necessary or appropriate in accordance with the provisions of this Agreement and applicable law. Except as expressly provided herein, the authority to conduct the business of the Partnership shall be exercised only by the General Partner. Subject to Section 5.01E, the General Partner may appoint, contract, or otherwise deal with any Person, including employees of its Affiliates, to perform any acts or services for the Partnership necessary or appropriate for the conduct of the business and affairs of the Partnership. -18- B. No Limited Partner shall participate in or have any control whatsoever over the Partnership's business or have any authority or right to act for or bind the Partnership; provided, however, that any action of the Limited Partners which for purposes of the Act would not constitute such participation or control shall not be deemed such for purposes of this Agreement. The Limited Partners hereby unanimously Consent to the exercise by the General Partner of the powers conferred on it by this Agreement, subject to the restrictions and limitations set forth in this Agreement or this Act. C. Except to the extent otherwise provided herein, the General Partner is hereby authorized, without the Consent of the Limited Partners, to: (i) execute any and all agreements (including the Purchase Agreement, the Ground Leases, the Management Agreement, the Loan Agreement, and the Limited Debt Service Guarantee, which agreements shall be deemed to satisfy all requirements of this Agreement), contracts, documents, certifications and instruments necessary or convenient in connection with the acquisition, development, financing, management, maintenance, operation, sale, or other disposition of the Partnership's properties and assets except as otherwise limited by this Agreement; (ii) borrow money from itself or others (including Affiliates of any general partner of the Partnership) and issue evidences of indebtedness necessary, convenient, or incidental to the accomplishment of the purposes of the Partnership and to secure the same by mortgage, pledge, or other lien on the assets of the Partnership, such borrowing and security to be only with respect to the following: (a) any amounts advanced by the General Partner or an Affiliate of the General Partner (including, without limitation, advances by Marriott under the Limited Debt Service Guarantee), which amounts may or may not be secured, or any other lender to enable the Partnership to satisfy its obligations arising in the normal course of its business, to make payments of principal, interest, premium, or penalty on any debt of the Partnership or to make capital repairs, improvements, and expansions, (b) the debt under the Loan Agreement, (c) amounts incurred for the purpose of making distributions to the Partners (which, in the case of a borrowing to make a distribution to the Partners with respect to any unpaid Partners' Preferred Distribution, shall be borrowed from the General Partner, shall not exceed an amount equal to the Cash Available for Distribution (other than prior borrowings pursuant to this parenthetical included therein) with respect to the 13 Accounting Periods ending on the last day of the Fiscal Quarter for which such distribution is to be made, and shall be based on funds of the Partnership reasonably expected to be received within the following 12 months), (d) any indebtedness the incurrence of which has been specifically Consented to by the Limited Partners under Section 5.02B, (e) any indebtedness incurred to refinance (and thereafter further refinance as often as shall be necessary) the unamortized portion of any of the foregoing (including the costs of such refinancing) from time to time (including, without limitation, indebtedness from third parties to finance the payment of amounts payable under the Management Agreement), or (f) any indebtedness that the General Partner otherwise has determined, in accordance with its fiduciary duties as a general partner, is in the best interests of the Partnership and the Limited Partners; provided, however, that in connection with the borrowing of money on a nonrecourse basis, no lender shall be granted or acquire, at any time as a result of making such a loan, any direct or indirect interest in the profits, capital, or property of the Partnership other than as a secured creditor; (iii) prepay in whole or in part, refinance (to the extent permitted by clause (ii) above), fix the interest rate on, recast, modify or extend any mortgage debt -19- affecting or encumbering any of the Partnership's property and in connection therewith to execute any extensions, consolidations, modifications, or renewals of mortgages on any assets of the Partnership; (iv) deal with, or otherwise engage in business with, or provide services to and receive compensation therefor from, any Person who has provided or may in the future provide any services, lend money, or sell property to or purchase property from the General Partner or any Affiliate of the General Partner. No such dealing, engaging in business, or providing of services may involve any direct or indirect payment by the Partnership of any rebate or any reciprocal arrangement for the purpose of circumventing any restriction set forth herein upon dealings with the General Partner or any Affiliate of the General Partner; (v) engage in any kind of activity and perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of, the purposes of the Partnership, as may be lawfully carried on or performed by a limited partnership under the laws of the State of Delaware and in each state where the Partnership has been qualified to do business; and (vi) take such actions (including, but not limited to, amending this Agreement) as the General Partner determines are advisable or necessary, based upon advice of counsel to the Partnership, and will not result in any material adverse effect on the economic position of holders of a majority of the Units, (a) to preserve the tax status of the Partnership as a partnership for Federal income tax purposes, (b) to conform this Agreement to (i) the Act for the purpose of preserving the tax status of the Partnership as a partnership for Federal income tax purposes, or (ii) provisions of the Code or the Treasury Regulations relating to taxation of partners and partnerships, including, without limitation, any changes thereto, or (c) in the event that any provision of the Code or the Treasury Regulations causes the terms of this Agreement to differ to the detriment of the Limited Partners from the terms as contemplated by the Partners (as reflected in the Prospectus), to modify this Agreement in a manner designed to ameliorate such difference. D. Any Person dealing with the Partnership or the General Partner may rely upon a certificate signed by the Secretary or any Assistant Secretary of the General Partner, thereunto duly authorized, as to: (i) the identity of the General Partner or any Limited Partner; (ii) the existence or non-existence of any fact or facts which constitute a condition precedent to the acts by the General Partner or in any other manner germane to the affairs of the Partnership; (iii) the Persons who are authorized to execute and deliver any instrument or document of the Partnership; and (iv) any act or failure to act by the Partnership or as to any other matter whatsoever involving the Partnership or any Partner. E. Except as otherwise specifically set forth herein (including, without limitation Section 5.04) or in the Prospectus and except for (a) legal and financial services (other than in connection with administrative services described in Section 5.04) and procurement services rendered by employees of the General Partner and Affiliates of the General Partner (which services shall be reasonably necessary to the prudent operation of the business and shall be rendered upon -20- commercially reasonable terms, for compensation that is less than or equal to 90% of the compensation that would be charged by an unaffiliated third party, and upon terms and conditions that are, in the reasonable judgment of the General Partner (and in making such judgment the General Partner must not be negligent or guilty of misconduct), as favorable to the Partnership as the terms and conditions that the Partnership could obtain from unaffiliated third parties, for the same purpose in the geographic location where the General Partner has its place of business), (b) architectural and engineering services (which must satisfy the conditions of Section 5.01E(viii) below), and (c) services rendered pursuant to the Management Agreement, neither the General Partner nor any Affiliate of the General Partner shall perform any service for which compensation is to be paid by the Partnership, or sell or lease any goods or materials to the Partnership or advance or lend any funds to the Partnership, unless the agreements, contracts, and arrangements between the Partnership and the General Partner or such Affiliate of the General Partner relating to such services are performed in extraordinary circumstances and satisfy all of the following conditions, those relating to good or materials satisfy all the following conditions, and those relating to advances or loans to the Partnership satisfy the conditions of Section 5.01E(vi) and Section 5.08(xvi) below: (i) such services, goods, or materials must be reasonably necessary to the prudent operation of the business of the Partnership; (ii) the General Partner or any such Affiliate must have the ability to render the services or to sell or lease the goods or materials covered thereby and must have been previously engaged in the business or rendering such services or selling or leasing such goods or materials, independently of the Partnership and as an ordinary and ongoing business; (iii) such agreements, contracts, or arrangements must be fair to the Partnership and reflect commercially reasonable terms and conditions that, in the reasonable judgment of the General Partner (and in making such judgment the General Partner must not be negligent or guilty of misconduct), are as favorable to the Partnership as the terms and conditions that the Partnership could obtain from unaffiliated third parties for the same purpose, shall provide for compensation to the General Partner or any such Affiliate at the lesser of the actual cost or 90% of the competitive price that would be charged for such services, goods, or materials by unaffiliated third parties, and shall be embodied in a written contract which precisely describes the subject matter thereof and all compensation to be paid therefor, and the compensation and other terms thereof shall be fully disclosed in the reports furnished to Limited Partners pursuant to Sections 9.04B and 9.04C; (iv) neither the General Partner nor any such Affiliate may participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of this Agreement; (v) no such agreement, contract, or arrangement as to which the Limited Partners had previously given Consent may be amended in such manner as to increase the fees or other compensation payable to the General Partner or any such Affiliate or to decrease the responsibilities or duties of the General Partner or any such Affiliate in the absence of the Consent contemplated by Section 5.02B(iii); (vi) any such agreement, contract, or arrangement which relates to or secures any funds advanced or loaned to the Partnership by the General Partner or any such Affiliate must reflect commercially reasonable terms, such loan or advance must be on terms and conditions that, in the reasonable judgment of the General Partner (and in making such judgment the General Partner must not be negligent or guilty of misconduct), are as favorable to the Partnership as the terms and conditions that the -21- Partnership could obtain from unaffiliated third parties or banks for the same purpose in the geographic location where the property securing such loan is located (in the case of loans made in connection with a single property or several properties in a single geographic location) or, in all other cases, where the General Partner has its principal place of business (without reference to the financial abilities or guarantees of the General Partner or any Affiliate of the General Partner), and no prepayment charge or penalty shall be required on any such loan or advance; provided, however, that any advances by Marriott under the Limited Debt Service Guarantee shall be deemed to satisfy the provisions of this Section 5.01E(vi); (vii) any such agreement, contract, or arrangement which relates to the performance of services or to the sale or lease of goods or materials (other than the Management Agreement) shall contain a clause allowing termination without penalty on sixty days' notice; (viii) with respect to architectural and engineering services for the Inns, the Person rendering such services shall satisfy the requirements of Section 5.01E(ii) (including the rendering of such services to other properties owned or managed by the General Partner or any of its Affiliates) and the compensation to and other arrangements with such Person in connection therewith shall satisfy the requirements of Sections 5.01E(iii) and (ix) (with actual cost including the cost of any appraisal if required hereunder); provided, however, that the cost of such services shall not exceed 90% of the amount the Partnership would have been required to pay an unrelated third party; and provided, further, that if the total cost of any single improvement to any Inn shall exceed $250,000 and the General Partner or any of its Affiliates shall have rendered architectural or engineering services in connection with such improvement, the Partnership shall obtain, at the General Partner's expense, an appraisal of the fair market value of such improvement from an independent appraiser and, if the cost of such improvement to the Partnership (including the cost of such appraisal) exceeds its fair market value, then the Person rendering such services shall not be entitled to reimbursement of its costs of performing such services to the extent of such excess; and (ix) the General Partner and its Affiliates shall not be entitled to compensation for the cost of (a) depreciation, utilities, capital equipment, and other overhead and related administrative items related to services performed hereunder (except that the General Partner and its Affiliates may be reimbursed for computer time); and (b) salaries, fringe benefits, travel expenses, and other administrative items related to services performed hereunder incurred by or allocated to any "controlling persons" of the General Partner or its Affiliates (except that the General Partner and its Affiliates may be reimbursed for travel expenses incurred in extraordinary circumstances and directly attributable to the rendering of such services); for purposes of this Section 5.01E(ix), "controlling persons" means "the chairman or any member of the board of directors of the General Partner, Marriott, Host, or other Affiliates of the General Partner; executive management, including the president, vice-presidents, the secretary, and the treasurer of the General Partner, Marriott, Host, and other Affiliates of the General Partner; and any Person (including Host and Marriott in their corporate capacities but not including employees thereof unless otherwise included in "controlling persons") holding five percent or more of the voting securities of the General Partner, Marriott, Host, or such other Affiliates"; and the Partnership shall not compensate the General Partner or its Affiliates for the actual cost of services for which the General Partner or any of its Affiliates is entitled to compensation by way of a separate fee, if any. -22- F. In addition to any specific contracts or agreements described herein, the Partnership may enter into any other contracts or agreements specifically described in the Prospectus (including the Agency Agreement and the Escrow Agreement, entered into in connection with the sale of the Units, which agreements shall be deemed to satisfy all requirements of this Agreement) without any further act, approval, or vote of the Limited Partners that are not inconsistent with this Agreement. Section 5.02. Restrictions on Authority of the General Partner. A. Without the Consent of all of the Limited Partners, the General Partner shall not have authority on behalf of the Partnership to: (i) do any act in contravention of this Agreement; (ii) except as otherwise provided in this Agreement, do any act which would make it impossible to carry on the ordinary business of the Partnership; (iii) confess a judgment in excess of $100,000 against the Partnership; (iv) convert property of the Partnership to its own use, or possess or assign any rights in specific property of the Partnership for other than a purpose of the Partnership; (v) admit a Person as a Limited Partner or as a General Partner, except as provided in this Agreement; (vi) perform any act that would subject any Limited Partner to liability as a general partner in any jurisdiction or any other liability except as provided for herein or under the Act; (vii) list, recognize, or facilitate the trading of the Interests (or any interest therein) on any "established securities market" within the meaning of section 7704 of the Code, or permit any of its Affiliates (or to the extent the General Partner has rights with respect thereto, the Selling Agent or any of its Affiliates) to take such actions, if as a result thereof the Partnership would be taxed for Federal income tax purposes as an association taxable as a corporation; or (viii) create for the Interests (or any interest therein) a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code or otherwise permit, recognize, or facilitate the trading of the Interests (or any interest therein) on any such market, or permit any of its Affiliates (or to the extent the General Partner has rights with respect thereto, the Selling Agent or any of its Affiliates) to take such actions, if as a result thereof the Partnership would be taxed for Federal income tax purposes as an association taxable as a corporation. B. Without the Consent of the Limited Partners, the General Partner shall not have the authority on behalf of the Partnership to: (i) have the Partnership acquire interests in other hotel properties, in addition to the Inns, or in other assets not reasonably related to the conduct of the Partnership's business as set forth in Section 2.03; (ii) sell any Inn to the General Partner or an Affiliate of the General Partner unless the aforesaid Consent of the Limited Partners has been obtained and the -23- following procedures have been followed: (a) the General Partner shall give not less than 30 days' notice of the proposed sale to the Limited Partners, which notice shall set forth the price and other material terms and conditions on which the proposed transaction is to be effected; (b) the Partnership shall obtain three appraisals of the fair market sales value of the Inn to be sold, such appraisals to be prepared by independent, nationally recognized appraisers experienced in the valuation of hotel properties selected by the General Partner (the cost of all such appraisals to be borne by the General Partner or Affiliate); (c) such appraiser shall not have, directly or indirectly, any material interest in or material business or professional relationship with the General Partner or any of its Affiliates and the compensation of each such appraiser shall be determined and embodied in a written contract before such appraisal is prepared; (d) the price at which the sale is effected shall not be less than the average of the three amounts determined by the three appraisers, disregarding entirely any appraisal that differs by more than 20% from the amount determined by the appraiser whose determination is between the highest and lowest of the amounts determined by the three appraisers (in the case of a purchase pursuant to the right of first refusal granted to the Manager, the price shall not be less than the higher of such average or the price offered to the Partnership by a third party); (e) the purchase price must be payable in cash; (f) no real estate commission may be paid by the Partnership in connection with such sale; and (g) the General Partner shall include copies of such appraisals with the aforesaid notice to the Limited Partners; (iii) effect any amendment to any agreement, contract, or arrangement with the General Partner or any of its Affiliates which adversely effects the rights of or benefits to the Limited Partners or, in the case of the Purchase Agreement, the Ground Leases, the Limited Debt Service Guarantee, and the Management Agreement, which reduces the responsibilities or duties of the General Partner as a general partner of the Partnership or any of its Affiliates under this Agreement or any such other agreement, or which increases the compensation payable to the General Partner or any of its Affiliates hereunder or thereunder; provided, however, the foregoing shall not be deemed to require the Consent of the Limited Partners for the General Partner to cause the Partnership to enter into a new management agreement with respect to the Inns, on terms substantially the same as those in the Management Agreement as contemplated therein, in the event of the refinancing of fewer than all of the Inns; (iv) incur debt of the Partnership except as set forth in Section 5.01C(ii); (v) agree to the addition of transient guest rooms at an Inn unless the Inn has had an average occupancy rate of at least 70% for a consecutive period of at least 13 Accounting Periods immediately prior to commencement of construction of the addition; (vi) make any election to continue beyond its term, discontinue, or dissolve the Partnership; (vii) voluntarily withdraw as a General Partner; (viii) permit or cause the Partnership to incur any debt in excess of $250,000 (except the debt pursuant to the Loan Agreement and liabilities to Marriott and its Affiliates with respect to the Limited Debt Service Guarantee) otherwise permitted to be incurred pursuant to the terms of this Agreement if such debt would not constitute in its entirety "qualified nonrecourse financing" within the meaning of section 465(b)(6)(B) of the Code and the applicable Treasury Regulations and a -24- Nonrecourse Liability, unless (a) the General Partner, in accordance with its fiduciary duties as a general partner and taking into consideration both the reasonably foreseeable tax consequences to the Limited Partners as a group and the alternatives that the General Partner believes are reasonably available to the Partnership, determines that such action is not detrimental to the best interests of the Limited Partners (and in making such determination, the General Partner may rely upon an opinion of independent counsel as to the tax consequences to the Limited Partners as a group), or (b) the General Partner shall have obtained the Consent of the Limited Partners to such action; (ix) cause the Partnership to merge or consolidate with any other entity; (x) accept the substitution of more than five (5) Inns under the Purchase Agreement; sell, lease, or otherwise dispose (or consent to the sale, lease, or other disposition), directly or indirectly, in one transaction or a series of related transactions, of the greater of (1) 15 of the Inns or any interest therein, or (2) a number of the Inns or any interest therein for which the aggregate original purchase price and Development Fee, as allocated in the Purchase Agreement, exceeds 30% of the total purchase price and Development Fee paid by the Partnership for the Inns; or sell, lease, or otherwise dispose (or consent to the sale, lease, or other disposition), directly or indirectly, in one transaction or a series of related transactions, of any of the Inns or any interest therein if the purchaser, lessee, or other transferee is the General Partner or any Affiliate thereof, except in accordance with Section 5.02B(ii); (xi) cause the Partnership to sell all or substantially all of the assets of the Partnership in one transaction or a series of related transactions, except upon dissolution and liquidation in accordance with Article Eight; or (xii) cause the Partnership to incur any debt that would result in Refinancing Proceeds being distributed to the Partners unless such Refinancing Proceeds are distributed to the Partners in the same taxable year in which the Partnership incurred such liability. C. Any transaction between the Partnership and the General Partner or an Affiliate that is effected with the requisite Consent of the Partners in accordance with this Section 5.02 after disclosure to the Limited Partners of all the material terms thereof shall be deemed to satisfy the requirements of Section 5.01E. Section 5.03. Duties and Obligations of the General Partner. A. The General Partner shall take all action which may be necessary or appropriate for the acquisition, development, maintenance, preservation, and operation of the properties and assets of the Partnership in accordance with the provisions of this Agreement and applicable laws and regulations (it being understood and agreed, however, that the General Partner shall be permitted to cause the partnership to contract with other Persons for the direct performance of day-to-day management or operational services for the Inns and other properties of the Partnership (and to pay fees therefor in such amounts as the General Partner determines to be fair and equitable) and that the General Partner shall have no obligation to perform such services itself, the General Partner's obligation with respect thereto being limited to using its best efforts to cause the Partnership to locate and employ a manager or operator to perform such services). The General Partner shall have fiduciary responsibility for the safekeeping and use of the funds and assets of the Partnership, whether or not in the possession and control of the General Partner, and the General Partner shall not employ or permit any other Person to employ such funds or assets except in accordance with the terms of this Agreement. Notwithstanding the foregoing, however, the General -25- Partner shall have no liability for any loss sustained by the Partnership as a result of the bankruptcy, receivership, insolvency, or other economic failure of any bank, savings and loan institution, other depositary of funds or entity to or with which funds of the Partnership have been deposited or invested pursuant to Section 9.03, so long as the General Partner would not have liability under Section 5.06 in the selection of such depositary or the maintenance of Partnership funds thereat. B. The General Partner shall not (i) directly or through a subsidiary engage in any business other than that of acting as general partner of the Partnership, (ii) pay dividends or make other distributions or payments on its stock or incur any obligations if, as a result, its net worth would be reduced below the requirement of Section 5.03D, (iii) merge or consolidate with another entity except Marriott or a wholly owned direct or indirect subsidiary of Marriott, (iv) voluntarily dissolve, or (v) borrow any funds or become liable for any obligations of third parties except to the extent that any such borrowings or liabilities are directly related to meeting the financial needs of the Partnership. Host and the General Partner agree that so long as the General Partner is the general partner of the Partnership, its parent company, Host, will not transfer its stock of the General Partner except to a wholly owned, direct or indirect, subsidiary of Marriott and Marriott and the General Partner agree that so long as the General Partner is the general partner of the Partnership, Marriott will not sell the stock of Host unless the stock of the General Partner is thereafter owned by Marriott or a wholly owned, direct or indirect, subsidiary of Marriott. Marriott also shall pay to the Partnership, upon demand, the amount of any losses incurred by the Partnership as a result of the attachment by any creditor of Marriott or any of its Affiliates of any Partnership funds held by or on behalf of the Manager pursuant to the Management Agreement (including, without limitation, Inn working capital and net revenues from Inn operations). In addition, in the event the General Partner fails to make a required payment to the Partnership pursuant to Section 3.05C with respect to a Foreign Investor who purchased Units in the Initial Public Offering or any permitted transferee pursuant to Section 7.01I, Marriott shall pay to the Partnership the amount required to be paid to the Partnership by the General Partner thereunder and shall succeed to all rights and remedies of the General Partner thereunder. C. The General Partner shall devote to the Partnership such time as may be necessary for the proper performance of its duties hereunder, but the officers and directors of the General Partner shall not be required to devote their full time to the performance of duties of the General Partner. D. The General Partner shall have at the time of the admission of the Initial Limited Partners, and shall use its reasonable best efforts to maintain at all times thereafter, a net worth at an amount equal to at least $8,417,878 in excess of its investment in the Partnership. E. The General Partner shall take such action as may be necessary or appropriate in order to form or qualify the Partnership under the laws of any jurisdiction in which the Partnership is doing business or owns property or in which such formation or qualification is necessary in order to protect the limited liability of the Limited Partners or in order to continue in effect such formation or qualification. F. Except as otherwise permitted in Section 5.02B(viii), the General Partner shall at all times conduct its affairs and the affairs of the Partnership and all of its Affiliates in such a manner that neither the Partnership nor any Partner nor any Affiliate of any Partner will have any personal liability on any Partnership Debt. The General Partner shall use its best efforts, in the conduct of the Partnership's business, to put all suppliers and other Persons with whom the Partnership does business on notice that the Limited Partners are not personally liable for Partnership obligations, and all agreements to which the Partnership is a party shall include a statement to the effect that the Partnership is a limited partnership organized under the Act; but the General Partner shall not be liable to the Partnership or to any Limited Partner for any failure to -26- give such notice to such suppliers or other Persons or to have any such agreement fail to contain such statement. G. The General Partner shall prepare or cause to be prepared and shall file on or before the due date (or any extension thereof) any Federal, state or local tax returns required to be filed by the Partnership. The General Partner shall cause the Partnership to pay any and all taxes payable by the Partnership whether by way of withholding from distributions to the Partners or otherwise. H. The General Partner shall be under a duty to conduct the affairs of the Partnership in good faith and in accordance with the terms of this Agreement and in a manner consistent with the purposes set forth in Section 2.03. Nothing contained in this Agreement is intended or shall be construed to contract away the fiduciary duty of the General Partner to the Limited Partners. I. The General Partner shall use its best efforts to assure that the Partnership shall not be deemed an investment company as such term is defined in the Investment Company Act of 1940. J. The General Partner shall monitor the transfers of Interests to determine (i) if such Interests are being traded on an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of section 7704 of the Code, and (ii) whether additional transfers of Interests would result in the Partnership being unable to qualify for at least one of the "safe harbors" set forth in IRS Notice 88-75 (or such other guidance subsequently published by the IRS setting forth safe harbors under which Interests will not be treated as "readily tradable on a secondary market (or the substantial equivalent thereof)" within the meaning of section 7704 of the Code) (the "Safe Harbors"). The General Partner shall take (and cause its Affiliates to take) all steps reasonably necessary or appropriate to prevent any trading of Interests or any recognition by the Partnership of transfers made on such markets and, except as otherwise provided herein, to ensure that at least one of the Safe Harbors is met. K. The General Partner shall maintain or cause to be maintained for five (5) years after the closing of the Initial Public Offering a record of the information obtained to indicate that the Initial Limited Partners met the suitability standards employed in connection with the Initial Public Offering and shall obtain a commitment from the Selling Agent to maintain the same record of information required of the General Partner. L. From time to time, the General Partner shall consider whether or not, in the reasonable judgment of the General Partner, it would be in the best interests of the Partnership to effectuate a sale or refinancing of all or a portion of the Inns, with all or part of the Capital Receipts from any such sale or refinancing to be distributed to the Partners in accordance with Article Four. If the General Partner, in its reasonable judgment, determines that such a sale or refinancing would be in the best interests of the Partnership, then the General Partner shall, subject to Section 5.02B(x) in the case of a sale, use its reasonable best efforts to cause the Partnership to effectuate such a sale or refinancing. In the event that not all of the Inns have been sold or otherwise disposed of prior to the year 2001, then, subject to Section 5.02B(x) and to the Management Agreement and the Loan Agreement, the General Partner shall use its reasonable best efforts to sell the remaining Inns, in one or more transactions, as it determines appropriate in its reasonable judgment. Section 5.04. Compensation of General Partner. The General Partner as general partner of the Partnership shall not in such capacity receive any salary, fees, profits, or distributions except the General Partner shall receive such allocations and distributions to which it may be entitled under Article Four or Article Eight. Notwithstanding the foregoing, however, the -27- Partnership shall reimburse the General Partner and its Affiliates for the actual cost of goods and materials used for or by the Partnership and obtained from unrelated third parties and for the actual cost of providing any accounting, tax, and other administrative services required or contemplated by this Agreement (excluding services required to be performed under the Management Agreement) to the extent that such goods, materials, and services are reasonably necessary to the prudent operation of the business of the Partnership and the cost thereof is comparable to or less than the amount the Partnership would have been required to pay to an unrelated third party. Notwithstanding the foregoing, the General Partner and its Affiliates shall not be entitled to reimbursement for (i) depreciation, utilities, capital equipment, and other overhead and related administrative items (except that the General Partner and its Affiliates may be reimbursed for computer time and other expenses to the extent incurred in connection with the administration of the Partnership); and (ii) salaries, fringe benefits, travel expenses, and other administrative items incurred by or allocated to any "controlling persons" of the General Partner or its Affiliates (except that the General Partner and its Affiliates may be reimbursed for travel expenses incurred in extraordinary circumstances and directly attributable to the rendering of reimbursable administrative services). For purposes of this Section 5.04, "controlling persons" means "the chairman or any member of the board of directors of the General Partner, Marriott, Host, or other Affiliates of the General Partner; executive management, including the president, vice- presidents, the secretary, and the treasurer of the General Partner, Marriott, Host, and other Affiliates of the General Partner; and any Person (including Host and Marriott in their corporate capacities but not including employees thereof unless otherwise included in "controlling persons") holding five percent or more of the voting securities of the General Partner, Marriott, Host, or such other Affiliate." Notwithstanding the foregoing provisions of this Section 5.04, the Partnership shall not reimburse the General Partner for expenses related to services for which the General Partner or any of its Affiliates is entitled to compensation by way of a separate fee, if any. All expenses of the Partnership shall be billed directly to and paid by the Partnership, and, except as expressly permitted by this Section 5.04, no reimbursement shall be made therefor to the General Partner or any of its Affiliates. The General Partner and its Affiliates may perform other services for the Partnership in accordance with Section 5.01E. Section 5.05. Other Business of Partners. Any Limited Partner may engage independently or with others in other business ventures of every nature and description. Nothing in this Agreement shall be deemed to prohibit any Affiliate of the General Partner from dealing, or otherwise engaging in business with Persons transacting business with the Partnership or from providing services relating to the purchase, sale, financing, management, development, or operation of hotels, motels, restaurants, or other food and lodging facilities and receiving compensation therefor, even if competitive with the business of the Partnership. Neither the Partnership nor any Partner shall have any right by virtue of the relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, even if competitive with the business of the Partnership. Neither the General Partner nor any Affiliate of the General Partner shall be obligated to present any particular opportunity (other than an opportunity that is within the scope of the purpose of the Partnership specified in Section 2.03) to the Partnership even if such opportunity is of a character which, if presented to the Partnership could be taken by the Partnership, and any Affiliate of the General Partner shall have the right to take for its own account (individually or as a trustee, partner, or fiduciary) or to recommend to others any such particular opportunity. Section 5.06. Limitation on Liability of General Partner; Indemnification. A. Subject to this Section 5.06, the General Partner shall not be liable for the return of the Capital Contributions of the Limited Partners or for any portion thereof, it being expressly understood that any return of capital shall be made solely from the assets of the Partnership; nor shall the General Partner be required to pay the Partnership or to any Limited Partner any deficit in the Capital Account of any Partner upon dissolution or otherwise, except as otherwise provided in Section 8.02E. -28- B. The General Partner shall have no liability, responsibility, or accountability in damages or otherwise to any other Partner or to the Partnership for, and the Partnership agrees to indemnify, pay, protect, and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner and to the extent permitted by law) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses, and disbursements of any kind or nature whatsoever (including, without limitation, all costs and expenses of defense, appeal, and settlement of any and all suits, actions, or proceedings threatened or instituted against the General Partner or the Partnership and all costs of investigations in connection therewith) which may be imposed on, incurred by, or asserted against the General Partner or the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership, or on the part of the General Partner as the general partner of the Partnership, including any action or inaction in connection with the General Partner acting as Tax Matters Partner or Designated Person under Section 5.07, if, but only if, (i) the action or inaction of the General Partner giving rise thereto was determined by the General Partner, in good faith, to be in the best interests of the Partnership; (ii) such action or inaction shall have been on behalf of the Partnership and within the scope of the authority granted to the General Partner by this Agreement or by law or by the Limited Partners in accordance with this Agreement; and (iii) the General Partner and its Affiliates were not guilty of negligence, fraud, misconduct, or breach of fiduciary duty to the Partnership or any Partner. The satisfaction of the obligations of the Partnership under this Section 5.06 shall be from and limited to the assets of the Partnership and no Limited Partner shall have any personal liability on account thereof. The provisions of this indemnification shall also extend to any Person performing services for the Partnership on behalf of the General Partner, within the scope of its authority as the General Partner of the Partnership, who is an Affiliate of the General Partner, so long as such Person satisfied the requirements of clauses (i), (ii), and (iii) above. Notwithstanding any other provision of this Agreement, the Partnership shall not incur any cost in excess of the cost of insuring the Partnership itself in respect of any liability insurance that insures the General Partner or any other Person for any liability with respect to which indemnity would be prohibited under this Section 5.06B. C. The General Partner shall have no liability or responsibility hereunder to make loans, advances, or additional Capital Contributions to the Partnership except as specified in Sections 3.04, 3.11A, and 8.02E and except as may otherwise be provided as a matter of law or under the Loan Agreement. However, except for advances made pursuant to the Limited Debt Service Guarantee (which advances will be repaid in accordance with such guarantee), to the extent the General Partner advances any funds to meet any liabilities or obligations of the Partnership, any such advances shall be deemed loans to the Partnership by the General Partner and, subject to Section 5.01E(vi), shall accrue interest per annum at one percentage point in excess of the Prime Rate (or the highest lawful rate under the laws of the State of Delaware, whichever is less) payable in arrears on the first day of each Fiscal Quarter and such amounts shall be due and payable upon that date which is the fifth anniversary of the date on which any such advances were made; provided, however, that any and all such advances governed by this Section 5.06C shall be paid prior to distributions to Partners out of any Cash Available for Distribution to the Partners (except for distributions with respect to the Partners' Preferred Distribution), upon the liquidation or dissolution of the Partnership, or the distribution to the Partners of any Capital Receipts from the sale of an Inn. D. Notwithstanding the foregoing, neither the General Partner nor any other Persons specified in Section 5.06B nor any Person acting as an underwriter or broker-dealer on behalf of the Partnership shall be indemnified by the Partnership for liabilities arising under Federal or state securities laws unless (i) there has been a successful adjudication in favor of the indemnitee on the merits of each count involving alleged securities law violations, or such claims against the indemnitee have been dismissed with prejudice on the merits by a court of competent jurisdiction, and, in either case, indemnification of litigation costs is approved by a court of competent jurisdiction, or (ii) a court of competent jurisdiction approves a settlement of the claims against a -29- particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for Federal or state securities law violations, the party seeking indemnification shall place before the court the published positions of the Securities and Exchange Commission, the Massachusetts Securities Division, the Missouri Securities Division, the Pennsylvania Securities Commission, and any other state securities commissions of states in which Units were offered or sold with respect to the issue of indemnification for securities law violations. Notwithstanding any other provision of this Agreement, the Partnership shall not incur the cost of any liability insurance that insures the General Partner or any other Person for any liability with respect to which indemnity would be prohibited under this Section 5.06D. E. The Partnership may not advance expenses or other costs incurred by the General Partner (or any other Person described in Section 5.06B) in defending any threatened or pending action, suit, or proceeding subject to this Section 5.06. F. In discharging its obligations under this Agreement, the General Partner may obtain an opinion, appraisal, or examination by independent counsel, appraiser, accountant, or other expert, if appropriate, and shall be entitled to rely, to the extent reasonable, upon such opinion, appraisal, or examination for matters within the expertise of the person or entity providing or rendering the same. Section 5.07. Designation of Tax Matters Partner and Designated Person for Purposes of Investor List. A. The General Partner shall act as the Tax Matters Partner of the Partnership, as provided in Treasury Regulations pursuant to section 6231 of the Code, and as the Designated Person for purposes of maintaining the Investor List. Each Partner hereby approves of such designation and agrees to execute, certify, acknowledge, deliver, swear to, file, and record at the appropriate public offices such documents as may be deemed necessary or appropriate to evidence such approval. B. To the extent and in the manner provided by applicable Code sections and Treasury Regulations thereunder, the Tax Matters Partner shall furnish the name, address, profits interests, and taxpayer identification number of each Partner (or assignee) to the IRS. C. To the extent and in the manner provided by applicable Code sections and Treasury Regulations thereunder, the Tax Matters Partner shall inform each Partner of administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"). D. The Tax Matters Partner is authorized, but not required: (i) to enter into any settlement with the IRS with respect to any tax audit or judicial review, and in the settlement agreement the Tax Matters Partner may expressly state that such agreement shall bind all Partners except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Treasury Regulations thereunder) files a statement with the IRS providing that the Tax Matters Partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a "notice partner" (as defined in section 6231 of the Code) or a member of a "notice group" (as defined in section 6223(b)(2)); (ii) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax -30- purposes (a "final adjustment") is mailed to the Tax Matters Partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Partnership's principal place of business is located; (iii) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (iv) to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (v) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and (vi) to take any other action on behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. E. Notwithstanding any other provision of this Agreement (but subject to Sections 5.04, 5.06B, and 5.06D of this Agreement), the Partnership shall indemnify and reimburse, to the full extent provided by law, the Tax Maters Partner for all expenses, including legal and accounting fees (as such fees are incurred), claims, liabilities, losses, and damages incurred in connection with any tax audit or judicial review proceeding with respect to the tax liability of the Partners, the payment of all such expenses to be made before the distribution of Cash Available for Distribution to the Partners. Neither the General Partner nor any of its Affiliates nor other Person shall be obligated to provide funds for such purpose. F. The taking of any action and the incurring of any expense by the Tax Matters Partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole discretion of the Tax Matters Partner and the provisions on limitations of liability of the General Partner and indemnification set forth in Section 5.06 of this Agreement shall be fully applicable to the Tax Matters Partner in its capacity as such. 5.08. Other Limitations. The following additional limitations shall apply to the operation and management of the Partnership: (i) no Cash Available for Distribution shall be reinvested in the Inns or other Partnership assets; (ii) except for such reserves as may be determined by the General Partner, in its reasonable discretion, to be necessary to provide for the foreseeable cash needs of the Partnership or for the maintenance, repair, expansion, or restoration of the Inns, no Capital Receipts shall be reinvested in the Inns or other Partnership assets unless sufficient cash will be distributed to the Partners pursuant to Article Four to pay any Federal or state income tax (assuming Partners are in a combined Federal and state marginal income tax bracket of 35%) resulting from the transaction giving rise to such Capital Receipts; (iii) the General Partner shall not receive for its account any kickbacks or rebates with respect to expenditures made by or on behalf of the Partnership in the General Partner's role as the general partner of the Partnership; nor shall the -31- General Partner enter into any reciprocal arrangement that has the effect of circumventing this Section 5.08(iii); (iv) no commission or other fee shall be payable to the General Partner or any Affiliate, directly or indirectly, in connection with the distribution or reinvestment of any Cash Available for Distribution or Capital Receipts; (v) the General Partner shall not directly or indirectly, pay or award any commissions or other compensation to any Person for encouraging or inducing any other Person to purchase Units; provided, however, that nothing herein shall prohibit the payment of normal sales commissions and fees to the underwriters or broker-dealers (including, without limitation, the Selling Agent) in connection with an offering of Interests in the Partnership; (vi) any sale, purchase, or lease of any real property or any interest therein by the Partnership, including, without limitation, the Partnership's purchase of the Inns and exercise of any Site Purchase Option, shall be supported by an appraisal report of an independent, nationally recognized appraiser of hotel properties selected by the General Partner and the sum of the purchase price paid for such real property and Acquisition Fees payable by the Partnership in connection with such purchase shall not exceed the appraised value of such real property set forth in such appraisal report; (vii) the total commissions payable to a Person in connection with the sale of one or more of the Inns or other real estate owned by the Partnership (solely for the sale of such real estate) shall be limited to a competitive real estate commission not to exceed six percent (6%); (viii) neither the General Partner (other than in discharge of its responsibilities under this Agreement, for which it shall receive no fee or other compensation) nor any Affiliate shall be granted an exclusive right to sell or exclusive employment to sell any Inn or other real estate owned by the Partnership, and neither the General Partner nor any Affiliate shall be paid any commission or other fee for services in connection with the sale or other disposition of any Inn or other real estate owned by the Partnership, provided that nothing in this Section 5.08 shall be construed to limit the General Partner's right to the allocations and distributions described in Article IV; (ix) neither the General Partner nor any Affiliate shall provide insurance brokerage services in connection with obtaining insurance on the Partnership's property; (x) the Partnership shall commit at least 79.0% of the Capital Contributions of the Limited Partners to Investment in Properties, as described under "Use of Proceeds" in the Prospectus; (xi) the Partnership shall cause the requirements of section 1707.09(J) of the Ohio Revised Code to be complied with in connection with the Initial Public Offering if the Units are registered to be offered and sold in Ohio, and in any event the General Partner shall pay Organization and Offering Expenses to the extent the same exceeds 15% of the Capital Contributions of the Limited Partners; (xii) the Partnership shall not purchase or lease any property (other than goods or materials purchased in connection with the operation of the Inns in -32- accordance with Section 5.01E or in connection with administration of the Partnership in accordance with Section 5.04) in which the General Partner or any Affiliate has an interest or cause the Partnership to acquire any property from any partnership or joint venture in which the General Partner or any Affiliate has an interest unless such purchase or lease is pursuant to the Purchase Agreement or the Ground Leases; (xiii) the Partnership shall not incur mortgage indebtedness in excess of 85% of the purchase price of the Inns (or such lesser amount as may be permitted under the Loan Agreement) prior to a refinancing of the debt incurred pursuant to the Loan Agreement or thereafter incur mortgage indebtedness, except to the extent necessary to repay the debt incurred pursuant to the Loan Agreement, in excess of 85% of the aggregate fair market value of all refinanced Inns, as determined by the lender as of the date of the refinancing; (xiv) the Partnership shall not make any loans or otherwise extend credit to the General Partner or any of its Affiliates; (xv) the Partnership shall not lease any property to the General Partner or any of its Affiliates; (xvi) the Partnership shall not borrow any money from the General Partner or any of its Affiliates, the principal amount of which is scheduled to be paid over a period of 48 months or longer and/or not less than 50% of the principal amount of which is scheduled to be paid during the first 24 months, other than pursuant to Section 5.06C or the Limited Debt Service Guarantee; (xvii) the Partnership shall not borrow any funds from the General Partner or any Affiliate of the General Partner unless such borrowing is in accordance with Section 5.01(E)(vi) and Section 5.06C; (xviii) the Partnership shall not acquire any property in exchange for Interests in the Partnership; and (xix) the Partnership shall not invest in limited partnership interests, general partnership interests, or joint ventures. ARTICLE SIX WITHDRAWAL AND REMOVAL OF GENERAL PARTNER Section 6.01. Limitation on Voluntary Withdrawal. Except as provided in Section 5.02B(vii), the General Partner shall not have the right (but shall have the power) to retire or withdraw voluntarily from the Partnership, and any withdrawal in violation hereof shall constitute a breach of this Agreement and shall be subject to the provisions of Section 6.03. Prior to any voluntary withdrawal, the General Partner shall give the Limited Partners notice of its intention to withdraw at least 90 days in advance of such withdrawal and the Limited Partners may, by Consent of the Limited Partners, elect a substitute General Partner. If a substitute General Partner is elected, it shall be admitted immediately prior to the withdrawal of the General Partner and shall continue the business of the Partnership without dissolution. The General Partner shall not sell, transfer, or assign its entire general partner Interest or any portion thereof other than as provided below. The General Partner shall be permitted to assign its Interest in the Net Profits, Net Losses, -33- Losses, Gains, Cash Available for Distribution, Capital Receipts, and other allocations and distributions only to a wholly owned Affiliate, subject to the following conditions: (i) the General Partner shall not be permitted to assign such rights unless the General Partner receives an opinion of counsel that such assignment shall not cause any material adverse tax consequences to the Partnership or the Limited Partners or cause a default on any Partnership debt obligation; (ii) notwithstanding such assignment by the General Partner of its Interest in the Net Profits, Net Losses, Gains, Cash Available for Distribution, or Capital Receipts as provided above, upon any such assignment (A) the General Partner shall not cease to be a general partner of the Partnership, and shall continue to be a general partner of the Partnership, and (B) the General Partner shall not cease to have any and all rights and powers of a general partner under this Agreement and the Act and shall continue to have any and all such rights and powers and the assignee shall not acquire any such rights and powers of a general partner; and (iii) following any such assignment, the Interest of the General Partner in the Net Profits, Net Losses, Gains, Losses, Cash Available for Distribution, Capital Receipts, and other allocations and distributions shall be not less than 1% thereof. Section 6.02. Bankruptcy or Dissolution of the General Partner. In the event of the bankruptcy of the General Partner or other event that causes the General Partner to cease to be a general partner under Sections 17-402(6), (7), (8), (9), or (10) of the Act, the General Partner shall cease to be the General Partner and its Interest shall terminate; provided, however, that such termination shall not effect any rights or liabilities of the General Partner which matured prior to such event, or the value, if any, at the time of such event of the Interest of the General Partner. Section 6.03. Liability of Withdrawn General Partner. If the General Partner shall cease to be General Partner of the Partnership, it shall be and remain liable for all obligations and liabilities incurred by it as General Partner prior to the time such withdrawal shall have become effective, but it shall be free of any obligation or liability incurred on account of the activities of the Partnership from and after the time such withdrawal shall have become effective. Any withdrawal by the General Partner except in accordance with Sections 5.02B(vii) and 6.01 shall constitute a breach of this Agreement. If the General Partner withdraws in violation of this Agreement, (a) the Partnership shall be entitled to recover from the withdrawn General Partner damages for breach of this Agreement and offset such damages against the amount, if any, otherwise distributable to it in addition to any remedies otherwise available under applicable law, and (b) the General Partner's Interest as General Partner in the Partnership shall be treated as the Interest of a removed General Partner under Section 6.04 and shall be reduced by 50% (which reduction of the General Partner's interest is not a penalty). In addition, if the General Partner withdraws from the Partnership (whether with Consent of the Limited Partners or in violation of this Agreement), the General Partner's Interest shall be subject to purchase in the same manner as the interest of a removed General Partner; provided, however, that the purchase price payable in connection with any such purchase shall be paid by a non-interest bearing promissory note with principal payable, if at all, from distributions the General Partner otherwise would have received from this Agreement had the General Partner not withdrawn. Section 6.04. Removal of General Partner. In the event of the removal of the General Partner pursuant to Section 10.02B, the removed General Partner's Interest as General Partner in the Partnership shall become a limited partner interest but without any voting or consensual rights which other Limited Partners may have (except the right to continue the business of the Partnership and to appoint one or more general partners as provided in Section 6.05A, with respect to which the General Partner agrees that it will consent in writing to such action); provided, -34- however, that if the General Partner is removed pursuant to Section 10.02B and if the notice of the meeting or solicitation of Consent for such removal contained a statement (which shall have been true) that the General Partner breached any of its obligations under Section 5.03, breached any of the restrictions under Section 5.02, committed an act of fraud, committed any act of misconduct, bad faith, gross negligence, or breach of fiduciary duty of loyalty in carrying out its duties as the general partner which was not remedied within 30 days, or breached any other provision of this Agreement which was not remedied within 30 days after notification thereof, then its Interest will be reduced by fifty percent (50%). Such reduction of the General Partner's interest is not a penalty. In the event of the removal of the General partner pursuant to Section 10.02B, then the Partnership shall have the right (but not the obligation) to purchase the removed General Partner's interest in the Partnership (determined after giving effect to the preceding sentence) within 60 days of such removal (or if later, upon the determination of the "present fair market value" of such interest as set forth below) at the "present fair market value" of such interest. For purposes of the preceding sentence, the "present fair market value" of the removed General Partner's Interest in the Partnership shall be the amount agreed to between the Partnership and the removed General Partner or, in the absence of such an agreement, the amount determined by arbitration in accordance with the then current rules of the American Arbitration Association. Payment of the purchase price for the removed General Partner's Interest may be made, at the election of the Partnership, in cash or by a promissory note bearing interest at the Prime Rate (but not higher than the maximum lawful rate) and providing for payment of principal in five equal annual installments. The expense of all arbitrations pursuant to this Section 6.04 shall be borne equally by the Partnership and the removed General Partner. Section 6.05. Continuation and Reconstitution. A. Upon the occurrence of an event described in Section 8.01A(ii), (iii), or (iv), any remaining General Partner and any substitute General Partner shall be obligated to continue the business of the General Partner without dissolution. In the event that, upon the occurrence of such an event, there is no remaining General Partner or substitute General Partner or there is no remaining or substitute General Partner who agrees to continue the business of the Partnership, in breach of the obligation set forth in the preceding sentence, then the Partnership shall be dissolved and its affairs shall be wound up unless, within 90 days after the occurrence of such event, all Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more additional general partners. B. If, upon the occurrence of an event described in Section 8.01A(ii), (iii), or (iv) at a time when there is no remaining or substitute General Partner or there is no remaining or substitute General Partner who agrees to continue the business of the Partnership, in breach of the obligation set forth in the first sentence of Section 6.05A, the Partnership is not continued in accordance with Section 6.05A, then, within an additional 90 days after the period referred to above, the Limited Partners, by Consent of the Limited Partners, may elect to reconstitute the Partnership and continue its business on the same terms and conditions set forth in this Agreement by forming a new limited partnership on terms identical to those set forth in this Agreement (except to the extent that such terms are amended by Consent of the Limited Partners in order to reflect the interests, allocations, fees, benefits, rights, duties, and obligations of the successor general partner) and having as a general partner a Person approved by a Consent of the Limited Partners. Except as amended by Consent of the Limited Partners as aforesaid, the successor general partner shall have all of the rights, duties, and obligations of the former General Partner and shall have a 1% interest in the Net Profits, Net Losses, Gains, Losses, Cash Available for Distribution, Capital Receipts, and other allocations and distributions. Upon any such Consent of the Limited Partners, all Partners shall be bound thereby and shall be deemed to have approved thereof. Unless such an election is made within 180 days after the occurrence of an event described in such Section, the Partnership shall continue only activities necessary to wind up its affairs. If such an election is so made within 180 days after the occurrence of such an event, then: -35- (i) the reconstituted Partnership shall continue until the end of the term set forth in Section 2.04 unless earlier dissolved in accordance with terms of this Agreement; (ii) if the successor general partner is not the former General Partner, then, subject to Section 6.04, the interest of the former General Partner shall be treated thenceforth as a limited partner interest; and (iii) all necessary steps shall be taken to cancel this Agreement and the Certificate of Limited Partnership and to enter into a new partnership agreement and certificate of limited partnership, and the successor general partner may for this purpose exercise the powers of attorney granted the General Partner pursuant to this Agreement; provided that the action of the Limited Partners, by Consent of the Limited Partners, to approve a successor general partner and to reconstitute and to continue the business of the Partnership, as provided in this Section 6.05B (which actions shall not be taken and such reconstitution shall not be effective until 15 days following such vote), shall be void ab initio if prior to or within 15 days after such vote either: (A) the Partnership shall have received an opinion of counsel, satisfactory to the Limited Partners as provided in Section 10.02C, that such action may not be effected without adversely affecting the liability of the Limited Partners under the Act or a court having jurisdiction over the matter shall have entered a judgment subject to no further appeal to such effect; or (B) the Partnership shall have received an opinion of counsel, satisfactory to the Limited Partners as provided in Section 10.02C, that such action may not be effected without changing the Partnership's status as a partnership for federal income tax purposes, or a court having jurisdiction over the matter shall have entered a judgment subject to no further appeal to such effect, or the IRS shall have issued a ruling to such effect. ARTICLE SEVEN ASSIGNABILITY OF UNITS Section 7.01. Restrictions on Assignments. After the admission to the Partnership of the Initial Limited Partners, a Limited Partner shall have the right to assign any Interest (which for purposes of this Agreement shall include any form of assignment, transfer, alienation or hypothecation of any Interest), subject to the following limitations: A. No assignment of any Interest, either wholly or in part and whether absolute or for collateral purposes, may be made other than on the first day of a Fiscal Quarter (commencing on or after the first day of the first full Fiscal Quarter of the Partnership). B. No assignment of any Interest may be made if the assignment is pursuant to a transaction constituting a "sale or exchange" (within the meaning of section 708(b)(1)(B) of the Code) of the Interest and if the Interest sought to be assigned, when added to the total of all other Interests assigned within a period of 12 consecutive months prior thereto, would, in the opinion of legal counsel for the Partnership, result in the Partnership being deemed to have been terminated within the meaning of section 708 of the Code. The General Partner shall give Notification to all Limited Partners in the event that sales or exchanges should be suspended for such reason. Any suspended sales or exchanges shall be made (in chronological order to the extent practicable) as of the first day of an Accounting Period after the end of any such 12-month period, subject to the provisions of this Article Seven. -36- C. The General Partner may prohibit any assignment of an Interest in the Partnership if, in the opinion of legal counsel to the Partnership, such assignment would require filing of a registration statement under the Securities Act of 1933 or would otherwise violate any Federal or state securities or Blue Sky laws (including any investment suitability standards) or regulations applicable to the Partnership or the Units. D. No purported assignment by a Limited Partner of any Unit after which the assignor or the assignee would hold at least a fraction of a Unit but less than five Units, will be permitted or recognized (except for assignments by gift, inheritance or family dissolution or assignments to Affiliates of the assignor). E. No transfer, assignment, or negotiation on any date of an Interest may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation, or (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. F. No purported transfer or assignment of any Interest, or any beneficial interest therein, may be made, and any such purported transfer will be void ab initio, if, as a result of such transfer, the Partnership would be unable to satisfy at least one of the Safe Harbors. Notwithstanding the foregoing, if the Partnership shall have received a favorable IRS ruling or opinion of counsel satisfactory to the General Partner to the effect that such transfer will not result in the Partnership being classified as a "publicly traded partnership" within the meaning of section 7704 of the Code, this Section 7.01F shall not apply to such transfer. G. No assignment of any Interest may be made to any Person unless such Person agrees in writing that such Person will not, directly or indirectly, create for the Units, or facilitate the trading of Units on, a "secondary market (or the substantial equivalent thereof)," within the meaning of section 7704 of the Code. H. No assignment of any Interest may be made if, in the opinion of legal counsel to the Partnership, it would result in the Partnership not being able to obtain or continue in effect any license permitting the service or sale of alcoholic beverages in an Inn. I. No assignment of any Interest may be made to any Person who is not a "United States person" within the meaning of section 7701(a)(30) of the Code, except that this limitation shall not apply to a Limited Partner who is (i) a Foreign Investor (as defined in Section 3.05(C), or an Affiliate of a Foreign Investor, who purchases Units in the Initial Public Offering, or (ii) a Foreign Investor, or an Affiliate of a Foreign Investor, who acquires the Interest from a Person qualifying under clause (i) above; it being intended that Units sold to a Foreign Investor or an Affiliate of a Foreign Investor in the Initial Public Offering shall not be subject to this limitation unless and until such Units are acquired by a "United States person" who is not an Affiliate of a Foreign Investor. J. No assignment of any Interest may be made to any Person generally exempt from Federal income tax under section 501 of the Code or otherwise. K. No transfer or assignment of any Interest may be made unless the proposed assignee has provided the General Partner with (i) a fully completed and executed Application and Assignment and Admission as Substituted Limited Partner in the form set forth on the reverse side of the Unit Certificate and (ii) such other information as the General Partner may reasonably request. -37- L. The General Partner may prohibit transfers of Units for the remainder of a taxable year, notwithstanding that any such transfer would not in itself violate any restrictions on transfers contained in this Section 7.01, if the General Partner, in good faith and based upon the advice of counsel to the Partnership, determines that such action is necessary or advisable in order to protect the Partnership from possible failure to meet at least one of the Safe Harbors. No purported transfer or assignment shall be of any effect unless all of the foregoing conditions have been satisfied. The General Partner is authorized to impose any other limitations or restrictions on the assignment of Interests to the extent that it, in the exercise of its reasonable discretion and based upon the advice of counsel to the Partnership, determines such further limitations or restrictions are necessary or advisable to protect the Partnership from being considered a "publicly traded partnership," within the meaning of section 7704 of the Code. The General Partner shall, from time to time, review the limitations and restrictions on the assignment of Interests then in effect and the Federal income tax law, regulations, and rulings applicable thereto, and shall eliminate or modify any such limitation or restriction to make it less restrictive on assignment of Interests if the Partnership shall have received an opinion of counsel that such elimination or modification may be made without causing the Partnership to fail to meet at least one of the Safe Harbors or be considered an association taxable as a corporation under the applicable federal income tax laws. M. No assignment of any Interest may be made to any Person who is related (within the meaning of section 1.752-1T(h) of the Treasury Regulations) to Sumitomo Trust & Banking Co., Ltd., New York Branch or any subsequent lender to the Partnership (other than Marriott, the General Partner or an Affiliate thereof) whose loan is Nonrecourse Debt. Section 7.02. Assignees and Substituted Limited Partners. A. If a Limited Partner dies, the executor, administrator or trustee, or, if a Limited Partner is adjudicated incompetent or insane, the committee, guardian or conservator, or, if a Limited Partner becomes bankrupt, the trustee or receiver of the estate, shall have all the rights of a Limited Partner for the purpose of settling or managing the estate and such power as the decedent, incompetent, or bankrupt Limited Partner possessed to assign all or any part of the Units and to join with the assignee thereof in satisfying conditions precedent to such assignee becoming a Substituted Limited Partner. The death, dissolution, adjudication of incompetence or bankruptcy of a Limited Partner in and of itself shall not dissolve the Partnership. B. The Partnership will not recognize for any purpose any assignment of any Interest unless (i) there shall have been filed with the Partnership not less than 15 days prior to the first day of the next Fiscal Quarter commencing following such filing, a duly executed and acknowledged counterpart of the instrument making such assignment (in the form set forth on the reverse side of the Unit Certificate) signed by both the assignor and the assignee and a duly executed Application and Admission as Substituted Limited Partner, which instrument evidences, inter alia, the written acceptance by the assignee of all of the terms and provisions of this Agreement, and (ii) the General Partner has determined that such an assignment is permitted under Article Seven and evidenced such determination by executing the Application for Assignment and Admission as Substituted Limited Partner. Irrespective of whether or not any successor to a Limited Partner or a purported assignee of a Limited Partner's Interest hereunder provides the aforesaid instruments, any such Person shall be bound by the terms and provisions of this Agreement. C. Subject to the provisions of this subparagraph 7.02C, no assignee of a Limited Partner's Interest shall be entitled to become a Substituted Limited Partner unless: (i) the General Partner shall have given its written consent thereto, which consent may be withheld in its absolute discretion; -38- (ii) the transferring Limited Partner and the assignee shall have executed and acknowledged such other instrument or instruments as the General Partner may deem necessary or desirable to effect such admission; (iii) the assignee shall have accepted, adopted, and approved in writing all of the terms and provisions of this Agreement, as the same may have been amended, and executed a power of attorney similar to the power of attorney granted in this Agreement; and (iv) the assignee shall pay or obligate itself to pay, as the General Partner may require, all reasonable expenses incurred in connection with his admission as a Substituted Limited Partner (except that the cost of any opinions of counsel referred to in this Article Seven shall be borne by the Partnership). An assignee of a Limited Partner's Interest shall become a Substituted Limited Partner only when the General Partner has reflected the admission of such Person as a Limited Partner in the books and records of the Partnership. The General Partner shall take action once each Fiscal Quarter to reflect in the books and records all Persons, if any, approved for admission to the Partnership as Substituted Limited Partners since the last such action. D. Limited Partners who shall have assigned all their interest in any Interests in accordance with the provisions of this Article Seven shall cease to be Limited Partners of the Partnership with respect to such Interests as of the date that such assignment is given effect the Partnership in accordance with the terms of this Article Seven. A purported assignment of an Interest not in accordance with the provisions of this Article Seven shall not be given effect for any purpose. E. Any Person who is the assignee of any of the Interest of a Limited Partner in accordance with the terms of this Article Seven, but who does not become a Substituted Limited Partner shall be entitled to all the rights of an assignee of a limited partner interest under the Act, including the right to receive distributions from the Partnership and the share of Net Profits, Gain, Net Losses, Loss and recapture income attributable to the Interests assigned to such Person, but shall not be deemed to be a holder of Units for any other purpose under this Agreement. In the event any such Person desires to make a further assignment of any such Interests, such Person shall be subject to all the provisions of this Article Seven to the same extent and in the same manner as any Limited Partner desiring to make an assignment of the Interests. In the event that Units are assigned in accordance with this Article Seven and such assignment is recognized by the General Partner in accordance with this Agreement but the assignee thereof is not admitted as a Substituted Limited Partner, such Units shall be voted in any matter presented to the Limited Partners for a vote in the same proportion as all Units held by Limited Partners are voted. F. There shall be no restrictions on the assignments of Interests except as provided in Article Six or this Article Seven. The Partnership shall not impose any fee on the assignment of Interests in excess of the lesser of the actual costs incurred by the Partnership in connection with such assignment or $150. ARTICLE EIGHT DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP Section 8.01. Events Causing Dissolution. -39- A. The Partnership shall be dissolved and its affairs wound up on the first to occur of the following events: (i) the bankruptcy of the Partnership; or (ii) the withdrawal (whether or nor in accordance with this Agreement) or removal of the General Partner, unless there is, at the time of the occurrence of such event, a remaining or substitute General Partner that continues the business of the Partnership pursuant to its obligations under Section 6.05A or the Partnership is continued pursuant to Section 6.05A; or (iii) the bankruptcy of the General Partner, unless there is, at the time of the occurrence of such event, a remaining or substitute General Partner that continues the business of the Partnership pursuant to its obligation under Section 6.05A or the Partnership is continued pursuant to Section 6.05A; or (iv) the occurrence of any event listed in Section 17-402(6), (7), (8), (9), or (10) of the Act where the General Partner shall cease to be a general partner unless there is, at the time of the occurrence of such event, a remaining or substitute General Partner that continues the business of the Partnership pursuant to its obligation under Section 6.05A or the Partnership is continued pursuant to Section 6.05A; (v) the sale or other disposition of all or substantially all of the property of the Partnership; or (vi) action of the Limited Partners pursuant to Section 10.02B(ii); or (vii) the expiration of the term of the Partnership. Dissolution of the Partnership shall be effective on the day on which the event occurs giving rise to the dissolution. The Partnership shall not terminate until the assets of the Partnership shall have been liquidated as provided in Section 8.02 and all proceeds therefrom have been collected. Notwithstanding the dissolution of the Partnership, prior to the termination of the Partnership, as aforesaid, the business of the Partnership and the affairs of the Partners as such, shall continue to be governed by this Agreement. B. Except as otherwise provided in Section 8.02E, the Partners shall look solely to the assets of the Partnership for all distributions with respect to the Partnership and their Capital Contribution thereto, and shall have no recourse therefor (upon dissolution or otherwise) against the General Partner or any Limited Partner. Section 8.02. Liquidation. A. Upon dissolution of the Partnership and the failure to reconstitute the Partnership as provided in Section 6.05B, the General Partner (or if the dissolution is caused by the occurrence of an event described in Section 8.01A(ii), (iii), or (iv), then a Person that may be designated as "liquidating trustee" by the Consent of the Limited Partners, which "liquidating trustee" shall have all of the powers of the General Partner under this Agreement for purposes of liquidating and winding up the affairs of the Partnership) (the term "General Partner" as used in this Section 8.02 shall be deemed to mean the "liquidating trustee" where appropriate) shall liquidate the assets of the Partnership and the proceeds of such liquidation shall be applied and distributed in the following order of priority: (i) to the payment of the expenses of the liquidation; -40- (ii) in satisfaction of Partnership Debt and all other liabilities of the Partnership (whether by payment or making reasonable provision for payment thereof) owing to creditors of the Partnership other than Partners who are creditors; (iii) in satisfaction of any liabilities of the Partnership (whether by payment or making reasonable provision for payment thereof) owing to Partners who are creditors of the Partnership; and (iv) to the General Partner and to the Limited Partners, in proportion to the net balances in their respective Capital Accounts (after the adjustments required pursuant to Article Four of this Agreement in respect of Net Profits, Net Losses, Gains, and Losses have been reflected therein), to reduce any net balances then existing in the Capital Accounts of the Partners. B. Notwithstanding the foregoing, in the event the General Partner shall determine that an immediate sale of all or part of the Partnership assets would cause undue loss to the Partners, the General Partner, in order to avoid such loss, after having given Notification to all the Limited Partners, to the extent not then prohibited by the limited partnership act of any jurisdiction in which the Partnership is then formed or qualified and applicable in the circumstances, may defer liquidation of and withhold from distribution for a reasonable time any assets of the Partnership except those necessary to satisfy the Partnership's debts and obligations, provided that the liquidation shall be carried out in conformity with the timing requirements of section 1.704- 1(b)(2)(ii)(b) of the Treasury Regulations. C. No assets of the Partnership shall be distributed in kind. D. The General Partner shall cause the liquidation and distribution of all the Partnership's assets and shall cause the cancellation of the Partnership's certificate of limited partnership upon completion of winding up the business of the Partnership. E. Upon the dissolution and termination of the Partnership or a liquidation of the Interest of the General Partner, if, after giving effect to Sections 8.02A through 8.02D hereof for the Fiscal Year in which such dissolution or liquidation occurs, there shall be a deficit in the Capital Account of the General Partner, while there is a positive balance in the Capital Account of any other Partner, the General Partner shall contribute to the Partnership (in cash) the amount of such deficit, which thereupon shall be distributed by the Partnership pro rata to any Partners possessing positive balances in their respective Capital Accounts. Such contribution by the General Partner is to be made to the Partnership not later than the later of the close of the taxable year in which the dissolution or liquidation (as defined in section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations) occurs or 90 days after the date of such dissolution of liquidation. Section 8.03. Constructive Termination. In the event that the Partnership terminate by reason of section 708(b)(1)(B) of the Code, but no event of dissolution has occurred under Section 8.01 of this Agreement, the assets of the Partnership shall, for Federal income tax purposes only, be deemed to have been distributed in kind to the Partners in the same manner as if the Partnership were liquidated under Section 8.02 of this Agreement, and to have been immediately contributed to a successor partnership (for Federal income tax purposes) subject to this Agreement. The Capital Accounts of the Partners thereupon shall be restated in accordance with section 1.704-1(b) of the Treasury Regulations, and allocations of items of Partnership income, gain, loss and deduction for book as well as tax purposes shall thereafter be made in accordance with the terms of this Agreement, section 1.704-1(b) of the Treasury Regulations, and section 704(c) of the Code, applicable. -41- ARTICLE NINE BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS, ETC. Section 9.01. Books and Records. A. The books and records of the Partnership shall be maintained by the General Partner in accordance with applicable law at the principal office of the Partnership and shall be available for examination at such location by any Partner or such Partner's duly authorized representatives at any and all reasonable times. All appraisal reports obtained by the Partnership, whether in connection with the acquisition of the Inns or otherwise, shall be retained by the Partnership for at least five years from the date thereof and shall be available for inspection and duplication by Limited Partners and their designated representatives. B. Each Limited Partner, and each such Limited Partner's duly authorized representative, shall have the right, at reasonable times and at such Limited Partner's own expense, upon prior written notice to the General Partner (which notice shall be given a reasonable length of time in advance in light of the scope of such request, and in no event less than five business days in advance), (i) to have true and full information regarding the status of the business and financial condition of the Partnership as is possessed by the General Partner; (ii) to inspect and copy the books of the Partnership and other reasonably available records and information as is possessed by the General Partner concerning the operation of the Partnership, including copies of any appraisal reports described in subparagraph A above and copies of the Federal, state, and local income tax returns of the Partnership; (iii) to have a current list of the name and last known business, residence, or mailing address of each Partner mailed to such Limited Partner or representatives; (iv) to have true and full information regarding the amount of cash and a description and statement of the value of any property services contributed to the Partnership and the date upon which each Partner became a Partner; and (v) to have a copy of this Agreement, the Certificate of Limited Partnership and all amendments or certificates of amendment, as the case may be, thereto, together with copies of any powers of attorney pursuant to which any such amendment or certificate of amendment has been executed. Section 9.02. Accounting and Fiscal Year. The books of the Partnership will be kept on the accrual basis. The Partnership will report is operations for tax purposes on the accrual method. The Fiscal Year of the Partnership shall end December 31 in each year. Section 9.03. Bank Accounts and Investments. The bank accounts of the Partnership shall be maintained in such banking institutions as the General Partner shall determine (which institutions shall not be the General Partner or any of its Affiliates), and withdrawals shall be made only in the regular course of Partnership business on such signature or signatures as the General Partner may determine. All deposits and other funds not needed in the operation of the business or not yet invested may be invested in U.S. government securities, securities issued or guaranteed by U.S. government agencies, securities issued or guaranteed by states or municipalities, certificates of deposit and time or demand deposits in commercial banks, bankers' acceptances, savings and loan association deposits, or deposits in members of the Federal Home Loan Bank System. Except as expressly permitted pursuant to the Management Agreement, the funds of the Partnership shall not commingled with the funds of any other Person (including the General Partner or any Affiliate of the General Partner). Section 9.04. Reports. The General Partner shall deliver to each holder of Units the following: A. As soon as practicable but in no event later than 75 days after the end of each Fiscal Year of the Partnership (90 days after the end of the initial Fiscal Year of the Partnership if -42- the closing of the Initial Public Offering occurs in 1989), such information as shall be necessary for the preparation by such holder of a Federal income tax return, and state income or other tax returns with regard to the jurisdictions in which the Inns are located. Such information shall include computation of the distributions to such holder and the allocation to such holder of the Net Profits or Net Losses, as the case may be, and any Gain or Loss, as the case may be, recognized by the Partnership during such Fiscal Year; and B. Within 120 days after the end of each Fiscal Year of the Partnership, a report prepared by the General Partner which report shall set forth the following: (i) a statement of assets, liabilities, and Partners' capital, a statement of income and expenses on an accrual basis, a statement of cash flow, and a statement of changes in Partner's capital, prepared by the General Partner on the accrual basis of accounting, in accordance with generally accepted accounting principles, which statements are to be audited and reported on by a firm of independent public accountants selected by the General Partner, setting forth its opinion as to the items in this clause (i); (ii) the balances in the Capital Accounts of the Limited Partners in the aggregate and of the General Partner and the identity and amount of all sources of cash distributed or to be distributed to the Partners in respect of such Fiscal Year; (iii) a report (which need not be audited, but verification of the reimbursed expenses covered by such report shall be within the scope of the statement provided pursuant to Section 9.04B(i) of this Agreement) summarizing the fees, commissions, compensation, and other remuneration and reimbursed expenses paid by the Partnership for such Fiscal Year to the General Partner or any Affiliate of the General Partner and the services performed for the Partnership in connection therewith; (iv) a report of the activities of the Partnership for such Fiscal Year. (v) a budget (which need not be audited) setting forth the expected Net Profits and Net Losses per Unit for the current Fiscal Year; and (vi) with respect to each covered by the financial forecast included in the Prospectus, a table comparing the forecasts included in the Prospectus with the actual results during the period covered by the report. The report of the firm of the independent public accountants certifying the items in clause (i) above shall include: (a) a statement that an audit of such financial statements has been made in accordance with generally accepted accounting standards and that such financial statements are in conformity with generally accepted accounting principles; (b) a statement of the opinion of the firm of independent public accountants with respect to the financial statements and the accounting principles and practices reflected therein and in regard to the consistency of the application of such accounting principles; and (c) an identification of any matters reflected in such financial statements to which such firm takes exception. -43- C. Within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Partnership, the General Partner shall send to each Person who was a holder of Units at any time during the Fiscal Quarter then ended (i) a balance sheet (which need not be audited); (ii) a profit and loss statement (which need not be audited); (iii) a statement of cash flow for such Fiscal Quarter (which need not be audited) (all of the foregoing statements to be prepared in accordance with generally accepted accounting principles); (iv) a statement setting forth any transactions between the Partnership and the General Partner or any Affiliate thereof, the amount of any fees received by either the General Partner or any Affiliated thereof for services rendered to the Partnership, and a description of such services; and (v) any other pertinent information regarding the Partnership and its activities during the period covered by the report. D. Concurrent with the report sent pursuant to Section 9.04C for the third Fiscal Quarter of each Fiscal Year, the Partners will be furnished an estimate of Net Profits or Net Losses per Unit for such Fiscal Year. E. The General Partner may prepare and deliver to the holders of the Units from time to time in its sole discretion during each Fiscal Year, in connection with cash distributions or otherwise, unaudited statements showing the results of operations of the Partnership to the date of such statement. F. The General Partner shall prepare and file such registration statements, annual reports, quarterly reports, current reports, proxy statements, and other documents, if any, as may be required under the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder. Section 9.05. Tax Depreciation and Elections. A. With respect to all depreciable assets of the Partnership, the General Partner may, in its sole discretion, elect to use such depreciation method for Federal tax purposes as it deems appropriate and in the best interest of the Partners generally. B. The General Partner may, in its sole and absolute discretion, make an election under section 754 of the Code and shall make such other tax elections under Federal, state, or local law as it may from time to time deem necessary or appropriate. Section 9.06. Interim Closing of the Books. There shall be an interim closing of the books of account of the Partnership (i) at the date of the admission to the Partnership of the Initial Limited Partners, (ii) at any time a taxable year of the Partnership ends pursuant to the Code, and (iii) at such other times as the General Partner shall determine are required by good accounting practice or may be appropriate under the circumstances. Section 9.07. Information from Limited Partners. The holders of Units shall, within 30 days of a written request by the General Partner, furnish to the General Partner such information or execute such forms or certificates as the General Partner shall reasonably require for the purpose of complying with Federal, state or other tax requirements. Without further request, each Foreign Investor shall furnish to the General Partner each year not later than February 15 of such year two properly completed copies of IRS Form 4224 ("Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States") or such other forms as may be required to claim exemptions from withholding. ARTICLE TEN -44- MEETING AND VOTING RIGHTS OF LIMITED PARTNERS Section 10.01. Meetings. A. Meetings of the Limited Partners for any purpose may be called by the General Partner and shall be called by the General Partner upon receipt of a request in writing signed by holders of 10% or more of the Units held by Limited Partners. Such request and any notification from the General Partner shall state the purpose of the proposed meeting and the matters proposed to be acted upon thereat. If the meeting is called pursuant to such a request, notification of such meeting shall be sent to the Limited Partners by certified mail within ten business days after receipt of such a request and any such meeting shall be held on a date not less than 15 no more than 60 days after receipt of such request. Any meeting may be held at the principal office of the Partnership or at such other location which is reasonably convenient to the Partners and which is within the United States as the General Partner may deem appropriate or desirable. In addition, the General Partner may, and, upon receipt of a request in writing signed by holders of 10% or more of the Units held by Limited Partners, the General Partner shall, submit any matter (upon which the Limited Partners are entitled to act by Consent of the Limited Partners) to the Limited Partners for a vote without a meeting. B. Notification of any meeting (other than a meeting called pursuant to Section 10.01A) shall be given not less than 10 days nor more than 60 days before the date of the meeting to the Limited Partners at their record addresses, or at such other address which they may have furnished in writing to the General Partner. Any Notification of a meeting pursuant to Section 10.01A or this Section 10.01B shall be in writing, and shall state the place, date, hour and purpose of the meeting, and shall indicate that it is being issued at or by the direction of the Partner or Partners calling the meeting. The hour of the meeting shall be during normal business hours. If a meeting is adjourned to another time or place, and if any announcement of the adjournment of time or place is made at the meeting, it shall not be necessary to give Notification of the adjourned meeting. The presence in person or by proxy of Limited Partners holding a majority of the outstanding Units shall constitute a quorum at all meetings of the Limited Partners; provided, however, that if there be no such quorum, Limited Partners holding a majority of the Units so present or so represented may adjourn the meeting from time to time without further notice, until a quorum shall have been obtained. No Notification of the time, place, or purpose of any meeting of Limited Partners need be given to any Limited Partner who attends in person or is represented by proxy (except when a Limited Partner attends a meeting for the express purpose of disapproving at the beginning of the meeting the transaction of any business on the ground that the meeting is not lawfully called or convened), or to any Limited Partner entitled to such notice who, in a writing executed and filed with the records of the meeting, either before or after the time thereof, waives such Notification. C. For the purpose of determining the Limited Partners entitled to vote at any meeting of the Partnership or any adjournment thereof, the General Partner may fix, in advance, a date as the record date for any such determination of Limited Partners. Such date shall be not more than 60 days nor less than 10 days before any such meeting. D. The Limited Partners may authorize any Person to act for them by proxy in all matters in which a Limited Partner is entitled to participate, whether by waiving notice of any meeting or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or the Partner's attorney-in-fact. No proxy shall be valid beyond the period permitted by law. Every proxy shall be revocable at the pleasure of the Limited Partner or the Limited Partner's attorney-in-fact executing it. -45- E. At each meeting of Limited Partners, the General Partner shall appoint such officers and adopt such rules for the conduct of such meeting as the General Partner shall deem appropriate. F. As and to the extent that the Securities Exchange Act of 1934 is applicable to the procedural rules governing any meeting of Limited Partners (including any proxies or proxy statement related thereto), the provisions of such act shall take precedence over any provision of this Section 10.01 which may be inconsistent therewith. Section 10.02. Special Voting Rights of Limited Partners. A. If at any time any agreement (including the Management Agreement) pursuant to which operating management of any property of the Partnership is vested in the General Partner or an Affiliate of the General Partner provides that the Partnership has a right to terminate such agreement as a result of the failure of the operation of such property to attain any economic objective or as result of a default of the General Partner or such Affiliate thereunder, the Limited Partners, without the Consent of the General Partner, may, by Consent of the Limited Partners, take action to exercise the right of the Partnership to terminate such agreement. B. To the extent not inconsistent with the Act or other applicable law, the Limited Partners, may, by Consent of the Limited Partners without the Consent of the General Partners, vote to: (i) amend this Agreement; provided, however, that (a) the allocable percentage interests of the Partners in the allocations set forth in Article Four may not be altered, and no new material obligation may be imposed on any Partner, without such Partner's approval, and (b) the provisions of Section 2.03 may not be altered without the consent of the General Partner; (ii) dissolve the Partnership; (iii) remove the General Partner, such removal to be effective upon the date set forth in the resolution adopted by such Consent of the Limited Partners, provided that any such action for removal must also provide for the appointment of a substitute General Partner by Consent of the Limited Partners (such substitute General Partner to be admitted as a general partner immediately prior to the effective date of removal of the General Partner to be removed and such substitute, together with any then remaining general partners, shall continue the business of the Partnership without dissolution); provided further, however, that if prior to or within 15 days after such vote either: (A) the Partnership shall have received an opinion of counsel, satisfactory to the Limited Partners as provided in Section 10.02C, that such action may not be effected without adversely affecting the liability of the Limited Partners under the Act or a court having jurisdiction over the matter shall have entered a judgment subject to further appeal to such effect; or (B) the Partnership shall have received an opinion of counsel, satisfactory to the Limited Partners as provided in Section 10.02C, that such action may not be effected without changing the Partnership's status as a partnership for federal income tax purposes, or a court having jurisdiction over the matter shall have entered a judgment subject to no further appeal to such effect, or the IRS shall have issued a ruling to such effect, then such vote shall be void ab initio; provided further, that following such vote, no other actions shall be taken and the removal and appointment shall not be effective until the expiration of the 15-day period described above; -46- (iv) elect a substitute General Partner to the extent provided in Section 6.01 or reconstitute and continue the Partnership as provided in Section 6.05B; or (v) cause the Partnership to sell all or substantially all of the assets of the Partnership. C. For the purposes of Sections 6.05B and 10.02B(iii), counsel shall be deemed to be satisfactory to the Limited Partners if (i) such counsel is not counsel for the General Partner or any Affiliate of the General Partner and (ii) either (a) such counsel shall have been proposed by the General Partner and affirmatively approved within 45 days by Consent of the Limited Partners, (b) such counsel shall have been proposed for such proposes by the holders of 10% or more of the Units held by Limited Partners and affirmatively approved within 45 days by Consent of the Limited Partners, or (c) consent of the Limited Partners to any action pursuant to Sections 6.05B or 10.02B shall have been obtained without the proposal or selection of any counsel. The existence of an opinion of counsel, court judgment, or IRS ruling to the effect described in Section 6.05B or 10.02B with respect to a particular contemplated action shall not affect the rights of Limited Partners to vote on other future actions or the existence of such rights. ARTICLE ELEVEN MISCELLANEOUS PROVISIONS Section 11.01. Appointment of General Partner as Attorney-in-Fact. A. Each Limited Partner irrevocably constitutes and appoints the General Partner and the President, any Vice President, Secretary, Treasurer, Assistant Secretary, and Assistant Treasurer of any corporate General Partner as his true and lawful attorney-in-fact with full power and authority in such Limited Partner's name, place, and stead to execute, acknowledge, deliver, swear to, file, and record at the appropriate public offices such documents as may be necessary or appropriate to carry out the provisions of this Agreement, including but not limited to: (i) all counterparts of this Agreement, and any amendment or restatement thereof, including all certificates and instruments, which the General Partner deems appropriate to form, qualify, or continue the Partnership as a limited partnership (or a partnership in which the Limited Partners will have limited liability comparable to that provided by the Act) in the jurisdictions in which the Partnership may conduct business or in which such formation, qualification, or continuation is, in the opinion of the General Partner, necessary or desirable to protect the limited liability of the Limited Partners; (ii) all amendments to this Agreement adopted in accordance with the terms hereof and all instruments which the General Partner deems appropriate to reflect a change or modification of the Agreement in accordance with the terms hereof; (iii) all documents or instruments which the General Partner deems appropriate to reflect the admission of a Limited Partner (including any Substituted Limited Partner), in accordance with this Agreement, the dissolution of the Partnership (including a certificate of cancellation), sales or transfers of Partnership property, sales or transfers of Partnership Interests, or the initial amount or increase or reduction in amount of any Partner's Capital Contribution or reduction in any Partner's Capital Account in accordance with the terms of this Agreement; and -47- (iv) any instrument, certificate, or document to implement the provisions of Section 5.01C(vi) or Section 3.05C. B. The appointment by all Limited Partners of the General Partner and the aforesaid officers of any corporate General Partner as attorney-in -fact shall be deemed to be a power coupled with an interest, in recognition of the fact that each of the Partners under this Agreement will be relying upon the power of the General Partner to act as contemplated by this Agreement in any filing and other action by it on behalf of the Partnership, and shall survive, and not be affected by, the subsequent bankruptcy, death, incapacity, disability, adjudication of incompetence or insanity, or dissolution of any Person hereby giving such power and the transfer or assignment of all or any part of the Units or Interest of such Person; provided, however, that in the event of the transfer by a Limited Partner of all such Limited Partner's Interest, the foregoing power of attorney of a transferor Partner shall survive such transfer only until such time as the transferee shall have been admitted to the Partnership as a Substituted Limited Partner and all required documents and instruments shall have been duly executed, filed, and recorded to effect such substitution. Section 11.02. Amendments. A. Subject to the provisions of Section 7.02, each Initial Limited Partner, Substituted Limited Power, and any successor General Partner, whether or not such Person becomes a signatory hereof shall be deemed, solely by reason of having become a Partner, to have adopted, and to have agreed to be bound by all the provisions of this Agreement. Without limiting the foregoing, each Initial Limited Partner, Substituted Limited Partner, and any successor General Partner shall take any action requested by the General Partner (including, without limitation, executing this Agreement or such other instrument or instruments as the General Partner shall determine) to reflect such Person's adoption of, and agreement to be bound by all the provisions of, this Agreement. B. In addition to the amendments otherwise authorized herein, amendments may be made to this Agreement from time to time by the General Partner with the Consent of the Limited Partners; provided, however, that without the Consent of all Partners, this Agreement may not be amended so as to (i) convert the Interest of a Limited Partner into a general partner's Interest; (ii) adversely affect the liability of a Limited Partner; (iii) alter the Interest of a Partner in Net Profits, Net Losses, Gain, Loss, or distributions of Cash Available for Distribution, Sale Proceeds, or Refinancing Proceeds, or reduce the percentage of Partners which is required to Consent to any action hereunder; (iv) limit in any manner the liability of the General Partner as provided in Section 3.09; (v) permit the General Partner to take any action prohibited by Section 5.02A; (vi) cause the Partnership to be taxed for Federal income tax purposes as an association taxable as a corporation; or (vii) effect any amendment or modification to this Section 11.02B. C. If this Agreement shall be amended to reflect the withdrawal, removal, bankruptcy or any event described in Section 17-402(6), (7), (8), (9), or (10) of the Act where the General Partner shall cease to be a general partner when the business of the Partnership is being continued, such amendment shall be signed by the withdrawing General Partner (and the General Partner hereby agrees to do so) and by the successor General Partner. D. In making any amendments, there shall be prepared and filed for recordation by the General Partner such documents and certificates as shall be required to prepared and filed, no such filing being required solely by reason of this Agreement, under the Act and under the laws of the other jurisdictions under the laws of which the Partnership is then formed or qualified, not less frequently, in the case of substitution of a Limited Partner, than once each calendar quarter. E. The General Partner may, without the Consent of the Limited Partners, make any amendment to this Agreement (i) as is necessary solely to clarify provisions thereof so long -48- as such amendment does not adversely affect the rights of the Limited Partners under this Agreement, or (ii) is expressly permitted by Section 5.01C(vi). Section 11.03. General Partner Representations and Warranties. The General Partner represents that, except to the extent expressly permitted by Section 5.06B, the Partnership shall not incur the cost of any insurance which insures any party against any liability as to which such party is prohibited from being indemnified under this Agreement. Section 11.04. Binding Provisions. The covenants and agreements contained here shall be binding upon, and inure to the benefit of, the heirs, executors, administrators, personal representatives, successors, and assigns of the respective parties hereto. Section 11.05. Applicable Law. Notwithstanding the place where this Agreement may be executed by any of the parties hereto, this Agreement, the rights and obligations of the parties hereto, and any claims and disputes relating thereto shall be subject to and governed by the Act and the other laws of the State of Delaware as applied to agreements among Delaware residents to be entered into and performed entirely within the State of Delaware, and such laws shall govern all aspects of this Agreement, including, without limitation, the limited partnership aspects of this Agreement. Section 11.06. Counterparts. This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all the parties have not signed the same counterpart. Section 11.07. Separability of Provisions. Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid. Section 11.08. Article and Section Titles. Article and section titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. Section 11.09. Short Form Filings. The General Partner shall have authority to sign any short-form Certificate of Limited Partnership or restated or amended Certificate of Limited Partnership meeting the requirement of applicable law which reflects this Agreement, as same may be amended. Section 11.10. Submissions to State Securities Law Administrators. Pursuant to registration applications, the Partnership shall submit to state securities administrators of states in which the Units were offered or sold, upon request, any report or statement required by this Agreement to be distributed to the Limited Partners. -49- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. GENERAL PARTNER: MARRIOTT FIBM ONE CORPORATION By: /s/ ----------------------------------------- Its: President ---------------------------------------- ORGANIZATIONAL LIMITED PARTNER: CHRISTOPHER G. TOWNSEND /s/ Christopher G. Townsend ---------------------------------------- LIMITED PARTNERS: All Limited Partners now and hereafter admitted to the Partnership as limited partners of the Partnership, pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner Marriott FIBM One Corporation, as attorney- in-fact for all Limited Partners By: /s/ ----------------------------------------- Its: President ---------------------------------------- Solely for purposes of the obligations contained in Section 5.03B, the undersigned have executed this Agreement as of the date first above written. Marriott Corporation By: /s/ ----------------------------------------- Its: Vice President & Assistant Treasurer ---------------------------------------- Host International, Inc. By: /s/ ----------------------------------------- Its: Vice President & Assistant Treasurer ---------------------------------------- -50- EX-10.A 3 EXHIBIT 10.A EXHIBIT 10.a MANAGEMENT AGREEMENT -------------------- by and between FAIRFIELD FMC CORPORATION ------------------------- as "MANAGEMENT COMPANY" and FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP --------------------------------------------- as "OWNER" Dated as of November 17, 1989 TABLE OF CONTENTS ----------------- Page ---- Article I - Definition of Term - ------------------------------ 1.01 Definition of Terms............................................... Article II - Appointment of Management Company - ---------------------------------------------- 2.01 Appointment....................................................... 2.02 Delegation of Authority........................................... 2.03 Licenses and Permits.............................................. 2.04 Non-Discrimination................................................ Article III - Ownership of the Hotels - ------------------------------------- 3.01 Ownership of Inns................................................. 3.02 Compliance with Ground Lease...................................... Article IV - Term - ----------------- 4.01 Term.............................................................. 4.02 Performance Termination........................................... 4.03 Actions to be Taken on Termination................................ 4.04 Pre-Closing Termination........................................... Article V - Compensation of Management Company - ---------------------------------------------- 5.01 Management Fees and System Fee.................................... 5.02 Incentive Management Fees......................................... 5.03 Application of Capital Proceeds................................... 5.04 Debt Service Payment.............................................. 5.05 Accounting and Interim Payment.................................... Article VI - Pre-Opening - ------------------------ 6.01 Pre-Opening Services.............................................. 6.02 Responsibility for Pre-Opening Services........................... Article VII - Working Capital and Fixed Asset Supplies - ------------------------------------------------------ 7.01 Working Capital and Inventories................................... 7.02 Fixed Asset Supplies.............................................. Article VIII - Repairs, Maintenance and Replacements - ---------------------------------------------------- 8.01 Routine Repairs and Maintenance................................... 8.02 FF&E Reserve...................................................... 8.03 Building Alterations, Improvements, Renewals and Replacements..... 8.04 Liens............................................................. 8.05 Ownership of Replacements......................................... Article IX - Bookkeeping and Bank Accounts - ------------------------------------------ 9.01 Books and Records................................................. 9.02 Accounts, Expenditures............................................ 9.03 Annual Operating Projection....................................... 9.04 Operating Losses; Credit.......................................... i Article X - Trademarks, Trade Names and Service Marks - ----------------------------------------------------- 10.01 Trademark, Trade Names and Service Marks.......................... 10.02 Purchase of Inventories and Fixed Asset Supplies.................. 10.03 Breach of Covenant................................................ Article XI - Possession and Use of The Inns - ------------------------------------------- 11.01 Ground Leases..................................................... 11.02 Management of the Inns............................................ 11.03 Chain Services.................................................... 11.04 Marketing Fund.................................................... 11.05 Owner's Right to Inspect.......................................... 11.06 Reservations System............................................... Article XII - Insurance - ----------------------- 12.01 Property and Operational Insurance................................ 12.02 General Insurance Provisions...................................... 12.03 Cost and Expense.................................................. 12.04 Owner Provided Coverage........................................... 12.05 Loan Agreement Insurance Provisions............................... Article XIII - Taxes - -------------------- 13.01 Real Estate and Personal Property Taxes........................... Article XIV - Inn Employees - --------------------------- 14.01 Employees......................................................... Article XV - Damage, Condemnation and Force Majeure - --------------------------------------------------- 15.01 Damage and Repair................................................. 15.02 Condemnation...................................................... 15.03 Force Majeure..................................................... Article XVI - Defaults - ---------------------- 16.01 Events of Default................................................. 16.02 Remedies.......................................................... Article XVII - Waiver and Partial Invalidity - -------------------------------------------- 17.01 Waiver............................................................ 17.02 Partial Invalidity................................................ 17.03 Estoppel Certificates............................................. Article XVIII - Assignment - -------------------------- 18.01 Assignment........................................................ 18.02 Mortgages and Collateral Assignments.............................. Article XIX - Sale of an Inn or Inns - ------------------------------------ 19.01 Right of First Refusal............................................ 19.02 Effect of Sale or Refinancing of an Inn........................... Article XX - Miscellaneous - -------------------------- 20.01 Right to Make Agreement........................................... 20.02 Consents.......................................................... 20.03 Agency............................................................ 20.04 Applicable Law.................................................... ii 20.05 Recordation....................................................... 20.06 Headings.......................................................... 20.07 Notices........................................................... 20.08 Limited Liability................................................. 20.09 Entire Agreement.................................................. 20.10 Binding Effect.................................................... 20.11 Compliance with Loan Documents.................................... iii MANAGEMENT AGREEMENT -------------------- This Management Agreement ("Agreement") is executed as of the day of November, 1989 ("Execution Date"), by FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP ("Owner"), a Delaware limited partnership with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20058, and FAIRFIELD FMC CORPORATION ("Management Company"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20058. R E C I T A L S : A. Owner has entered into an agreement (the "Purchase Agreement") to acquire up to fifty Fairfield Inn properties (collectively, the "Inns" or individually, an "Inn," as more particularly described in Section 1.01 hereof) which are being operated or are under construction to be operated under the trade name "Fairfield Inn." Pursuant to the Purchase Agreement, Owner will acquire fee title to 18 parcels of real property and leasehold interests in 32 parcels of real property (collectively, the "Sites" or individually, a "Site") described on Exhibit A attached to this Agreement and incorporated herein. Each Site is or will be improved with a Fairfield Inn property. Each respective Site and the Inn thereon are collectively referred to as an "Inn," as more particularly described in Section 1.01 hereof. B. Owner desires to have Management Company manage and operate the Inns and Management Company is willing to perform such services for the account of Owner on the terms and conditions set forth herein. C. Management Company has represented that it possesses the resources necessary to fulfill its obligations under this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITION OF TERMS ------------------- 1.01 Definition of Terms The following terms when used in this Agreement shall have the meanings indicated: "Accounting Period" shall mean the four (4) week accounting periods ----------------- having the same beginning and ending dates as Management Company's four (4) week accounting periods, the first of which during any full Fiscal Year shall begin on the first Saturday of such Fiscal Year and shall end on the fourth following Friday. There shall be thirteen (13) consecutive four- week Accounting Periods in each full Fiscal Year, except that the last Accounting Period in a Fiscal Year may occasionally contain five (5) weeks when necessary to conform the accounting system to the calendar. "Additional Inn Investments" shall mean any amounts expended by Owner, -------------------------- after the purchase of the Inns by Owner pursuant to the Purchase Agreement, for the following purposes: a) to fund the cost of any expansion or improvements, previously consented to by Management Company, of any Inn; b) to fund the cost of any repairs or replacements under Section 15.01, with respect to any Inn, which are not covered by insurance proceeds under Section 12.01A; c) to fund under Section 8.03 A2 the cost of any building alterations and related expenses requested by Management Company; and, d) to fund any reasonable business needs (not including amounts funded under Section 8.02 E) of Owner relating to the operation of one or more of the Inns, as requested by or otherwise approved by Management Company (which approval shall not be unreasonably withheld). "Additional Inn Investment Loan" shall mean (i) any indebtedness ------------------------------ incurred by Owner to fund an Additional Inn Investment or any refinancing thereof, provided that the terms of any such loan are commercially reasonable, plus (ii) expenses of up to two (2) percentage points of the principal amount of any refinancing thereof. "Administrative Expense" shall mean, with respect to any Fiscal Year, ---------------------- an annual amount equal to the lesser of (i) the aggregate amount of payments for, or reserves created for payment for, administrative expenses of Owner with respect to such Fiscal Year; or (ii) an amount equal to $375,000 for 1989 or, for any Fiscal Year after 1989, an amount equal to $375,000 increased by the CPI. "Agreement" shall have the meaning ascribed to it in the Preamble. --------- "Annual Operating Projection" shall have the meaning ascribed to it in --------------------------- Section 9.03. "Base Management Fee" shall mean an annual amount equal, during any ------------------- given Fiscal Year (or portion thereof), to one percent (1%) of Gross Revenues for each Fiscal Year through 1994 and two percent (2%) of Gross Revenues for each Fiscal Year thereafter. "Building Estimate" shall have the meaning ascribed to it in ----------------- Section 8.03 A. "Capital Proceeds" shall mean Net Refinancing Proceeds and/or Net ---------------- Sales Proceeds. "Cash Flow Available for Incentive Management Fee" shall have the ------------------------------------------------ meaning ascribed to it in Section 5.02 F. "Chain Services" shall have the meaning ascribed to it in -------------- Section 11.03. -2- "Consumer Price Index Adjustment" shall mean an increase by the ------------------------------- percentage by which the "Consumer Price Index for All Urban Consumers (CPI-U); U.S. City Average, 1982-84=100, All Items" (or appropriate substitute index if such index is no longer published) (the "CPI") for January of the Fiscal Year in question exceeds the CPI for January 1989. "Contingent Incentive Management Fees" shall mean those portions of ------------------------------------ any Incentive Management Fees for each Fiscal Year (or portion thereof) which are not paid to Management Company in such Fiscal Year (or portion thereof) owing to the limitations set forth in Section 5.02 hereof. Notwithstanding anything herein to the contrary, any portion of the Incentive Management Fee from the Effective Date through the Accounting Period ending December 31, 1992 that would have been paid for such year but for the aforesaid limitations of Section 5.02 shall not be included in Contingent Incentive Management Fees and Management Company shall never be entitled to payment thereof. "Deductions" shall have the meaning ascribed to it in the definition ---------- of Operating Profit. "Development Inn" or "Development Inns" shall mean those Inns --------------- ---------------- currently under development by Marriott to be acquired by the Owner from Marriott or Marriott affiliates on or subsequent to the Effective Date. "Effective Date" shall mean the date on which Owner first acquires fee -------------- (or leasehold) title to one or more of the Inns purchased pursuant to the Purchase Agreement. "Execution Date" shall have the meaning ascribed to it in the -------------- Preamble. "FF&E" shall mean furniture, furnishings, fixtures, vehicles, ---- carpeting and equipment (including communication and computer systems), but shall not include Fixed Asset Supplies. "FF&E Replacement Estimate" shall have the meaning ascribed to it in ------------------------- Section 8.02 D. "FF&E Reserve" shall have the meaning ascribed to it in ------------ Section 8.02 A. "Fiscal Year" shall mean Management Company's Fiscal Year which now ----------- ends at midnight on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday. A partial Fiscal Year between the end of the last full Fiscal Year and the Termination of this Agreement shall, for purposes of this Agreement, constitute a separate Fiscal Year. If Management Company's Fiscal Year is changed in the future, appropriate adjustment to this Agreement's reporting and accounting procedures shall be made; provided, however, that no such change or adjustment shall alter the term of this Agreement or in any way reduce the applications of Operating Profit or other payments due hereunder. -3- "Fixed Asset Supplies" shall mean supply items included within -------------------- "Property and Equipment" under the Uniform System of Accounts, including, but not limited to, linen, uniforms, and similar items, whether used in connection with public space or rooms. "Force Majeure" shall have the meaning ascribed to it in ------------- Section 15.03. "Gross Revenues" shall mean, for all Accounting Periods to date in -------------- each Fiscal Year, all revenues and receipts of every kind derived from operating the Inns and all departments and parts thereof, including, but not limited to: income (from both cash and credit transactions), before commissions and discounts for prompt or cash payments, from rental of rooms, meeting rooms and space of every kind; license, lease and concession fees and rentals (not including gross receipts of any licensees, lessees and concessionaires); income from vending, facsimile and copy machines; wholesale and retail sales of merchandise (except as otherwise provided in Section 8.02C hereof with respect to the sale of FF&E and except for wholesale sales of merchandise not generally related to the business of the Inns), service charges, and proceeds, if any, from business interruption or other loss of income insurance, all determined in accordance with generally accepted accounting principles; provided, however, that Gross Revenues shall not include (i) gratuities to Inn employees; (ii) federal, state or municipal excise, sales or use taxes or similar assessments or Impositions collected directly from patrons or guests or included as part of the sales price of any goods or services; (iii) Net Refinancing Proceeds or Net Sales Proceeds; (iv) proceeds from the sale of FF&E; (v) interest received or accrued with respect to the funds in the FF&E Reserve or the other operating accounts of the Inns; or (vi) any refunds, rebates, discounts and credits of a similar nature, given, paid or returned in the course of obtaining Gross Revenues or components thereof (including, without limitation, commissions and discounts for prompt or cash payments). "Ground Leases" shall have the meaning ascribed to them in the ------------- definition of Ground Rent. "Ground Rent" shall mean, for all Accounting Periods to date in each ----------- Fiscal Year, the total rent and other amounts paid or accrued to the landlord by Owner pursuant to those certain ground leases entered into between the Owner and Marriott and certain affiliates of Marriott ("Ground Leases") for leasing of the land on which 32 of the Inns are or will be located, as amended, renewed or replaced from time to time. "Impositions" shall have the meaning ascribed to it in Section 13.01. ----------- "Incentive Management Fee" shall mean an annual amount which equals ------------------------ fifteen percent (15%) of Operating Profit in any Fiscal Year increasing to twenty percent (20%) of Operating Profit for all Fiscal Years (and portions thereof) after the end of the first period of thirteen (13) consecutive Accounting Periods during which Operating Profit has equaled or exceeded the Operating Profit Objective. Payment of the Incentive Management Fee to Management Company shall be subject to the provisions of Article V hereof. -4- "Initial Term" shall have the meaning ascribed to it in section 4.01. ------------ "Inn" or "Inns" shall refer individually or collectively to the --- ---- Fairfield Inn properties listed in Exhibit A hereto or any Fairfield Inn property substituted therefor under the Purchase Agreement. The terms "Inn" or "Inns" incorporate not only the Site or Sites but also all easement or other appurtenant rights thereto, together with the buildings and all other improvements now or hereafter constructed thereon, and all FF&E and Fixed Asset Supplies installed or located therein. Each Inn shall become subject to this Agreement when acquired by the Owner pursuant to the Purchase Agreement. "Inn Retention" shall mean the amount of any loss or reserve under ------------- Management Company's, Marriott's or a Marriott Affiliate's blanket insurance or self-insurance programs which is allocated to an Inn, not to exceed the higher of (a) the maximum per occurrence limit reasonably established for similar inns or hotels participating in such programs, or (b) if applicable, the insurance policy deductible on any loss which may fall within high hazard classifications as mandated by the insurer (e.g., earthquake, flood, windstorm on coastal properties). If the Inn is not a participant under Management Company's, Marriott's or a Marriott Affiliate's blanket insurance or self-insurance programs, "Inn Retention" shall mean the amount of any loss or reserve allocated to the Inn, not to exceed the insurance policy deductible. "Inn Term" shall have the meaning ascribed to it in Section 4.01. -------- "Inventories" shall mean "Inventories" as defined in the Uniform ----------- System of Accounts, such as, but not limited to, provisions in storerooms; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items. "Lender" shall mean Sumitomo Trust & Banking Co. (U.S.A.). ------ "Limited Debt Service Guarantee" shall mean the agreements between ------------------------------ Marriott, the Lender and/or Owner whereby Marriott will lend Owner an amount not to exceed Sixteen Million Five Hundred Thousand Dollars ($16,500,000) to the extent necessary for payment of (i) interest on the Permanent Loan and renewals and replacements thereof, and (ii) the principal amount of the Permanent Loan and renewals and replacements thereof. "Limited Debt Service Guarantee Advance" shall mean payments advanced -------------------------------------- by Marriott under the Limited Debt Service Guarantee. "Loan Agreement" shall mean that certain agreement entered into -------------- between Owner and Lender regarding the Permanent Loan. "Management Company" shall have the meaning ascribed to it in the ------------------ Preamble. "Marketing Fund" shall mean that certain fund (or any successor fund) -------------- maintained by Management Company, in its capacity as operator or franchisor of the Fairfield Inn system, to provide for developing, producing and administering certain system-wide programs/materials for -5- advertising, marketing, direct sales, promotions and public relations. The Management Company will have no ownership interest in the Marketing Fund. "Marriott" shall mean Marriott Corporation, the corporate parent of -------- Management Company. "Marriott Affiliate" shall mean Marriott and any corporation of which ------------------ Marriott, either directly or indirectly through one or more intermediary corporations, owns over fifty percent (50%) of the voting stock or any partnership wherein Marriott, either directly or indirectly, through one or more intermediary corporations or other entities, owns or controls the general partnership interests and over fifty percent (50%) of the voting and economic partnership interests of such partnership. "Net Refinancing Proceeds" shall mean the cumulative full amount ------------------------ disbursed (in one or more advances) under any loan or loans obtained by Owner (other than Additional Hotel Investment Loans), from time to time, to the extent and in the amount such disbursement or disbursements are not used for the following purposes: (i) the simultaneous repayment of other indebtedness of Owner, (ii) commercially reasonable transaction costs, and (iii) the payment of, or creation of reserves in the reasonable discretion of Owner for, reasonable and necessary expenditures of Owner, including (but not limited to) Administrative Expenses, FF&E Reserves, Ground Rent and Working Capital needs related to the Inns. "Net Sales Proceeds" shall mean the cumulative net proceeds received ------------------ by Owner, from time to time, from any one or more of the following: (i) any Sale of an Inn; (ii) the condemnation, eminent domain taking, casualty or other disposition of any of (or any portion of) the Inns or the Sites; or (iii) the liquidation of Owner's property interest in the Inns in connection with a dissolution of Owner. The phrase "net proceeds," as used in the foregoing sentence, shall mean the gross proceeds received from any of the foregoing to the extent and in the amount such gross proceeds are not used for the following purposes: (i) simultaneous repayment of any indebtedness secured by the Inn or Inns being sold (or the pro rata portion (according to allocation of the loan amount to such Inn) of indebtedness secured by all the Inns) and all other indebtedness required to be repaid therefrom; (ii) commercially reasonable transaction costs and, in the case of a condemnation, eminent domain taking or casualty, all costs of repairing, restoring, replacing, and reconstructing an Inn or any portion thereof; (iii) in the case where Owner exercises the site purchase option under a Ground Lease, the purchase price of the land covered thereby; and (iv) the payment of, or creation of reserves in the reasonable discretion of Owner for, Administrative Expenses, FF&E Reserves, Ground Rent and Working Capital needs related to the remaining Inns. The term "Net Sales Proceeds" shall not include proceeds from disposition of FF&E described in Section 8.02C hereof. -6- "Operating Loss" shall mean, for all Accounting Periods to date in -------------- each Fiscal Year, the excess, if any, of Deductions over Gross Revenues. "Operating Profit" shall mean, for all Accounting Periods to date in ---------------- each Fiscal Year, the excess of Gross Revenues over the following deductions ("Deductions") incurred by Management Company in operating the Inns: 1. The cost of sales including salaries, wages (including accruals for periodic bonuses to Inn employees), fringe benefits, payroll taxes and other costs related to Inn employees (the foregoing costs shall not include salaries and other employee costs of executive personnel of Management Company who do not work at one of the Inns on a regular basis); 2. Departmental expenses, administrative and general expenses and the cost of Inn advertising, central reservations, local marketing and business promotion, heat, light and power, and routine repairs, maintenance and minor alterations treated as Deductions under Section 8.01; 3. Credit card and travel agent commissions; 4. The cost of Inventories and Fixed Asset Supplies consumed in the operation of each Inn; 5. Reasonable bad debt expense (or a reasonable reserve) for uncollectable accounts receivable as determined by Management Company; 6. All costs and fees of independent accountants or other third parties retained by Management Company who perform services required or permitted hereunder; -7- 7. The cost and expense of technical consultants and operational experts retained by Management Company (or retained by Owner and approved by Management Company) for specialized services in connection with non- routine Inn work or other specialized services not covered by the Base Management Fee or the System Fee; 8. The Base Management Fee payable after giving effect to Section 5.01D hereof; 9. The System Fee; 10. The Inn's pro rata share of costs and expenses incurred by Management Company in providing Chain Services and the national reservations system; 11. Insurance costs and expenses (including Inn Retention or other deductibles) as provided in Article XII; 12. Taxes, if any, payable by or assessed against Management Company related to this Agreement or to Management Company's operation of the Inns (exclusive of Management Company's income taxes) and all Impositions; 13. The contributions to the FF&E Reserve which are required pursuant to Section 8.02; 14. Contributions to the Marketing Fund; 15. Amortization of the amounts described in Section 8.02E3; 16. Rent payable under any equipment leases not funded out of the FF&E Reserve; and 17. Such other costs and expenses as are specifically provided for elsewhere in this Agreement or are otherwise [Page missing] -8- "Owner's Net Contributed Capital" shall mean the excess of (a) Owner's ------------------------------- Contributed Capital over (b) cumulative distributions of Net Refinancing Proceeds and Net Sales Proceeds to the Partners of the Owner pursuant to Sections 4.06 and 4.07 of the Partnership Agreement (excluding distributions to the Partners to satisfy the "Partners' 12% Preferred Distribution" (as defined therein)). "Owner's Priority Return" shall mean, for all Accounting Periods to ----------------------- date in each Fiscal Year, an amount equal to an annual non-cumulative amount retained by Owner out of Operating Profit, as set forth in Section 5.02B hereof, equal to nine percent (9%) of Owner's Contributed Capital in 1989 and 1990 (such amount to be adjusted to reflect the actual number of days between the Effective Date and the end of each such Fiscal Year), nine and one-half percent (9.5%) of Owner's Contributed Capital in 1991 and 1992 and ten percent (10%) of Owner's Contributed Capital in each Fiscal Year thereafter, subject to reduction upon any Termination. "Owner's 12% Priority and Capital Return" shall mean, for all --------------------------------------- Accounting Periods to date in each Fiscal Year, an amount equal to (a) the portion not yet retained by Owner from Operating Profit, Net Refinancing Proceeds or Net Sales Proceeds of a twelve percent (12%) per annum cumulative non-compounded return on the average daily balance outstanding of Owner's Net Contributed Capital plus (b) the portion not yet retained by Owner from Net Refinancing Proceeds or Net Sales Proceeds of one hundred percent (100%) of Owner's Net Contributed Capital. "Partner" or "Partners" shall mean a partner or partners in Owner. --------------------- "Partnership Agreement" shall mean the Amended and Restated Agreement --------------------- of Limited Partnership of Owner of even date herewith. "Permanent Loan" shall mean the loan in the principal amount of One -------------- Hundred Sixty Four Million Eight Hundred Fifty Thousand Dollars ($164,850,000) provided or to be provided to Owner by Lender to finance a portion of the purchase price of the Inns pursuant to the Purchase Agreement and certain other amounts pursuant to the Loan Agreement, such as development fees, Lender's fees, title insurance, and mortgage and transfer taxes. "Prime Rate" shall mean the prime rate of interest announced from time ---------- to time by The First National Bank of Chicago. "Purchase Agreement" shall have the meaning ascribed to it in the ------------------ Recitals. "Qualified Debt" shall mean the sum of, without duplication, (i) the -------------- Permanent Loan, (ii) indebtedness incurred to pay the Incentive Management Fees, any remaining unpaid Base Management Fees under Section 5.01D hereof, any remaining unpaid Ground Rent under Section 4.02(d) of the Ground Leases, or any Contingent Incentive Management Fees, (iii) Additional Inn Investment Loans, (iv) indebtedness incurred to pay any outstanding Limited Debt Service Guarantee Advances and accrued interest thereon, and (v) Replacement Debt with respect to the Inns. -9- "Qualifying Debt Service" shall mean, for all Accounting Periods to ----------------------- date in each Fiscal Year, (i) the Stipulated Debt Service, (ii) interest and principal actually paid or accrued on all Qualified Debt (other than the Permanent Loan and all refinancings thereof in an amount up to the original principal amount thereof), plus (iii) all fees related thereto and all penalties attributable to acts or omissions of Management Company. In no event, however, shall "Qualifying Debt Service" include, with respect to any indebtedness: (i) any balloon payments; or (ii) voluntary prepayments on the Permanent Loan; or (iii) any repayments of the portion of the principal and interest of any indebtedness which is incurred for the purpose of distributing the same to the Partners of Owner. The term "balloon payments," as used in this Agreement, shall mean any repayments or prepayments (whether voluntary or involuntary) of principal in any given Fiscal Year (regardless of whether the borrower is permitted or obligated to make the same) to the extent that any such repayments or prepayments exceed the principal amount, if any, that would have been payable during such Fiscal Year pursuant to the terms of such indebtedness. "Renewal Term(s)" shall have the meaning ascribed to it in --------------- Section 4.01. "Replacement Debt" shall mean that portion of any indebtedness Owner ---------------- incurs on commercially reasonable terms (i) to refinance part or all of the original principal amount of the Permanent Loan or part or all of the then outstanding balance of other Qualified Debt, plus (ii) to finance the reasonable costs of any refinancings in clause (i) above but not in excess of 2% of the principal amount of such refinancing. "Sale of an Inn" or "Sale of the Inns" shall mean any sale, -------------- ---------------- assignment, transfer or other disposition, for value or otherwise, voluntary or involuntary, of the fee simple title (or leasehold interest, as the case may be) to one or more of the Inns. "Seller" shall mean Marriott and each other "Seller" under the ------ Purchase Agreement. "Site" or "Sites" shall refer individually or collectively to the ---- ----- parcels of land whose addresses are set forth on Exhibit A attached hereto and incorporated herein. "Stipulated Debt Service" shall mean $15,940,995. ----------------------- "System Fee" shall mean an annual amount payable to Management ---------- Company, to pay for a portion of the Inns' share of certain costs and expenses benefitting all Fairfield Inn properties incurred by Management Company, Marriott or Marriott Affiliates as described in Section 5.01B. Such amount shall be equal, during any given Fiscal Year (or portion thereof), to three percent (3%) of Gross Revenues for each Fiscal Year (or portion thereof). The System Fee shall be paid as provided in Article V. "Termination" shall mean the expiration or sooner cessation of this ----------- Agreement with respect to a specific Inn or all the Inns. "Uniform System of Accounts" shall mean the Uniform System of Accounts -------------------------- for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City, Inc. -10- "Working Capital" shall mean funds which are reasonably necessary for --------------- the day-to-day operation of the Inns' business, including, without limitation, amounts sufficient for the maintenance of change and petty cash funds, operating bank accounts, receivables, payrolls, prepaid expenses and funds required to maintain Inventories, less accounts payable and accrued current liabilities. END OF ARTICLE I -11- ARTICLE II APPOINTMENT OF MANAGEMENT COMPANY --------------------------------- 2.01 Appointment ----------- Owner hereby appoints and employs Management Company as Owner's exclusive agent to supervise, direct and control the management and operation of the Inns for the term provided in Article IV. Management Company accepts said appointment and agrees to manage the Inns as Fairfield Inns during their respective Inn Terms and in accordance with the terms and conditions hereinafter set forth. The performance of all activities by Management Company hereunder shall be for the account of Owner. Management Company may not delegate its duties hereunder except to a Marriott Affiliate which satisfies the requirements of Section 18.01 A 1 hereof. Management Company represents and warrants that it possesses the resources necessary to fulfill its obligations under this Agreement. Marriott covenants that it and/or Marriott Affiliates will make available to Management Company any and all resources possessed by Marriott and/or Marriott Affiliates, but not otherwise possessed by Management Company, necessary for Management Company to fulfill its obligations hereunder. 2.02 Delegation of Authority ----------------------- The operations of the Inns shall be under the exclusive supervision and control of Management Company which, except as otherwise specifically provided in this Agreement, shall be [Page 22 missing] withdrawal or revocation have been exhausted; (iii) Management Company has made every reasonable effort to obtain a substitute license or permit that would allow for the continued operation of such Inn as a Fairfield Inn; and (iv) such revocation is not common with other economy hotels in the same market area. 2.04 Non-Discrimination ------------------ The parties recognize that Management Company, Marriott and Marriott Affiliates either own or manage other hotels and inns. Certain of these hotels and inns, now or in the future, may be located within the general geographical area of one or more of the Inns. Management Company, Marriott and Marriott Affiliates shall institute reasonable internal controls and procedures to ensure that no favoritism shall be accorded to such other hotels or inns owned or managed by Management Company, Marriott, or a Marriott Affiliate on the basis of the ownership or management thereof and that, at all times during the term of this Agreement, Management Company, Marriott and Marriott Affiliates will operate the various hotels or inns under its management, including the Inns, in a non-discriminatory manner. END OF ARTICLE II -12- ARTICLE III OWNERSHIP OF THE INNS --------------------- 3.01 Ownership of Inns ----------------- A. Owner hereby covenants that, upon the acquisition of each of the Inns pursuant to the Purchase Agreement, it will, have, keep and maintain good and marketable title to the respective fee or leasehold interests in each Inn, free and clear of any and all liens, encumbrances or other charges, except as follows: 1. Easements or other encumbrances (other than those described in subsections 2, 3 and 4 hereof) which do not adversely affect the operation of any Inn by Management Company, including, without limitation, any encumbrances or other defects of title subject to which title was conveyed to Owner under the terms of the Purchase Agreement; 2. Mortgages, deeds of trust or similar security instruments which contain a provision reasonably acceptable to Management Company's counsel that this Agreement will not be subject to forfeiture or Termination other than in accordance with the terms hereof, notwithstanding a default under such mortgage, deed of trust or security instrument; and which either (i) secure one of the following: (x) any indebtedness on which all or a portion of the payments constitute Qualifying Debt Service, or (y) debt incurred for distribution to the Partners of Owner, or (ii) secure any amount due under the Loan Agreement. 3. Liens for taxes, assessments, levies or other public charges not yet due or which are being contested in good faith; 4. Liens, encumbrances, or other charges resulting from Management Company's acts; and 5. The terms and conditions of the Ground Leases. B. Provided Management Company is not in monetary default under this Agreement, Owner shall pay and discharge, on or before the due date, any and all installments of principal and interest due and payable upon any mortgage, deed of trust or like instrument described in this Section (including, without limitation, any amounts owed under the Loan Agreement) and shall indemnify Management Company from and against all claims, litigation and damages arising from the failure to make such payments as and when required. Notwithstanding the foregoing, Owner shall not be required to indemnify Management Company for lost profits if the reason for failure to pay and discharge amounts due under any instrument described in this section is due to insufficient Operating Profits to make such payments. 3.02 Compliance with Ground Leases ----------------------------- So long as Management Company is not wrongfully withholding any money from Owner and no other monetary "event of default" by Management Company has occurred and is -13- continuing, Owner agrees to pay all rental due under the Ground Leases. Owner and Management Company shall abide by all the terms and conditions of the Ground Leases and shall not take any or fail to take any action which would result in a default of the tenant under the Ground Leases provided Management Company shall have no obligation to pay rent or other monetary obligations of tenant under the Ground Leases. END OF ARTICLE III -14- ARTICLE IV TERM ---- 4.01 Term ---- A. The term of this Agreement shall be from the Effective Date to the expiration of the Inn Term (as defined in subsection B below) for the last Inn to which this Agreement applies. B. With respect to each Inn, the "Inn Term" shall consist of an "Initial Term" and the "Renewal Term(s)". The "Initial Term" shall begin on the Effective Date (or, as to a Development Inn, on the purchase date of such Development Inn), and shall continue until December 31, 2009. Each Inn Term will automatically be extended and renewed (on the same terms and conditions contained herein, except as set forth in the final sentence of this Section 4.01B) for each of five (5) successive periods of ten (10) Fiscal Years each ("Renewal Terms") and one period of five (5) Fiscal Years, provided that an "event of default" by Management Company has not occurred under Section 16.01 hereof (or, if such an "event of default" has occurred, that it is being cured in accordance with the provisions of Section 16.01 or 16.02 hereof) unless Management Company, at its option, elects to terminate this Agreement as to any or all of the Inns as set forth below. If Management Company elects to exercise such option to terminate this Agreement, as to one or more of the Inns, on the expiration of the then current Inn Term with respect to such Inn or Inns, Management Company shall give Owner written notice to that effect at least eighteen (18) months prior to the expiration of the then current Inn Term with respect to such Inn or Inns. Management Company shall continue to manage such Inn or Inns during the final eighteen (18) months of their respective Inn Terms, unless, during such eighteen (18) month period, Owner effects a sale of such Inn or Inns or secures a new manager therefor, in which case the respective Inn Terms of such affected Inns shall be prematurely terminated, as of the date of such sale or the effective date of such new management contract. In the event Management Company elects to terminate as to one or more, but not all, of the Inns, the adjustments described in subsections B through F of Section 19.02 shall be made to this Agreement. 4.02 Performance Termination ----------------------- A. Subject to the provisions of Section 4.02 B below, Owner shall have the option to terminate this Agreement with respect to all of the Inns if the sum of the Operating Profit for all of the Inns during any three (3) consecutive Fiscal Years during the term of this Agreement (not including any period of time before the expiration of the 1992 Fiscal Year) does not equal or exceed eight percent (8%) of the sum total for the same three (3) Fiscal Years of (i) the original total cost ($239,127,000) of the Inns, as adjusted for any Termination, added once for each of such three (3) Fiscal Years, plus (ii) the weighted average outstanding balance of Additional Inn Investments with respect to the Inns, added once for each of such three (3) Fiscal Years. Such option to terminate shall -15- be exercised by serving written notice thereof on Management Company no later than sixty (60) days after the receipt by Owner of the annual accounting under Section 9.01 hereof for such third consecutive Fiscal Year. Such notice shall state the basis on which Owner asserts the right of termination and shall show all mathematical calculations constituting the basis therefor. If Management Company does not elect to avoid termination pursuant to Section 4.02 B below, this Agreement shall terminate as of the end of the second full Accounting Period following the date on which Management Company receives Owner's written notice of its intent to terminate this Agreement. Owner's failure to exercise its right to terminate this Agreement pursuant to this Section 4.02 A during any given Fiscal Year shall not be deemed an estoppel or waiver of Owner's right to terminate this Agreement as to subsequent Fiscal Years to which this Section may apply. B. Upon receipt of Owner's written notice of termination under Section 4.02 A, Management Company shall have the option, to be exercised within sixty (60) days after receipt of said notice, to avoid such termination by advancing to Owner the amount of any deficiency described in Section 4.02 A, and upon paying such deficiency, Management Company shall be deemed to have satisfied the test described in Section 4.02 A for such three (3) year period. If Management Company exercises such option, then the foregoing Owner's election to terminate this Agreement under Section 4.02 A shall be cancelled and be of no force or effect, and this Agreement shall not terminate. All advances of up to $10 million of any deficiencies to Owner pursuant to this Section 4.02 B shall become "Contingent Incentive Management Fees." Such cancellation, however, shall not affect the right of Owner, as to subsequent Fiscal Years to which Section 4.02 A applies, to again elect to terminate this Agreement pursuant to the provisions of Section 4.02 A (which subsequent election shall again be subject to Management Company's rights under this Section 4.02 B). If Management Company does not exercise its option to make the advance permitted by this Section 4.02 B, then this Agreement shall be terminated as of the date set forth in Section 4.02 A. 4.03 Actions to be Taken on Termination ---------------------------------- Upon a Termination of this Agreement with respect to any one or more of the Inns, the following shall be applicable: A. Management Company shall prepare a final accounting statement with respect to such Inn or Inns, as more particularly described in Section 9.01 hereof, dated as of the date of Termination. Within thirty (30) days of the receipt by Owner of such final accounting statement, the parties will make whatever cash adjustments are necessary pursuant to such final statement. The cost of preparing such final accounting statement shall be a Deduction, unless the Termination occurs as a result of a default by either party, in which case the defaulting party shall pay such cost. B. Management Company shall release and transfer to Owner any of Owner's funds which are held or controlled by Management Company with respect to such Inn or Inns. -16- C. Management Company shall make available to Owner such books, records and other documents respecting such Inn or Inns (including those from prior years, subject to Management Company's reasonable records retention policies) as will be needed by Owner to prepare the accounting statements, in accordance with the Uniform System of Accounts, for such Inn or Inns for the year in which the Termination occurs and for any subsequent year. D. Management Company shall (to the extent permitted by law) assign to Owner or to the new manager all operating licenses and permits for such Inn or Inns which have been issued in Management Company's name; provided that if Management Company has expended any of its own funds in the acquisition of any of such licenses or permits, Owner shall reimburse Management Company therefor if it has not done so already. E. Appropriate adjustments shall be made regarding the application of this Agreement to any remaining Inns, such as, but not limited to, those adjustments described in Section 19.02. In the event of Termination for any reason other than a sale of such Inn or Inns or as a result of an "event of default" by Owner hereunder, the adjustments described in Section 19.02 shall be made with respect to the remaining Inns, and Owner shall be released from all further obligations hereunder with respect to the terminated Inn or Inns. F. Various other actions shall be taken, as described in this Agreement, including, but not limited to, the actions described in Sections 7.01, 10.02, 12.03 and 14.01 C. G. Management Company shall peacefully vacate and surrender such Inn or Inns to Owner and cooperate with Owner and the new manager after the Termination. 4.04 Pre-Closing Termination. ------------------------ A. Owner may terminate this Agreement if it elects, pursuant to Section 2.06 of the Purchase Agreement, to terminate the transactions contemplated therein. Should Owner elect to terminate the transactions contemplated in such Purchase Agreement only with respect to certain Inns, Owner may terminate this Agreement with respect to such Inns. In such case, the adjustments and actions described in this Agreement for the termination of this Agreement with respect to one Inn or the sale of one Inn shall be made (with such adjustments being made as of the date of the distribution to the Partners of Owner of the amounts received by Owner in connection therewith). B. On the Effective Date (or, as to a Development Inn, on the purchase date of such Development Inn), Manager shall deliver to Owner a certificate stating, if true, that there are no covenants or restrictions which would prohibit or materially limit Management Company from operating any Inn as a Fairfield Inn, including material facilities customarily a part of or related to a Fairfield Inn (or, if not true, stating the extent to which it is not true). If on the Effective Date (or, as to a Development Inn, on the purchase date of such Development Inn) there are any covenants or restrictions which would prohibit or materially limit Management Company from operating any Inn as a Fairfield Inn, including material facilities customarily a part of or related to a Fairfield Inn, -17- either party may terminate this Agreement as to such Inn. In such case, the adjustments and actions described in this Agreement for the termination of this Agreement with respect to one Inn or the sale of one Inn shall be made. END OF ARTICLE IV -18- ARTICLE V COMPENSATION OF MANAGEMENT COMPANY ---------------------------------- 5.01 Management Fees and System Fee ------------------------------ A. In consideration of services to be performed during the term of this Agreement, Management Company shall, subject to the provisions of this Article V, be paid the Base Management Fee and the Incentive Management Fee to cover services which benefit all Fairfield Inn properties operated by Management Company, are performed by personnel not normally located at the Inn and are not Chain Services (whether or not such services are obtained from Management Company's employees or through third party contractors). Such services include but are not limited to corporate and divisional executive management, divisional financial services (excluding certain accounting services included as "Chain Services"), corporate accounting services, manpower planning, recruiting and hiring for all Fairfield Inn management positions, management training for Management Company operated inns, regional management and administrative services, services of Management Company's technical and operational experts making periodic inspection and consultation visits to the Inns (excluding visits for personnel of the Architectural and Construction division of the Management Company or its affiliates). [Page missing] Base Management Fee for such Fiscal Year (or all Accounting Periods to date in such Fiscal Year) that is required to be paid currently shall be reduced by the amount of the shortfall in Owner's Net Cash Flow (and such reduction shall be made before any reduction of Ground Rent as a result of the operation of Section 4.02(d) of the Ground Leases); provided, however, that such reduction in the Base Management Fee shall not exceed an amount equal to (a) the maximum available amount remaining under the Development Fee Adjustment mechanism at the time of its expiration pursuant to Section 2.10 of the Purchase Agreement (but in no event greater than $8,000,000), minus (b) the total amount of Base Management Fees and Ground Rent that is not paid currently during such four (4) Fiscal Year period as a result of the operation of this Section 5.01D and Section 4.02(d) of the Ground Leases, respectively. Within forty (40) days after the end of each Fiscal Year, Owner and Management Company shall make any necessary adjustments in the amount of Base Management Fee reductions required hereunder based upon the entire Fiscal Year. Any Base Management Fees which are not paid currently as a result of the operation of this Section 5.01D shall be payable, without adjustment for interest, as provided in Section 5.03 hereof. -19- 5.02 Incentive Management Fees ------------------------- Any Incentive Management Fee and Contingent Incentive Management Fee the payment of which is based on Operating Profit shall, in each Fiscal Year (and with respect to each Accounting Period within each such Fiscal Year, as more particularly described in Section 5.05 hereof), be payable in accordance with the following sequence of computations, and no Incentive Management Fee shall be paid until sufficient Operating Profit is available for actual payment thereof: A. First, Owner shall retain any Operating Profit (to the extent of Operating Profit in that Fiscal Year) in amounts sufficient to pay the Ground Rent payable after giving effect to Section 4.02(d) of the Ground Leases, the Qualifying Debt Service and Administrative Expenses for such Fiscal Year (which shall be prorated among the Accounting Periods within any given Fiscal Year). B. Second, Owner shall retain any remaining Operating Profit until Owner has retained an amount equal to Owner's Priority Return (which shall be prorated among the Accounting Periods within any given Fiscal Year). C. Third, Owner shall retain any remaining Operating Profit in amounts necessary to repay any outstanding Limited Debt Service Guarantee Advances and accrued interest thereon. D. Fourth, Owner shall retain any and all such additional amounts as Owner is required pursuant to the terms of the Permanent Loan to pay prior to payment of Incentive Management Fees and Contingent Incentive Management Fees hereunder. E. Fifth, Owner shall retain fifty percent (50%) of any remaining Operating Profit for such Fiscal Year (which shall be prorated among the Accounting Periods within any given Fiscal Year). F. Sixth, Owner shall apply the remaining fifty percent (50%) of Operating Profit for such Fiscal Year (or portion thereof) ("Cash Flow Available for Incentive Management Fee") to pay Management Company the Incentive Management Fee for the current Fiscal Year. Notwithstanding anything herein to the contrary, in the event Cash Flow Available for Incentive Management Fee is insufficient to pay the full Incentive Management Fee for any Fiscal Year (or portion thereof) ending before or nearest December 31, 1992, such unpaid Incentive Management Fee shall never be paid. In the event Cash Flow Available for Incentive Management Fee is insufficient to pay the full Incentive Management Fee for any Fiscal Year beginning thereafter, such unpaid Incentive Management Fee shall be payable subsequently, without adjustment for interest, as a "Contingent Incentive Management Fee" pursuant to this Article V. Following application pursuant to the above to pay the Incentive Management Fee for the current year, Owner shall apply any remaining balance of Cash Flow Available for Incentive Management Fee to pay Management -20- Company any Contingent Incentive Management Fees then owed to Management Company. Upon termination of this Agreement with respect to an Inn or Inns due to a default of Management Company or if Management Company fails to renew the Term with respect to such Inn or Inns, Management Company shall not be entitled to receive payment of any Contingent Incentive Management Fee with respect thereto. G. Seventh, following application pursuant to paragraph F above, Owner shall retain any remaining balance of Cash Flow Available for Incentive Management Fee. 5.03 Application of Capital Proceeds ------------------------------- In the event that Owner, from time to time during the term of this Agreement, realizes Capital Proceeds, then Owner shall apply such Capital Proceeds (to the extent thereof) in the following order and amounts: (1) First, to pay transaction costs of the sale or refinancing and other amounts excluded from gross proceeds in determining Capital Proceeds. (2) Second, Owner shall retain any remaining balance of Capital Proceeds until Owner has retained an amount equal to any unamortized payments (and return thereon) under Section 8.02E3 hereof; (3) Third, Owner shall retain any remaining balance of such Capital Proceeds until Owner has retained from appropriate sources an amount equal to Owner's 12% Priority and Capital Return. (4) Fourth, Owner shall retain any remaining balance of Capital Proceeds until Owner has retained an amount equal to any outstanding Limited Debt Service Guarantee Advances (and accrued interest thereon). (5) Fifth, Owner shall retain any remaining balance of Capital Proceeds until Owner has retained an amount equal to any Ground Rent remaining unpaid as a result of the operation of Section 4.02(d) of the Ground Leases. -21- (6) Sixth, Owner shall apply any remaining balance of Capital Proceeds to pay to Management Company an amount equal to any Base Management Fees remaining unpaid as a result of the operation of Section 5.01D hereof. (7) Seventh, Owner shall apply the remaining balance of Capital Proceeds to pay to Management Company any Incentive Management Fees or Contingent Incentive Management Fees then owed to Management Company. (8) Eighth, Owner shall retain any remaining balance of Capital Proceeds. 5.04 Debt Service Payment -------------------- In the event (i) Owner's actual scheduled debt service on the principal amount of Owner's indebtedness secured by one or more of the Inns is in excess of Qualifying Debt Service for any Fiscal Year (or portion thereof) during the Inn Term, (ii) but for the provisions of this Section 5.04, Management Company is entitled to receive pursuant to Section 5.02 all or a portion of the Incentive Management Fee for such Fiscal Year (or portion thereof), and (iii) the total amount retained by Owner pursuant to Sections 5.02A and 5.02B for such Fiscal Year (or portion thereof) is less than the sum of the actual debt service described in clause (i) above, plus the Owner's Administrative Expenses and plus the Ground Rent, then Management Company shall not be entitled to current payment of such portion of its Incentive Management Fee for such Fiscal Year (or portion thereof) up to an amount equal to the excess of said sum over the total amount retained by Owner pursuant to Sections 5.02A and 5.02B for such Fiscal Year (or portion thereof). Owner shall use such amount otherwise allocated to Incentive Management Fee to pay said actual debt service. Such portion of the Incentive Management Fee shall become a Contingent Incentive Management Fee. 5.05 Accounting and Interim Payment ------------------------------ A. Within twenty (20) days after the close of each Accounting Period, Management Company shall submit an interim accounting to Owner showing, in reasonable detail, the amount (and calculation where appropriate) of Gross Revenues, Deductions, FF&E Reserve contributions and expenditures, Operating Profit, Ground Rent, Cash Flow Available for Incentive Management Fee and (with respect to 1993 through 1996) Owner's Net Cash Flow, and all retentions, distributions and other applications thereof with respect to the Inns. Management Company shall transfer with each accounting any interim amounts due Owner and shall retain any interim management fees due Management Company (as described in this Article V). Each accounting will be prepared on a consolidated basis rather than on an individual Inn basis. Management Company shall also prepare an accounting showing Gross Revenues, Deductions and Operating Profit on an individual Inn basis. B. Calculations and payments of the Base Management Fee, System Fee, the Incentive Management Fee, the Contingent Incentive Management Fee, and applications of -22- Operating Profit made with respect to each Accounting Period within a Fiscal Year shall be accounted for cumulatively. Within sixty (60) days after the end of each Fiscal Year, Management Company shall submit an accounting, as more fully described in Section 9.01, for such Fiscal Year to Owner, which accounting shall be controlling over the interim accountings. Any adjustments required by the Fiscal Year accounting shall be made by cash payments within five (5) business days of the receipt by Owner of such final accounting. No adjustment shall be made for any Operating Loss in a preceding or subsequent Fiscal Year. C. Within twenty (20) days after the closing of a refinancing or a sale of one or more of the Inns, Owner will provide Management Company an accounting showing Owner's Priority Return and Owner's 12% Priority and Capital Return, Net Sales Proceeds, and Net Refinancing Proceeds (as the case may be). D. Within twenty (20) days after the close of each Accounting Period, Owner will provide Management Company an accounting showing Owner's Priority Return, the balance of any principal and interest of Debt Service Guarantee Advances, and Net Contributed Capital. END OF ARTICLE V -23- ARTICLE VI PRE-OPENING ----------- 6.01 Pre-Opening Services -------------------- It is recognized that certain activities must be undertaken so that the Development Inns can function properly at their Opening Dates as defined in the Purchase Agreement. Accordingly, Management Company shall on behalf of Owner: A. Recruit, train and employ the staff required for the Development Inn; B. Undertake pre-opening promotion and advertising, including opening celebrations; C. Provide, for a period to end not later than sixty (60) days from the Opening Date, a task force of experts and personnel to supervise and assist with certain pre-opening and opening operations; D. Obtain and maintain the initial licenses and permits required for the operation of the Development Inns as contemplated by this Agreement; E. In general, render such other miscellaneous services incidental to the preparation and organization of the Development Inns' operations as may be required for the Development Inns to be adequately staffed and capable of operating at the Opening Dates. The expenses relating to such activities shall include, but not be limited to, salaries and wages (including those of personnel of Management Company and Marriott Affiliates), professional fees, telephone expenses, staff hiring and training costs, travel and moving expenses, costs of opening celebrations, the cost of heat, light and power not chargeable to the cost of constructing or operating the Development Inns, advertising and promotion expense, and miscellaneous expenses. 6.02 Responsibility for Pre-Opening Expenses --------------------------------------- The expenses for the activities outlined in Section 6.01 shall be borne by Seller in accordance with the Purchase Agreement and in accordance with the above, or as otherwise requested by Management Company. Pre-opening expenses incurred or paid by Management Company promptly shall be reimbursed by Seller upon receipt of a statement of account for such Pre-opening expenses. END OF ARTICLE VI -24- ARTICLE VII WORKING CAPITAL AND FIXED ASSET SUPPLIES ---------------------------------------- 7.01 Working Capital and Inventories ------------------------------- The parties recognize that Seller shall sell to Owner, who shall in turn provide to Management Company, as agent, the initial Working Capital and Inventories for the Inns. Management Company believes that the level of initial Working Capital so provided should be reasonably sufficient for each Inn to operate as a fully functioning Fairfield Inn as of the Effective Date (or in the case of the Development Inns, as of the their purchase dates) and for a period of at least six (6) months thereafter. Owner shall from time to time thereafter promptly advance, upon request of Management Company, any additional funds necessary to maintain Working Capital and Inventories at levels reasonably determined by Management Company to be necessary to satisfy the needs of each Inn as its operation may from time to time require. Funds so advanced for Working Capital shall be utilized by Management Company on behalf of Owner for the purposes of this Agreement pursuant to cash-management policies established for the Fairfield Inn system, but Owner shall be the beneficial owner of all such funds throughout the term of this Agreement. Upon Termination with respect to any Inn or Inns, Management Company shall return to Owner any unused Working Capital (including Inventories), except for Inventories purchased by Management Company pursuant to Section 10.02. 7.02 Fixed Asset Supplies -------------------- The parties recognize that Seller shall sell to Owner, who shall in turn provide to Management Company, as agent, the initial Fixed Asset Supplies for the Inns. Management Company believes that the level of initial Fixed Asset Supplies so provided should be reasonably sufficient for each Inn to operate as a fully functioning Fairfield Inn hotel as of the Effective Date (or in the case of the Development Inns, as of their purchase dates) and for a period of at least six (6) months thereafter. Owner shall from time to time thereafter promptly advance, upon request of Management Company, any additional funds necessary to maintain Fixed Asset Supplies at levels reasonably determined by Management Company to be necessary to satisfy the needs of each Inn as its operation may from time to time require. Fixed Asset Supplies shall remain the property of Owner throughout the term of this Agreement except for Fixed Asset Supplies purchased by Management Company pursuant to Section 10.02. END OF ARTICLE VII -25- ARTICLE VIII REPAIRS, MAINTENANCE AND REPLACEMENTS ------------------------------------- 8.01 Routine Repairs and Maintenance ------------------------------- Management Company shall maintain the Inns in good repair and condition and in conformity with applicable laws and regulations and shall make or cause to be made such routine maintenance, repairs and minor alterations, the cost of which can be expensed under generally accepted accounting principles, as it, from time to time, deems reasonably necessary for such purposes. The cost of such maintenance, repairs and alterations shall be paid from Gross Revenues and shall be treated as a Deduction in determining Operating Profit. The cost of non-routine repairs and maintenance, either to an Inn building or its FF&E, shall be paid for in the manner described in Sections 8.02 and 8.03. 8.02 FF&E Reserve ------------ A. Management Company shall establish an escrow reserve account for the Inns ("FF&E Reserve") in a bank designated by Owner and approved by Management Company to cover the cost of: 1. Replacements and renewals related solely to the Inns' FF&E; and 2. Certain routine repairs and maintenance to the Inns' buildings which are normally capitalized under generally accepted accounting principles, such as exterior and interior repainting, resurfacing building walls, floors, roofs and parking areas, and buying or leasing replacement vehicles, but which are not major repairs, alterations, improvements, renewals or replacements to such building's structure or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems, the cost of which are paid by Owner under Section 8.03 rather than from the FF&E Reserve. B. During the period of time from the Effective Date up to the end of the 1989 Fiscal Year, Management Company shall transfer into the FF&E Reserve an amount equal to one percent (1%) of Gross Revenues from the Inns for such period of time; during the 1990 Fiscal Year, Management Company shall transfer into the FF&E Reserve an amount equal to two percent (2%) of Gross Revenues from the Inns for such Fiscal Year; during Fiscal Year 1991, Management Company shall transfer into the FF&E Reserve an amount equal to three percent (3%) of Gross Revenues from the Inns for such Fiscal Year; during the 1992 Fiscal Year, Management Company shall transfer into the FF&E Reserve an amount equal to four percent (4%) of Gross Revenues from the Inns for such Fiscal Year; during the Fiscal Year 1993, Management Company shall transfer into the FF&E Reserve an amount equal to five percent (5%) of Gross Revenues from the Inns for such Fiscal Year; and commencing with the Fiscal Year 1994, and for all Fiscal Years thereafter, subject to the provisions of subsection E, below, Management Company shall transfer into the FF&E Reserve an -26- amount equal to six percent (6%) of Gross Revenues from the Inns for each of such Fiscal Years. Transfers into the FF&E Reserve shall be made at the time of each interim accounting described in Section 5.06 A. Any amounts held in the FF&E Reserve may be applied, as between the Inns, without regard for the source of such amounts, provided that such application satisfies the requirements of this Article VIII. All amounts transferred into the FF&E Reserve shall be deducted from Gross Revenues in determining Operating Profit and deposited in the special FF&E Reserve account described in Section 8.02 A hereof. C. Management Company shall from time to time make such (1) replacements and renewals to each Inn's FF&E, and (2) repairs to such Inn's buildings of the nature described in Section 8.02 A 2, as it deems reasonably necessary, up to the balance in the FF&E Reserve. No expenditures will be made in excess of said balance without the prior approval of Owner. At the end of each Fiscal Year, any amounts remaining in the FF&E Reserve shall be carried forward to the next Fiscal Year. Proceeds from the sale of FF&E no longer necessary to the operation of an Inn shall be deposited in the FF&E Reserve. The FF&E Reserve will be kept in an interest-bearing account, and any interest which accrues thereon shall be retained in the FF&E Reserve. Neither (i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on amounts held in the FF&E Reserve, shall (a) result in any reduction in the required contributions to the FF&E Reserve set forth in subsection B above, nor (b) be included in Gross Revenues. D. Management Company shall prepare an estimate ("FF&E Replacement Estimate") of the expenditures (and time schedule) necessary for (1) replacements and renewals to each Inn's FF&E, and (2) repairs to each Inn building of the nature described in Section 8.02 A 2, during the ensuing Fiscal Year and shall submit such Repairs and Equipment Estimate to Owner at the same time it submits the Annual Operating Projection described in Section 9.03. Management Company will consider in good faith suggestions made by Owner with respect to the Repairs and Equipment Estimate and make appropriate modifications thereto. E. The percentage contributions for the FF&E Reserve described in Section 8.02 B are estimates based upon Management Company's and Marriott Affiliates' prior experience. As each Inn ages, these percentages either (i) may not be sufficient to keep the FF&E Reserve at the levels necessary to make the replacements and renewals to the FF&E of the Inns, or to make the repairs to the Inns buildings of the nature described in Section 8.02 A 2, which are required to maintain such Inns as Fairfield Inn properties or (ii) may be in excess of those amounts necessary to maintain such Inns as Fairfield Inn properties. If Management Company reasonably determines that the percentages contained in Section 8.02 B are in excess of the amounts sufficient to maintain the Inns as Fairfield Inn properties, then Management Company may reduce the percentages. Management Company shall provide to Owner upon request from time to time a report, in -27- reasonable detail, supporting the amount in the FF&E Reserve with respect to the Inns and/or the percentages contained in Section 8.02B. If the Repairs and Equipment Estimate reasonably prepared in good faith by Management Company exceeds the available funds in the FF&E Reserve or if Management Company reasonably determines that the percentages contained in Section 8.02B are insufficient to maintain the Inns as Fairfield Inn properties and Management Company requests Owner to increase the percentages, Owner will: 1. Agree to increase the annual percentage in Section 8.02 B to provide the appropriate funds required, or 2. Arrange to obtain outside financing for the additional funds required, in which event the principal and interest payments on such financing shall constitute Deductions in determining Operating Profit, or 3. Provide the additional funds required, in which case such amounts (plus interest at the Prime Rate plus one percent (1%) per annum), to the extent not retained pursuant to Section 5.03(2), shall be retained by Owner from Gross Revenues as if it were a repayment on an interest bearing loan in equal installments over the period of the next sixty-five (65) Accounting Periods. Such periodic amounts shall be treated as Deductions. A failure or refusal by Owner to agree to either 1, 2 or 3 above within a sixty (60) day period after Management Company's request therefor shall entitle Management Company, within sixty (60) days after such failure or refusal, to notify Owner that it will terminate this Agreement, as to those Inns as to which agreement was not reached, as of a date nine (9) months after the date of Management Company's notice of termination. If Owner subsequently does either 1, 2 or 3 above within nine (9) months after Management Company notifies Owner of its intention to terminate this Agreement, this Agreement shall not be terminated and Management Company shall continue to manage the Inns in question. If Management Company does not so notify Owner, it shall continue to manage the Inns in question, as provided under this Agreement, without the aforesaid increase in the percentage contribution to the FF&E Reserve. F. Upon Termination of this Agreement with respect to any one or more of the Inns, whether pursuant to 8.02 E above or pursuant to other provisions of this Agreement, a portion of the FF&E Reserve shall be released from the FF&E Reserve and paid to Owner; such portion shall be computed by multiplying the amount then in the FF&E Reserve by a fraction, the numerator of which shall be the Gross Revenues attributable to the Inn or Inns which are the subject of Termination for the most recently concluded Fiscal Year and the denominator of which shall be all Gross Revenues for the same Fiscal Year. G. With the exception of any furniture or equipment leases which are in effect on the Effective Date and with the exception for telephone equipment, if Management Company -28- elects to lease rather than purchase any FF&E which is customarily purchased in the Fairfield Inn system with monies from the FF&E Reserve, the lease payments for such FF&E shall be made from the FF&E Reserve. 8.03 Building Alterations, Improvements, Renewals, and Replacements -------------------------------------------------------------- A. Management Company shall prepare an annual estimate of the expenses for necessary major repairs, alterations, improvements, renewals and replacements (which repairs, alterations, improvements, renewals and replacements are not among those referred to in Section 8.02 A 2 and are not expansions) to the structural, mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation elements of each Inn building ("Building Estimate") and shall submit such Building Estimate to Owner for its approval at the same time the Annual Operating Projection is submitted. The Building Estimate shall be prepared on a consolidated basis showing proposed expenditures as to each Inn. Management Company shall not make any expenditures for such purposes until the Building Estimate is approved by Owner; provided that if major repairs, alterations, improvements, renewals or replacements to any Inn are required by reason of any law, ordinance, regulation or order of a competent government authority (after exhausting any appeals), or are otherwise reasonably required for the continued safe and orderly operation of such Inn, Management Company shall immediately give Owner notice thereof and shall be authorized (but not obligated) to take appropriate remedial action without such approval if Owner does not act; provided further that Management Company shall in no event act without obtaining Owner's prior consent if the cost of such remedial action exceeds, for any given Inn: (i) during the first partial and full Fiscal Years of this Agreement, One Hundred Thousand Dollars ($100,000); or (ii) during all subsequent Fiscal Years, four percent (4%) of the Inn's annual Gross Revenues. Owner shall bear the cost of all such alterations, improvements, renewals or replacements by either: 1. Providing financing for the additional funds required, in which event the principal and interest payments on such financing shall constitute Additional Inn Investment Loans and be included in Qualifying Debt Service, or 2. Providing the additional funds required, which amounts shall be treated as Additional Inn Investments hereunder. B. If Owner does not approve the Building Estimate as to one or more or all of the Inns within sixty (60) days after it has been submitted, Management Company may, within sixty (60) days after the end of said sixty-day period, notify Owner that it will terminate this Agreement as to those Inns as to which agreement was not reached as of a date nine (9) months after the date of Management Company's notice of termination. If Owner subsequently approves the Building Estimate within nine (9) months after Management Company notifies Owner of its intention to terminate this Agreement, this Agreement shall not be terminated and Management Company shall -29- continue to manage the Inns in question. If Management Company does not so notify Owner, it shall continue to manage the Inns in question, as provided under this Agreement, without making any expenditures in the Building Estimate that were not approved. The provisions of this subsection 8.03B shall not apply to requests from Management Company to expand any Inn. 8.04 Liens ----- Management Company and Owner shall use their reasonable best efforts to prevent any liens from being filed against any Inn which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to such Inn. They shall cooperate fully in obtaining the release of any such liens, and the cost thereof, if the lien was not occasioned by the fault of either party, shall be treated the same as the cost of the matter to which it relates. If the lien arises as a result of the fault of either party, then the party at fault shall bear the cost of obtaining the lien release. 8.05 Ownership of Replacements ------------------------- All repairs, alterations, improvements, renewals or replacements made pursuant to Article VIII, and all amounts kept in the FF&E Reserve, shall be the property of Owner. END OF ARTICLE VIII -30- ARTICLE IX BOOKKEEPING AND BANK ACCOUNTS ----------------------------- 9.01 Books and Records ----------------- Books of control and account shall be kept on the accrual basis and in all material respects in accordance with the Uniform System of Accounts, with the exceptions provided in this Agreement. Owner may at reasonable intervals during Management Company's normal business hours examine such records. Within sixty (60) days after the end of each Fiscal Year, Management Company shall furnish Owner a statement in reasonable detail summarizing the operations of the Inns for such Fiscal Year and a certificate of Management Company's chief accounting officer certifying that such year-end statement is true and correct. The parties shall, within ten (10) business days after the receipt of such statement, make any adjustments, by cash payment, in the amounts paid or retained for such Fiscal Year as are needed because of the final figures set forth in such statement or send a notice of dispute setting forth the calculation in reasonable detail. If Owner desires, at its own expense, to audit such statement and supporting records, Owner shall begin such audit within ninety (90) days following its receipt of such statement and shall complete such audit within ninety (90) days thereafter. The cost of such audit shall not be treated as a Deduction. If Owner does not make an audit, then such statement shall be deemed to be conclusively accepted by Owner as being correct, and Owner shall have no right thereafter, except in the event of fraud by Management Company or as provided in Section 9.01B, to question or examine the same. If any audit by Owner discloses an understatement of any amounts due Owner, Management Company shall promptly pay Owner such amounts found to be due, plus interest thereon (at the Prime Rate plus one percentage point (1%) per annum) from the date such amounts should originally have been paid. If, however, the audit discloses that Management Company has not received any amounts due it, Owner shall pay Management Company such amounts, plus interest thereon (at the Prime Rate plus one percentage point (1%) per annum) from the date such amounts should originally have been paid. If Owner disputes the accuracy of such audit, Owner shall give written notice of such dispute to Management Company setting forth the dispute in reasonable detail. Any further dispute concerning the correctness of an audit not settled by Owner and Management Company shall be settled by arbitration, in accordance with the then current rules of the American Arbitration Association. B. If Owner's audit discloses an error in the total payment of amounts due Owner for any Fiscal Year so audited that is in excess of five percent (5%), Management Company shall pay for the cost of Owner's audit. In addition, in such event, Owner may audit the statements of Inn operations and supporting records at Management Company's expense for the three (3) -31- preceding Fiscal Years. The costs of such audits shall not be treated as a Deduction. Any error or dispute with respect thereto shall be handled as set forth in Section 9.01A. C. All statements shall be prepared on a consolidated basis rather than on an individual Inn basis; however to the extent Management Company prepares them for its own internal purposes, Management Company shall, on Owner's written request, furnish Owner with copies of unaudited statements prepared for each Inn separately. 9.02 Accounts, Expenditures ---------------------- A. All funds derived from operation of the Inns shall be deposited by Management Company, in accordance with Management Company's cash management procedures, in bank account(s) in a financial institution(s) designated by Management Company. Withdrawals from said account(s) shall be made by representatives of Management Company whose signatures have been authorized. Reasonable petty cash funds shall be maintained at each Inn. B. All payments made by Management Company hereunder shall be made from authorized bank accounts, petty cash funds, or from Working Capital provided pursuant to Section 7.01. Management Company shall not be required to make any advance or payment to or for the account of Owner except out of such funds, and Management Company shall not be obligated to incur any liability or obligation for Owner's account without assurances that necessary funds for the discharge thereof will be provided by Owner. Debts and liabilities incurred by Management Company as a result of its operation and management of the Inns pursuant to the terms hereof, whether asserted before or after the Termination of this Agreement, will be paid by Owner to the extent funds are not available for that purpose from the operation of the Inns. 9.03 Annual Operating Projection --------------------------- Management Company shall submit to Owner for its review thirty (30) days after the beginning of each Fiscal Year after the Effective Date an "Annual Operating Projection." Such projection shall project, on a consolidated and consolidating basis, the estimated average daily room rates, average occupancy, Gross Revenues, departmental profits, Deductions, and Operating Profit for the forthcoming Fiscal Year for the Inns, taking into account each Inn's market area. Management Company shall use its reasonable best efforts to adhere to the Annual Operating Projection. It is understood, however, that the Annual Operating Projection is an estimate only and that unforeseen circumstances such as, but not limited to, the costs of labor, material, services and supplies, casualty, operation of law, or economic and market conditions may make adherence to the Annual Operating Projection impracticable, and Management Company shall be entitled to depart therefrom due to causes of the foregoing nature. 9.04 Operating Losses; Credit A. To the extent there is an Operating Loss for any Accounting Period, additional funds in the amount of any such deficiency shall be provided by Owner within twenty (20) -32- days after Management Company has given written notice to Owner of such Operating Loss. If Management Company elects not to so notify Owner or if Owner does not so fund such deficiency on Management Company's request (but, in such latter case, without affecting Management Company's other remedies under this Agreement), Management Company shall have the right to withhold an amount equal to such deficiency from future disbursements of funds otherwise due to Owner. B. In no event shall either party borrow money in the name of or pledge the credit of the other. END OF ARTICLE IX -33- ARTICLE X TRADEMARKS, TRADE NAMES AND SERVICE MARKS ----------------------------------------- 10.01 Trademarks, Trade Names and Service Marks ----------------------------------------- A. During the term of this Agreement, each Inn shall be known as a Fairfield Inn, with such additional identification as may be necessary to provide local identification, and the Marriott name may be used in conjunction therewith. Notwithstanding anything herein to the contrary, if the name of the Fairfield Inn system is changed, Management Company shall change the name of the Inns to conform thereto. The costs for such change shall be treated as either a Deduction or taken from monies in the FF&E Reserve, depending on the nature of the cost. The name "Marriott," or "Fairfield Inn" when used alone or in connection with another word or words and the Marriott trademarks, service marks, trade names, symbols, logos and designs shall in all events remain the exclusive property of Marriott, and nothing contained herein shall confer on Owner the right to use the Marriott or Fairfield Inn name, trademarks, service marks, trade names, symbols, logos or designs otherwise than in strict accordance with the terms of this Agreement. Except as provided in Section 10.02, upon Termination with respect to an Inn, any use of or right to use the Marriott or the Fairfield Inn name, trademarks, service marks, trade names, symbols, logos or designs by Owner shall cease forthwith with respect to such Inn and Owner shall as soon as practicable remove from the Inn any signs or similar items which contain the Marriott or the Fairfield Inn name, trademarks, service marks, trade names, symbols, logos or designs. If Owner has not removed such signs or similar items promptly upon Termination, Management Company shall have the right to remain at the Inn as long as is necessary for it to do so. B. Included under the terms of this Section are all trademarks, service marks, trade names, symbols, logos or designs used in conjunction with the Inns, whether or not the marks contain the "Marriott" or the "Fairfield Inn" name. The right to use such trademarks, service marks, trade names, symbols, logos or designs belongs exclusively to Marriott Affiliates or Management Company, and the use thereof inures to the benefit of Marriott and/or Management Company whether or not the same are registered and regardless of the source of the same. C. Upon Termination of this Agreement with respect to an Inn, if there are any trademarks, service marks, trade names, symbols, logos or designs which are unique to such Inn, Management Company shall, to the extent it is capable, transfer such name(s) to Owner, without charge other than any out-of- pocket expenses. 10.02 Purchase of Inventories and Fixed Asset Supplies ------------------------------------------------ A. Upon Termination of this Agreement, either in its entirety or with respect to a given Inn, Management Company shall have the option, to be exercised within thirty (30) days after Termination, to purchase, at their then book value, (and remove from the Inn at its expense -34- within a reasonable time thereafter) any items of such Inn's Inventories and Fixed Asset Supplies as may be marked with the Marriott or Fairfield Inn name or any Marriott or Fairfield Inn trademark, trade name, symbol, logo or design. In the event Management Company does not exercise such option, Owner agrees that it will use any such items not so purchased exclusively in connection with the Inn until they are consumed. B. During the term of this Agreement, for so long as Owner is known as Fairfield Inn by Marriott Limited Partnership (or any other name containing the words "Marriott" or "Fairfield Inn"), Owner may use such name to the extent necessary on its legal and business documents. Upon Termination of this Agreement as to all of the Inns, Owner shall promptly take all necessary steps so that its name no longer contains the words "Marriott" or "Fairfield Inn." 10.03 Breach of Covenant ------------------ Management Company and/or its affiliated companies shall be entitled, in case of any breach of the covenants of Article X by Owner or others claiming through it, to injunctive relief and to any other right or remedy available at law. Article X shall survive Termination. END OF ARTICLE X -35- ARTICLE XI POSSESSION AND USE OF THE INNS ------------------------------ 11.01 Ground Leases ------------- So long as Management Company is not wrongfully withholding any money from Owner and so long as no other monetary event of default has occurred and is continuing, Owner agrees to promptly pay and discharge (i) any and all rental due and owing pursuant to the Ground Leases and (ii) any payments and charges required to be paid thereunder and, at its expense, to prosecute all appropriate actions, judicial or otherwise, necessary to assure Management Company's operation of those Inns subject to Ground Leases as provided herein. 11.02 Management of the Inns ---------------------- A. Management Company shall manage each Inn under standards comparable to those prevailing in other inns in the "Fairfield Inn" system, including all activities in connection therewith which are customary and usual to such an operation. B. Unless specifically approved in writing by Owner in its sole and absolute discretion, no gaming or gambling shall be permitted in the Inns other than occasional use thereof for such purposes on a not-for-profit basis and in compliance with all applicable laws. 11.03 Chain Services -------------- Management Company will, during the term of this Agreement, cause to be furnished to each Inn certain services ("Chain Services") which are furnished generally on a central or regional basis to all Fairfield Inn properties in the Fairfield Inn chain which are managed by Management Company or any Marriott Affiliate and which benefit each such Fairfield Inn property as a participant in the Fairfield Inn system. Chain Services shall include: (i) development and operation of computer systems; (ii) computer payroll services; (iii) accounting services supporting Fairfield Inn properties managed or operated by Management Company or any Marriott Affiliate; (iv) regional engineering support; and (v) such additional central or regional services as may from time to time be furnished for the benefit of inns in the Fairfield Inn system or in substitution for services now performed at individual inns which may be more efficiently performed on a group basis. Costs and expenses incurred in the provision of such services shall be allocated on the basis of relative Gross Revenues for the most recently concluded Fiscal Year for all Fairfield Inn properties owned, leased or managed by Management Company or a Marriott Affiliate in the United States receiving the same. 11.04 Marketing Fund -------------- Management Company will, during the term of this Agreement, maintain, manage and administer the Marketing Fund for the benefit of all hotels in the Fairfield Inn system. Owner will contribute to the Marketing Fund an annual amount determined by Management Company, -36- such amount to be contributed on an Accounting Period basis within thirty days after the end of each Accounting Period; provided, however, that if any Fairfield Inn property in the system at any time shall not be required to contribute to the Marketing Fund or is required to contribute on a basis that is more favorable to the owner thereof than the foregoing, then the contribution to the Marketing Fund hereunder shall be calculated and paid on the same basis as for such other Fairfield Inn property. Funds in the Marketing Fund shall be expended only for the purposes of the Marketing Fund. Management Company shall furnish to Owner, upon request, an annual report setting forth the amount of contributions to the Marketing Fund and the general breakdown of expenditures therefrom during the preceding Fiscal Year. 11.05 Owner's Right to Inspect ------------------------ Owner or its agents shall have access to any Inn at any and all reasonable times for the purpose of protecting the same against fire or other casualty, prevention of damage to the Inns, inspection, making repairs, or showing such Inns to prospective purchasers, tenants or mortgagees. 11.06 Reservations System ------------------- Management Company will, during the term of this Agreement, maintain, manage and administer, or cause to be maintained, managed and administered by a Marriott Affiliate, a national reservations system for the benefit of all hotels in the Fairfield Inn system. Such reservations system shall be comparable to the current national reservations service and shall be accessible from the Marriott full-service hotel reservations system. Costs and expenses incurred in the provision of such reservations system (net of all amounts paid with respect to the reservations system by other owners of Fairfield Inns such as franchisees, on a basis other than relative number of reservations) shall be allocated on the basis of relative number of reservations among all Fairfield Inn properties in the Fairfield Inn system. END OF ARTICLE XI -37- ARTICLE XII INSURANCE --------- 12.01 Property and Operational Insurance ---------------------------------- Management Company shall, commencing with the Effective Date and thereafter during the term of this Agreement, procure and maintain, using funds deducted from Gross Revenues in determining Operating Profit, either with insurance companies of recognized responsibility or by legally qualifying itself as a self insurer in the state where the respective Inn is located, a minimum of the insurance identified below. A. Property insurance on each Inn building(s) and contents against loss or damage by all perils covered by "all risk" (as such term is commonly used in the insurance industry, excluding earthquake and flood) coverage in an amount not less than one hundred percent (100%) of the replacement cost thereof except that if such 100% replacement cost coverage is not available on reasonable terms and rates, then such insurance shall be in an amount not less than ninety percent (90%) of the replacement cost of the Inn; B. Should an Inn be located in a zone identified by the Federal Emergency Management Agency as a flood hazard area, flood insurance shall be maintained in an amount not less than the maximum limit available under the National Flood Insurance Program if required by the Owner's lender holding a first mortgage on said Inn. C. Insurance against loss or damage from explosion of boilers, pressure vessels, pressure pipes and sprinklers, to the extent applicable to each Inn; D. Business interruption insurance covering loss of profits and necessary continuing expenses for interruptions caused by any occurrence covered by the insurance referred to in Section 12.01 A through C for Management Company's established period (but not less than one (1) year after the occurrence) of a type and in amounts as are generally established by Management Company at other similar inns it or Marriott Affiliates own, lease or manage under the Fairfield Inn name in the United States; E. General liability insurance against claims for personal injury, death or property damage occurring on, in, or about any Inn, and automobile liability insurance on vehicles operated in conjunction with any Inn, with a combined single limit for each occurrence of not less than Twenty Million Dollars ($20,000,000); F. Workers' compensation and employer's liability insurance as may be required under applicable laws covering all of Management Company's employees at the Inn; G. Fidelity bonds, with reasonable limits to be determined by Management Company, covering its employees in job classifications normally bonded in other similar inns it, or its Affiliates, own, lease or manage under the Fairfield Inn name in the United States or as otherwise -38- required by law, and comprehensive crime insurance to the extent Management Company and Owner mutually agree it is necessary for any Inn; and H. Such other insurance in amounts as Management Company in its reasonable judgment deems advisable for protection against claims, liabilities and losses arising out of or connected with the operation of any Inn or as reasonably required by Owner's lender(s) holding a first mortgage on any Inn, subject to Management Company's reasonable approval. 12.02 General Insurance Provisions ---------------------------- A. All insurance described in Section 12.01 may be obtained by Management Company by endorsement or equivalent means under its, Marriott's, or a Marriott Affiliate's blanket insurance policies, provided that such blanket policies substantially fulfill the requirements specified herein. B. Management Company may self insure or otherwise retain such risks or portions thereof as it does with respect to other similar inns it or Marriott Affiliates own, lease or manage under the Fairfield Inn name in the United States. C. All policies of insurance required under Section 12.01 shall be carried in the name of Management Company. The policies required under Sections 12.01 A, B, C, D and E shall include Owner as an additional insured. Upon notice by the Owner, Management Company shall also have the policies required under Sections 12.01 A, B, C and D include any mortgagee or lender on the Inns as additional insureds. Subject to the rights of any such Lender, any property losses thereunder shall be payable to the insured parties as and to the extent their respective interests may appear. Any mortgage on any Inn shall contain provisions to the effect that, in the absence of a default thereunder, proceeds of the insurance policies required to be carried under Section 12.01 A, B and C shall be available for repair and restoration of the Inn. D. All policies and certificates of insurance provided for under Article XII shall, to the extent obtainable, state that the insurance shall not be cancelled or materially changed without at least thirty (30) days' prior written notice to the policy holder and all certificate holders. E. Management Company shall deliver to Owner certificates of insurance with respect to all policies so procured, including existing, additional and renewed policies, and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof prior to the respective dates of expiration. 12.03 Cost and Expense ---------------- Insurance premiums and any costs or expenses with respect to the insurance or self-insurance required under this Article XII, including any Inn Retention, shall be treated as Deductions. Such premiums and costs shall be allocated on an equitable basis to the inns participating under Management Company's, Marriott's or a Marriott Affiliate's blanket insurance or self- insurance programs. Any reserves, losses, costs or expenses which are uninsured shall be -39- treated as a cost of insurance and shall be Deductions. Premiums on policies for more than one year shall be charged pro rata against Gross Revenues as a Deduction over the period of the policies. Upon Termination, either of this entire Agreement or with respect to a given Inn, an escrow fund in an amount reasonably acceptable to Management Company and Owner shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to cover the amount of any Inn Retention and all other costs which will eventually have to be paid by Management Company with respect to pending or contingent claims, including those which arise after Termination for causes arising during the term of this Agreement. 12.04 Owner Provided Coverage ----------------------- Notwithstanding anything to the contrary contained in this Article XII, Owner may, at its option, with sixty (60) days advance written notice to Management Company, procure the insurance coverages required under subsections A, B, C, D and E of Section 12.02 hereof, the premiums for which are to be treated as a Deduction. However, if the cost of such insurance procured by Owner exceeds the cost of Management Company's insurance by ten percent (10%) for comparable coverages, all excess costs over such 10% threshold shall be the sole responsibility of Owner and not be a Deduction in computing Operating Profit. Should Owner exercise its option to provide such insurance, Owner hereby waives its rights of recovery from Management Company, its affiliates, directors and employees for loss or damage to the Hotel, and any resultant interruption of business, to the extent covered by the insurance provided herein. 12.05 Loan Agreement Insurance Provisions ----------------------------------- To the extent that the provisions of this Article XII shall conflict with the insurance provisions of the Loan Agreement and related documents at the time such Loan Agreement and related documents are executed and, to the extent that the provisions of the Loan Agreement and such related documents provide for more extensive coverage than this Article XII, the insurance provisions of such Loan Agreement and related documents shall control. Any revisions of the insurance provisions contained in such Loan Agreement and related documents occurring subsequent to the date of execution of such Loan Agreement and related documents shall be with the consent of Management Company for the provision contained in the first sentence of this Section to apply. END OF ARTICLE XII -40- ARTICLE XIII TAXES ----- 13.01 Real Estate and Personal Property Taxes --------------------------------------- All real estate and personal property taxes, levies, assessments and similar charges on or relating to each Inn ("Impositions") during each Inn Term shall be paid by Management Company on behalf of Owner from Gross Revenues before any fine, penalty, or interest is added thereto or lien placed upon the Inn or this Agreement, unless payment thereof is in good faith being contested and enforcement thereof is stayed. Accruals of any such payments shall be a Deduction in determining Operating Profit. Owner shall, within five (5) days of receipt, furnish Management Company with copies of official tax bills and assessments which it may receive with respect to any of the Inns. Either Owner or Management Company, with Owner's consent, not to be unreasonably withheld, (in which case Owner agrees to sign the required applications and otherwise cooperate with Management Company in expediting the matter) may initiate proceedings to contest any Imposition, and all reasonable costs of any such contest shall be paid from Gross Revenues and shall be a Deduction in determining Operating Profit. END OF ARTICLE XIII -41- ARTICLE XIV INN EMPLOYEES ------------- 14.01 Employees --------- A. All personnel employed at each Inn shall at all times be the employees of Management Company, Marriott, or a Marriott Affiliate. Management Company shall have absolute discretion to hire, promote, supervise, direct, move and train all employees at the Inns, to fix their compensation and, generally, establish and maintain all policies relating to employment. B. Management Company shall be permitted to provide free accommodations and amenities to its employees and representatives visiting each Inn in connection with its management or operation. No person shall otherwise be given gratuitous accommodations or services without prior joint approval of Owner and Management Company except in accordance with usual practices of the hotel and travel industry. C. At Termination with respect to a given Inn, other than a Termination (i) by reason of a default of Management Company hereunder, or (ii) at Management Company's option (except as a result of a default by Owner), provided that the expiration of a given Inn Term under Section 4.01 shall not be deemed "at Management Company's option" for purposes of this Section 14.01, an escrow fund shall be established from Operating Profit to reimburse Management Company for all costs and expenses incurred by Management Company in terminating its employees at the Inn in accordance with its standard policies, such as severance pay, unemployment compensation and other employee liability costs arising out of the termination of employment of Management Company's employees at such Inn. Transfer costs shall not be included. D. Neither Owner nor Management Company shall effect a Termination of this Agreement without allowing sufficient time for Management Company to comply with notice requirements of federal and state laws and regulations regarding the closing of a business or termination of employees. Management Company shall comply with notice requirements of federal and state laws and regulations regarding the closing of a business or termination of employees. END OF ARTICLE XIV -42- ARTICLE XV DAMAGE, CONDEMNATION AND FORCE MAJEURE -------------------------------------- 15.01 Damage and Repair ----------------- A. If, during the term hereof, any Inn is damaged or destroyed by fire, casualty or other cause, Owner shall, at its cost and expense and with all reasonable diligence, repair or replace the damaged or destroyed portion of such Inn to the same condition as existed previously. To the extent available, proceeds from the insurance described in Section 12.01 shall be applied to such repairs or replacements. However, Owner shall not be obligated to so repair or replace the damaged or destroyed portion of such Inn if one or more of the following is true: (i) the Inn is so badly damaged or destroyed that it cannot reasonably be repaired or replaced within one (1) year of the date of the casualty; (ii) the proceeds of insurance available for such repair or replacement are less than ninety percent (90%) of the estimated repair and replacement costs; or (iii) the remainder of the Inn Term with respect to such Inn is less than ten (10) years, and Management Company fails to agree to extend such Inn Term to a date which is at least ten (10) years after the estimated date of the completion of such repair and/or replacement. If Owner elects not to repair or replace said damaged portion of such Inn for one or more of the foregoing reasons, it shall so notify Management Company by written notice within ninety (90) days after the date of the casualty. If Owner does not so notify Management Company, Owner shall promptly commence and complete the repairing, rebuilding or replacement of the same so that the Inn shall be substantially the same as it was prior to such damage or destruction. B. In the event damage or destruction to any Inn from any cause materially and adversely affects the operation of such Inn and Owner notifies Management Company pursuant to the provisions of Section 15.01A above that Owner will not repair or replace such damage for one or more of the reasons set forth in Section 15.01A, Management Company may, at its option, terminate this Agreement with respect to such Inn within sixty (60) days after such notice. C. Subject to the provisions of Section 15.01B, if (i) damage to any Inn is in excess of the amount of insurance proceeds plus amounts made available by Management Company or Marriott Affiliates, or (ii) the conditions of Section 15.01A(i) or (iii) are met, Owner may terminate this Agreement with respect to such Inn upon sixty (60) days' written notice. 15.02 Condemnation ------------ A. In the event all or substantially all of any Inn shall be taken in any eminent domain, condemnation, compulsory acquisition, or similar proceeding by any competent authority for any public or quasi-public use or purpose, or in the event a portion of the Inn shall be so taken, but the result is that it is unreasonable to continue to operate such Inn, this Agreement shall terminate with respect to such Inn. Owner and Management Company shall each have the right to initiate -43- such proceedings as they deem advisable to recover any damages to which they may be entitled. Management Company's rights to recover any damages subject to this subsection shall be subject and subordinate to the prior rights of the Lender or its successors and assigns to recover damages related to its interest in the Inn being taken. B. In the event a portion of any Inn shall be taken by the events described in Section 15.02 A, or the entire Inn is affected but on a temporary basis, and the result is not to make it unreasonable to continue to operate such Inn, this Agreement shall not terminate. However, so much of any award for any such partial taking or condemnation as shall be necessary to render such Inn equivalent to its condition prior to such event shall be used for such purpose. Any balance of the condemnation award, to the extent resulting in Net Sales Proceeds, shall be retained and applied pursuant to Section 5.03. 15.03 Force Majeure ------------- A. If acts of God, acts of war, civil disturbance, governmental action, strikes or other organized labor disputes, vendor delays or fires (collectively herein referred to as "Force Majeure") shall make it impractical for either Owner or Management Company to perform any of its respective obligations hereunder, such obligation shall be suspended until it is again possible for the affected party to perform it. In addition, if such an event, in Management Company's or Owner's reasonable judgment, makes continued operation of an Inn impractical for more than a reasonably temporary period, then Management Company or Owner may terminate this Agreement as to such Inn on sixty (60) days written notice to the other. B. The provisions of Section 15.03 A shall not apply to the specific provisions of this Agreement regarding (i) damage or destruction, (ii) condemnation, and (iii) withdrawal or revocation of licenses or permits. END OF ARTICLE XV -44- ARTICLE XV DEFAULTS -------- 16.01 Events of Default ----------------- The following shall constitute "events of default" to the extent permitted by applicable law: A. The failure of either party to make any payment required to be made in accordance with the terms hereof within ten (10) days after written notice that such payment has not been made; or B. Unless Section 16.01 A is applicable, the breach by either party of any material representation, warranty or covenant contained in this Agreement, or the default by either party in the performance of any covenants, undertakings, obligations or conditions set forth in this Agreement, which breach or default shall not have been cured within thirty (30) days after notice of such breach or default; provided that an "event of default" shall not exist with regard thereto if such breach or default (i) is not attributable to a failure to pay any sums due under this Agreement and (ii) such breach or default is curable (but not within such thirty (30) day period) and the defaulting party commences the cure of said breach or default within said thirty (30) day period and thereafter proceeds diligently and in good faith to complete such cure; or C. If a court of competent jurisdiction has entered a final, non- appealable judgment finding Management Company liable for fraud, gross negligence or willful or wanton misconduct in its dealings with Owner hereunder; or D. If Management Company or Owner shall apply for or consent to the appointment of a receiver, trustee or liquidator of all or a substantial part of its assets or make a general assignment for the benefit of its creditors, or file a voluntary-petition in bankruptcy or a petition seeking reorganization, composition, arrangement with creditors, liquidation or similar relief under any present or future statute, law or regulation, or file any answer admitting the material allegations of a petition filed against it in any such proceeding, or be adjudicated a bankrupt or insolvent, or take any action looking toward dissolution; or E. If any final order, judgment or decree (that is, an order, judgment or decree affirmed on appeal to a court of last resort or after the expiration of any period to appeal) shall be entered without the application, approval or consent of Management Company or Owner by any court of competent jurisdiction, approving a petition seeking reorganization, composition, arrangement with creditors, liquidation or similar relief under any present or future statute, law or regulation with respect to Management Company or Owner, or appointing a receiver, trustee or liquidator of all or a substantial part of Management Company's or Owner's assets and such order, -45- judgment or decree shall continue unstayed and in effect for an aggregate of sixty (60) days (whether or not consecutive). 16.02 Remedies -------- A. If, at any time during the term of this Agreement, an "event of default" (as defined in Section 16.01) shall occur, then the non-defaulting party may, at its option, terminate this Agreement by giving notice to the other party, specifying a date, not earlier than thirty (30) days after the receipt of such notice, for Termination of this Agreement. If the default has not been cured on or before the date specified in the aforesaid notice, this Agreement shall terminate on such date. B. The rights set forth in Section 16.02 A shall not be in substitution for, but shall be in addition to, any and all rights and remedies available to the non-defaulting party by reason of applicable law. END OF ARTICLE XVI -46- ARTICLE XVII WAIVER, PARTIAL INVALIDITY AND OTHER MATTERS -------------------------------------------- 17.01 Waiver ------ The failure of either party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. 17.02 Partial Invalidity ------------------ If any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, this Agreement shall be construed as if such portion had not been inserted herein except when such construction would operate as an undue hardship on Management Company or Owner or constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Agreement. 17.03 Estoppel Certificates --------------------- Promptly after written request therefor from the other party (and in any event within fifteen (15) days thereafter), each party shall deliver to the other (and to all actual or potential lenders or transferees thereof as requested by the other party) a certificate identifying this Agreement and all amendments hereto, stating that this Agreement as so amended is in full force and effect, stating the date to which all payments hereunder have been made and the amount (if ascertainable) of all future payments required hereunder, identifying any known defaults of the other hereunder, and covering such additional matters as may be reasonably requested. END OF ARTICLE XVII -47- ARTICLE XVIII ASSIGNMENT ---------- 18.01 Assignment ---------- A. Neither party shall assign or transfer or permit the assignment or transfer of this Agreement without the prior written consent of the other; provided, however, that Management Company shall have the right, without such consent, to (1) assign its interest in this Agreement to any Marriott Affiliate (other than one which is a partner of Owner) which (i) has adequate experience in managing hotels and has adequate capital and resources to conduct its business as Management Company under this Agreement and (ii) agrees in writing to be bound by and comply with the terms of this Agreement (such written agreement to be delivered to Owner), and (2) lease shops or grant concessions at the Inns so long as the terms of any such leases or concessions do not exceed the term of this Agreement. Nothing contained herein shall prevent (i) the conditional assignment of this Agreement as security for any mortgage on the Inns pursuant to Section 18.02; (ii) the transfer of this Agreement in connection with a merger or consolidation or a sale of all or substantially all of the assets of Marriott; or (iii) an assignment of this Agreement in connection with a permitted sale of one or more of the Inns pursuant to Section 19.01. B. In the event either party consents to an assignment of this Agreement by the other, no further assignment shall be made without the express consent in writing of such party, unless such assignment may otherwise be made without such consent pursuant to the terms of this Agreement. An assignment by either Owner or Management Company of its interest in this Agreement shall not relieve Owner or Management Company, as the case may be, from their respective obligations under this Agreement, and shall inure to the benefit of, and be binding upon, their respective successors, heirs, legal representatives, or assigns. 18.02 Mortgages and Collateral Assignments ------------------------------------ Owner may from time to time (i) grant mortgages, deeds of trust or similar security instruments encumbering the Inns, and (ii) collaterally assign its interest under this Agreement as additional security, provided that all such mortgages, deeds of trust, other security instruments and collateral assignments: (a) are granted or entered into in connection with indebtedness that is described in Section 3.01 A 2 hereof, and (b) each contain a non- disturbance provision in the form described in Section 3.01 A 2 hereof. Provided that all of the provisions of Section 3.01 A 2 are complied with, Management Company agrees that (in connection with Owner obtaining such secured loans) it will: (v) comply with any reasonable reporting requirements of the lender; (w) provide the lender with notice of any default by Owner hereunder and thereafter permit the lender to effect a cure thereof within a reasonable period; (x) deliver to the lender, upon Owner's written request therefor, a statement that this Agreement is in full force and effect and that there are no outstanding -48- defaults hereunder, or, if there are outstanding defaults, describing what they are; (y) subordinate Management Company's interest in this Agreement to the rights of the lender upon foreclosure of any such mortgage, deed of trust, security agreement or like instrument, or upon the granting of a deed in lieu of foreclosure (provided that such lender simultaneously agrees to a non- disturbance provision in the form described in Section 3.01 A 2 hereof); and (z) attorn to and recognize such lender or its assignee as being the "Owner" under this Agreement upon a conveyance of title to an Inn to such lender or its assignee, whether such conveyance is the result of a foreclosure of said mortgage, deed of trust, security agreement or like instrument, or is the result of a deed in lieu of foreclosure. END OF ARTICLE XVIII -49- ARTICLE XIX SALE OF AN INN OR INNS ---------------------- 19.01 Right of First Refusal ---------------------- A. If Owner receives an unsolicited bona fide written offer to purchase or lease any one or more of the Inns and desires to accept such offer, Owner shall promptly give written notice thereof to Management Company stating the name of the prospective purchaser or tenant, as the case may be, the price or rental and the terms and conditions of such proposed sale or lease, together with all other information reasonably requested by Management Company and reasonably available to Owner. Within thirty (30) days after the date of receipt of Owner's written notice, Management Company shall elect, by written notice to Owner, one of the following alternatives: 1. To purchase or lease such Inn or Inns at the same price or rental and upon the same terms and conditions as those set forth in the written notice from Owner to Management Company or upon other terms acceptable to Owner, in which event Owner and Management Company shall promptly enter into a purchase agreement for such sale or lease and shall consummate the same within one hundred fifty (150) days. 2. To enter into a new Management Agreement, with respect to such Inn or Inns, with such purchaser or tenant, which new Management Agreement will be on all of the terms and conditions of this Agreement except that in preparing such new Management Agreement, the provisions of Sections 5.01D and 5.03(5) and (6) hereof shall be deleted from such new Management Agreement and appropriate adjustments (which in the case of a sale pursuant to a site purchase option under a Ground Lease shall provide that, from and after the date on which an Inn is sold pursuant to the exercise of such site purchase option, the amount of Ground Rent hereunder shall be deemed to be the total rent and other amounts that would have been paid or accrued to the former landlord by Owner if such Ground Lease were still in effect) shall be made to all terms and provisions of this Agreement which have been agreed to and/or computed on the assumption that this Agreement will apply to all fifty (50) Inns (and reciprocal adjustments shall likewise be made to this Agreement itself, which will be applicable to the Inns not being sold under this Section 19.01, as set forth in Section 19.02 hereof); provided, however, that if Management Company in good faith reasonably believes (and so states in writing to Owner) that any one or more of the following is true: (i) that the proposed purchaser is a competitor in the lodging business, of Management Company, Marriott or any Marriott Affiliate (unless the proposed purchaser is a financial institution that is solely a passive owner of competitive properties in the lodging business); (ii) the proposed purchaser is known in the community as being of bad moral character; or (iii) that the financial condition and prospects of the proposed purchaser are not adequate to discharge the obligations of Owner under this Agreement, Management Company shall have the right to terminate this Agreement, by written -50- notice to Owner, with respect to such Inn or Inns, and Management Company shall not be required to enter into such new management agreement with respect thereto. The effective date of such Termination shall coincide with the date of the consummation of the proposed sale or lease. Such Termination shall not be effective if such sale or lease is not consummated. B. If Management Company shall fail to elect any of the alternatives of subsection A above within said thirty (30) day period, such failure shall be conclusively deemed to constitute election under subsection 19.01A2 above to enter into a new management agreement with respect to such Inn or Inns, with such purchaser or tenant, and the provisions thereof shall prevail as if Management Company had so elected. Any proposed sale or lease of which notice has been given by Owner to Management Company hereunder must be consummated on substantially the same terms within one hundred eighty (180) days following the giving of such notice, unless Management Company has exercised its option under subsection 19.01A1 above to purchase or lease the Inns. Failing such consummation, such notice, and any response thereto given by Management Company, shall be null and void and all of the provisions of Section 19.01A1 must again be complied with before Owner shall have the right to consummate a sale or lease of the Inn upon the terms contained in said notice, or otherwise. C. Any sale, assignment, transfer, or other disposition, for value or otherwise, voluntary or involuntary, of the controlling interest in Owner (i.e., the possession directly or indirectly of the power to direct or cause the direction of the management and policies of Owner, whether through the ownership of voting securities, or by contract or otherwise) in a single transaction or series of related transactions (and, if Owner is a limited partnership, which is combined with a transfer of the general partnership interest(s) in connection therewith) shall be deemed a sale or lease of the Inns under Section 19.01 and shall be subject to the provisions thereof. D. If Owner intends to sell or refinance any one or more of the Inns, Management Company agrees to cooperate in providing information to facilitate such sale or refinancing. 19.02 Effect of Sale or Refinancing of an Inn --------------------------------------- Upon the consummation of the Sale of an Inn or a refinancing of the Permanent Loan (or any Replacement Debt with respect thereto) as to fewer than all of the Inns then subject to this Agreement, subject to the provisions of Section 19.01, then: A. This Agreement shall terminate with respect to the Inns sold or released from the mortgage securing the Permanent Loan (or any Replacement Debt with respect thereto) in connection with such refinancing, but not with respect to the remaining Inns; as to each such Inn, the actions described in Section 4.03 shall be taken (except that, if Management Company is entering into a new management agreement with the purchaser or tenant, as the case may be, of such Inn, then the action described in subsection G of Section 4.03 shall not be necessary); -51- B. Any sale or lease of all of the Inns shall be conditioned on the purchaser or tenant assuming the obligations of Owner under this Agreement with respect to the Inns being sold or leased, subject to the rights of Management Company under the provisions of Section 19.01B2, by appropriate instrument in form reasonably satisfactory to Management Company; and any sale or lease of, or any refinancing of the Permanent Loan (or any Replacement Debt with respect thereto) as to, fewer than all of the Inns then subject to this Agreement shall be conditioned on the purchaser or tenant (or Owner in the case of any such refinancing) entering into a new Management Agreement with respect to such Inn or Inns in the form described in Section 19.01A2 (except that, in the case of a refinancing, the provisions of Sections 5.03(5) and (6) hereof shall not be included in such new Management Agreement). Upon such sale or lease, an executed copy of such Assumption Agreement or new Management Agreement shall be delivered to Management Company and Owner hereunder shall be released from all further obligations hereunder with respect to the Inns being sold or leased; C. A portion of the FF&E Reserve maintained pursuant to Section 8.02 hereof for the Inns being so sold, leased or refinanced shall be transferred to the purchaser of such Inn (or, at the direction of the Owner, released to the Owner); such portion shall be computed by multiplying the FF&E Reserve by a fraction, the numerator of which shall be the Gross Revenues attributable to such Inn being so sold, leased or refinanced for the most recently concluded Fiscal Year and the denominator of which shall be the Gross Revenues attributable to all the Inns for such Fiscal Year; D. Owner's Priority Return, Owner's Contributed Capital, Owner's 12% Priority and Capital Return, Owner's Net Contributed Capital (and the 12% return component of Owner's 12% Priority and Capital Return), the Operating Profit Objective, Owner's Net Cash Flow and the amounts set forth in Section 5.01D, and the amount set forth in Section 4.02A(i) shall be reduced by an amount equal to the percentage calculated by dividing the amount of the Operating Profit for the prior twenty-six (26) Accounting Periods for the Inn being so sold, leased or refinanced by the total Operating Profit for the prior twenty-six (26) Accounting Periods for all of the Inns; E. To the extent Contingent Incentive Management Fees are not eliminated by the sale of one or more Inns or by previous or current refinancings, a portion of the remaining Contingent Incentive Management Fee will be allocated to the Inn being so sold, leased or refinanced. The portion of the Contingent Incentive Management Fee allocated to the Inn being so sold, leased or refinanced shall be calculated by multiplying (a) the remaining unpaid Contingent Incentive Management Fee by (b) the percentage the Operating Profit generated by the Inn being sold for the prior twenty six (26) Accounting Periods represents to the total Operating Profit for all the Inns for such prior twenty six (26) Accounting Period. The purchaser or tenant of such Inn(s) shall assume the obligation to pay the Contingent Incentive Management Fee allocated to such Inn(s) pursuant to the terms of the Management Agreement; -52- F. Appropriate adjustments shall be made to those other terms and provisions of this Agreement (e.g., Working Capital, insurance) which have been agreed on, computed or established on the assumption that this Agreement will apply to all fifty (50) of the Inns. Such adjustments shall be calculated by multiplying (a) the total amount of such other term or provision by (b) the percentage the Operating Profit generated by the Inn being so sold, leased or refinanced for the prior twenty-six (26) Accounting Periods represents to the total Operating Profit for all the Inns for the prior twenty-six (26) Accounting Periods; G. Unless Management Company has elected not to enter into a new management agreement with the purchaser or tenant, as the case may be, of such Inn, for one or more of the reasons set forth in subsections (i), (ii) and (iii) of Section 19.01A2 hereof, Management Company and such purchaser or tenant shall execute the new management agreement described in Section 19.01A 2. H. In the case of any adjustments pursuant to this Section 19.02 which are based on the prior twenty-six (26) Accounting Periods, such adjustments shall be made based on the actual number of full Accounting Periods the Inns have been subject to this Agreement if the Inns have been subject to this Agreement for less than twenty-six full Accounting Periods. END OF ARTICLE XIX -53- ARTICLE XX MISCELLANEOUS ------------- 20.01 Right to Make Agreement ----------------------- Each party warrants, with respect to itself, that neither the execution of this Agreement nor the finalization of the transactions contemplated hereby shall violate any provision of law or judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; or require any consent, vote or approval which has not been taken, or at the time of the transaction involved shall not have been given or taken. Each party covenants that it has and will continue to have throughout the term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder. 20.02 Consents -------- Wherever in this Agreement the consent or approval of Owner or Management Company is required, such consent or approval shall not be unreasonably withheld, shall be in writing and shall be executed by a duly authorized officer or agent of the party granting such consent or approval. If either Owner or Management Company fails to respond within thirty (30) days to a request by the other party for a consent or approval, such consent or approval shall be deemed to have been given (except as otherwise provided in this Agreement). 20.03 Agency ------ The relationship of Owner and Management Company shall be that of principal and agent, and nothing contained in this Agreement shall be construed to create a partnership or joint venture between them or their successors in interest. Management Company's agency established by this Agreement is coupled with an interest and may not be terminated by Owner until the expiration of the term of this Agreement, except as provided in Section 4.02, Articles XV or XVI. Notwithstanding the agency relationship created by this Agreement, nothing contained herein shall prohibit, limit, or restrict (except as specifically set forth in Sections 2.04 hereof), Management Company or any of its Affiliates and subsidiaries from developing, owning, operating, leasing, managing or franchising competing hotels or restaurants or food services facilities in the market area where any one or more of the Inns are located. 20.04 Applicable Law -------------- This Agreement shall be construed under and shall be governed by the laws of the State of Maryland. -54- 20.05 Recordation ----------- The terms and provisions of this Agreement shall run with the land designated as the Sites, and with Owner's interest therein, and shall be binding upon all successors to such interest. At the request of either party, the parties shall execute sufficient copies of an appropriate memorandum of this Agreement in recordable form and cause the same to be recorded in the jurisdiction where the Inns are located. For so long as the Lender is the lender under the Permanent Loan, the consent of Lender (such consent not to be unreasonably withheld or delayed) is required for the recordation of this Agreement in any jurisdiction in which an Inn, subject to the Permanent Loan at the time of recordation, is located. 20.06 Headings -------- Headings of Articles and Sections are inserted only for convenience and are in no way to be construed as a limitation on the scope of the particular Articles or Sections to which they refer. 20.07 Notices ------- Notices, statements and other communications to be given under the terms of this Agreement shall be in writing and delivered by hand against receipt or sent by certified or registered mail, postage prepaid, return receipt requested: To Owner: -------- Fairfield Inn by Marriott Limited Partnership c/o Marriott FIBM One Corporation 10400 Fernwood Road Bethesda, Maryland 20058 Attn: Assistant General Counsel (Corporate Finance) To Management Company: --------------------- Fairfield Management Corporation 10400 Fernwood Road Bethesda, Maryland 20058 Attn: Law Department/Inn Operation or at such other address as is from time to time designated by the party receiving the notice. Any such notice which is properly mailed shall be deemed to have been served as of five (5) days after said posting for purposes of establishing that the sending party complied with the applicable time limitations set forth herein, but shall not be binding on the addressee until actually received. 20.08 Limited Liability ----------------- Management Company agrees that no general or limited partner of Owner shall have any personal liability hereunder in excess of such partner's contribution to the capital of Owner. -55- 20.09 Entire Agreement ---------------- This Agreement, together with other writings signed by the parties expressly stated to be supplemental hereto and together with any instruments to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties and supersedes all prior understandings and writings, and may be changed only by a writing signed by the parties hereto. 20.10 Binding Effect -------------- This Agreement shall bind and inure to the benefit of all the respective heirs, personal representatives, successors and permitted assigns of the parties hereto. 20.11 Compliance with Loan Documents ------------------------------ Unless the contrary is otherwise permitted in this Agreement, Management Company shall take such actions and refrain from taking such actions, as shall be necessary for Owner to comply with its obligations under the Loan Agreement and other loan documents executed by Owner in connection with the Permanent Loan to the extent such loan documents have been furnished to Management Company and to the extent such loan documents require Owner, explicitly or implicitly, to cause or limit the performance of Management Company. Notwithstanding the above, Management Company shall have no obligation to make any monetary payments under such loan documents. END OF ARTICLE XXI -56- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. Attest: OWNER ----- FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a Delaware limited partnership ("Owner") By: MARRIOTT FIBM ONE CORPORATION, a Delaware Corporation, General Partner By - ------------------------------- ------------------------------------ Secretary President MANAGEMENT COMPANY ------------------ Attest FAIRFIELD FMC CORPORATION, a Delaware Corporation ("Management Company") By - ------------------------------- ------------------------------------ Assistant Secretary Vice President MARRIOTT -------- Attest: MARRIOTT CORPORATION (for purposes of Sections 2.01, 2.04, 6.02, 10.01 and 10.02 only) By - ------------------------------- ------------------------------------ Assistant Secretary Vice President -57- Exhibit A THE INNS
Birmingham-Homewood, Alabama Atlanta-Northwest, Georgia 155 Vulcan Road 2191 Northwest Parkway Homewood, Alabama 35209 Marietta, Georgia 30067 Montgomery, Alabama Atlanta-Peachtree Corners, Georgia 5601 Carmichael Road 6650 Bay Circle Drive Montgomery, Alabama 36117 Norcross, Georgia 30071 Buena Park, California Atlanta-Southlake, Georgia I-5 at Beach Boulevard 1599 Adamson Parkway Buena Park, California 90602 Morrow, Georgia 30260 Placentia, California Savannah, Georgia SR-57 and Orangethorpe Avenue Lee Boulevard Placentia, California 92670 Savannah, Georgia Gainesville, Florida Bloomington/Normal, Illinois 6901 NW 4th Boulevard 202 Landmark Drive Gainesville, Florida 32608 Normal, Illinois 61761 Miami-West, Florida Chicago-Lansing, Illinois Palmetto Expressway at NW 36th Street 17301 Oak Avenue Miami, Florida 33166 Lansing, Illinois 60438 Orlando-International Drive, Florida Peoria, Illinois 8342 Jamaican Court 4203 North War Memorial Drive Orlando, Florida 32819 Peoria, Illinois 61614 Orlando-South, Florida Rockford, Illinois 1850 Landstreet Road 7712 Potawatomi Trail Orlando, Florida 32809 Rockford, Illinois 61108 Atlanta-Airport, Georgia Indianapolis-Castleton, Indiana 2451 Old National Highway 8325 Bash Road College Park, Georgia 30349 Indianapolis, Indiana 46250 Atlanta-Gwinnett Mall, Georgia Indianapolis, College Park, Indiana 3500 Venture Highway 9251 Wesleyan Road Duluth, Georgia 30136 Indianapolis, Indiana 46268 Atlanta-Northlake, Georgia Des Moines, Iowa 2155 Ranchwood Drive 114th Street Atlanta, Georgia 30345 Clive, Iowa 50322 Kansas City/Overland Park, Kansas Durham I-85, North Carolina 4401 West 107th Street 3710 Hillsborough Road Overland Park, Kansas 66211 Durham, North Carolina
Exhibit A -- Continued
Kansas City-West, Kansas Fayetteville, North Carolina 6601 Frontage Road 562 Cross Creek Mall Merriam, Kansas 66202 Fayetteville, North Carolina 28303 Auburn Hills, Michigan Greensboro, North Carolina 1294 Opdyke Road 2003 Athena Court Auburn Hills, Michigan 48057 Greensboro, North Carolina 27407 Detroit-Airport, Michigan Raleigh-Northeast, North Carolina 31119 Flynn Drive 2641 Appliance Court Romulus, Michigan 48174 Raleigh, North Carolina 27604 Detroit-Madison Heights, Michigan Willmington, North Carolina 32800 Stephenson Highway Route 132 at New Center Drive Madison Heights, Michigan 48071 Wilmington, North Carolina 28403 Detroit-Warren, Michigan Cleveland/Brook Park, Ohio 7454 Convention Boulevard 16644 Snow Road Warren, Michigan 48093 Brook Park, Ohio 44142 Detroit-West (Canton), Michigan Columbus-North, Ohio 5700 Haggerty Road 887 Morse Road Canton, Michigan 48187 Columbus, Ohio 43229 Kalamazoo, Michigan Dayton-North, Ohio 3800 Cork Street 6960 Miller Lane Kalamazoo, Michigan 49001 Dayton, Ohio 45414 St. Louis-Hazelwood, Missouri Toledo-Airport, Ohio 9079 Dunn Road 1401 East Mall Drive Hazelwood, Missouri 60342 Holland, Ohio 43528 Charlotte-Airport, North Carolina Florence, South Carolina 3400 I-85 Service Road 140 Dunbarton Drive Charlotte, North Carolina 28208 Florence, South Carolina 29501 Charlotte-Northeast, North Carolina Greenville, South Carolina 5415 North I-85 Service Road 60 Roper Mountain Road Charlotte, North Carolina 28213 Greenville, South Carolina 29607 Hilton Head, South Carolina Virginia Beach, Virginia 9 Marina Side Drive Beach Road (S.R. 44) and Independence Boulevard Hilton Head Island, South Carolina 29928 Virginia Beach, Virginia 23462 Johnson City, Tennessee Madison, Wisconsin 207 East Mountcastle Drive 4765 Hayes Road Johnson City, Tennessee 37601 Madison, Wisconsin 53704 Hampton, Virginia Milwaukee, Wisconsin 1905 Coliseum Drive 20150 West Blue Mound Road Hampton, Virginia 23669 Waukesha, Wisconsin 53186
EX-10.B 4 EXHIBIT 10.B EXHIBIT 10.b FIRST AMENDMENT TO MANAGEMENT AGREEMENT THIS FIRST AMENDMENT TO MANAGEMENT AGREEMENT, dated as of July 31, 1990, by and among FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a Delaware limited partnership ("Owner"), a Delaware limited partnership with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20058, and FAIRFIELD FMC CORPORATION ("Management Company"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20058. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the parties hereto have heretofore entered into a Management Agreement dated as of November 17, 1989 (the "Agreement"); WHEREAS, the parties hereto desire to make certain amendments to the Agreement as hereinafter set forth; and WHEREAS, unless otherwise defined herein, each capitalized term used herein shall have the meaning set forth in the Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. The definition of the term "Lender" contained in Section 1.01 of the Agreement (Definition of Terms, page 10) is hereby amended in its entirety to read as follows: "`Lender' shall mean Sumitomo Trust & Banking Co., Ltd., New York Branch;" 2. The definition of the term "Owner's Net Contributed Capital" ------------------------------- contained in Section 1.01 of the Agreement (Definition of Terms, page 16) is hereby amended in its entirety to read as follows: "`Owner's Net Contributed Capital' shall mean the excess of (a) ------------------------------- Owner's Contributed Capital over (b) cumulative distributions of Net Refinancing Proceeds and Net Sales Proceeds to the Partners of the Owner pursuant to Sections 4.06 and 4.07 of the Partnership Agreement (excluding distributions to the Partners to satisfy the 'Partners' 12% Preferred Distribution' (as defined therein)). For purposes of determining the average daily balance outstanding of Owner's Net Contributed Capital under this Agreement, the Owner's Contributed Capital shall be deemed to have been contributed on July 22, 1990. 3. The definition of the term "Owner's Priority Return" contained in ----------------------- Section 1.01 of the Agreement (Definition of Terms, page 16) shall be amended in its entirety to read as follows: "`Owner's Priority Return' shall mean, for all Accounting Periods ----------------------- to date in each Fiscal Year, an amount equal to an annual non- cumulative amount retained by Owner out of Operating Profit, as set forth in Section 5.02B hereof, equal to nine percent (9%) of Owner's Contributed Capital in 1990 (such amount to be adjusted to reflect the actual number of days between July 22, 1990 and the end of such Fiscal Year), nine and one- half percent (9.5%) of Owner's Contributed Capital in 1991 and 1992 and ten percent (10%) of Owner's Contributed Capital in each Fiscal Year thereafter, subject to reduction upon any Termination." 4. The definition of the term "Partnership Agreement" contained in Section 1.01 of the Agreement (Definition of Terms, page 17) shall be amended in its entirety to read as follows: "`Partnership Agreement' shall mean the Amended and Restated --------------------- Agreement of Limited Partnership of Owner dated as of July 31, 1990." 5. Except as expressly amended in this First Amendment to Management Agreement, the Agreement shall remain and continue in full force and effect, shall be binding upon the parties hereto and is in all respects ratified and confirmed hereby. 6. This First Amendment to Management Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto shall be governed by and construed in accordance with the laws of Maryland. 2 IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment to Management Agreement, caused this First Amendment to Management Agreement to executed on their behalf, as of the day and year first above written. Attest: OWNER ----- FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP a Delaware limited partnership ("Owner") By: MARRIOTT FIBM ONE CORPORATION, a Delaware Corporation, General Partner By: - ------------------------ --------------------------- Secretary President Attest: MANAGEMENT COMPANY ------------------ FAIRFIELD FMC CORPORATION, a Delaware corporation ("Management Company") By: - ------------------------ -------------------------- Assistant Secretary Vice President Attest: MARRIOTT -------- MARRIOTT CORPORATION for purposes of Sections 2.01 2.04, 6.02, 10.01 and 10.02 only By: - ------------------------ -------------------------- Assistant Secretary Vice President 3 EX-10.C 5 EXHIBIT 10.C EXHIBIT 10.c Execution Version SECOND AMENDMENT TO MANAGEMENT AGREEMENT This Amendment ("Amendment") is effective as of the 13th day of January, 1997 ("Amendment Date") by FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP ("Owner"), a Delaware limited partnership, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817 and FAIRFIELD FMC CORPORATION ("Manager") a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. WHEREAS, Owner and Manager have entered into that certain Management Agreement dated as of November 17, 1989, as amended by the First Amendment to Management Agreement dated July 31, 1990 (as amended, the "Management Agreement") for the operation and management of the Inns; WHEREAS, Owner has entered into a Loan Agreement of even date herewith with Nomura Asset Capital Corporation ("NACC") to refinance the Permanent Loan; and WHEREAS, the parties desire to modify the Management Agreement in connection with such refinancing. NOW, THEREFORE, the parties agree to amend the Management Agreement as follows: 1. Section 1.01, "Definition of Terms," is amended as follows: a. The following definitions are added: "Cash Management Procedures" shall mean the procedures set forth -------------------------- in the exhibit entitled "Cash Management Procedures", which is an exhibit to that certain Modification, Subordination and Non- Disturbance Agreement, Estoppel, Assignment and Consent Among Manager, Owner, and NACC dated as of the Amendment Date. "Computer Lease" shall mean a lease or other agreement under -------------- which computer equipment located in one or more Inns is leased to Owner or to Manager, as agent for Owner (including the license, if any, of operating software therefor). "Debt Service Reserve Account" shall have the meaning ascribed to ---------------------------- it in the Cash Management Procedures. "Equipment Leases" shall mean all or any FF&E Leases, Telephone ---------------- Leases, Computer Leases, TV System Leases and leases of motor vehicles used primarily for transporting Inn guests. "FF&E Lease" shall mean a lease of any FF&E located in one or ---------- more Inns other than a TV System Lease, a Telephone Lease, a Computer Lease, or a lease of a motor vehicle used primarily for transporting Inn guests. "FF&E Replacements" shall mean the items described in Sections ----------------- 8.02 A 1 and 2." "Manager" shall mean Management Company. -------- "Manager Loans" shall have the meaning ascribed to it in Section ------------- 5.06 (which is added to this Management Agreement by this Amendment.) "Servicer" shall have the meaning ascribed to it in the Cash -------- Management Procedures. "Telephone Lease" means any lease of the telephones and/or other --------------- telecommunication systems and equipment located in an Inn. "TV System Lease" means a lease or other agreement under which --------------- equipment (excluding television sets) for the transmission into Inn rooms or televised programming is leased or otherwise provided, regardless of whether such lease or other agreement contains a right or option to purchase such equipment. b. The definition of "Development Inns" is amended in its entirety to read as follows: "Development Inns" shall mean those Inns that were under ---------------- development by Marriott as of the Effective Date of the Management Agreement and which have been subsequently acquired by Owner. As of the Amendment Date, there are no Inns that are under development to be acquired by Owner as part of the Management Agreement. c. The definition of "Lender" is amended in its entirety to read as follows: "Lender" shall mean Nomura Asset Capital Corporation, its ------ successors and assigns. d. The definitions of "Limited Debt Service Guarantee" and "Limited Debt Service Guarantee Advance" are deleted, and any references to those terms shall be of no force or effect. e. The definition of "Marriott" is amended in its entirety to read as follows: "Marriott" shall mean Marriott International, Inc., a Delaware -------- corporation, the corporate parent of Manager. f. The definition of "Permanent Loan," is amended in its entirety to read as follows: "Permanent Loan" shall mean the first mortgage indebtedness -------------- secured by the Inns to be provided to Owner by Lender pursuant to a Loan Agreement dated as of the Amendment Date, secured by mortgages dated as of the Amendment Date in an initial amount not to exceed the principal amount of One Hundred Sixty Five Million Four Hundred Thousand Dollars ($165,400,000). g. The definition of "Qualified Debt" is amended to delete the following phrase in clause (ii): "any remaining unpaid Ground Rent under Section 4.02(d) of the Ground Leases." h. The definition of "Qualifying Debt Service" is amended by inserting the following at the end thereof: 2 Upon the Termination of this Agreement with respect to a given Inn or Inns (whether in connection with a Sale of the Inn or Inns, or pursuant to other applicable provisions of this Agreement), Qualifying Debt Service shall be reduced by interest and principal on any (or any portion of any) Additional Inn Investment Loans attributable to such Inn or Inns. i. The definition of "Stipulated Debt Service" is amended in its entirety to read as follows: "Stipulated Debt Service" shall mean Seventeen Million Ninety ----------------------- Nine Thousand One Hundred Forty One Dollars and Twenty Eight Cents ($17,099,141.28). 2. Section 4.01, "Term," is amended as follows: a. In the first sentence, "December 31, 2009" is replaced with "December 31, 2019." b. In the third sentence, "for each of five (5) successive periods" is replaced with "for each of four (4) successive periods". 3. Section 5.02, "Incentive Management Fees," is amended as follows: a. Paragraph B is amended to add the following at the end thereof: less the amount of any outstanding Manager Loans, which amount shall be paid to Manager for repayment of such loans out of the amount otherwise being retained by Owner pursuant to this paragraph B. b. Paragraph D is amended to add the following at the end thereof: , provided that such additional amounts shall not include an adjustment relating to the number of days in the Fiscal Year. 4. Section 5.03, "Application of Capital Proceeds," is amended by inserting the following at the end of the first sentence: ; provided, however, that any such amounts retained by Owner pursuant to this Section 5.03 shall be less the amount of any outstanding Manager Loans, which amount shall be paid by Owner to Manager out of the amount otherwise being retained by Owner pursuant to this Section. 5. Section 5.05, "Accounting and Interim Payment," Paragraph B, is amended as follows: a. The following is inserted at the end of the first sentence: ", taking into account the provisions of Section 8.02 B regarding any `Excess Amounts'(as that term is defined therein)." b. The following is inserted at the end of the second sentence: "and which shall include an accounting with respect to any `Excess Amounts' under Section 8.02 B (as that term is defined therein)." 3 6. A new Section 5.06 is added as follows: 5.06 Manager Loans. ------------- Manager shall have the right, but not the obligation, at any time and from time to time, to advance funds reasonably needed for additional Working Capital and to fund any shortfalls in the Debt Service Reserve Account in an amount which when added to the outstanding balance of previous such advances shall not exceed the average amount of the Deductions for each Accounting Period during the preceding full thirteen (13) Accounting Periods. Any such advances shall be deemed a loan by Manager to Owner in such amount (each, a "Manager Loan"), shall bear interest at one percent (1%) above the Prime Rate, and shall be repayable by Owner out of Operating Profit in the priority set forth in Section 5.02, and Capital Proceeds in the priority set forth in Section 5.03, and as required by Section 19.02 I, or out of other funds available to Owner. Owner shall evidence any such loan by executing a promissory note payable to Manager in the principal amount of each such loan and bearing interest as aforesaid. Each such note shall be payable upon the earlier of (i) ten (10) years from the date of such advance, or (ii) the sale of substantially all of the Inns; and, during the term of this Agreement, shall be payable out of Operating Profit, Capital Proceeds, and as required by Section 19.02 I. 7. Section 7.01, "Working Capital and Inventories" is amended by deleting the third sentence through the end of the provision, and replacing it with the following: Owner shall from time to time after the Amendment Date advance within fifteen (15) days after receipt of Manager's written request any additional funds necessary to maintain Working Capital and Inventories at levels reasonably determined by Manager to be necessary to satisfy the needs of each Inn as its operations may from time to time require. In the event Owner fails to advance additional Working Capital within said fifteen (15) day period, Manager may, in addition to any other rights or remedies available to it at law or in equity: (i) retain or be paid the required amounts from any portion of Operating Profit otherwise to be retained by or be paid to Owner (consistent with the Cash Management Procedures, if applicable), (ii) make a Manager Loan to Owner in accordance with Section 5.06, or (iii) terminate this Agreement upon not less than thirty (30) days written notice to Owner. With the exception of the outstanding balance of all Working Capital advances made as Manager Loans, funds for Working Capital and Inventories advanced by Owner shall remain the property of Owner throughout the term of this Agreement. Upon Termination, Manager shall return to Owner any unused Working Capital and Inventories except for Inventories purchased by Manager pursuant to Section 10.02, and except for the outstanding balance of all Working Capital advances by Manager made as Manager Loans. 8. Section 8.02, "FF&E Reserve," is amended as follows: a. Paragraph B is amended by replacing "Section 5.06A" with "Section 5.05A" in the fourth line on page 49. b. Paragraph B is further amended by deleting the clause following the last semicolon in the first sentence (which clause begins with the words "and commencing with the 4 Fiscal Year 1994" on the third-to-the-last line of page 48), and replacing it with the following: during Fiscal Years 1994, 1995 and 1996, Management Company shall transfer into the FF&E Reserve an amount equal to six percent (6%) of Gross Revenues from the Inns for such Fiscal Year. Commencing with the Fiscal Year 1997, and for all Fiscal Years thereafter, Management Company shall transfer into the FF&E Reserve an amount equal to seven percent (7%) of Gross Revenues from the Inns for each of such Fiscal Years, subject to the following: (i) if Management Company determines that seven percent (7%) of Gross Revenues exceeds the amounts necessary for making FF&E Replacements under Section 8.02 for the then-current Fiscal Year or subsequent Fiscal Years, and the amounts transferred into the FF&E Reserve are not adjusted under Section 8.02 E, then such excess amount, up to a maximum of one percent (1%) of Gross Revenues, shall be deemed the "Excess Amount", and Management Company shall so notify Owner as part of the FF&E Replacement Estimate described in Section 8.02 D; (ii) Excess Amounts shall not be a Deduction for purposes of calculating or paying Incentive Management Fees under Article V, and shall be available for the purpose of funding Owner-approved expenditures under Section 8.03; and (iii) if Excess Amounts (including any Excess Amounts from prior Fiscal Years that were not used for Owner-approved expenditures under Section 8.03) are actually used for FF&E Replacements under Section 8.02, then such Excess Amounts shall be deemed a Deduction for purposes of calculating and paying Incentive Management Fees under Article V, and any necessary adjustments shall be made promptly thereafter (but in any event not later than the annual accounting described in Section 5.05 B). c. Paragraph C is amended by inserting the following at the end thereof: Manager, in its reasonable discretion, and subject to the exceptions stated below, shall decide whether to purchase or lease any FF&E Replacements or motor vehicles used in transporting Inn guests. If Manager enters into any lease of FF&E Replacements or motor vehicles used in transporting Inn guests, it shall do so on Owner's behalf and as Owner's agent; or, upon Manager's recommendation and request, Owner shall directly enter into such leases. Notwithstanding the foregoing, Manager shall not and shall not require Owner to enter into any lease other than: (i) Telephone Leases, (ii) Computer Leases, (iii) TV System Leases, (iv) FF&E Leases, and (v) leases of motor vehicles used in transporting Inn guests. With respect to FF&E Leases only, Manager shall be required to obtain Owner's prior written approval before entering into or requesting that Owner enter into any FF&E Lease, if (a) the fair market value of the FF&E with respect to all FF&E Leases relating to each Inn (including those being entered into) would exceed at any time Fifty Thousand Dollars ($50,000) (as increased each Fiscal Year after Fiscal Year 1997 by the CPI Percentage) in respect of such Inn, (b) the FF&E to be covered by such FF&E Lease is FF&E that is not customarily leased in 5 the hotel industry in the United States, or (c) such FF&E Lease is on payment terms (including the amounts and schedule of payments) that would be materially more favorable to the lessor thereof than payment terms customary in the hotel industry in the United States for similar leases. With respect to TV System Leases only, Manager shall be required to obtain Owner's prior written approval before entering into or requesting the Owner enter into any TV System Lease, if (a) the equipment to be covered by such TV System Lease is not customarily leased in the hotel industry in the United States or (b) such TV System Lease is on payment terms (including the amounts and schedule of payments) that would be materially more favorable to the lessor thereof than payment terms customary in the hotel industry in the United States for similar leases. In cases described in the preceding two sentences, Owner's approval shall not be unreasonably withheld; provided, however, that the failure of any Lender to approve such leasing proposal shall justify Owner in withholding its approval. Payments under the leases described in this paragraph shall be made from the FF&E Reserve to the extent so provided in paragraph G of this Section 8.02. d. Paragraph E is amended by inserting the following at the end thereof: If Owner agrees to obtain outside financing or provide additional funding as described in Subsection 2 or 3 above but fails to deposit such funds into the FF&E Reserve within sixty (60) days after such agreement, then, in addition to any other remedies to which it is entitled, Manager shall be entitled to (i) notify Owner that it will terminate this Agreement as to those Inns for which funds were not deposited as of a date three (3) months after the date of Manager's notice, or (ii) continue to manage the Inn or Inns without making such alterations, improvements, renewals, or replacements. e. Paragraph F is amended in its entirety to read as follows: F. Upon Termination of this Agreement with respect to any one or more of the Inns, whether pursuant to Section 8.02 E above or pursuant to other provisions of this Agreement, that portion of the FF&E Reserve properly allocable to said Inn or Inns shall be released from the FF&E Reserve and paid to Owner unless Manager will continue operating some or all of the Inns being terminated from this Management Agreement, in which case Manager shall transfer all amounts held in the Reserve properly allocable to the Inns that Manager will continue operating to one or more new accounts for the benefit of the new owner or owners of such Inns. 9. Section 8.03, "Building Alterations, Improvements, Renewals, and Replacements," is amended as follows: a. Paragraph B is amended by inserting the following before the last sentence: If Owner approves the Building Estimate but fails to deliver funds required by such Building Estimate on the later of sixty (60) days after (A) such approval or (B) such later date Owner's receipt of a request by Manager for the delivery of funds, then Manager may, at its option and in addition to any other remedies available to it, (i) notify Owner that it will terminate this Agreement as to those Inns for which funds were not deposited as of a date three (3) months after the date of Manager's notice, (ii) use funds from the FF&E Reserve to pay for the expenditures in the approved Building 6 Estimate, or (iii) continue to manage the Inn or Inns without making such alterations, improvements, renewals or replacements. b. A new Paragraph C is added as follows: C. From time to time Manager may, at Owner's request and with Manager's prior consent (which may be withheld in Manager's sole discretion), use funds in the FF&E Reserve for the purpose of funding Owner-approved expenditures under this Section 8.03, it being understood and agreed that, except for Excess Amounts under Section 8.02 B (ii), such funds shall be repaid into the FF&E Reserve out of Owner's funds (and not as a Deduction) at such time as Manager shall request. 10. Section 12.05, "Loan Agreement Insurance Provisions," is amended by inserting "A." at the beginning thereof, and adding a new paragraph B as follows: B. "Manager's Insurance Program" shall mean Manager's insurance program in effect with respect to other similar inns that Manager or Marriott Affiliates own, lease or manage under the Fairfield Inn name in the United States. Section 12.05 A was agreed to in the context of the loan agreement entered into by Owner and Sumitomo Trust & Banking Co., Ltd., New York Branch, that was in effect prior to the Amendment Effective Date. The Loan Agreement entered into by Owner and Lender as of the Amendment Date contains insurance provisions that in some instances require more extensive insurance coverage than that which Manager's Insurance Program was required to have in effect as of the Amendment Effective Date. Manager has not provided its consent under Section 12.05 A to the extent the Loan Agreement would require changes in Manager's Insurance Program relating to: (i) earthquake insurance coverage; (ii) the qualifications or eligibility of the insurers that are normally part of Manager's Insurance Program; or (iii) the use of insurers at a cost higher than that which Manager would normally have incurred under Manager's Insurance Program. Accordingly, the parties understand and agree that, notwithstanding the definition of "Loan Agreement" in Section 1.01, as amended by the Second Amendment to Management Agreement, the provision contained in the first sentence of Section 12.05 A shall not apply with respect to any such provisions in the Loan Agreement with Lender. 11. Section 19.02, "Effect of Sale or Refinancing of an Inn," is amended as follows: a. Paragraph C is amended in its entirety to read as follows: That portion of the FF&E Reserve maintained pursuant to Section 8.02 hereof that is properly allocable to the Inns being so sold, leased or refinanced shall be transferred to a new account for the benefit of the purchaser of such Inn. b. Paragraph D is amended in its entirety to read as follows: Qualifying Debt Service, Owner's Priority Return, Owner's Contributed Capital, Owner's 12% Priority and Capital Return, Owner's Net Contributed Capital (and the 12% return component of Owner's 12% Priority and Capital Return), the Operating Profit Objective, Owner' s Net Cash Flow and the amounts set forth in Section 5.01 D, and the amount set forth in Section 4.02 7 A (i) shall be reduced by the percentage thereof allocable to such IM set forth in Exhibit "B". c. A new Paragraph I is added as follows: I. Owner shall pay Manager an amount equal to a portion of the outstanding balance of all Manager Loans determined by multiplying the total outstanding balance of all Manager Loans by a fraction, the numerator of which is the amount of Operating Profit attributable to the Inn being sold for the immediately preceding full Fiscal Year, and the denominator of which is the amount of Operating Profit from all Inns for the immediately preceding full Fiscal Year. 12. A new Section 20.12, "Confidentiality," is added as follows: 20.12 Confidentiality --------------- The parties agree that matters set forth in and all information, budgets and reports generated as a result of this Agreement are strictly confidential and each party will make every effort to ensure that the information is not disclosed to any outside person or entities (including the press), other than such parties' lenders, equity holders, bona fide prospective investors or purchasers, and their respective accountants, counsel and other consultants or advisors, and other than the holders of any securities to be issued by Owner or by any lender pursuant to a securitization of the notes evidencing the obligation of Owner (so long as all such information sent to such holders is marked with a confidentiality notice that refers to the provisions of this Section 20.11 and directs such holders to comply with the provisions hereof reasonably acceptable to Manager), without the written consent of the other party except as may be reasonably necessary (i) to obtain licenses, permits and other public approvals necessary for the refurbishment or operation of any Inn (ii) in connection with Owner's financing of any Inn or any sale of any Inn (subject to the limitations above with respect to a securitization), (iii) in connection with a sale of a controlling interest in Owner, Manager, or Marriott, (iv) in connection with an audit or other investigation conducted pursuant to this Agreement or the Owner's or Manager's interest in any Inn, (v) in connection with a foreclosure sale on Owner's interest in any Inn, or (vi) as required by any law, rule, regulation or judicial process, or by any regulatory or supervisory authority having jurisdiction over the parties or their Affiliates. 13. A new Section 20.13 is added as follows: 20.13 Offerings --------- No reference to Manager, Marriott, or to any Marriott Affiliate will be made in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (herein collectively referred to as the "Prospectus"), issued by Owner or one of its affiliates or lenders, which is designed to interest potential investors (debt or equity) in one or more or all of the Inns, or securities secured by the Inns, unless Manager has previously received a copy of all such references. However, regardless of whether Manager does or does not so receive a copy of all such references, neither Manager, Marriott, nor any Marriott Affiliate will be deemed an issuer or obligor or guarantor in respect of any securities described in the Prospectus, nor will it have any responsibility for the Prospectus, and Owner will not issue or approve any 8 Prospectus that does not so state. Unless Manager agrees in advance, the Prospectus will not include: (i) any proprietary marks of Manager, Marriott, or any Marriott Affiliate; or (ii) except as required by applicable securities laws, the text of this Agreement. Owner shall be entitled, however, to include in the Prospectus an accurate summary of this Agreement. With respect to any offering not registered under any federal or state securities law, if there are no legal requirements pursuant to which such information must be publicly disclosed, appropriate measures shall be taken to ensure that entities or individuals receiving such Prospectus shall acknowledge the confidentiality of such information. Owner shall indemnify, defend and hold Manager, Marriott, and all Marriott Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, costs, liability and damage (including reasonable attorneys' fees and expenses, and the cost of litigation related thereto) arising out of any Prospectus or the offering described therein for which Owner or any of its affiliates is an issuer or sponsor. Owner shall, prior to distribution of any Prospectus by any of its lenders, use commercially reasonable best efforts to obtain such an indemnification for the benefit of Manager, Marriott, and all Marriott Affiliates from such lender. 14. A new Exhibit "B", attached hereto and incorporated by reference herein, is added to the Management Agreement. 15. All other terms of the Management Agreement shall remain in full force and effect. 16. Any term capitalized in this Amendment and not defined herein shall have the meaning given to it in the Management Agreement. [Remainder of Page Intentionally Left Blank] 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first written above. WITNESS: OWNER: FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP ("Owner") By: MARRIOTT FIBM ONE CORPORATION, a Delaware Corporation, General Partner /s/ David E. Reichmann By: - ---------------------- ----------------------------------- Vice President Name: David E. Reichmann WITNESS: MANAGER: FAIRFIELD FMC CORPORATION ("Manager") /s/ Alex Joel - -------------------------- Name: Alex Joel By: /s/ Raymond G. Murphy ------------------------------ Raymond G. Murphy Vice President 10 EX-10.D 6 EXHIBIT 10.D Exhibit 10.d MASTER INDENTURE OF MORTGAGE, DEED OF TRUST, DEED TO SECURE DEBT, ASSIGNMENT OF RENTS AND FIXTURE FILING KNOW ALL MEN BY THESE PRESENTS: THIS MASTER INDENTURE OF MORTGAGE, DEED OF TRUST, DEED TO SECURE DEBT, ASSIGNMENT OF RENTS AND FIXTURE FILING (this "Indenture") dated as of the 31st day of July 1990, from FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, (the "Borrower") a Delaware limited partnership having an address at 10400 Fernwood Road, Bethesda, Maryland 20817, in favor of (i) SUMITOMO TRUST & BANKING CO., LTD., NEW YORK BRANCH, the New York branch of a Japanese chartered bank (together with its successors and assigns, the "Bank"), having an office at ---- 527 Madison Avenue, New York, New York 10022, with respect to that portion of the Trust Estate located in the States of Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Michigan, Ohio, South Carolina and Wisconsin, and (ii) to (A) Stewart Title of California ("Stewart of California"), a California --------------------- corporation having an address at 2010 Main Street, Suite 250, Irvine, California 92714, with respect to that portion of the Trust Estate located in the State of California, (B) Lawrence J. Gordon ("LJG"), an individual having an address at --- 11 North Brentwood, Clayton, Missouri 63105, with respect to that portion of the Trust Estate located in the State of Missouri, (C) the Fidelity Company ("Fidelity"), a North Carolina corporation having an address at c/o Leslie E. -------- Browder, Suite 2400, Wachovia Building, 301 North Main Street, Winston-Salem, North Carolina 27102, with respect to that portion of the Trust Estate located in the State of North Carolina, (D) Samuel B. Miller II, Esq. ("SBM"), an --- individual having an address at 2101 North Roan Street, Johnson City, Tennessee 37601, with respect to that portion of the Trust Estate located in the State of Tennessee, and (E) Stewart Title and Settlement Services, Inc. ("Stewart ------- Settlement"), a Virginia corporation having an address at 2697 Dean Drive, - ---------- Suite 203, Virginia Beach, Virginia 23542, with respect to that portion of the Trust Estate located in the State of Virginia (Stewart of California, LJG, Fidelity, SBM and Stewart Settlement, together with their respective successors and assigns, collectively referred to herein as the "Trustee"), for the benefit ------- of the Bank. RECITALS: -------- A. The Borrower has entered into a Credit Agreement dated as of the date hereof (as at any time amended, supplemented or otherwise modified, the ("Credit Agreement") with the Bank, providing inter alia, for the Bank to make ---------------- ----- ---- certain Loans to the Borrower to be evidenced by and repayable with interest thereon in accordance with the Note (as such terms are defined in the Credit Agreement of even date herewith. B. The Bank has made a Loan (as defined in the Credit Agreement) to the Borrower in the amount of $164,850,000 as evidenced by the Note in the face amount of $164,850,000 made by the Borrower to the Bank. C. The Note is secured in part by THIS INDENTURE AND THE IMPLEMENTING INSTRUMENTS (hereinafter defined) UP TO THE MAXIMUM PRINCIPAL AMOUNT OF $164,850,000. D. Simultaneously with the execution and delivery of this Indenture, the Borrower is executing and delivering, and from time to time hereafter as Loans are advanced, the Borrower will execute and deliver, short- form Indentures of Mortgage, Assignments of Rents and Fixture Filings and short- form Indenture of Deeds to Secure Debt, Assignments of Rents and Fixture Filings (each, an "Implementing Mortgage", and collectively, the "Implementing --------------------- ------------ Mortgages"), and short-form Indenture of Deeds of Trust, Assignment of Rents and - --------- Fixture Filings (each, an "Implementing Deed of Trust", and collectively, the -------------------------- "Implementing Deeds of Trust") each --------------------------- of which Implementing Mortgages and Implementing Deeds of Trust (collectively, the "Implementing Instruments") covers or will cover a specified portion of the ------------------------ Trust Estate (as hereinafter defined) owned or hereafter acquired by the Borrower and which Implementing Mortgages and Implementing Deeds of Trust are to be recorded in those jurisdictions in which the respective portion of the Trust Estate is located. E. Each of such Implementing Instruments refers to, incorporates by reference, and supplements the provisions of, this Indenture, it being the intent of the parties that the provisions of this Indenture shall be applicable generally to, and be incorporated by reference in, and supplemented by, each of the Implementing Instruments. F. It is a condition of the obligation of the Bank to extend credit to the Borrower pursuant to the Loan Documents (as hereinafter defined) that the Borrower execute and deliver this Indenture, and the Implementing Instruments. GRANTING CLAUSE NOW, THEREFORE in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in order to secure the following (collectively, the "Obligations"): ----------- (a) The payment of principal of and premium (if any) and interest on the Loan evidenced by the Note (which shall mature on December 31, 1996, in the maximum aggregate principal amount of $164,850,000, including without limitation, any other Loans and future advances thereunder and all other obligations which may from time to time be owing to the Bank in connection with Loans or under the Credit Agreement, the Note or any other Loan Document, and all modifications, extensions, substitutions, exchanges and renewals thereof, and (b) the performance and payment of the obligations, covenants and agreements contained in this Indenture, the Implementing Instruments and each of the other Loan Documents, and all the monies now or hereafter secured hereby, including, without limitation, any and all sums expended by the Bank pursuant to Sections 1.08(d), 1.12 and 1.13(b) of this Indenture, together with interest - ---------------- ---- ------- thereon, the Borrower does hereby, and by the Implementing Instruments does irrevocably grant, bargain, sell, release, convey, warrant, assign, transfer, mortgage, pledge, set over and confirm unto the Bank with mortgage covenants, or in trust to the Trustee for the benefit and security of the Bank, as the case may be, and (to the extent available under applicable law) with power of sale and right of entry and possession, under and subject to the terms and conditions hereinafter set forth, all of the following described property: (i) all of the Borrower's right, title and interest in and to the respective lands and premises owned by the Borrower as more particularly described in Schedule I hereto (collectively, the "Fee Properties"); and ---------- -------------- (ii) all of the Borrower's right, title and interest in and to the respective leases and lease agreements to which it is a party, and all renewals and extensions thereof, permitted modifications or new leases entered into pursuant to the terms hereof and all rights and options thereunder (individually, a "Ground Lease"; and collectively, the "Ground Leases") more ------------ ------------- particularly described in Schedule II hereto affecting the respective lands and ----------- premises (collectively, the "Leasehold Properties" and, together with the Fee -------------------- Properties, collectively the "Properties"); ---------- TOGETHER WITH all interests, estates or other claims, both in law and in equity, that the Borrower now has or may hereafter acquire in (a) the respective Properties, (b) all easements, rights-of-way and rights used in connection therewith or as a means of access thereto and (c) all tenements, hereditament and appurtenances in any manner belonging, relating or appertaining thereto (collectively, the "Easements and Rights of Way"); and --------------------------- TOGETHER WITH all estate, right, title and interest of the Borrower, now owned or hereafter acquired, in and to any land lying within the right-of- way of any streets, open or proposed adjoining the respective Properties, and any and all sidewalks, alleys and strips and gores of land adjacent to or used in connection therewith (collectively, the "Adjacent Rights"); and --------------- TOGETHER WITH all estate, right, title and interest of the Borrower, now owned or hereafter acquired, in and to any and all buildings and other improvements now or hereafter located on the Properties and all building materials, building equipment and fixtures of every kind and nature located on the respective Properties or, attached to, contained in or used in any such buildings and other improvements, and all appurtenances and additions thereto and betterments, substitutions and replacements ;thereof (collectively, the "Improvements"); and ------------ TOGETHER WITH all estate, right, title and interest of the Borrower, now owned or hereafter acquired, in and to all fixtures, equipment and machinery and all renewals, substitutions and replacements thereof including, but not limited to, all appliances, apparatus and fittings of every kind (and including also all of the interest of the Borrower in any of such items, at any time acquired under any security agreement, conditional sale contract, chattel mortgage or other security instrument should the purchase of any such items pursuant to such arrangements be permitted under the Credit Agreement) located in or used in the operation of the rooms, halls, dining rooms, lounges, offices, lobbies and all other public spaces, lavatories, basements, cellars, vaults another portions of the Improvements (other than those owned by hotel guests), and now or hereafter located on or at or attached to the Properties to the extent that an interest in such tangible property arises under applicable real estate law, and any and all products and accessions to any such property which may exist at any time, with the complete and comfortable use, enjoyment occupancy or operation thereof, together with any proceeds realized from the sale, transfer or conversion of any of the above (collectively, the "Fixtures"); -------- and TOGETHER WITH all estate, right, title and interest of the Borrower, now owned or hereafter acquired, in and to all rights, royalties and profits in connection with all minerals, oil and gas and other hydrocarbon substances on or in the Properties, water, water rights (whether riparian, appropriative, or otherwise and whether or not appurtenant) and water stock (collectively, the "Mineral and Related Rights"); and -------------------------- TOGETHER WITH all estate, right, title and interest of the Borrower, now owned or hereafter acquired in and to all leases, subleases, lettings, licenses and other occupancy agreements, and guarantees thereof, and all renewals, modifications, or extensions thereof, all rights and options under such leases or licenses for the Properties or any part thereof now or hereafter entered into (collectively, the "Space Leases" and all right, title and interest ------------ of the Borrower thereunder, including, without limitation, all rents, revenues, issues, income and profits payable thereunder, (subject, however, to the right of the Borrower so long as no Default (as hereinafter defined) shall have occurred and be continuing to collect and use such rents, revenues, issues, income and profits) including all replacements and substitutions for, or additions to, all products and proceeds of, and all books, records and files relating to, any of the foregoing (collectively, the "Rents and Royalties"); and ------------------- TOGETHER WITH all estate, right, title and interest and other claim or demand that the Borrower now has or may hereafter acquire with respect to any damage to the Properties, the Improvements or Fixtures and any and all proceeds of insurance in effect with respect to the Improvements or Fixtures owned by the Borrower and any unearned premiums accrued, accruing or to accrue under any and all insurance policies now or hereafter obtained by the Borrower and any and all awards made for the taking by eminent domain, or by any proceeding or purchase in lieu thereof, of the Properties, the Improvements or the Fixtures, including without limitation any awards resulting from a change of grade of streets are as the result of any other damage to the Properties, the Improvements or the Fixtures for which compensation shall be given by any governmental authority all of which are hereby assigned to the Bank who is hereby authorized to collect and receive the proceeds thereof and to give proper receipts and acquittances therefor (collectively, the "Damage Rights)"; and ------------- TOGETHER WITH all the estate, right, title and interest of the Borrower, now owned or hereafter acquired, with respect to any parking facilities located other than on the Properties and used or intended to be used in connection with the operation, ownership or use of the Properties, any and all replacements and substitutions for the same, and any other parking rights, easements, covenants and other interests in parking facilities acquired by the Borrower for the use of tenants or occupants of the Improvements (collectively, the "Parking Rights"); and -------------- TOGETHER WITH all estate, right, title and interest of the Borrower, now owned or hereafter acquired, in respect of any and all air rights, development rights, zoning rights or other similar rights or interests which benefit or are appurtenant to the Properties or the Improvements (collectively, "Air and Development Rights"); and -------------------------- All of the foregoing Easements and Rights-of-Way, Adjacent Rights, Improvements, Fixtures, Minerals and Related Rights, Rents and Royalties, Space Leases, Damage Rights, Parking Rights, and Air and Development Rights being sometimes hereinafter referred to collectively as the "Ancillary Rights and -------------------- Properties" and the Properties, and Ancillary Rights and Properties collectively - ---------- referred to herein as the "Trust Estate". ------------ TO HAVE AND TO HOLD the Trust Estate with all privileges and appurtenances thereunto belonging, to the Bank or the Trustee (for the benefit of the Bank), as the case may be, and their respective successors and assigns, forever, upon the trust, terms and conditions and for the uses hereinafter set forth. IT BEING THE INTENT OF THE PARTIES HERETO that, except to the extent required by applicable law, this Indenture not be recorded in the respective jurisdictions where the various Properties are located but that this Indenture be implemented by recording in each jurisdiction an applicable Implementing Instrument, describing the portion of the Trust Estate located in such jurisdiction, each of the Implementing Instruments to secure all of the obligations. PROVIDED ALWAYS, that if the Obligations shall be paid in full, and if each and every covenant and condition contained herein and in the Loan Documents shall be complied with, then this Indenture and the lien and estate, as the case may be, granted hereby and by the Implementing Instruments shall cease, determine and be void. This Indenture, the Implementing Instruments, the Credit Agreement, the Note, the "Security Agreement", the "Purchase Agreement Assignment", the "Management Agreement Assignment", the "Subordination and Attornment of Management Agreement", the "Debt Service Guaranty" (each as defined in the Credit Agreement), and any other instrument given to evidence or further secure the payment and performance of any Obligation are sometimes hereinafter collectively referred to as the "Loan Documents". -------------- TO PROTECT THE SECURITY OF THIS INDENTURE, THE BORROWER HEREBY COVENANTS AND AGREES AS FOLLOWS: ARTICLE I Particular Covenants and Agreements of the Borrower --------------------------------------------------- Section 1.01. Payment of Obligations; Representations and Warranties; ------------------------------------------------------- etc. - ---- (a) The Borrower shall pay when due the principal of, and interest on, the indebtedness outstanding under, and all other Obligations according to the terms of the Note, this Indenture, the Credit Agreement and all other Loan Documents, and shall abide and comply with each and every covenant and agreement set forth in the Note, this Indenture, the Credit Agreement and all other Loan Documents. The Borrower acknowledges that as of the date hereof, it has no offsets, defenses or counterclaims with respect to the Obligations. (b) The Borrower represents and warrants: (i) that it has the full power and lawful authority to grant, bargain, sell, release, convey, warrant, assign transfer, mortgage, pledge, set over and confirm unto the Bank, or the Trustee for the benefit and security of the Bank, the case may be, the Trust Estate and that it will forever defend the title to the Trust Estate and the validity and priority of the lien or estate hereof and of each Implementing Instrument against the claims and demands of all persons whomsoever; (ii) that upon the execution of this Indenture and based on filings made or to be made pursuant to Section 1.0 of this Indenture, the ----------- Bank will have a valid and enforceable first mortgage lien on and/or be a beneficiary under a valid enforceable first deed of trust in the Trust Estate; and (iii) that the Borrower has not performed any act which might prevent the Bank from enforcing any of the terms and conditions of the Credit Agreement, this Indenture, the Implementing Instruments or the liens, security interests and estate created pursuant to this Indenture or the Implementing Instruments or which would limit the ability of the Bank to enforce any of the same. Section 1.02. Further Assurances; Filing; Re-Filing; etc. ------------------------------------------ (a) The Borrower shall execute, acknowledge and deliver, from time to time, such further instruments as the Bank or the Trustee may reasonably require to accomplish the purposes of this Indenture and the Implementing Instruments. (b) The Borrower, immediately upon the execution and delivery of this Indenture, and thereafter from time to time, shall cause this Indenture, the Implementing Instruments and any security agreement, mortgage, deed to secure debt or deed of trust supplemental hereto and each instrument of further assurance to be filed, registered or recorded and refiled, re-registered or re- recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and perfect the lien or estate of this Indenture and the Implementing Instruments upon the Trust Estate. (c) The Borrower shall pay all filing, registration and recording fees, and all expenses incident to the execution, filing, recording, registration and acknowledgment of this Indenture, the Implementing Instruments and any security agreement, mortgage, deed to secure debt or deed of trust supplemental hereto and any instrument of further assurance, and all federal, State, county and municipal stamp taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution, delivery, filing, registration and recording of any of the Note, this Indenture, the Implementing Instruments and any security agreement, mortgage, deed to secure debt or deed of trust supplemental hereto or any instruments of further assurance. (d) The Borrower will, at its sole cost and expense, do, execute, acknowledge and deliver all and every such acts, information reports, returns and withholding of monies as shall be necessary or appropriate to comply fully, or to cause full compliance, with all applicable information reporting and back- up withholding requirements of the Internal Revenue Code of 1986, as amended including all regulations promulgated thereunder) in respect of the Trust Estate and all transactions related thereto, and will at all times provide the Bank, upon request, with satisfactory evidence of such compliance and notify the Bank of the information reported in connection with such compliance. Section 1.03. Title. The Borrower shall forever warrant, maintain, ----- preserve and defend title to the Trust Estate, the lien of and security interest created by this Indenture and the Bank's first lien on and first security interest in the Trust Estate against the claims and demands of all Persons whomsoever. Section 1.04. Insurance. The Borrower will obtain and maintain with --------- respect to the Trust Estate the insurance policies required by Section 8.04 of the Credit Agreement in accordance with the terms thereof. Section 1.05. Impositions. ----------- (a) Subject to Section 8.03(c) of the Credit Agreement the Borrower shall pay or cause to be paid, before any fine, interest, penalty or other cost for non-payment attaches thereto, all taxes, assessments, water and sewer rates, utility charges and all other governmental or nongovernmental charges and/or levies now or hereafter assessed or levied against the Trust Estate or any portion thereof) or upon the lien or estate of the Bank or the Trustee therein (collectively, "Impositions"), which, if unpaid, might by law become a Lien on ----------- the Trust Estate. (b) If a Default (as hereinafter defined) shall occur and be continuing, the Borrower, at the election of the Bank, shall deposit, or cause to be deposited, with the Bank monthly in advance of the first day of each month an amount equal to one-twelfth of the annual amount of Impositions to be paid pursuant this Section 1.05 and of the premiums on insurance which the Borrower ------------ is required to maintain pursuant to Section 8.04 of the Credit Agreement. The determination of the amount so payable and of the fractional part thereof to be deposited with the Bank so that the aggregate of such deposit shall be sufficient for each such purpose, shall be made by the Bank. If one month prior to the due date of any Imposition and/or of any insurance premium, the amounts then on deposit therefor shall be insufficient for the payment thereof in full, the Borrower, within 10 days after demand, shall deposit the amount of the deficiency with the Bank. All amounts deposited shall be held by the Bank without interest and shall be applied to the payment of the obligations with respect to which such amounts were deposited on or before the dates upon which the same would become delinquent in such order or priority as the Bank shall determine; provided, however, that the amounts so deposited may be applied by the Bank, in its sole discretion, to the payment of the charges for which they have been deposited or to the payment of the Obligations. (c) The amount deposited pursuant to paragraph (b) above shall not constitute trust funds and may be commingled with the general funds of the Bank. Upon an assignment of this Indenture, the Bank shall pay over the balance of such deposits in its possession to the assignee and the Bank thereupon shall be completely released from all liability with respect thereto and the Borrower or owner of the Properties shall, upon the making of such payment, look solely to the assignee or transferee in reference thereto. This provision shall apply to every transfer of such deposits to a new assignee. Upon full payment of the Obligations, the Bank shall promptly pay over any balance of the deposits in its possession to the Borrower. Section 1.06. Disposition of the Trust Estate; Maintenance of the --------------------------------------------------- Improvements and Fixtures. - ------------------------- (a) Except as otherwise permitted in Section 8.17 of the Credit Agreement, the Borrower shall not voluntarily or involuntarily (other than as a result of condemnation), by operation of law or otherwise, sell, lease, transfer or dispose of, or suffer any third party to sell, transfer or dispose of, all or any part of the Trust Estate or any interest therein or any stock in the general partner of the Borrower. A transfer or disposition of the Trust Estate or any part thereof or interest therein shall include, without limitation, (a) execution of any lease (or sublease, in the case of a Leasehold Property) for (i) the Trust Estate (or any portion thereof) and/or (ii) Space Leases in the Improvements covering space in excess of 2,000 rentable (as to any particular Hotel) square feet (excluding room rentals made in the ordinary course of the Borrower's business), (b) any direct sale, assignment, conveyance, transfer (including a transfer or other alienation of all or any part of the Trust Estate or any interest therein, which shall include, without limitation/ the creation of a Lien (as defined in the Credit Agreement) or other encumbrance on the Trust Estate (other than the Permitted Liens, (as defined in the Credit Agreement)) and (c) any assignment, pledge, grant of security interest in, conditional sales or the execution of a title retention agreement with regard to the Fixtures. (b) Except as expressly permitted by Section 8.17 of the Credit Agreement, the Borrower shall not permit the Improvements or Fixtures to be removed, demolished or materially altered without the written consent of the Bank; shall not commit, permit or suffer any material waste or deterioration of the Trust Estate; shall maintain the Trust Estate in good repair, working order and condition, except for reasonable wear and use; and shall restore and repair all Damaged Property (as defined in the Credit Agreement) (whether or not insured against or insurable and without regard to the sufficiency of any insurance proceeds) or any part of the Trust Estate affected by any Taking (as defined in the Credit Agreement) (without regard to the sufficiency of the Taking Proceeds (as defined in the Credit Agreement)) so that when restored or repaired the same shall be of at least equal quality, value and usefulness in connection with the operation and maintenance of the Properties, Improvements and Fixtures that existed immediately prior to such casualty or Taking. Section 1.07. Compliance with Covenants. The Borrower shall comply ------------------------- with all recorded covenants, conditions and restrictions, which are now, or at any time in the future may be, applicable to or affecting the Trust Estate (or any portion thereof). Section 1.08. Compliance With Laws; Indemnification. ------------------------------------- (a) The Borrower shall notify the Bank promptly of any notice or order which the Borrower receives from any Governmental Authority (as defined in the Credit Agreement) with respect to the Borrower's compliance with material Legal Requirements (as defined in the Credit Agreement), promptly take any and all actions necessary to bring its operations into compliance with such Legal Requirements and shall fully comply with the Legal Requirements which at any time are applicable to its operations at any of its Properties. (b) The Borrower shall indemnify and hold the Bank, and the Trustee, harmless from and against any and all loss, cost liability, damage and expense, including attorneys' fees and disbursements (except to the extent resulting from the Bank's or the Trustee's own gross negligence or willful misconduct) imposed upon the Bank and/or the Trustee (whether as a holder of this Indenture or as a successor in interest to the Borrower as owner of the Trust Estate), in any manner arising out of or related to (i) any violation of or failure of the Borrower or the Trust Estate to comply with any Legal Requirement, or (ii) any Default, including, without limitation, the filing of a lien against the Properties in favor of any Governmental Authority (each, a "Claim"). In case any such Claim is brought ----- against the Trustee or the Bank, the Borrower shall, upon notice from the Bank or the Trustee defend any such Claim any counsel reasonably satisfactory to the Bank. (c) [Intentionally Omitted] (d) The Bank, at its election and in its sole discretion may (but shall not be obligated to) cure any failure on the part of the Borrower to comply with any Legal Requirement, which could result in (i) a lien on any portion of the Trust Estate, (ii) costs, fines or penalties against the Trust Estate (or any part thereof) or the Borrower, or (iii) a Claim, and in such event, without limitation, may take any of the following actions: (i) arrange for the prevention of any disposal, release or threat of release of Hazardous Materials or spill at the Properties, and pay any costs associated with such prevention; (ii) arrange for the removal or remediation of Hazardous Materials which may be disposed of or released or result from a Spill at the Properties, and pay any costs associated with such removal and/or remediation; (iii) pay on behalf of the Borrower, any costs, fines or penalties imposed on the Borrower by any Governmental Authority or any representative thereof in connection with such release or threat of release of hazardous materials or as a result of a spill; or (iv) make any other payment or perform any other act which will prevent a Lien in favor of any Governmental Authority from attaching to the Trust Estate (or any portions thereof). Any partial exercise by the Bank of the remedies set forth herein, or any partial undertaking on the part of the Bank to cure the Borrower's failure to comply with any Legal Requirement, shall not obligate the Bank to complete the actions taken or require the Bank to expend further sums to cure the Borrower's noncompliance; nor shall the exercise of any such remedies operate to place upon the Bank any responsibility for the operation, control, care, management or repair of the Properties or make the Bank the "operator" of the Properties within the meaning or any such Legal Requirement. Any amount paid or costs incurred by the Bank as a result of the exercise by the Bank of any of the rights hereinabove set forth, together with interest thereon at the Post-Default Rate (as defined in the Credit Agreement), shall be immediately due and payable by the Borrower to the Bank and until paid shall be added to and become a part of the Obligations secured hereby; and the Bank, by making any such payment or incurring any such costs, shall be subrogated to any rights of the Borrower to seek reimbursement from any third parties, including, without limitation, a predecessor-in-interest to the Borrower's title who may be a "responsible party" or otherwise liable under the aforementioned Legal Requirements in connection with any such release or threat of release of Hazardous Materials. (e) If, after the occurrence and during the continuance of any Default under Sections 1.08(b) or (c), the Bank desires that an environmental ----------------------- survey and risk assessment with respect to any of the Properties be prepared, the Borrower shall supply such a survey and risk assessment by an independent engineering firm selected by the Borrower and satisfactory to the Bank, in form and detail satisfactory to the Bank (including test borings of the ground and chemical analyses of air, water and waste discharges), estimating current liabilities and assessing potential sources of future liabilities of the Borrower or any other owner or operator of Properties under Environmental Laws (as defined in the Credit Agreement). (f) The provisions of this Section 1.08 shall survive the ------------ expiration or satisfaction of this Indenture. Section 1.09. Limitations of Use. The Borrower shall not, without ------------------ the Bank's consent, initiate, join in or consent to any change in any private restrictive covenant, zoning ordinance or other public or private restrictions limiting or defining the uses that may be made of any of the Properties and/or the Improvements or any part thereof that would have a material adverse effect on the value of any of the Properties and/or the Improvements (or any part thereof). The Borrower shall comply with the provisions of all leases, licenses, agreements and private covenants, conditions and restrictions that at any time are applicable to the Trust Estate. Section 1.10. Inspection of the Properties. The Borrower shall keep ---------------------------- adequate records and books of account in accordance with generally accepted accounting principles consistently applied and shall permit the Bank and its authorized representatives to enter and inspect the Properties and the Improvements and to examine the records and books of the Borrower with respect thereto and make copies or extracts thereof all at such reasonable times upon reasonable notice as may be requested by the Bank or the Trustee. Section 1.11. Estoppel Certificates. At any time and from time to --------------------- time, the Borrower, within 5 Business Days (as defined in the Credit Agreement) upon request, shall furnish the Trustee and the Bank a written statement, duly acknowledged, of the amount of the Obligations then secured by this Indenture and whether any offsets or defenses exist against such Obligations. Section 1.12. Actions to Protect Trust Estate. If the Borrower shall ------------------------------- fail to (a) perform and observe any of the terms, covenants or conditions required to be performed or observed by it under any of the Ground Leases, (b) effect the insurance required by Section 8.04 of the Credit Agreement, (c) make the payments required by Section 1.05, or (d) perform or observe any of ------------ its other covenants or agreements hereunder or under the other Loan Documents, the Bank may, without obligation to do so, and upon notice to the Borrower (except in an emergency) effect or pay the same. All sums, including reasonable attorneys' fees and disbursements, so expended or expended to sustain the lien or estate of this Indenture or its priority, or to protect or enforce any of the rights hereunder, or to recover any of the Obligations, shall be a lien on the Trust Estate, shall be deemed to be added to the Obligations secured hereby, and shall be paid by the Borrower within 10 days after demand therefor, together with interest thereon at the Post-Default Rate. In any action or proceeding to foreclose this Indenture as a deed of trust or to recover or collect the Obligations secured hereby, the provisions of law respecting the recovery of costs, disbursements and allowances shall prevail unaffected by this covenant. Section 1.13. Leasehold Interests. ------------------- (a) The Borrower shall (i) promptly perform and observe all of the terms, covenants and conditions required to be performed and observed by the Borrower under the Ground Leases and do all things necessary to preserve and to keep unimpaired its rights thereunder, (ii) promptly notify the Bank of any default by the Borrower under any such Ground Lease in the performance of any of the terms, covenants or conditions on its part to be performed or observed thereunder or of the giving of any notice by the lessor to the Borrower of any default under any Ground Lease or of such lessor's intention to exercise any remedy reserved to the lessor thereunder and (iii) promptly cause a copy of each such notice given by the lessor under any Ground Lease to the Borrower to be delivered to the Bank. (b) If the Borrower shall fail promptly to perform or observe any of the terms, covenants or conditions required to be performed by it under any Ground Lease, including, without limitation, payment of all rent and other charges due thereunder, the Bank may, without obligation to do so, take such action as is appropriate to cause such terms, covenants or conditions to be promptly performed or observed on behalf of the Borrower but no such action by the Bank shall release the Borrower from any of its obligations under this Indenture. Upon receipt by the Bank from the lessor under any Ground Lease of any notice of default by the Borrower thereunder, the Bank may rely thereon and take any action as aforesaid to cure such default even though the existence of such default or the nature thereof be questioned or denied by the Borrower or by any party on behalf of the Borrower; provided, however, that except to the -------- ------- extent that immediate action is warranted under the circumstances, the Bank shall not exercise its right to cure a default of the Borrower hereunder until the Borrower's cure period as set forth in the Ground Lease shall have expired. Any amount paid or costs incurred by the Bank as a result of the exercise by the Bank of any of the rights hereinabove set forth, together with interest thereon at the Post-Default Rate (as defined in the Credit Agreement), shall be immediately due and payable by the Borrower to the Bank, and until paid shall be added to and become a part of the Obligations secured hereby. (c) The Borrower shall not surrender its leasehold estate and interests under any Ground Lease, nor terminate or cancel any Ground Lease, nor modify, change, supplement, alter or amend any Ground Lease orally or in writing, and the Borrower does hereby expressly release, relinquish and surrender unto the right, power and authority, if any, to modify, change, alter or amend any Ground Lease to which it is a party in any way, and any attempt on the part of the Borrower to exercise any such right without the consent of the Bank shall be null and void. (d) No release or forbearance of any of the Borrower's obligations under any Ground Lease, pursuant to the terms thereof or otherwise shall release the Borrower from any of its obligations under this Indenture. (e) To the extent permitted by applicable law, neither the fee title to the property demised by any Ground Lease nor the leasehold estate created by any Ground Lease shall merge, but shall always remain separate and distinct, notwithstanding the union the aforesaid estates either in the lessor or the Borrower under any Ground Lease or in a third party by purchase or otherwise, unless the Bank shall, at its option, execute and record a document evidencing its intent to merge the estates. If the Borrower acquires the fee title or any other estate, title or interest in any Leasehold Property covered by any Ground Lease, this Indenture shall attach to, be a lien upon and spread to the fee title or such other estate so acquired, and such fee title or other estate shall, without further assignment, mortgage or conveyance, become and be subject to the lien of this Indenture. The Borrower shall notify the Trustee and the Bank of any such acquisition by the Borrower and, on written request by the Bank, shall cause to be executed and recorded all such other and further assurances or other instruments in writing as may in the opinion of the Bank be required to carry out the intent and meaning hereof. (f) The Borrower shall enforce all of the obligations of to lessor under the Ground Leases to which it is a party to the end that the Borrower may enjoy all of the rights granted to it under the Ground Leases, and shall promptly notify the Bank and the Trustee of any default by the lessor under any Ground Lease in the performance or observance of any of the terms, covenants and conditions on the part of such lessor to be performed or observed under any Ground Lease. (g) The Borrower shall obtain from the lessor under each Ground Lease to which it is a party and deliver to the Bank, within 2 days after demand from the Bank, a statement in writing certifying that such Ground Lease is unmodified and in full force and effect and the dates to which the rent and other charges, if any, have been paid, and stating whether or not, to the best knowledge of the signer of such certificate, the Borrower is in default in the performance of any covenant, agreement or condition contained in such Ground Lease, and, if to, specifying each such default of which the signer has knowledge. (h) [Intentionally Omitted] (i) In the event that any proceeds of insurance on any part of the Trust Estate, or any Taking Proceeds, shall be deposited with any person pursuant to the requirements of any Ground Lease, the Borrower shall promptly notify the Bank and the Trustee of the name and address of the person with whom such proceeds have been deposited and of the amount so deposited. (j) The Borrower shall not exercise any right to purchase any of the Leasehold Properties, pursuant to an option or right of first refusal set forth in any Ground Lease, without giving prior written notice thereof to the Bank. The Borrower agrees prior to consummating the purchase of the Landlord's Interest (as defined in the applicable Ground Lease) to deliver to the Bank a Mortgage and Implementing Instrument encumbering the interest purchased and reasonably satisfactory to the Bank. If a Default shall occur and be continuing, the Bank shall have, and is hereby granted, the irrevocable right to exercise any such option or right of first refusal, either in its own name and behalf, or in the name and behalf of the Borrower, as the Bank shall in its sole discretion determine. (k) The Bank shall have the right to participate in any arbitration or appraisal proceeding under any Ground Lease and the Borrower shall cooperate with the Bank in all respects. ARTICLE II Assignment of Rents, Issues and Profits --------------------------------------- Section 2.01. Assignment of Rents, Issues and Profits. The Borrower --------------------------------------- hereby assigns and transfers to the Bank, as further security for the payment of the Obligations, the rents, revenues, issues, profits, royalties, income and benefits derived from its Properties the Improvements and Fixtures (collectively, the "Rents"), and hereby gives to and confers upon the Bank the ----- right, power and authority to collect the tame. The Borrower irrevocably appoints the Bank its true and lawful attorney-in-fact, at its option at any time and from time to time following the occurrence and during the continuance of a Default, to demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, in the name of the Borrower or otherwise, for the Rents and apply the same to the Obligations as provided in Section 4.03(a) --------------- hereof; provided, however, that the Borrower shall have the right to collect the Rents at any time prior to the occurrence of a Default (but not more than one month in advance, except in the case of security deposits). The foregoing assignment of Rents is intended to be an absolute present assignment from the Borrower to the Bank and not merely the creation of a security interest, subject only to the terms of this Indenture. Section 2.02. Collection Upon Default. To the extent permitted by ----------------------- law, if a Default (as hereinafter defined) shall have occurred and be continuing, the Bank may, at any time without notice, either in person, by agent or by a receiver appointed by a court, and without regard to the adequacy of any security for the Obligations or the solvency of the Borrower, enter upon and take possession of the Properties, the Improvements and the Fixtures or any part thereof, in its own name, sue for or otherwise collect the Rents including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including attorneys' fees, to the payment of the Obligations and in such order as the Bank may determine. The collection of the Rents or the entering upon and taking possession of the Properties, the Improvements or the Fixtures or any part thereof, or the application thereof as aforesaid, shall not cure or waive any Default or notice thereof or invalidate any act done in response to such Default or pursuant to notice thereof. ARTICLE III Security Agreement ------------------ Section 3.01. Creation of Security Interest. The Borrower hereby ----------------------------- grants to the Bank a security interest in the Fixtures for the purpose of securing the Obligations. The Bank shall have, in addition to all rights and remedies provided herein and in the other Loan Documents, all the rights and remedies of a secured party under the Uniform Commercial Code of the State in which the applicable portion of the Fixtures is located. Section 3.02. Warranties, Representations and Covenants. The ----------------------------------------- Borrower hereby warrants, represents and :covenants that: (a) the Fixtures will be kept on or at the related Properties and the Borrower will not remove any Fixtures from the related Properties, except such portions or items of the Fixtures which are consumed or worn out in ordinary usage, all of which shall be promptly replaced by the Borrower, except as otherwise expressly provided in Section B.17(a) of the Credit Agreement, (b) all covenants and obligations of the Borrower contained herein relating to the Trust Estate shall be deemed to apply to the Fixtures whether or not expressly referred to herein and (c) this Indenture constitutes a security agreement and "fixture filing" as those terms are used in the applicable Uniform Commercial Code. Information relative to the security interest created hereby may be obtained by application to the Bank at the jailing address set forth on Page 1 hereof. The mailing addresses of the Borrower is set forth on Page 1 hereof. ARTICLE IV Defaults; Remedies ------------------ Section 4.01. Defaults. If -------- (a) an Event of Default under and as defined in the Credit Agreement shall occur and be continuing; (b) default shall be made in the performance or observance of any covenant or agreement of the Borrower contained in Section 1.0(a) hereof and such default shall not have been remedied within 3 Business Days after notice thereof shall have been given to the Borrower by the Bank or Trustee; or (c) the Borrower shall default in the performance or observance of any other covenant or agreement of the Borrower hereunder or under the Implementing Mortgages or the Implementing Deeds of Trust and such default shall not have been remedied ((i) within 30 days after notice thereof shall have been given to the Borrower by the Bank or the Trustee or (ii) if such default cannot be cured within said period of 30 days with the exercise of all due diligence provided such cure is commenced before the expiration of said 30 days and thereafter shall prosecute the curing of such default with diligence and continuity, within such period of time as may be necessary to complete the curing of same; provided that if such default shall be a material default, such default must be cured within 180 days after notice thereof; (any such default, Event of Default or failure by the Borrower to perform or observe of any other covenant or agreement as set forth herein being hereinafter called a "Default"); then, as more particularly provided in the Credit Agreement, the principal of and accrued interest on the Note outstanding under the Credit Agreement and all other Obligations may be declared, or may become, due and payable, without presentment, demand, protest or other formalities of any kind, all of which have been waived pursuant to the Credit Agreement, except as otherwise provided herein. Section 4.02. Default Remedies. ---------------- (a) If a Default shall have occurred and be continuing, this Indenture and the Implementing Mortgages and the Implementing Deeds of Trust may, to the maximum extent permitted by law, be enforced either as a deed of trust, deed to secure debt or as a mortgage, at the option of the Bank, and the Trustee or the Bank, as the case may be, may exercise any right, power or remedy permitted to it hereunder, under any of the other Loan Documents or by law, and, without limiting the generality of the foregoing, the Trustee or the Bank, as the case may be, may, personally or by their respective agents, to the maximum extent permitted by law: (i) enter and take possession of the Trust Estate or any part thereof, exclude the Borrower and all persons claiming under the Borrower whose claims are junior to this Indenture and any Implementing Instrument, wholly or partly therefrom, and use, operate, manage and control the same either in the name of the Borrower or otherwise as the Trustee or the Bank, as the case may be, shall deem best, and upon such entry, from time to time at the expense of the Borrower and the Trust Estate, make all such repairs, replacements, alterations, additions or improvements to the Trust Estate or any part thereof as the Trustee or the Bank, as the case may be, may deem proper and, whether or not the Trustee or the Bank has so entered and taken possession of the Trust Estate or any part thereof, collect and receive all the rents and profits and apply the same, to the maximum extent permitted by law, to the payment of all expenses which the Trustee or the Bank may be authorized to make under this Indenture, the Implementing Mortgages or the Implementing Deeds of Trust, the remainder to be applied to the payment of the Obligations until the same shall have been repaid in full; if the Trustee or the Bank, as the case may be, demands or attempts to take possession of the Trust Estate or any portion thereof in the exercise of any rights hereunder, the Borrower shall promptly turn over and deliver complete possession thereof to the Trustee or the Bank; and (ii) personally or by agents, with or without entry, if the Trustee or the Bank, as the case may be, shall deem it advisable: (x) sell the Trust Estate or any part thereof at a sale or sales held at such place or places and time or times and upon such notice and otherwise in such manner as may be required by law, or, in the absence of any such requirement, as the Trustee or the Bank may deem appropriate, and from time to time adjourn any such sale by announcement at the time and place specified for such sale or for such adjourned sale without further notice, except such as may be required by law; (y) proceed to protect and enforce its rights under this Indenture, the Implementing Mortgages and Implementing Deeds of Trust, by suit for specific performance of any covenant contained herein or in the Loan Documents or in aid of the execution of any power granted herein or in the Loan Documents, or for the foreclosure of this Indenture and the respective Implementing Mortgage and/or the Implementing Deed of Trust (as a mortgage, deed to secure debt or deed of trust, as the case may be, or otherwise) and the sale of the Trust Estate or any part thereof under the judgment or decree of a court of competent jurisdiction, or for the enforcement of any other right as the Trustee or the Bank shall deem most effectual for such purpose, provided, that in the event of a sale, by foreclosure or otherwise, of less than all of the Trust Estate, this Indenture and the respective Implementing Mortgage and/or the Implementing Deed of Trust shall continue as a lien on, and security interest in, the remaining portion of the Trust Estate; or (z) exercise any or all of the remedies available to a secured party under the applicable Uniform Commercial Code, including, without limitation: (1) either personally or by means of a court appointed receiver, take possession of all or any of the Fixtures and exclude therefrom the Borrower and all persons claiming under the Borrower, and thereafter hold, store, use, operate, manage, maintain and control, make repairs, replacements, alterations, additions and improvements to and exercise all rights and powers of the Borrower in respect of the Fixtures or any part thereof; if the Trustee or the Bank, as the case may be, demands or attempts to take possession of the Fixtures in the exercise of any rights hereunder, the Borrower shall promptly turn over and deliver complete possession thereof to the Bank; (2) without notice to or demand upon the Borrower, make such payments and do such acts as the Trustee or the Bank, as the case may be, may deem necessary to protect its security interest in the Fixtures, including, without limitation, paying, purchasing, contesting or compromising any encumbrance which is prior to or superior to the security interest granted hereunder, and in exercising any such powers or authority paying all expenses incurred in connection therewith; (3) require the Borrower to assemble the Fixtures or any portion thereof, at a place designated by the Bank or the Trustee and reasonably convenient to both parties, and promptly to deliver such Fixtures to the Trustee or the Bank, as the case may be, or an agent or representative designated by it; the Trustee or the Bank, as the case may be, and their agents and representatives, shall have the right to enter upon the premises and property of the Borrower to exercise the Trustee's or the Bank's rights hereunder; (4) sell, lease or otherwise dispose of the Fixtures or any portion thereof, with or without having the Fixtures at the place of sale, and upon such terms and in such manner as the Trustee or the Bank, as the case may be, may determine (and the Trustee or the Bank may be a purchaser at any such sale); and (5) unless the Fixtures are perishable or threaten to decline speedily in value or are of a type customarily sold on a recognized market, the Trustee or the Bank, as the case may be, shall give the Borrower at least 10 days' prior notice of the time and place of any sale of the Fixtures or Other intended disposition thereof. (b) If a Default shall have occurred and be continuing, the Trustee or the Bank, as the case may be, to the maximum extent permitted by law, shall be entitled, as a matter of right, to the appointment of a receiver of the Trust Estate or any part thereof, without notice or demand, and without regard to the adequacy of the security for the Obligations or the solvency of the Borrower. The Borrower hereby irrevocably consents to such appointment and waives notice of any application therefor. Any such receiver or receivers shall have all the usual powers and duties of receivers in like or similar cases and all the powers and duties of the Bank and the Trustee, as the case may be, in case of entry and shall continue as such and exercise all such powers until the date of confirmation of sale of the Trust Estate or any part thereof, unless such receivership is sooner terminated. (c) If a Default shall have occurred and be continuing, the Borrower shall, to the maximum extent permitted by law, pay monthly in advance to the Trustee or the Bank, as the case may be, or to any receiver appointed at the request of the Trustee or the Bank, as the case may be, to collect rents, the fair and reasonable rental value for the use and occupancy of the Properties, the Improvements and the Fixtures or of such part thereof as may be in the possession of the Borrower and used by the Borrower for its for its personal use. Upon default in the payment thereof, the Borrower shall vacate and surrender possession of the Properties, the Improvements and the Fixtures to the Trustee or the Bank or such receiver, and upon a failure so to do may be evicted by summary proceedings. (d) In any sale under any provision of this Indenture or pursuant to any judgment or decree of court, the Trust Estate, to the maximum extent permitted by law, may be sold in one or more parcels or as an entirety and in such order as the Trustee or the Bank may elect, without regard to the right of the Borrower or any person claiming under the Borrower to the marshallinq of assets. The purchaser at any such sale shall take title to the Trust Estate or the part thereof so sold free and discharged of the estate of the Borrower therein, the purchaser being hereby discharged from all liability to see to the application of the purchase money. Any person, including the Trustee or the Bank, as the case may be, may purchase at any such sale. Upon the completion of any such sale by virtue of this Section 4.02, the Trustee or the Bank, as the ------------ case may be, shall execute and deliver to the purchaser an appropriate instrument which shall effectively transfer all of the Borrower's and the Trustee's estate, right, title, interest, property, claim and demand in and to the Trust Estate or portion thereof so sold, but without any covenant or warranty, express or implied. The Trustee and the Bank are each hereby irrevocably appointed the attorney-in-fact of the Borrower in its name and stead to make all appropriate transfers and deliveries of the Trust Estate or any portions thereof so sold and, for that purpose, the Trustee and/or the Bank may execute all appropriate instruments of transfer, and may substitute one or more persons with like power, the Borrower hereby ratifying and confirming all that said attorneys or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, the Borrower shall ratify and confirm, or cause to be ratified and confirmed, any such sale or sales by executing and delivering, or by causing to be executed and delivered, to the Trustee or the Bank, as the case may be, or to such purchaser or purchasers all such instruments as may be advisable, in the judgment of the Trustee or the Bank for such purpose, and as may be designated in such request. Any sale or sales made under or by virtue of this Indenture or any of the Implementing Instruments, to the extent not prohibited by law, shall operate to divest all the estate, right, title, interest, property, claim and demand whatsoever, whether at law or in equity, of the Borrower in, to and under the Trust Estate, or any portions thereof so sold, and shall be a perpetual bar both at law and in equity against the Borrower and against any and all persons claiming or who may claim the same, or any part thereof, by, through or under the Borrower. The powers and agency herein granted are coupled with an interest and are irrevocable. (e) To the maximum extent permitted by applicable law, all rights of action under the Loan Documents and this Indenture may be enforced by the Trustee or the Bank, as the case may be, without the possession of the Loan Documents and without the production thereof at any trial or other proceeding relative thereto. Any such suit or proceeding instituted by the Trustee shall be brought in its name and as trustee of an express trust, and any recovery of judgment shall, subject to the rights of the Trustee be for the benefit of the Bank. Section 4.03. Application of Proceeds. The proceeds of any sale ----------------------- made either under the power of sale (to the extent available under applicable law) hereby given or under a judgment, order or decree made in any action to foreclose or to enforce this Indenture or any of the Implementing Instruments, or of any monies held by the Trustee or the Bank, as the case may be, hereunder shall, to the maximum extent permitted by law, be applied: (i) first to the payment of all costs and expenses of such sale, including the Trustee's and/or the Bank's attorneys' fees; (ii) then to the payment of all charges, expenses and advances incurred or made by the Trustee and/or the Bank in order to protect the lien and estate of this Indenture or any Implementing Instrument or the security afforded hereby; (iii) then to the payment in full of all Obligations (in such order and priority as the Bank may elect); and any surplus remaining shall be paid to the Borrower or to whomsoever may be lawfully entitled to receive the same. Section 4.04. Right to Sue. The Trustee and the Bank or either of ------------ them shall have the right from time to time to sue for any sums required to be paid by the Borrower under the terms of this Indenture as the same become due, without regard to whether or not the Obligations shall be, or shall have become, due and without prejudice to the right of the Trustee or the Bank thereafter to bring any action or proceeding of foreclosure or any other action upon the occurrence and continuance of any Default existing at the time such earlier action was commenced. Section 4.05. Powers of the Trustee and the Bank. The Trustee and ---------------------------------- the Bank may at any time or from time to time renew or extend this Indenture, the Implementing Instruments or with the agreement of the Borrower) alter or modify the same in any way, or waive any of the terms, covenants or conditions hereof or thereof in whole or in part, and may release or reconvene any portion of the Trust Estate or any other security, and grant such extensions and indulgences in relation to the Obligations, or release any person liable therefor as the Trustee or the Bank, as the case may be, may determine without the consent of any junior lienor or encumbrancer, without any obligation to give notice of any kind thereto (except as may be required by applicable law), without in any manner affecting the priority of the lien and estate of this Indenture, the Implementing Mortgages and the Implementing Deeds of Trust on or in any part of the Trust Estate and without affecting the liability of any other person liable for any of the Obligations. Section 4.06. Remedies Cumulative. ------------------- (a) No right or remedy herein conferred upon or reserve to the Trustee or the Bank, as the case may be, is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other sight or remedy under this Indenture, the Implementing Mortgages, the Implementing Deeds of Trust or under applicable law, whether now or hereafter existing; the failure of the Trustee or the Bank, as the case may be, to insist at any time upon the strict observance or performance of any of the provisions of this Indenture and the Implementing Mortgages and/or Implementing Deeds of Trust, or to exercise any right or remedy provided for herein or therein or under applicable law, shall not impair any such right or remedy nor be construed as a waiver or relinquishment thereof. (b) The Trustee and the Bank, and each of them, shall be entitled to enforce payment and performance of any of the obligations of the Borrower and to exercise all rights and powers under this Indenture, the Implementing Instruments or under any Loan Document or any laws now or hereafter in force, notwithstanding that some or all of the Obligations may now or hereafter be otherwise secured, whether by mortgage, deed to secure debt, deed of trust,, pledge, lien, assignment or otherwise; neither the acceptance of this Indenture, the Implementing Mortgages and the Implementing Deeds of Trust nor the enforcement hereof or thereof, whether by court action or pursuant to the power of sale or other powers herein contained, shall prejudice or in any manner affect the Trustee's or the Bank's right to realize upon or enforce any other security now or hereafter held by the Trustee and/or the Bank, as the case may be, it being stipulated that the Trustee and the Bank, and each of them, shall be entitled to enforce this Indenture, the Implementing Instruments and any other security now or hereafter held by the Trustee or the Bank in such order and manner as the Trustee or the Bank in its sole discretion, may determine; every power or remedy given by the Loan Documents to the Trustee or the Bank or to which the Bank is otherwise entitled, may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by the Trustee or the Bank, and either of them may pursue inconsistent remedies. Section 4.07. Waiver of Stay, Extension, Moratorium Laws, Equity of ----------------------------------------------------- Redemption. To the maximum extent permitted by law, the Borrower shall not at - ---------- any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any applicable present or future stay, extension or moratorium law, which may affect observance or performance of the provisions o~ this Indenture or any Implementing Mortgage or Implementing Deed of Trust; nor claim, take or insist upon any benefit or advantage of any present or future law providing for the valuation or appraisal of the Trust Estate or any portion thereof prior to any sale or sales thereof which may be made under or by virtue of Section 4.02 hereof; and the Borrower, to the extent that it lawfully may, ------------ hereby waives all benefit or advantage of any such law or laws. The Borrower for itself and all who may claim under it, hereby waives, to the maximum extent permitted by applicable law, any and all rights and equities of redemption from sale under the power of sale (to the extent available under applicable law created hereunder or from sale under any order or decree of foreclosure of this Indenture, any Implementing Mortgage or Implementing Deed of Trust and (if a Default shall have occurred) all notice or notices of seizure, and all right to have the Trust Estate marshalled upon any foreclosure hereof. Neither the Trustee nor the Bank shall be obligated to pursue or exhaust its rights or remedies as against any other part of the Trust Estate and the Borrower hereby waives any right or claim of right to have the Trustee or the Bank proceed in any particular order. Section 4.08. No Waiver. No failure to exercise, nor any delay in --------- exercising or any course of dealing in respect of any right, power or remedy hereunder by the Trustee or the Bank shall operate as a waiver thereof, nor shall any single or partial exercise by the Trustee or the Bank of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. ARTICLE V The Trustee ----------- Section 5.01. Acceptance by Trustee. The Trustee accepts this trust --------------------- with respect applicable portion of the Trust Estate when this Indenture shall have been duly executed and acknowledged and the Implementing Deeds of Trust with respect to the respective portion of the Trust Estate are made a public record as provided by law. Section 5.02. Compensation. The Trustee waives any statutory fee and ------------ shall accept reasonable compensation from the Bank in lieu thereof (which shall in no event be greater than the maximum amount permitted under applicable law) for any services rendered by it in accordance with the terms hereof. Section 5.03. Action in Accordance With Instructions. Upon receipt by -------------------------------------- the Trustee of instructions from the Bank at any time or from time to time, the Trustee shall (a) give any notice or direction or exercise any right, remedy or power hereunder or in respect of any part or all of the Trust Estate as shall be specified in such instructions and (b) approve as satisfactory all matters required by the terms hereof to be satisfactory to the Trustee or to the Bank. The Trustee may, but need not, take any of such actions in the absence of such instructions. In addition, at any time or from time to time, upon request of the sank and presentation of this Indenture and the Implementing Deeds of Trust for endorsement, and without affecting the liability of any person for payment of the Obligations, the Trustee may, upon such request, reconvey all or any part of the Trust Estate, consent to the making of any map or plat thereof, join in granting any easement thereon, or join in any extension agreement or any agreement subordinating the lien and estate hereof. Section 5.04. Resignation. The Trustee may resign at any time upon ----------- giving not less than 60 days prior notice to the Bank, but shall continue to act as trustee until its successor shall have been qualified and appointed pursuant to Section 5.05 hereof. ------------ Section 5.05. Successor Trustee. In the event of the death removal, ----------------- resignation or refusal or inability of the Trustee to act, for any reason, at any time, the Bank shall have the irrevocable power, with or without cause, without notice of any kind, and without applying to any court, to select and appoint a successor trustee. Each such appointment and substitution shall be made by notice to the Borrower, the Trustee 2nd successor trustee and by recording notice of such in each office in this Indenture or any Implementing Deed of Trust is recorded. Such notice shall be executed and acknowledged by the sank and shall contain reference to this Indenture and the Implementing Deeds of Trust and when so recorded shall be conclusive proof of proper appointment of the successor trustee. Such successor shall not be required to give bond for the faithful performance of its duties unless required by the Bank. ARTICLE VI Miscellaneous ------------- Section 6.01. Reconveyance by Trustee. The Bank shall promptly ----------------------- notify the Trustee of the payment in full of the Obligations or the Borrower's compliance with the release provisions of Section 8.17(b) of the Credit Agreement and shall surrender this Indenture and/or the Implementing Deeds of Trust (or those the subject of the relevant release) to the Trustee for cancellation and retention. Upon receipt of such notification, and upon payment by the Borrower of the Trustee's and/or the Bank's expenses, the Trustee or the Bank, as the case may be, shall release the lien of this Indenture and/or the Implementing Mortgages or reconvey the Implementing Deeds of Trust, as the case may be, without warranty or covenant, any portion of the Trust Estate then held hereunder (or those the subject of the relevant release) to the Borrower or upon the request of the Borrower and at the Borrower's expense assign this Indenture, the Implementing Mortgages and the Implementing Deeds of Trust (or those the subject of the relevant release) without recourse, to the Borrower's designee, or to the person or persons legally entitled thereto, by an instrument duly acknowledged in form for recording. Section 6.02. Notices. All notices and other communications provided ------- for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be deemed to have been properly given or served by personal delivery or by depositing in the United States Mail, post- paid and registered or certified, return receipt requested, and addressed to the recipient at the "Address for Notices" specified below its name on the signature pages hereof; or r attorney party, at such other address as shall be designated by such party upon 30 days prior written notice to each other party. All such communications and requests shall be deemed given upon personal delivery or three (3) Business Days after being deposited in the United States Mail with rejection or other refusal to accept or the inability to delivery because of changed addresses of which no notice was given constituting delivery for this purpose. Section 6.03. Amendments; Waivers; etc. This Indenture cannot be ------------------------- modified, changed or discharged except by an agreement in writing, duly acknowledged in form for recording, signed by the party against whom enforcement of such modification, change or discharge is sought. Section 6.04. Successors and Assigns. This Indenture applies to, ---------------------- inures to the benefit of and binds each of the parties hereto and their respective successors and assigns and shall run with the Properties. Section 6.05. Captions. The captions or headings at the beginning of -------- each Section hereof are for the convenience of the parties hereto and are not a part of this Indenture. Section 6.06. Invalidity of Certain Provisions. If the lien or -------------------------------- estate of this Indenture is invalid or unenforceable as to any part of the Trust Estate, the unsecured or partially secured portion of the Obligations shall be completely paid prior to the payment of the remaining and secured or partially secured portion thereof, and all payments made on such Obligations, whether voluntary or under foreclosure or other enforcement action or procedure, shall be considered to have been first paid on and applied to the full payment of that portion thereof that is not secured or fully secured by the lien or estate of this Indenture. Section 6.07. Severability. If any term or provision of this ------------ Indenture or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, or be inapplicable, invalid or unenforceable with respect to an Implementing Mortgage or an Implementing Deed of Trust, as the case may be, the remainder of this Indenture, or the application of such term or provision to persons or circumstances or the Implementing Instrument other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Indenture shall be valid and enforceable to the maximum extent permitted by law. Section 6.08. One of a Number of Indentures. This Indenture is given ----------------------------- as security together with the Implementing Instruments which collectively secure the Obligations. A copy of all such Implementing Instruments (including this Indenture) are on file with the Borrower and with the Bank and are available for inspection during normal business hours upon reasonable advance request therefor. A Default with respect to (i) this Indenture, (ii) any Implementing Mortgage (including this Indenture) or (iii) any Implementing Deed of Trust (including this Indenture) shall constitute a Default under all such instruments. Section 6.09. Trust is Irrevocable. The trust created hereby is -------------------- irrevocable by the Borrower. Section 6.10. Governing Law. The laws of the State of New York shall ------------- govern the validity, interpretation, construction and the Borrower's performance and observance of this Indenture, except that the laws of each State in which a portion of the Trust Estate is located shall govern the validity and enforcement of the security interest of the Bank in and to the portion of the Trust Estate located in such State. Section 6.11. Limitation on Liability. Notwithstanding anything to ----------------------- the contrary in this Indenture or in any of the other Related Agreements (as defined in the Credit Agreement), in the event of the maturity of the Obligations, or any part thereof, by acceleration or passage of time, or upon a default under this Indenture or a Default or Event of Default under any of the other Related Agreements, or a breach of any covenant or agreement contained in this Indenture or in any of the other Related Agreements: (a) the Bank shall not seek any judgment for a deficiency or money judgment against the Borrower or any partner thereof in connection with any action brought under this Indenture or any of the other Related Agreements; and (b) the Bank shall not seek any judgment on this Indenture except as a part of judicial proceedings to foreclose on this Indenture or any of the other Related Agreements, and in the event any suit is brought on this Indenture or concerning the Obligations as a part of judicial proceedings to foreclose on this Indenture or any of the other Related Agreements, any judgment obtained in such suit shall by its terms constitute a Lien on, and will be enforced only against, the Trust Estate and/or any other property conveyed or secured by any of the Related Agreements (together with the income therefrom, any funds held by the Bank pursuant to this Indenture or any of the other Related Agreements,, insurance proceeds and Taking Proceeds (as defined in the Credit Agreement)) and escrow and security deposits and not against any other assets or property of the Borrower or any partner thereof; provided, that the Borrower (but not the Limited Partners (as limited partners) except to the extent liability may be imposed under the Act (as defined in the Partnership Agreement)) shall be fully and personally liable for (i) any fraud or material misrepresentation of any of the representations made in Section 7 of the Credit Agreement, or (ii) willful misconduct of the Borrower, its employees or agents, or willful misapplication of Cash Flow Available for Loans (as defined in the Credit Agreement), any insurance proceeds, Taking Proceeds or tenant security deposits. FF&E Reserves (as defined in the Credit Agreement) or of any rental or other income which was required by any of the Related Agreements to be paid or applied in a specified manner. Nothing contained in this Section 6.11 hereof shall be deemed to constitute a release or impairment of the Obligations, or the Lien of this Indenture on the Trust Estate, or the Lien of any of the other Related Agreements on any property covered thereby, or shall preclude the Bank from foreclosing this Indenture or any of the other Related Agreements in case of an Event of Default, from enforcing any of the other rights of the Bank hereunder or under any of the other Related Agreements, or from enforcing any of the rights of the Bank against any other Person at any time liable under any guaranty, bond, policy of insurance or otherwise including, but not limited to, the Debt Service Guaranty, the Management Guaranty and the Indemnity Agreement (each as defined in the Credit Agreement) for the payment of the Obligations or for the performance of any of the covenants and agreements contained in this Indenture or any of the other Related Agreements. IN WITNESS WHEREOF, this Indenture has been duly executed under seal By the duly authorized representatives of the Borrower and the Trustee as of the day and year first above written. ATTEST (witnessed by): FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP By: Marriott FIBM One Corporation, its general partner By: --------------------------------------- David N. Chichester Its: President Address for Notices: ------------------- One Marriott Drive Washington, D. C. 20058 Attention: Law Department --------- STEWART TITLE OF CALIFORNIA, as Trustee with respect to that portion of the Trust Estate located in the State of California: By: --------------------------------------- Dale Rincon Its: President Address for Notices: ------------------- 2010 Main Street, Suite 250 Irvine, California 92714 Attention: Advisory Title Officer --------- ------------------------------------------ Lawrence J. Gordon, Esq. as Trustee with respect to that portion of the Trust Estate located in the State of Missouri Address for Notices: ------------------- 11 North Brentwood Clayton, Missouri 63105 Attention: --------- THE FIDELITY COMPANY, as Trustee with respect to that portion of the Trust Estate located in the State of North Carolina: By: --------------------------------------- Leslie E. Browder Its: Address for Notices: ------------------- Suite 2400 Wachovia Building 301 North Main Street Winston-Salem, North Carolina 27102 Attention: --------- ------------------------------------------ Samuel B. Miller II, Esq. as Trustee with respect to that portion of the Trust Estate located in the State of Tennessee Address for Notices: ------------------- 2101 North Roan Street Johnson City, Tennessee 37601 STEWART TITLE AND SETTLEMENT SERVICES, INC., as Trustee with respect to that portion of the Trust Estate located in the State of Virginia By: --------------------------------------- [type name] Its: [title] Address for Notices: ------------------- 2697 Dean Drive Suite 203 Virginia Beach, Virginia 23452 Attention: --------- STATE OF CALIFORNIA ) ) SS COUNTY OF ORANGE ) On this 27th day of July, in the year 1990, before me, the undersigned, a Notary Public in and for said County and State, personally appeared Dale Rincon personally known to me (or proven to me on the basis of satisfactory evidence) to be the President of Stewart Title of California, the corporation that executed the within Instrument on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument pursuant to its by- laws or a resolution of its board of directors. WITNESS my hand and official seal. signature -------------------------- Name: Mary Lynne Tryon STATE OF NEW YORK ) ) ss: PROBATE COUNTY OF NEW YORK ) BEFORE ME PERSONALLY APPEARED ------------------------------------- who states on oath that s/he saw the within named FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, by MARRIOTT FIBM ONE CORPORATION, its General Partner, by David N. Chichester, its President, as its act and deed, sign, seal and deliver the within and foregoing instrument, and that s/he with --------------------- witnessed the execution - ------------------------------------------------- thereof. - ------------------------------ SWORN to before me this 31st day of July, 1990 (L.S.) - ------------------------------ Notary Public My Commission Expires: STATE OF MISSOURI ) ) ss COUNTY OF ST. LOUIS ) On this 27th day of July, 1990, before me appeared Lawrence J. Gordon, to me known to be the person who executed the foregoing instrument; and being first duly sworn on oath acknowledged that he executed the same as his free act and deed for the purposes and uses therein stated. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my seal in the County and State aforesaid, the day and year above written. -------------------------------------- NOTARY PUBLIC My Term Expires: - -------------------------------- STATE OF NORTH CAROLINA ) ) COUNTY OF FORSYTH ) I, Ann W. Foster, a Notary Public of Forsyth County, State of North Carolina, certify that Sue T. Ashby personally came before me this day and acknowledged that she is Assistant Secretary of THE FIDELITY COMPANY, a North Carolina corporation, as Trustee with respect to that portion of the Trust Estate located in the State of North Carolina, and that by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by its President, sealed with its corporate seal and attested by herself as its Assistant Secretary. WITNESS my hand and official seal or stamp, this 27th day of July, 1990. ----------------------------------------- NOTARY PUBLIC My Commission Expires: August 5, 1991 STATE OF TENNESSEE COUNTY OF WASHINGTON Personally appeared before me, the undersigned Notary Public, in and for the State and County aforesaid, Samuel B. Miller, II, Trustee, the within named bargainor, with whom I am personally acquainted, or proved to me on the basis of satisfactory evidence, and who acknowledged that he executed the within instrument for the purposes therein contained. WITNESS my hand and seal at office in the State and County aforesaid this 31st day of July, 1990 ----------------------------------------- NOTARY PUBLIC My Commission Expires: 1-13-93 STATE OF VIRGINIA CITY OF VIRGINIA BEACH, to-wit; I, MARY S. LONG, a Notary Public in and for the City and State aforesaid, do hereby certify that BRIAN M. CLEMENTS, Vice-President of Stewart Title and Settlement Services, Inc., whose name is signed to the foregoing Instrument bearing date on this 27th day of July, 1990, has acknowledged the same before me in my City and State aforesaid. GIVEN under my hand and seal this 27th day of July, 1990. ----------------------------------------- NOTARY PUBLIC STATE OF NEW YORK: COUNTY OF NEW YORK: I, __________________________________________, a Notary Public in and for said County in said State, hereby certify that David N. Chichester, whose name as President of Marriott FIBM One Corporation, a Delaware corporation, as General Partner of Fairfield Inn by Marriott Limited Partnership, a Delaware limited partnership, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contends of said instrument, he, as such officer, and with full authority, executed the same voluntarily for and as the act of said corporation, acting in its capacity as General Partner as aforesaid. Given under my hand this 31st day of July, 1990. ___________________________________________(SEAL) NOTARY PUBLIC, STATE OF NEW YORK My Commission Expires: STATE OF NEW YORK ) ) ss COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me on this 31st day of July, 1990, by David N. Chichester and Christopher G. Townsend, President and Secretary, respectively, of Marriott FIBM One Corporation, a Delaware corporation, the general partner of Fairfield Inn by Marriott Limited Partnership, the partnership described in and which executed the foregoing instrument. WITNESS my hand and seal hereto affixed the day and year first above written. ------------------------------------------- NOTARY PUBLIC in and for the State of New York My Commission expires: STATE OF NEW YORK ) ) ss COUNTY OF NEW YORK ) On July 31, 1990 before me, the undersigned, a Notary Public in and for the aforesaid State, personally appeared David N. Chichester, personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as the President of MARRIOTT FIBM ONE CORPORATION, a Delaware corporation, and Christopher G. Townsend, personally known to me or proved to me on the basis of satisfactory evidence to be the person who attested the within instrument as the Secretary of said corporation, said corporation being the general partner of FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a Delaware limited partnership, the Borrower named in the above document, and that as such President and Secretary, being authorized so to do, executed the foregoing instrument on behalf of said corporation and said limited partnership before me and in my presence as an official witness for the purposes therein stated, and they delivered the same as such. WITNESS my hand and official seal this 31st day of July, 1990. [Notarial Seal] ------------------------------------------- NOTARY PUBLIC Name: -------------------------------------- My Commission Expires: - ---------------------------- STATE OF NEW YORK ) ) ss COUNTY OF NEW YORK ) On this 31st day of July, 1990, before me the undersigned, appeared David N. Chichester, to me personally known, who being by me duly sworn, did say that he is the President of Marriott FIBM One Corporation, a corporation that is a general partner in the Delaware limited partnership known as Fairfield Inn by Marriott Limited Partnership, and that said instrument was signed in behalf of said corporation by authority of its Board of Directors, and said President acknowledged said instrument to be the free act and deed of said corporation and that said corporation was duly authorized to sign said instrument for and on behalf of said partnership and that said instrument is the free act and deed of said partnership. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal at my office in the County of New York, State of New York, the day and year last above written. ------------------------------------------- NOTARY PUBLIC ------------------------------------------- (Type or print name of Notary) My commission expires: - ---------------------------- STATE OF NEW YORK COUNTY OF NEW YORK. to wit: I, the undersigned, a Notary Public in and for the State and County aforesaid, whose commission as such expires on the 20th day of April, 1991, do hereby certify that David N. Chichester as President of Marriott FIBM One Corporation the general partner of FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP whose name is signed to the foregoing document bearing date on the 31st day of July, 1990, has signed and acknowledged the same before me in my County and State aforesaid. ------------------------------------------- NOTARY PUBLIC STATE OF NEW YORK COUNTY OF NEW YORK Before me, the undersigned, a Notary Public, within and for said County and State, duly commissioned and qualified, personally appeared David N. Chichester, the President of Marriott FIBM One Corporation, a Delaware corporation, which said corporation is a general partner of Fairfield Inn by Marriott Limited Partnership, a Delaware Limited Partnership, with whom I am personally acquainted, and who acknowledged himself to be the President of Marriott FIBM One Corporation, a Delaware Corporation, the within named general partner of Fairfield Inn by Marriott Limited Partnership, the within named bargainor, and he as such President of Marriott FIBM One Corporation, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the said Limited Partnership by the Corporation by himself as President, thereby executing the instrument on behalf of the Limited Partnership. The said President, still upon oath, acknowledged that Marriott FIBM One Corporation, is a general partner of Fairfield Inn by Marriott Limited Partnership, a Delaware Limited Partnership, and that the said Marriott FIBM One Corporation, as such general partner, being duly authorized so to do, executed the foregoing instrument for the purpose therein contained by causing its said general partner to sign the name of the said Fairfield Inn by Marriott Limited Partnership, a Delaware Limited Partnership, by such general partner. WITNESS my hand and official seal at office this 31st day of July, 1990. -------------------------------------------- NOTARY PUBLIC My commission expires: - ----------------------------- STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On this 31st day of July, 1990, personally came before me David N. Chichester, who, being by me duly sworn, says that he is the President of MARRIOTT FIBM ONE CORPORATION, a Delaware corporation, and that the seal affixed to the foregoing instrument in writing was signed and sealed by him on behalf of the corporation by its authority duly given as the General Partner of FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a Delaware limited partnership. And the said President acknowledged the said writing to be the act and deed of said corporation as the General Partner of FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP. WITNESS, my hand and notarial seal this 31st day of July, 1990. ------------------------------------------- NOTARY PUBLIC My commission expires: - ------------------------------ STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On this 31st day of July, 1990, before me, the undersigned, a Notary Public in and for the State of New York, duly commissioned and sworn, personally appeared David N. Chichester, to me known who, being by me duly sworn, did depose and say that he resides at 7604 River Falls Drive, Potomac, Maryland 20854; that he is the President of FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, the corporation described in and which executed the foregoing instrument before me as witness hereto; and that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the board of directors of said corporation and that he signed his name thereto by like order and that he signed his name thereto under authority of the board of directors of said corporation. WITNESS my hand and seal hereto affixed the day and year first above written. ------------------------------------------- NOTARY PUBLIC in and for the State of New York. My Commission expires: STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On this 31st day of July, in the year 1990, before me, ____________________________, a Notary Public in and for said county and state, personally appeared David N. Chichester, personally known to me (or proved to me on the basis of satisfactory evidence) to be the President and Christopher G. Townsend, personally known to me (or proved to me on the basis of satisfactory evidence) to be the Secretary of Marriott FIBM One Corporation, the corporation that executed the within instrument and personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons who executed the within instrument on behalf of said corporation, said corporation being personally known to me to be one of the partners of Fairfield Inn by Marriott Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that such partnership executed the same. WITNESS my hand and official seal this 31st day of July, 1990. [NOTARIAL SEAL] ------------------------------------------- NOTARY PUBLIC Name: -------------------------------------- My Commission Expires: Schedule I ---------- FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP LIST OF FEE PROPERTIES The following properties more specifically described on Exhibits A-1 ------------ through A-16 attached hereto: ---- State: Alabama (Montgomery County) Exhibit A-1 Name of Property: Montgomery Address: 5601 Carmichael Road Montgomery, AL 36117 State: California (Orange County) Exhibit A-2 Name of Property: Placentia Address: SR-57 and Orangethorpe Avenue Placentia, Ca 92670 State: Georgia (Gwinnet County) Exhibit A-3 Name of Property: Atlanta-Gwinnett Address: 3500 Venture Highway Duluth, GA 30136 State: Georgia (Gwinnet County) Exhibit A-3 Name of Property: Atlanta-Peachtree Corners Address: 6650 Bay Circle Drive Norcross, GA 30071 State: Georgia (Clayton County) Exhibit A-4 Name of Property: Atlanta Southlake Address: 1599 Adamson Pkwy. Morrow, GA 30260 State: Illinois (Peoria County) Exhibit A-5 Name of Property: Peoria Address: 4203 N. War Memorial Drive Peoria, IL 61614 State: Illinois (Winnebago County) Exhibit A-6 Name of Property: Rockford Address: 7712 Potawatomi Trail Rockford, IL 61108 State: Indiana (Marion County) Exhibit A-7 Name of Property: Indianapolis/College Park Address: 9251 Wesleyan Road Indianapolis, IN 46268 State: Kansas (Johnson County) Exhibit A-8 Name of Property: Kansas City-West Address: 6601 Frontage Road Merriam, KS 66202
Schedule II ----------- FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP LIST OF LEASED PROPERTIES The following properties more specifically described on Exhibits B-1 ------------ through B-28 attached hereto: ---- State: Alabama (Jefferson County) Exhibit B-1 Name of Property: Birmingham-Homewood Address: 155 Vulcan Road Homewood, AL 35209 State: California (Orange County) Exhibit B-2 Name of Property: Buena Park Address: I-5 at Beach Boulevard Buena Park, CA 90602 State: Florida (Alachua County) Exhibit B-3 Name of Property: Gainesville Address: 6901 NW 4th Boulevard Gainesville, FL 32608 State: Florida (Dade County) Exhibit B-4 Name of Property: Miami West Address: Palmetto Expressway at NW 36th Street Miami, FL 33166 State: Florida (Orange County) Exhibit B-5 Name of Property: Orlando/International Drive Address: 8342 Jamaican Court Orlando, FL 32819 State: Florida (Orange County) Exhibit B-5 Name of Property: Orlando South Address: 1850 Landstreet Road Orlando, FL 32809 State: Georgia (Fulton County) Exhibit B-6 Name of Property: Atlanta Airport Address: 2451 Old National Pkwy. College Park, GA 30349 State: Georgia (Dekalb County) Exhibit B-7 Name of Property: Atlanta Northlake Address: 2155 Ranchwood Drive Atlanta, GA 30345 State: Georgia (Cobb County) Exhibit B-8 Name of Property: Atlanta Northwest Address: 2191 Northwest Pkwy.
Marietta, GA 30067 State: Georgia (Chatham County) Exhibit B-9 Name of Property: Savannah Address: Lee Boulevard Savannah, GA State: Illinois (McLean County) Exhibit B-10 Name of Property: Bloomington-Normal Address: 202 Landmark Drive Normal, IL 61761 State: Illinois (Cook County) Exhibit B-11 Name of Property: Chicago-Lansing Address: 17301 Oak Avenue Lansing, IL 60438 State: Indiana (Marion County) Exhibit B-12 Name of Property: Indianapolis-Castleton Address: 8325 Bash Road Indianapolis, IN 46250 State: Iowa (Polk County) Exhibit B-13 Name of Property: Des Moines Address: 1600 N.W. 114th Street Clive, IA 50322 State: Michigan (Wayne County) Exhibit B-14 Name of Property: Detroit Airport Address: 31119 Flynn Drive Romulus, MI 48174 State: Michigan (Wayne County) Exhibit B-14 Name of Property: Detroit West Address: 5700 Haggerty Road Canton, MI 48187 State: Michigan (Oakland County) Exhibit B-15 Name of Property: Detroit-Auburn Hills Address: 1294 Opdyke Rd. Auburn Hills, MI 48057 State: Michigan (Oakland County) Exhibit B-15 Name of Property: Madison Heights Address: 32800 Stephenson Hwy. Madison Heights, MI 48071 State: Michigan (Macomb County) Exhibit B-16 Name of Property: Detroit Warren Address: 7454 Convention Blvd. Warren, MI 48093
State: Michigan (Kalamazoo County) Exhibit B-17 Name of Property: Kalamazoo Address: 3800 East Cork Street Kalamazoo, MI 49001 State: North Carolina Exhibit B-18 Name of Property: (Mecklenburg County) Address: Charlotte Airport 3400 S. I-85 Service Road Charlotte, NC 28208 State: North Carolina Exhibit B-18 Name of Property: (Mecklenburg County) Address: Charlotte 5415 N. I-85 Service Road Charlotte, NC 28213 State: North Carolina (Durham City) Exhibit B-19 Name of Property: Durham Address: 3710 Hillsborough Road Durham, NC 27705 State: North Carolina Exhibit B-20 Name of Property: (Cumberland County) Address: Fayetteville 562 Cross Creek Mall Fayetteville, NC 28303 State: North Carolina (Guilford City) Exhibit B-21 Name of Property: Greensboro Address: 2003 Athena Court Greensboro, NC 27407 State: North Carolina (Wake County) Exhibit B-22 Name of Property: Raleigh Northeast Address: 2641 Appliance Court Raleigh, NC 27604 State: Ohio (Franklin County) Exhibit B-23 Name of Property: Columbus North Address: 887 Morse Road Columbus, OH 43229 State: Ohio (Montgomery County) Exhibit B-24 Name of Property: Dayton North Address: 6960 Miller Lane Dayton, OH 45414 State: South Carolina (Beauford City) Exhibit B-25 Name of Property: Hilton Head Address: 9 Marina Side Drive Hilton Head, SC 29928
State: Tennessee (Washington City) Exhibit B-26 Name of Property: Johnson City Address: 207 E. Mountcastle Drive Johnson City, TN 37601 State: Virginia (Virginia Beach City) Exhibit B-27 Name of Property: Virginia Beach Address: Beach Road (SR 44) and Independence Boulevard Virginia Beach, VA 23462 State: Wisconsin (Dane County) Exhibit B-28 Name of Property: Madison Address: 4765 Hayes Road Madison, WI 53704
EX-10.E 7 EXHIBIT 10.E EXHIBIT 10.e DEBT SERVICE GUARANTY AGREEMENT DEBT SERVICE GUARANTY AGREEMENT dated as of July 31, 1990 made by MARRIOTT CORPORATION, a corporation duly organized and validly existing under the laws of the State of Delaware (the "Guarantor"), to SUMITOMO TRUST & BANKING --------- CO., LTD., NEW YORK BRANCH, the New York branch of a Japanese chartered bank (the "Bank"). Fairfield Inn by Marriott Limited Partnership, a Delaware limited partnership (the "Borrower"), and the Bank are parties to a Credit Agreement -------- dated as of the date hereof (as modified and supplemented and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and ---------------- conditions thereof, for loans to be made by the Bank to the Borrower in an aggregate principal amount not exceeding $164,850,000. To induce the Bank to make loans under the Credit Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor has agreed (to the extent hereinafter provided) to guarantee the Guaranteed Obligations (as hereinafter defined). Accordingly, the parties hereto agree as follows: Section 1. Defined Terms and Accounting Determinations. ------------------------------------------- 1.01 Definitions. Unless otherwise defined herein, terms defined in ----------- the Credit Agreement are used herein as defined therein. In addition, as used herein: "Consolidated Subsidiary" shall mean, as to any Person, each ----------------------- Subsidiary of such Person (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of such Person in accordance with generally accepted accounting principles. "Guaranteed Amount" shall mean, at any time, an amount equal to 10% of ----------------- the aggregate principal amount of the Loans made by the Bank at such time (without giving effect to any payment or prepayment thereof but after giving effect to Sections 2.08 and 2.09 hereof) but in any event not exceeding $16,500,000. "Marriott Agreement" shall mean each Related Agreement to which the ------------------ Guarantor is or is contemplated by the Credit Agreement to become a party. "Material Consolidated Subsidiary" shall mean any Consolidated -------------------------------- Subsidiary of the Guarantor which takes any of the actions specified in Sections 5(e) or (f) hereof, or with respect to which any of the events specified in Sections 5(f), (g) or (h) hereof shall occur, if such actions or events could have a material adverse effect on the financial condition of the Guarantor. "Total Capital" shall have the meaning ascribed thereto in the ------------- Citibank Credit Agreement, the Revolving Credit Agreement or the Other Agreement (each as hereinafter defined), as the case may be, as applicable under the provisions of Section 4.07 hereof. 1.02 Accounting Terms and Determinations. ----------------------------------- (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Bank hereunder shall (unless otherwise disclosed to the Bank in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Bank hereunder after the date hereof. All calculations made for the purposes of determining compliance with the terms of the provisions incorporated by reference in Section 4.07 hereof shall (except as otherwise expressly provided herein) be made by application of generally accepted accounting principles applied on a basis consistent with those used in the preparation of the annual or quarterly financial statements furnished to the Bank pursuant to Section 4.01 hereof unless (i) the Guarantor shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Bank shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 4.01 hereof, shall mean the financial statements referred to in Section 3.02 hereof). (b) The Guarantor shall deliver to the Bank at the same time as the delivery of any annual or quarterly financial statement under Section 4.01 hereof a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above, and reasonable estimates of the difference between such statements arising as a consequences thereof. Section 2. The Guarantee. ------------- 2.01 Guarantee. Subject to the limitations set forth in Sections --------- 2.07, 2.08, 2.09 and 2.10 hereof, the Guarantor hereby guarantees to the Bank and its successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Bank to, and the Note held by the Bank of, the Borrower, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "Guaranteed Obligations"). The ---------------------- Guarantor hereby further agrees that if the Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Guarantor will promptly pay the same, without any demand or notice whatsoever, and that, in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. 2.02 Obligations Unconditional. Subject to the limitation set forth ------------------------- in Section 2.07 hereof, the obligations of the Guarantor under Section 2.01 hereof are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of the Credit Agreement, the Note or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 2.02 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not affect the liability of the Guarantor hereunder: (i) at any time or from time to time, without notice to the Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; 2 (ii) any of the acts mentioned in any of the provisions of the Credit Agreement or the Note or any other agreement or instrument referred to herein or therein shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under the Credit Agreement or the Note or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (iv) any Lien granted to, or in favor of, the Bank as security for any of the Guaranteed Obligations shall fail to be perfected. The Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Bank exhaust any right, power or remedy or proceed against the Borrower under the Credit Agreement or the Note or any other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 2.03 Reinstatement. The obligations of the Guarantor under this ------------- Section 2 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Borrower in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise and the Guarantor agrees that it will indemnify the Bank on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by the Bank in connection with such rescission or restoration. 2.04 Subrogation. The Guarantor hereby agrees that it shall not ----------- exercise any right or remedy arising by reason of any performance by it of its guarantee as provided in Section 2.01 hereof, whether by subrogation or otherwise, against the Borrower or any other guarantor of any of the Guaranteed Obligations of any security for any of the Guaranteed Obligations, except as contemplated by Section 2.08 hereof. 2.05 Remedies. The Guarantor agrees that, as between the Guarantor -------- and the Bank, the obligations of the Borrower under the Credit Agreement and the Note may be declared to be forthwith due and payable as provided in Section 9 of the Credit Agreement (and shall be deemed to have become automatically due and payable in the circumstances provided in paragraphs (g) and (h) of said Section 9) for purposes of Section 2.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against the Borrower and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by the Borrower) shall forthwith become due and payable by the Guarantor for purposes of said Section 2.01. 2.06 Continuing Guarantee. The guarantee in this Section 2 is a -------------------- continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 2.07 Limitation on Guarantee. Notwithstanding the foregoing ----------------------- provisions of this Agreement, the aggregate amount which the Guarantor may be required at any time to pay under this Agreement (other than the amounts payable under Section 6.04 hereof) shall not exceed the Guaranteed Amount after giving effect to Sections 2.08 and 2.09 hereof, it being understood that all payments and prepayments of the Guaranteed Obligations by the other Person (other than by the Guarantor pursuant to a demand by the Bank hereunder) shall, for purposes of this Section 2.07, be deemed to be applied first to the portion of the Guaranteed Obligations which exceeds the 3 Guaranteed Amount and last to the portion of the Guaranteed Obligations which does not exceed the Guaranteed Amount. 2.08 Advances to Borrower. Each payment of the Guaranteed -------------------- Obligations or any portion thereof by the Guarantor hereunder shall reduce the aggregate amount which the Guarantor may be obligated to pay hereunder by an amount equal to the amount of such payment. Each such payment shall, to the extent permitted by law, be deemed to be an advance (each an "Advance" and, ------- collectively, the "Advances") by the Guarantor to the Borrower as of the date of -------- and in an amount equal to such payment (provided that any inability of the Guarantor to make an advance to the Borrower, by reason of the Borrower's being the subject of a bankruptcy case or otherwise, shall not affect the obligations of the Guarantor under Section 2.01 hereof). The Borrower shall pay interest on each Advance from and including the date of such Advance to but excluding the date such Advance is repaid in full at a rate equal to the Prime Rate (each change in the rate of interest on an Advance to take effect as of the time of a change in the Prime Rate). The Borrower shall repay each Advance in full, together with all accrued and unpaid interest thereon, on the tenth anniversary date of such Advance. The Borrower may not prepay, purchase or redeem any principal of or interest on any Advance before the date on which such Advance is due as provided in the preceding sentence; provided, however, that subject to -------- ------- the last sentence of this Section 2.08, the Borrower may prepay the principal of and (if the principal of all of the Advances has been paid in full) interest on any Advance pursuant to Section 8.12 of the Credit Agreement not later than the 45th day after the end of any Accounting Quarter, provided, further, that -------- ------- nothing herein contained shall prevent the prepayment of any principal of or interest on any Advance from Sales Proceeds or Refinance Proceeds (each as defined in the Partnership Agreement). All payments required to be made by the Borrower to the Guarantor in respect of the principal of and interest on the Advances shall be subordinate to the payment of the obligations of the Borrower under the Credit Agreement and the Note in accordance with the terms of, and each of the Guarantor and the Borrower hereby agrees to be bound by, the provisions contained in Annex I hereto, which provisions are hereby incorporated herein by reference. 2.09 Adjustments of Amount Guaranteed. The aggregate amount which -------------------------------- the Guarantor may be required to pay hereunder in respect of the Guaranteed Obligations shall be reinstated and increased by an amount equal to the amount of such payment or prepayment of principal of the Advances made under Section 2.08 hereof. 2.10 Termination. Except as provided in Section 6.04 hereof, the ----------- obligations of the Guarantor under this Agreement shall terminate and be of no further force or effect on the first date on which no Default shall exist (and as to which the Guarantor shall have certified to the Bank) on or after the later of (a) July 31, 1993 or (b) the date on which the Debt Service Coverage for the Subject Hotels (other than the Subject Hotels released pursuant to Section 8.17(b) of the Credit Agreement) shall have exceeded 1.30 to 1 for each Accounting Quarter during the period of eight consecutive Accounting Quarters ending on or most recently prior to such date (and as to which an Authorized Accounting Officer of the General Partner shall have so certified to the Bank in reasonable detail). Section 3. Representations and Warranties. The Guarantor represents ------------------------------ and warrants to the Bank that: 3.01 Corporate Existence. Each of the Guarantor and its Material ------------------- Consolidated Subsidiaries: (a) is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation; (b) has all requisite corporate power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a material adverse effect on its financial condition, operations, business or prospects. 4 3.02 Financial Condition. The consolidated balance sheets of the ------------------- Guarantor and its Consolidated Subsidiaries as at December 29, 1989 and the related consolidated statements of income and retained earnings of the Guarantor and its Consolidated Subsidiaries for the fiscal year ended on said date with the opinion thereon (in the case of said consolidated balance sheet and statements) of Arthur Andersen & Co., and the unaudited consolidated balance sheets of the Guarantor and its Consolidated Subsidiaries as at June 15, 1990 and the related consolidated statements of income and retained earnings of the Guarantor and its Consolidated Subsidiaries for the Accounting Quarter ended on such date, heretofore furnished to the Bank, are complete and correct and fairly present the consolidated financial condition of the Guarantor and its Consolidated Subsidiaries as at said dates and the consolidated results of their operations for the fiscal year and Accounting Quarter ended on said dates (subject, in the case of such financial statements as at June 15, 1990, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis. Neither the Guarantor nor any of its Subsidiaries had on said dates any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheets as at said dates. Since June 15, 1990, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Guarantor and its Consolidated Subsidiaries from that set forth in said financial statements as at said date. 3.03 Litigation. Except as disclosed to the Bank in writing prior to ---------- the date of this Agreement, there are no legal or arbitral proceedings or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Guarantor) threatened against the Guarantor or any of its Subsidiaries which, if adversely determined, could have a material adverse effect on the financial condition, operations, business or prospects taken as a whole of the Guarantor or any of its Consolidated Subsidiaries. 3.04 No Breach. The execution and delivery of any Marriott --------- Agreement, the consummation of the transactions therein contemplated or compliance with the terms and provisions thereof will not conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Guarantor, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Guarantor or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Guarantor or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 3.05 Corporate Action. The Guarantor has all necessary corporate ---------------- power and authority to execute, deliver and perform its obligations hereunder and under each of the other Marriott Agreements; the execution, delivery and performance by the Guarantor of this Agreement and the other Marriott Agreements have been duly authorized by all necessary corporate action on its part; and this Agreement and the other Marriott Agreements have been duly and validly executed and delivered by the Guarantor and constitutes its legal, valid and binding obligation, enforceable in accordance with their respective terms. 3.06 Approvals. No authorizations, approvals and consents of, and no --------- filings and registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Guarantor of this Agreement or any other Marriott Agreement or for the validity or enforceability hereof or thereof. 3.07 ERISA. Each Plan, and, to the best knowledge of the Guarantor, ----- each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other applicable federal or state law, and no event or condition is occurring or exists concerning which the 5 Guarantor would be under an obligation to furnish a report to the Bank in accordance with Section 4.01(f) hereof. As of the most recent valuation date of each Plan either (i) each Plan was "fully funded", which for purposes of this Section 3.07 shall mean that the fair market value of the assets of the Plan is not less than the greater of (A) the Projected Benefit Obligation, as that term is defined in Financial Account Standards Board Statement Number 87 ("FASB 87"), under the Plan, or (B) the Accumulated Benefit Obligation, as that term is defined in FASB 87, under the Plan, computed assuming no participant turnover (except on account of death or disablement) and using an interest rate and mortality basis that satisfies the conditions set forth in 29 C.F.R. Part 2619 of the regulations relating to ERISA, or (ii) each Plan that is not "fully funded," determined pursuant to (i) above, is not "underfunded" in an amount, determined pursuant to (i) above, that, when aggregated with the amount of any such underfunding with respect to any other Plan or Plans, is in excess of $10,000,000. To the best knowledge of Guarantor, no Plan has ceased to satisfy the requirements of either (i) or (ii) of the immediately preceding sentence of this Agreement as of the date these representations are made with respect to any loan under this Agreement. 3.08 Taxes. United States Federal income tax returns of the ----- Guarantor and its Subsidiaries have been examined and closed through the fiscal year of the Guarantor ended July 26, 1974. The Guarantor and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid, or have made adequate provisions for the payment of, all taxes due pursuant to such returns or pursuant to any assessment received by the Guarantor or any of its Subsidiaries. The charges, accruals and reserves on the books of the Guarantor and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Guarantor, adequate. 3.09 Investment Company Act. The Guarantor is not an "investment ---------------------- company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.10 Public Utility Holding Company Act. The Guarantor is not a ---------------------------------- "holding company", or an "affiliate" of a "holding company" or a "Subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.11 Relation to Guarantor. Each of the Manager and the General --------------------- Partner is a direct or indirect Wholly-Owned Subsidiary of the Guarantor. Section 4. Covenants. The Guarantor agrees that, until the earlier --------- to occur of (i) the payment and satisfaction in full of the Guaranteed Obligations and the expiration or termination of the Commitment of the Bank under the Credit Agreement and (ii) the termination of the Guarantor's obligations hereunder in accordance with the provisions of Section 2.10 hereof: 4.01 Financial Statements. The Guarantor shall deliver to the Bank: -------------------- (a) as soon as practicable and in any event within 60 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Guarantor and its Consolidated Subsidiaries, unaudited consolidated statements of income and retained earnings of the Guarantor and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheets as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by the Authorized Accounting Officer of the Guarantor but subject to year-end audit and adjustments (the Guarantor may, provided that the foregoing requirements are in all respects satisfied thereby, comply with this Section 4.01(a) by delivering to the Bank its Form 10-Q as filed with the Securities and Exchange Commission (the "SEC"); --- 6 (b) as soon as practicable and in any event within 90 days after the end of each fiscal year of the Guarantor and its Consolidated Subsidiaries, consolidated statements of income and retained earnings of the Guarantor and its Consolidated Subsidiaries for such year and the related consolidated balance sheets as at the end of such year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, all in reasonable detail and certified by Arthur Andersen & Co., or other independent certified public accountants of recognized national standing (the Guarantor may, provided that the foregoing requirements are in all respects satisfied thereby, comply with this Section 4.01(b) by delivering to the Bank its Form 10-K as filed with the SEC); (c) as soon as practicable and in any event within 60 days after the end of each Accounting Quarter, a certificate of the Authorized Accounting Officer of the Guarantor (or of the Borrower if so directed by the Guarantor with the consent of the Bank) certifying as to the maximum aggregate amount that the Guarantor may be called upon to pay in respect of the Guaranteed Obligations hereunder, as at the end of such Accounting Quarter, setting forth in reasonable detail computations necessary to determine such amount (including, without limitation, the amount of prepayment of any Advance deemed made during such Accounting Quarter pursuant to Section 2.08 hereof); (d) upon request, copies of all registration statements and regular periodic reports, if any, which the Guarantor shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (e) promptly upon the mailing thereof to the shareholders of the Guarantor generally, copies of all financial statements, reports and proxy statements so mailed; (f) as soon as practicable, and in any event within 20 days after the Guarantor knows or has reason to know that any of the events or conditions enumerated below with respect to any Plan or Multiemployer Plan have occurred or exist, a statement signed by the Authorized Accounting Officer of the Guarantor setting forth details respecting such event or condition and the action, if any, which the Guarantor or its ERISA Affiliate proposes to take with respect thereto; provided, however, that if such event or condition is required to be reported or noticed to the Pension Benefit Guaranty Corporation (the "PBGC"), such statement, together with a copy of the relevant report or notice to the PBGC, shall be furnished to the Bank within ten (10) days after it is reported or noticed to the PBGC, or if such event or condition is a request for a waiver under Section 412(d) of the Code, as described in paragraph (i), below, filed with the Internal Revenue Service (the "IRS"), such request for a waiver, together with a copy of all relevant documents, shall be furnished to the Bank within ten (10) days after it is filed with the IRS: (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued under such Section, with respect to a Plan, as to which the PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (except that a failure to make a quarterly contribution to a trust established under a Plan ("Delinquent or Late Quarterly Contributions"), as required by Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the application for or the issuance of any waivers in accordance with Section 412(d) of the Code, provided the amount of any such Delinquent or Late Quarterly Contribution, when combined with all other Delinquent or Late Quarterly Contributions occurring during a calendar year, exceeds $2,500,000) and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or, if earlier, any board of directors or similar action taken by the Guarantor or an ERISA Affiliate to terminate any Plan; 7 (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Guarantor or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the occurrence of circumstances that may reasonably be deemed to result in the complete or partial withdrawal from a Multiemployer Plan by the Guarantor or any ERISA Affiliate that may give rise to a liability in excess of $10,000,000 under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt of the Guarantor or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Guarantor or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; (vi) the adoption of an amendment to any Plan that pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA would result in the loss of tax-exempt status of the trust of which such Plan is a part, if the Guarantor or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (vii) any event or circumstance exists which may reasonably be expected to constitute grounds for the Guarantor or any ERISA Affiliate to incur liability under Sections 4062, 4063, 4064 or 4069 of ERISA, or otherwise, with respect to any of the Plans, which liability together with any such liability with respect to any other Plan or Plans, is in an amount in excess of $10,000,000. (g) promptly after the Guarantor knows that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Guarantor has taken and proposes to take with respect thereto; and (h) from time to time and with reasonable promptness such other information which is reasonably available regarding the business, affairs or financial condition of the Guarantor or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as the Bank may reasonably request. The Guarantor will furnish to the Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of the Authorized Accounting Officer of the Guarantor (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing) and no condition, event or act which, with the giving of notice or lapse of time or both would constitute such a Default, describing the same in reasonable detail and describing the action that the Guarantor has taken and proposes to take with respect thereto, and (ii) setting forth in reasonable detail the computations necessary to determine whether the Guarantor is in compliance with Sections 4.05, 4.06 and 4.07 hereof as of the end of the respective fiscal quarter or fiscal year. 4.02 Litigation. The Guarantor will promptly give to the Bank notice ---------- of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, affecting the Guarantor or any of its Subsidiaries, except proceedings which, if adversely determined, would not have a material adverse effect on the consolidated financial condition, operations, business or prospects taken as a whole of the Guarantor and its Consolidated Subsidiaries. 8 4.03 Compliance with Laws; Maintenance of Assets; Etc. The Guarantor ------------------------------------------------ will comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements would materially and adversely affect the consolidated financial condition, operations, business or prospects taken as a whole of the Guarantor and its Consolidated Subsidiaries except to the extent such laws, rules and regulations shall currently be contested in good faith by appropriate proceedings diligently contested and against which adequate reserves are being maintained; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; maintain its principal operating properties in good repair and working order and condition, and from time to time make all necessary repairs, replacements, additions, betterments and improvements thereto so that at all times the efficiency thereof shall be fully preserved and maintained; maintain a corporate existence under the law of one of the States of the United States; permit access by the Bank to the books and records of the Guarantor, as the same relate to the preparation of the financial statements referred to in Section 4.01 hereof, during normal business hours and upon reasonable notice (any information furnished to the Bank hereunder (other than information publicly available) shall be kept confidential except to the extent disclosure is required by applicable law or legal process or to professional advisors or to Governmental Authorities having jurisdiction over the Bank or in connection with the enforcement of the Bank's rights hereunder); and keep insured by financially sound and reputable insurers all property of a character usually insured by corporations engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such corporations and carry such other insurance as is usually carried by such corporations. 4.04 Consolidation, Merger and Sale of Assets. The Guarantor will ---------------------------------------- not wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell or otherwise dispose of all or substantially all of its property or assets, except that the Guarantor may merge or consolidate with any other corporation if subsequent to such merger or consolidation, the Guarantor (i) shall be the continuing or surviving corporation and (ii) shall be in compliance with all of the provisions of this Agreement. 4.05 Notice of Transactions. The Guarantor will promptly notify the ---------------------- Bank in writing of any proposed purchase, sale, merger or other transaction (other than in the ordinary course of business) of which the Guarantor is a party, involving property or assets having a purchase price (in cash, stock or otherwise) in one transaction or in a series of related transactions in excess of 10% of Total Capital; provided that any such information furnished to the Bank shall be kept confidential by the Bank and not disclosed to other Persons, except (a) that such information may be disclosed (i) to auditors and counsel for the Bank, (ii) to any Governmental Authority to the extent such disclosure is required by law or regulation, (iii) in connection with the enforcement of the Bank's rights under the Related Agreements, (iv) if required by subpoena, court or regulatory order or otherwise by law or regulation, and (v) to any actual or prospective assignee of or participant in all or any part of the Bank's interest in the Loans (provided such assignee or participant first agrees to comply herewith), and (b) that the restrictions set forth herein shall not apply to any information that (i) is known to the Bank at any time it is furnished to the Bank hereunder or (ii) is publicly available. 4.06 Ownership of General Partner and Manager. Marriott shall at all ---------------------------------------- times own directly or indirectly all of the capital stock of the Manager, and the General Partner. The provisions of this Section 4.05 shall survive the termination of this Agreement until payment in full of the principal of and interest on the Loans and all other amounts payable by the borrower under the Principal Related Agreements. 9 4.07 Incorporation by Reference. Each of the Guarantor's covenants, -------------------------- agreements and obligations contained in paragraphs (b) through (d), inclusive, of Section 8 of that certain Revolving Credit Agreement dated as of October 15, 1987, as amended on February 27, 1989, between the Guarantor and Citibank, N.A., (as modified, supplemented and in effect from time to time the "Citibank Credit --------------- Agreement"), or if, the Citibank Credit Agreement shall no longer be in effect, - --------- the corresponding provisions of the next largest revolving credit facility of the Guarantor in effect from time to time having a commitment of not less than $10,000,000 utilizing substantially the same form of revolving credit agreement as the Citibank Credit Agreement and containing covenants similar to those contained in Section 8(b) through (d) of the Citibank Credit Agreement (as such revolving credit agreement shall be modified, supplemented and in effect from time to time the "Revolving Credit Agreement") are hereby incorporated by -------------------------- reference as hereinafter more specifically described. In the event at any time there shall be no Revolving Credit Agreement then, the Guarantor shall perform, comply with and be bound by, for the benefit of the Bank under this Agreement, as the Bank may elect, (i) each of such provisions of the last Revolving Credit Agreement as in effect prior to the termination of such Revolving Credit Agreement with the same effect as if such Revolving Credit Agreement had not been terminated or (ii) each of the corresponding provisions as set forth in any other revolving credit facilities (the "Other Agreement") simultaneously or --------------- subsequently entered into by the Guarantor. Without limiting the generality of the foregoing, the above-mentioned provisions of the Citibank Credit Agreement, the Revolving Credit Agreement or the Other Agreement, as the case may be, together with related definitions, are hereby incorporated herein by reference, as if set forth herein in full, mutatis mutandis; provided, however, that as ------- -------- -------- ------- incorporated herein, each reference therein to "this Agreement" or "Loans" shall be deemed to be a reference to the Citibank Credit Agreement, the Revolving Credit Agreement or the Other Agreement, as the case may be, or the Loans thereunder, as the case may be, and references to any covenants regarding the delivery of financial statements (which, in the case of the Citibank Credit Agreement, such reference is to "Section 8(a)") shall be deemed to be a reference to Section 4.01 hereof, except that, in the event the Revolving Credit Agreement is terminated and the Bank makes the election referred to in clause (i) of the preceding sentence, the term "Agreement" shall refer to this Agreement and the term "Loans" shall refer to any Indebtedness of the Guarantor. Section 4.08 Notice of Termination; Copies of Amendments. (a) The ------------------------------------------- Guarantor shall within 60 days of the close of each of its first three Fiscal Quarters and within 90 days of the close of each of its Fiscal Years, provide the Bank with copies of all calculations, certifications or other information as required by the foregoing provisions incorporated by reference into this Section 4.07, as the same may be amended from time to time or any successor or replacement provisions, together with (i) notification of any termination of any revolving credit agreement incorporated pursuant to the provisions of the first sentence of Section 4.07 or clause (ii) of the second sentence of Section 4.07 hereof, and (ii) copies of the covenants of any Revolving Credit Agreement or Other Agreement to be incorporated upon such termination and/or any amendments, modifications, supplements or waivers of such covenants, or (iii) a statement from an Authorized Accounting Officer of the Guarantor that there have been no terminations, amendments, modifications, supplements or waivers thereof. (b) The Guarantor shall promptly notify the Bank in writing of any default, and provide copies of any notice of default, under the covenants incorporated by reference pursuant to the provisions of the first sentence of Section 4.07 or clause (ii) of the second sentence of Section 4.07 hereof. Section 5. Events of Default. One or more of the following events ----------------- shall constitute a "Default" under this Agreement: ------- (a) the Guarantor shall fail to pay any amount payable under this Agreement within 3 days after such payment shall be due: or 10 (b) any representation, warranty or certification made by the Guarantor pursuant to this Agreement or any other Marriott Agreement, or any representation or warranty made or deemed made by the Guarantor in any certificate, document, financial or other statement furnished to the Bank at any time under or pursuant to the terms of this Agreement or any other Marriott Agreement, shall prove to be untrue when made or deemed made and the event or condition misrepresented affects the validity, binding effect or enforceability of this Agreement or any other Marriott Agreement or the Guarantor's obligations hereunder or thereunder or materially and adversely affects the Guarantor's ability to perform its obligations under this Agreement or any other Marriott Agreement; or (c) the Guarantor shall fail to perform or observe any term, covenant, or agreement contained in (i) Sections 1.02, 4.01 or 4.08(a) hereof and such failure shall continue unremedied for a period of 30 days after notice thereof to the Guarantor by the Bank, (ii) Section 4.08(b) hereof and such failure shall continue unremedied for a period of 10 days after notice thereof to the Guarantor by the Bank, (iii) Section 4 of this Agreement (other than Section 4.01, 4.03, 4.07 or 4.08 hereof), (iv) Section 4.07 upon the termination of the last Revolving Credit Agreement and the election by the Bank to incorporate by reference the covenants described by the provisions of clause (i) of Section 4.07, or (v) Section 4.03 and such failure shall continue unremedied for 30 days after notice thereof to the Guarantor by the Bank, provided that in the case of any such default under Section 4.03 which cannot be cured by the payment of money and cannot reasonably be cured within such 30 day period, if the Guarantor shall have commenced such cure within such 30 day period and thereafter shall prosecute the curing of such default with diligence and continuity, then the time within which such default may be cured shall be extended for such period as shall be necessary to complete the curing of same; provided, further, however, -------- ------- ------- that if such default shall be a material default, notwithstanding the foregoing proviso, such 30 day period shall not be extended for longer than 180 days after notice of such default to the Guarantor; or (d) an event of default shall have occurred and be continuing under the provisions of Section 8(b) through (d) of the Citibank Credit Agreement (or the corresponding provision of any Revolving Credit Agreement or the Other Agreement) and the lender or lenders thereto, or any trustee or agent on behalf of such lender or lenders, shall have declared the Indebtedness of Guarantor issued thereunder to become due and payable prior to its stated maturity; or (e) The Guarantor or any of its Material Consolidated Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Guarantor or any Material Consolidated Subsidiary shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in any involuntary case under the Bankruptcy Code, or (vi) take any organizational action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Guarantor or any Material Consolidated Subsidiary, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Guarantor or a Material Consolidated Subsidiary, as the case may be, or of all or any substantial part of its assets, or (iii) similar relief in respect of the Guarantor or such Material Consolidated Subsidiary, as the case may be, under any law relating to bankruptcy, insolvency, 11 reorganization, winding-up or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Guarantor or such Material Consolidated Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) A final judgment or judgments for the payment of money in excess of $10,000,000 in the aggregate shall be rendered by a court or courts of competent jurisdiction against the Guarantor or any Material Consolidated Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) An event or condition specified in Section 4.01(f) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Guarantor or any ERISA Affiliate shall incur or in the opinion of the Bank shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) which is, in the determination of the Bank, material in relation to the consolidated financial condition, business operations or prospects taken as a whole of the Borrower; or (j) The Guarantor shall have ceased to exist. Section 6. Miscellaneous. ------------- 6.01 No Waiver. No failure on the part of the Bank or any of its --------- agents to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Bank or any of its agents of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 6.02 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. --------------------------------------------------------------- THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE GUARANTOR AND THE BANK HEREBY IRREVOCABLY WAIVES, THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 6.03 Notices. All notices, requests, consents and demands hereunder ------- shall be in writing and shall be given in the manner specified in Section 10.02 of the Credit Agreement to the intended recipient at its address specified beneath its signature hereto or, at such other telecopy number or address as shall be designated by either party upon 30 days' notice to the other party. 12 6.04 Expenses. The Guarantor agrees to reimburse the Bank on demand -------- for any and all out-of-pocket costs and expenses in connection with the enforcement or collection of this Agreement. The provisions of this Section 6.04 shall survive the termination of this Agreement. 6.05 Waivers, etc. The terms of this Agreement may be waived, ------------ altered or amended only by an instrument in writing duly executed by the Guarantor and the Bank. Any such amendment or waiver shall be binding upon the Bank, each holder of any of the Guaranteed Obligations and the Guarantor. 6.06 Successors and Assigns. This Agreement shall be binding upon ---------------------- and inure to the benefit of the respective successors and assigns of the Guarantor, the Bank and each holder of any of the Guaranteed Obligations (provided, however, that the Guarantor shall not assign or transfer its rights or obligations hereunder without the prior written consent of the Bank). 6.07 Severability. If any provision hereof is invalid and ------------ unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Bank in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. MARRIOTT CORPORATION By /s/ David N. Chichester -------------------------- David N. Chichester Title: Vice President Address for Notices: Marriott Corporation One Marriott Drive Washington, D.C. 20058 Attention: Law Department The Borrower hereby agrees to be bound by the provisions of Section 2.08 hereof (and Annex I as incorporated therein) as of the day and year first above written: FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP By Marriott FIBM One Corporation (Sole General Partner) By: /s/ David N. Chichester -------------------------- David N. Chichester Title: President 14 ANNEX I Terms of Subordination (S)1. Definitions. Capitalized terms used herein and not defined ----------- herein shall have the meanings assigned thereto in the Debt Service Guaranty Agreement dated as of July _, 1990 (as from time to time amended, the "Debt ---- Service Guaranty") between Marriott Corporation (the "Guarantor") and Sumitomo - ---------------- --------- Trust & Banking Co., Ltd., New York Branch (together with its successors and assigns, the "Bank") or the Credit Agreement referred to therein. ---- (S)2. Terms of Subordination. ---------------------- A. Until payment in full by or for account of the Borrower of all of the Guaranteed Obligations, the Guarantor will not request, demand, sue for, or take, accept or receive from the Borrower, by set-off or in any other manner, and the Borrowed will not make, any payment of any moneys, principal or interest including, without limitation, post-petition interest), now or hereafter owing by Borrower to the Guarantor in respect of any Advance, or any security therefor, except, if no Default shall have occurred and be continuing, as provided in Section 2.08 of the Debt Service Guaranty and Section 8.12 of the Credit Agreement. B. In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of the Borrower or the proceeds thereof, to creditors of the Borrower, or upon any indebtedness of the Borrower, by reason of the liquidation, dissolution or other winding up of the Borrower, or the Borrower's business, or any sale, receivership, insolvency or bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or against the Borrower for any relief under any bankruptcy or insolvency law or laws relating to the relief of debtors, readjustment of indebtedness, reorganizations, compositions or extensions, then and in any such event, any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any or all indebtedness or obligations of the Borrower to the Guarantor in respect of any Advance (including, without limitation, post-petition interest) shall be paid or delivered directly to the Bank for application to the Guaranteed Obligations (including, without limitation, post-petition interest), due or not due, until the Guaranteed Obligations (including, without limitation, post- petition interest) shall have first been fully paid in cash. The Guarantor irrevocably authorizes and empowers the Bank to demand, sue for, collect and receive every such payment or distribution and give acquittance therefor and to file claims and take part in such other proceedings, in the Bank's own name or in the name of the Guarantor or otherwise, as the Bank may deem necessary or advisable for the enforcement of the terms and conditions hereof; and the Guarantor will execute and deliver to the Bank such powers of attorney, assignments or other instruments as may be requested by the Bank in order to enable the Bank to enforce any and all claims upon or with respect to any Advances, and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or with respect to any such indebtedness or obligations of the Borrower. C. Should any payment or distribution or security or proceeds thereof be received by the Guarantor upon or with respect to any Advance contrary to the foregoing provisions, the Guarantor will forthwith deliver the same to the Bank in precisely the form received (except for the endorsement or assignment of the Guarantor where necessary) for application to the Guaranteed Obligations (including, without limitation, post-petition interest) and, until so delivered, the same shall be held in trust by the Guarantor as property of the Bank. In the event of the failure of the Guarantor to make any such endorsement or assignment, the Bank, or any of its officers or employees, is hereby irrevocably authorized to make the same. D. The Guarantor will not assign or transfer to others any claim which it has or may hereafter have against the Borrower in respect of any Advance while any of the Obligations (including, without limitation, post- petition interest) remain unpaid, unless such assignment or transfer is made expressly subject to the Terms and Conditions in an instrument in form and substance satisfactory to the Bank. Any purported assignment in violation of this paragraph D shall be void. E. The Bank at any time and from time to time may enter into such agreement or agreements with the Borrower as the Bank may deem proper extending the time of payment of or renewing or otherwise altering the terms of all or any of the Obligations without notice to the Guarantor and without in any way impairing or affecting the obligations of the Guarantor under the terms and conditions hereof. F. The Bank shall not be prejudiced in its right to enforce the terms and conditions hereof in respect of any Advance owing to the Guarantor by any act or failure to act on the part of the Borrower or anyone in custody of the Borrower's assets or property. (S)3. Governing Law. The terms and conditions hereof shall be governed and construed by, in accordance with, the law of the State of New York [END OF ANNEX I] 2 EX-10.F 8 EXHIBIT 10.F EXHIBIT 10.f MODIFICATION OF CREDIT AGREEMENT AND GUARANTY OF MANAGEMENT AGREEMENT This MODIFICATION OF CREDIT AGREEMENT AND GUARANTY OF MANAGEMENT AGREEMENT (the "Modification") dated as of February 1, 1995, between THE SUMITOMO TRUST & BANKING CO., LTD. (the "Bank"), a banking corporation organized under the laws of Japan, acting through its New York Branch and having an address at 527 Madison Avenue, New York, New York 10022 (the "Bank") and FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a limited partnership existing under the laws of the State of Delaware (the "Borrower"). WITNESSETH: WHEREAS, the Bank and the Borrower entered into that certain Credit Agreement dated as of July 31, 1990, as amended (the "Credit Agreement" -- capitalized terms not otherwise defined herein shall have the respective meanings assigned in the Credit Agreement); WHEREAS, the Borrower executed that certain Master Indenture of Mortgage, Deed of Trust, Deed to Secure Debt, Assignment of Rents and Fixture Filing dated as of July 31, 1990 in favor of the Bank (as the same may be amended, supplemented or modified from time to time, the "Master Mortgage") and executed the Implementing Indentures of Mortgage, Deed of Trust, Deed to Secure Debt, Assignment of Rents and Fixture Filing as short forms of the Master Mortgage (collectively, the "Implementing Mortgages"; the Master Mortgage and the Implementing Mortgages, collectively, the "Mortgage"); WHEREAS, the Borrower executed that certain Promissory Note dated July 13, 1990 in favor of the Bank (the "Note"); WHEREAS, the Borrower and the Bank entered into that certain Security Agreement dated as of July 31, 1990 (the "Security Agreement"); WHEREAS, Marriott executed that certain Guaranty of Management Agreement dated as of July 31, 1990 in favor of the Bank (the "Management Guaranty"); WHEREAS, Marriott transferred the stock of the Manager to Marriott International, Inc., a Delaware corporation ("MI") (such transfer being hereinafter referred to as the "Manager Transfer"); WHEREAS, Marriott transferred the stock and/or fee interests of all Ground Lessors to a subsidiary of MI or to MI (the "Ground Lessor Transfer"); WHEREAS, MI would assume, and Marriott would be released from, all obligations of the Guarantor (as defined in the Management Guaranty) under the Management Guaranty (the "Management Guaranty Transfer"; the Manager Transfer, the Ground Lessor Transfer and the Management Guaranty Transfer, collectively, the "Transfers"); WHEREAS, Marriott has requested that the Bank grant its consent to the Transfers; WHEREAS, the Borrower and the Bank are executing modifications of the Mortgage dated as of the date hereof (collectively, the "Mortgage Modifications"); and WHEREAS, the Bank and the Borrower wish to modify certain provisions of the Credit Agreement in order to provide as set forth herein. NOW, THEREFORE, to modify certain provisions of the Credit Agreement and the Management Guaranty, and in consideration of the premises and of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree, effective as of the date hereof, as follows: 1. Marriott has changed its name to "Host Marriott Corporation" (hereinafter "Marriott"). 2. The following definition shall be added to Section 1 of the Credit Agreement: "Marriott International" shall mean Marriott International, Inc., a ---------------------- Delaware corporation, its successors and assigns. 3. Section 3 of the Credit Agreement shall be deleted in its entirety and the following shall be substituted in its place: Section 3. Payments of Principal and Interest. ---------------------------------- 3.01 Repayment of Loans. The Borrower will pay to the Bank the ------------------ principal of the Loans, and each Loan shall mature, on December 31, 1996 (the "Maturity Date"). ------------- 3.02 Interest. The Borrower will pay to the Bank interest on the -------- unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the Maturity Date at the rate of 9.67% per annum. Notwithstanding the foregoing, the Borrower will pay to the Bank interest at the Post-Default Rate on any principal of and interest on any Loan and on any other amount payable by the Borrower hereunder or under the Note, which shall not be paid in full when due (whether at stated maturity, by acceleration, on a Prepayment Date or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable semiannually on the Semi-Annual Dates, or upon the payment or prepayment thereof (but accrued only on the principal amount so paid or prepaid); provided, further, that interest payable at the Post-Default Rate shall be payable from time to time on demand. 4. Section 7.23 of the Credit Agreement shall be deleted in its entirety and the following substituted in its place: 7.23. Relation to Marriott and Marriott International: The Manager ----------------------------------------------- is a direct or indirect Wholly-Owned Subsidiary of Marriott International. The General Partner is a direct or indirect Wholly-Owned Subsidiary of Marriott. At all times, (a) the General Partner shall be the only general partner of the Borrower, and (b) the General Partner will remain a direct or indirect Wholly- Owned Subsidiary of Marriott. At all times hereafter, Marriott International or a subsidiary of Marriott International will be the lessor under each Ground Lease. At all times hereafter, the Manager will remain a direct or indirect Wholly-Owned Subsidiary of Marriott International. 5. Clause (1) of Section 9 of the Credit Agreement shall be deleted in its entirety and the following substituted in its place: The General Partner shall at any time cease to be the sole general partner of the Borrower; the General Partner shall at any time cease to be a direct or indirect Wholly-Owned Subsidiary of Marriott; the Manager shall at any time cease to be a direct or indirect -2- Wholly-Owned Subsidiary of Marriott International; or Marriott International or a subsidiary of Marriott International shall at any time cease to be the lessor under the Ground Leases. 6. Simultaneously herewith Marriott International and Marriott are executing an Assignment and Assumption Agreement dated the date hereof substantially in the form of Exhibit A (the "Management Guaranty Assignment") and upon such execution Marriott Corporation shall be released from all obligations of the Guarantor (as defined in the Management Guaranty) under the Management Agreement incurred after the date hereof. 7. The parties hereto confirm that the Mortgage, as modified and supplemented by the Mortgage Modifications, and the Security Agreement as well as any other Related Agreement given to secure the obligations of the Borrower shall secure the Credit Agreement as amended and modified hereby as well as any obligations of the Borrower under any other Related Agreements as amended hereby. 8. Representations and Warranties: The Borrower further represents ------------------------------ and warrants to the Bank: a. The Borrower is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware. The Borrower is duly qualified to transact business in the States of Alabama, California, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Missouri, North Carolina, Ohio, South Carolina, Tennessee, Virginia and Wisconsin and in such other jurisdictions where failure so to qualify would have a material adverse effect on the financial condition, operations, business or prospects of the Borrower. b. The General Partner is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The General Partner is duly qualified to transact business in the States of Alabama, California, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Missouri, North Carolina, Ohio, South Carolina, Tennessee, Virginia, and Wisconsin and in such other jurisdictions where failure so to qualify would have a material adverse effect on the financial condition, operations, business or prospects of the General Partner. c. Each of the Borrower and the General Partner has all requisite legal right, power and authority to execute, deliver and perform the Modification, the Mortgage Modifications and Management Guaranty Assignment and to consummate the transaction contemplated hereby and thereby. The execution, delivery and performance by the Borrower and the General Partner of the Modification, the Mortgage Modifications and the Management Guaranty Assignment have been duly authorized by all necessary action on the part of the Borrower and the General Partner, as the case may be. All consents of any other Person (including partners or creditors of the Borrower) and all consents or authorizations of, or other acts by or in respect of any Governmental Authority, required to be obtained by the Borrower in connection with the execution, delivery and performance by the Borrower and the General Partner, and the validity, binding effect and enforceability of each such party's obligations under the Modification, the Mortgage Modifications and the Management Guaranty Assignment have been obtained and are in full force and effect. -3- d. The Modification, the Mortgage Modifications and the Management Guaranty Assignment when executed and delivered will constitute legal, valid and binding obligations of the Borrower and the General Partner, enforceable in accordance with its respective terms, except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability effecting the enforcement of creditors' rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). e. The execution, delivery and performance by Borrower and the General Partner of the Modification, the Mortgage Modifications and the Management Guaranty Assignment to which either is a party and the consummation of the transactions contemplated thereby will not (i) conflict with or constitute a breach of or default under any agreement, indenture, lease or other instrument to which either is a party or by which it is or its revenues, properties, assets or operations are bound or subject, or violate any Legal Requirements; (ii) result in the creation or imposition of any Lien upon either of such party's revenues, properties or assets, other than as specifically contemplated by the Modification, the Mortgage Modifications and the Management Guaranty Assignment; (iii) result in the acceleration of any Indebtedness of such party; or (iv) result in a material adverse change in any agreement material to the operation of any Hotel. f. Except as set forth in Exhibit B hereto, no litigation, investigation or other proceeding is pending or, to the best of Borrower's knowledge, threatened before or by any Governmental Authority in any way restraining or enjoining, or threatening or seeking to restrain or enjoin, or in any way questioning or affecting the validity, binding effect or enforceability, as against the Borrower and the General Partner of, any provisions of the Modification, the Mortgage Modifications and the Management Guaranty Assignment or the legal existence of the Borrower and the General Partner, the status of its partners as partners, or its ability to conduct its operations, to perform its obligations under the Modification, the Mortgage Modifications and the Management Guaranty Assignment or to consummate any of the transactions contemplated thereby or affecting the Hotels or the Trust Estate. g. Neither the Borrower nor the General Partner is in default under any existing judgment, order, award or decree of any Governmental Authority or any other Legal Requirement, binding upon or affecting it. h. The Borrower is not an "investment company" or a company "affiliated" with or "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, and the Borrower will not become such by reason of its execution and delivery of, or performance of its obligations under, the Modification, the Mortgage Modifications and/or the Management Guaranty Assignment. i. All of the representations and warranties set forth in the Credit Agreement, the Mortgage and the Management Guaranty, as modified hereby are true and correct as of the date hereof. j. As of the date hereof, there are no counterclaims, offsets or defenses with respect to the obligations of the Borrower and the General Partner under the -4- Credit Agreement, the Management Guaranty and/or any other Related Agreements as modified hereby. k. As of the date hereof, all the recitals in this Modification are true and correct. 9. Except as modified hereby, the Credit Agreement and the other Related Agreements shall remain unmodified and in full force and effect. 10. This Modification may be executed in two counterparts, each of which shall constitute an original, but both of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Modification to be duly executed as of the day and year first above written. FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP By Marriott FIBM One Corporation, its general partner By: /s/ Pamela J. Murch ----------------------------- Vice President THE SUMITOMO TRUST & BANKING CO., LTD., NEW YORK BRANCH By: /s/ Suraj P. Bhatia ----------------------------- SURAJ P. BHATIA SENIOR VICE PRESIDENT MANAGER, PROJECT FINANCE DEPT. -5- EXHIBIT A --------- ASSIGNMENT AND ASSUMPTION OF MANAGEMENT GUARANTY This Assignment and Assumption of Guaranty of Management Agreement dated as of February 1, 1995 (the "Assignment and Assumption") between Host Marriott Corporation (as a result of a name change from Marriott Corporation), a corporation organized under the laws of the State of Delaware ("Marriott"), and Marriott International, Inc. ("International"), a corporation organized under the laws of the State of Delaware. W I T N E S S E T H - - - - - - - - - - WHEREAS, Marriott is the guarantor under that certain Guaranty of Management Agreement dated as of July 31, 1990 in favor of The Sumitomo Trust & Banking Co., Ltd. (the "Bank") (the "Management Guaranty"); NOW, THEREFORE, in consideration of the premises and of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. Marriott hereby sells, transfers, assigns and sets over to International all of its obligations, covenants and duties as guarantor under the Management Guaranty after the date hereof. 2. International hereby accepts such assignment and assumes and agrees to perform and comply with all the covenants, duties and obligations of Marriott as guarantor under the Management Guaranty after the date hereof and consents to Collateral Assignment of Management Agreement from Fairfield Inn by Marriott Limited Partnership ("Fairfield") to the Bank and the Subordination and Attornment of Management Agreement among Fairfield, the Bank and Fairfield FMC Corporation (the "Subordination") and agrees to the provisions of Section 9 of the Subordination. This Assignment and Assumption shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Modification to be duly executed as of the day and year first above written. HOST MARRIOTT CORPORATION By: ---------------------------------- Title: Vice President MARRIOTT INTERNATIONAL, INC. By: ---------------------------------- Title: Vice President EXHIBIT B --------- LITIGATION ---------- NONE ---- EX-10.G 9 EXHIBIT 10.G Final Executed Version LOAN AGREEMENT between FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP and NOMURA ASSET CAPITAL CORPORATION Dated as of January 13, 1997 TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS.............................................................. 1 Section 1.1 Definitions........................................ 1 ARTICLE II PROVISIONS CONCERNING THE ACCOUNTS AND PLEDGED PROPERTY.................. 18 Section 2.1 Cash Management Procedures.................... 18 Section 2.2 Right to Contest.............................. 18 Section 2.3 Defeasance.................................... 19 Section 2.4 Sale of all the Properties.................... 23 Section 2.5 Change of Control............................. 24 Section 2.6 Partial Release after the Optional Prepayment Date............................. 24 ARTICLE III PAYMENTS................................................................ 25 Section 3.1 Payments on the Note......................... 25 Section 3.2 Interest..................................... 25 Section 3.3 Payments without Deduction, etc.............. 26 Section 3.4 Periodic Payments............................ 26 ARTICLE IV DEFAULT; REMEDIES; ENFORCEMENT.......................................... 27 Section 4.1A Events of Default............................. 27 Section 4.1B Event of Default Cure......................... 30 Section 4.2 Remedies...................................... 30 Section 4.3 Remedies Cumulative; Delay or Omission Not a Waiver................................ 31 ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS............................... 32 Section 5.1 Representations and Warranties of the Borrower.................................... 32 Section 5.2 Affirmative Covenants......................... 39 Section 5.3 Negative Covenants............................ 45 Section 5.3A General Partner Covenant...................... 47 Section 5.4 Further Assurances............................ 48 Section 5.5 Representations, Warranties and Covenants of NACC..................................... 48 Section 5.6 Other......................................... 49 i ARTICLE VI SECURITIZATION.......................................................... 49 Section 6.1 Securitizazion................................ 49 ARTICLE VII PAYMENT OF FEES AND EXPENSES; INDEMNIFICATION........................... 51 Section 7.1 Fees and Expenses............................. 52 Section 7.2 Indemnification............................... 53 ARTICLE V IMMUNITY ............................................................... 55 Section 8.1 Partners, Employees and Agents of the Borrower Immune from Liability............. 55 ARTICLE IX MISCELLANEOUS PROVISIONS................................................ 55 Section 9.1 Notices....................................... 55 Section 9.2 Benefit of Agreement.......................... 56 Section 9.3 Governing Law................................. 56 Section 9.4 Counterparts.................................. 56 Section 9.5 Index, Descriptive Headings................... 57 Section 9.6 Amendment or Waiver; Integration.............. 57 Section 9.7 Survival of Representations and Warranties; Reliance........................ 57 Section 9.8 Returned Payments............................. 57 Section 9.9 Jurisdiction and Service; Waiver of Jury Trial....................................... 58 Section 9.10 Enforceability................................ 58 Section 9.11 Conflicting Terms............................. 58 Section 9.12 Relationship of Parties....................... 59 Exhibit A - ADA Compliance Work and Deferred Maintenance Work Exhibit B - Cash Management Procedures Exhibit C - Environmental Remediation Work Exhibit D - Permitted Investments Exhibit E - Properties and Addresses Exhibit F - Release Price Exhibit G - Organizational Structure of the Borrower Exhibit H - Operating Budget Exhibit I - Capital Budget Exhibit J - Financial Statements Exhibit K - General Partner Agreement Schedule 1 - Disclosure Report Schedule 2 - Ground Leases ii Exhibit 10.g LOAN AGREEMENT, dated as of January 13, 1997, between Fairfield Inn by Marriott Limited Partnership, a Delaware limited partnership (the "Borrower"), -------- and Nomura Asset Capital Corporation ("NACC") (together with its assigns and successors, the "Lender"). ------ W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower wishes to obtain a loan from the Lender in the principal amount of One Hundred Sixty Five Million Four Hundred Thousand Dollars ($165,400,000) to, among other things, (i) satisfy all existing debt secured by the Properties (as hereinafter defined) and, (ii) to the extent of any remaining proceeds, (a) provide initial funding for reserves for deferred maintenance, environmental remediation, compliance with the Americans With Disabilities Act of 1990, replacement of furniture, fixtures and equipment and capital improvements, (b) pay the costs of completing the transactions contemplated hereby, (c) provide working capital to the Borrower and (d) for such other purposes as the Borrower shall deem necessary or desirable, and the Lender is willing to make such loan to the Borrower on the terms and conditions hereinafter set forth; and WHEREAS, such loan is to be evidenced by the Note (as hereinafter defined) and secured by, inter alia, the Mortgages (as hereinafter defined), ----- ---- NOW, THEREFORE, in consideration of the above-mentioned premises and the agreements, representations and warranties hereafter set forth, the Borrower and the Lender agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. For all purposes of this Agreement, except as ----------- otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Section have the meanings assigned to them in this Section, and include the plural as well as the singular; (b) the words "herein," "hereof," "hereto" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (c) all references to any agreement or instrument shall be to that agreement or instrument as in effect from time to time, including any amendments, consolidations, replacements, restatements, modifications and supplements thereto; (d) all terms defined in this Section with reference to the Cash Management Procedures shall continue in effect after the termination of such Cash Management Procedures in accordance with the terms thereof; (e) all references to "Section(s)" and "Exhibit(s)" shall mean the Section(s) of and Exhibit(s) annexed to this Agreement unless expressly stated to be Section(s) or Exhibit(s) of the Cash Management Procedures; and (f) certain terms defined in this Section appear only in this Agreement and not in the Cash Management Procedures and vice versa. "Accounting Period" means, initially, each accounting period of four ----------------- consecutive weeks having the same beginning and ending dates as the Manager's corresponding four week accounting periods, except that the last Accounting Period in a Fiscal Year may be longer than four consecutive weeks when and to the extent necessary to conform the accounting system to the calendar, or if the accounting year on the basis of which the Properties are operated is changed to a calendar year or a conventional 365-day fiscal year, "Accounting Period" shall mean each calendar month in such fiscal year. "Accounting Quarter" means, initially, three (or, in the case of the last ------------------ Accounting Quarter in any Fiscal Year, four) consecutive Accounting Periods, ending on the last day of the third, sixth, ninth and last Accounting Period in each Fiscal Year, or, if the accounting year on the basis of which the Properties are operated is changed to a calendar year or a conventional 365-day fiscal year, "Accounting Quarter" shall mean each of the fiscal quarters in such fiscal year (i.e., there shall be four consecutive Accounting Quarters of three ---- months each). "Action" means any action, suit, claim, arbitration, governmental ------ investigation or other proceeding. "ADA Compliance Work" means the repairs, improvements and replacements to ------------------- the Properties to be made to comply with the Americans with Disabilities Act of 1990, as amended from time to time, in the amounts more particularly described on Exhibit A annexed hereto. --------- "Additional Capital Expenditures" has the meaning set forth in Section 8.3 ------------------------------- of the Cash Management Procedures. "Adjusted Rate" means the rate determined on the Optional Prepayment Date ------------- and on each anniversary thereof as the greater of (xx) the Base Rate plus 2% per annum and (yy) the yield, calculated by linear interpolation (rounded to three decimal places), of the 2 yields of United States Treasury Constant Maturities with the terms (one longer and one shorter) most nearly approximating those of U.S. Obligations having maturities as close as possible to the tenth anniversary of the Optional Prepayment Date, as determined by the Lender on the basis of Federal Reserve Statistical Release H.15-Selected Interest Rates under the heading U.S. Governmental Security/Treasury Constant Maturities, or other recognized source of financial market information selected by the Lender in each case on the last Business Day of the week immediately prior to the Optional Prepayment Date and each subsequent anniversary thereof, as the case may be, plus 3.775% per annum. "Affiliate" means, with respect to any Person, any individual, corporation, --------- partnership, limited liability company, trust or other entity of whatever nature which controls, is controlled by or is under common control with, such Person, including, without limitation, (a) any officer or director of any of the foregoing and (b) any partner, member or shareholder that controls any of the foregoing, and "control" shall mean ownership of more than twenty-five percent (25%) of all of the voting stock of a corporation or more than twenty-five percent (25%) of all of the legal and beneficial interests in any other entity or the possession of the power, directly or indirectly, to direct or cause the direction of the management and policy of a corporation or other entity, whether through the ownership of voting securities, common directors or officers, the contractual right to manage the business affairs of such entity, or otherwise. "Agreement" means this Loan Agreement. --------- "Annual Plan" has the meaning set forth in Section 5.2(d)(vi). ----------- "Bankruptcy Custodian" has the meaning set forth in Section 4.1A(g)(A)(2). -------------------- "Base Rate" means 8.40% per annum. --------- "Base Rate Interest" means interest on the Note at the Base Rate or the ------------------ Default Rate, as applicable, then due and payable for the applicable Debt Service Period. "Best Knowledge" means with respect to any provision, knowledge of -------------- information obtained by the Borrower or any officer or director of the General Partner. "Borrower" means Fairfield Inn by Marriott Limited Partnership. -------- "Business Day" means a day on which banks and foreign exchange markets are ------------ open for business in New York, New York. "Capital Budget" has the meaning set forth in Section 5.2(d)(vi). -------------- 3 "Capital Expenditure and FF&E Reserve Account" means the account -------------------------------------------- established pursuant to Section 8.1 of the Cash Management Procedures. "Capital and FF&E Expenditures" means the expenditures of amounts for the ----------------------------- purpose of the Repairs and Equipment Reserve, as such term in defined in the Management Agreement. "Cash Collateral Account" means the account established and held by the ----------------------- Servicer pursuant to Section 4.1 of the Cash Management Procedures. "Cash Management Procedures" means the provisions of Exhibit B. -------------------------- --------- "Change of Control" means any transfer of (i) an equity interest in the ----------------- General Partner, (ii) the General Partner's interest in the Borrower or (iii) any interest of a limited partner in the Borrower such that as a result of such transfer and any other transfers of limited partnership interests prior to the date of determination, any person other than Host Marriott, directly or indirectly, holds more than 49% of the limited partnership interests in the Borrower. "Closing Date" means the date of execution and delivery of this Agreement. ------------ "Condemnation Proceeds" has the meaning set forth in the applicable --------------------- Mortgage. "CPI Percentage" means, for any fiscal year, the percentage by which the -------------- "Consumer Price Index for All Urban Consumers (CPI-U); U.S. City Average, 1982- 84 = 100, All Items" (or appropriate substitute index if such index is no longer published) (the "CPI") for November of the preceding Fiscal Year exceeds the CPI for November 1996. "DCR" means Duff & Phelps Credit Rating Co. --- "Debt" means the obligations of the Borrower under the Transaction ---- Documents, together with all interest thereon, and all other sums, including, without limitation, fees, expenses, commissions, premiums and indemnities, which may or shall become due under any of the Transaction Documents, including the costs and expenses of enforcing any provision of the Transaction Documents that may be reimbursable thereunder. "Debt Service Coverage Ratio" means, as of any given date, the ratio of (i) --------------------------- Net Operating Income for the 13 full Accounting Periods for which financial statements are required to be furnished to the Lender pursuant to Section 5.2(d)(ii) immediately preceding the date of calculation for the Property or Properties regarding which the calculation is being made (or 12 Accounting Periods in 4 the case of a calendar year or 365 day Fiscal Year) to (ii) Debt Service Expense in respect of the 13 full Accounting Periods next succeeding such date (or 12 Accounting Periods in the case of a calendar year or 365 day Fiscal Year). "Debt Service Expense" means, in respect of any fiscal period, the -------------------- aggregate amount of scheduled interest and principal payable on (i) the Note, (ii) Subordinate Debt and (iii) Indebtedness covered by Purchase Money Security Interests for such period. For the purpose of the calculation of Debt Service Expense for any period subsequent to the Optional Prepayment Date, the amount set forth in clause (i) above shall be computed based on the Monthly Debt Service Payment. "Debt Service Payment Date" means the 11th day of each calendar month or ------------------------- the next Business Day immediately thereafter. "Debt Service Period" means the period from and including the eleventh ------------------- (11th) day of the calendar month immediately preceding each Debt Service Payment Date to the tenth (10th) day of the calendar month in which such Debt Service Payment Date occurs. "Debt Service Reserve Account" has the meaning set forth in Section 5.1 of ---------------------------- the Cash Management Procedures. "Default Rate" means a rate per annum equal to the lesser of (aa) two ------------ percent (2%) above the Base Rate or Adjusted Rate, as applicable, and (bb) the maximum rate allowed by law. "Defeasance Collateral" has the meaning set forth in Section 2.3(a)(iv)(A). --------------------- "Defeasance Debt Service Coverage Ratio" has the meaning set forth in -------------------------------------- Section 2.3(f). "Defeasance Deposit" has the meaning set forth in Section 2.3(f). ------------------ "Defeasance Security Agreement" has the meaning set forth in Section ----------------------------- 2.3(a)(iv)(A). "Deferred Maintenance Work" means the repairs, improvements and ------------------------- replacements to the Properties in the amounts more particularly described on Exhibit A hereto. - --------- "Direct Manager Funds" has the meaning set forth in Section 12.5 of the -------------------- Cash Management Procedures. "Disclosure Report" means the schedule annexed hereto as Schedule 1. ----------------- ---------- "Earthquake Restoration Cost" has the meaning set forth in Section 8.6 of --------------------------- the Cash Management Procedures. 5 "Earthquake Restoration Reserve Account" has the meaning set forth in -------------------------------------- Section 8.6 of the Cash Management Procedures. "Earthquake Restoration Work" has the meaning set forth in Section 8.6 of --------------------------- the Cash Management Procedures. "Eligible Account" means either (i) an account maintained with a federal or ---------------- state chartered depository institution or trust company, (a) if the funds therein are to be retained for more than 30 days, the long-term unsecured debt obligations of which (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the long-term unsecured debt obligations of the holding company of which) are rated by each Rating Agency in one of its two highest rating categories (or such other ratings as will not result in the rating of any of the Securities being reduced below their respective ratings on the date determination is to be made and as to which the Rating Agencies may otherwise agree) at the time of the deposit therein, or (b) if the funds therein are to be retained for less than 30 days, the short- term unsecured debt obligations of such depository institution or trust company (or, in the case of a depository institution or trust company that is the principal subsidiary of a holding company, the short-term unsecured debt obligations of the holding company of which), as the case may be, are rated not lower than A-1+ by S&P or the equivalent rating of the other Rating Agencies, or (ii) a segregated trust account maintained with the trust department of a federal or state chartered depository institution or trust company acting in its fiduciary capacity, provided that such account is subject to fiduciary funds on deposit regulations (or internal guidelines) substantially similar to 12 C.F.R. (S)9.10(b), or (iii) after the Securitization, an account in any other insured depository institution reasonably acceptable to the Servicer and the Trustee, so long as prior to the establishment of an account in any such other depository institution each of the Rating Agencies shall have delivered a Rating Comfort Letter with respect thereto. "Emergency Expenditures" means expenditures arising in the event of an ---------------------- emergency arising out of a fire or other casualty at an Inn, or other events, circumstances or conditions which give rise to safety or life threatening situations, to the extent such expenditures are necessary to protect the safety or welfare of guests and employees or to protect against further property damage to the Inn. "Entities" has the meaning set forth in Section 6.1(b). -------- "Environmental Indemnity Agreement" means the environmental indemnity --------------------------------- agreement, dated the Closing Date, from the Borrower to NACC. "Environmental Laws" has the meaning set forth in the Environmental ------------------ Indemnity Agreement. 6 "Environmental Remediation Work" means the actions taken with respect to ------------------------------ the Properties set forth on Exhibit C. --------- "Equipment Leases" means, with respect to each Property, the leases of ---------------- furniture, fixtures and equipment used in connection with the Properties. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and the rules and regulations promulgated thereunder. "ERISA Affiliate" means all members of a controlled group of corporations --------------- and all trades and businesses (whether or not incorporated) under common control and all other entities which, together with the Borrower, are treated as a single employer under any or all of Sections 414(b), (c), (m) or (o) of the IRC. "Event of Default" has the meaning set forth in Section 4.1A. ---------------- "Excess Cash Flow" means, for the period of determination, the difference ---------------- between (i) Net Operating Income and (ii) the sum of (A) the Monthly Debt Service Payments, (B) other Debt then due and payable to the Lender (other than payments required under Section 3.4(d)), (C) withdrawals from the Cash Collateral Account applied for the purposes set forth in clauses (A), (C), (D), (E), (F), (G), (H) and (I) of Section 4.4 of the Cash Management Procedures or, if Section 7.10 of the Cash Management Procedures is applicable, clauses (B), (C), (D) and (E) thereof and (D) an amount for each Fiscal Year equal to the lesser of (i) the aggregate amount of payments for, or reserves created for payment for, administrative expenses of the Borrower with respect to such Fiscal Year; or (ii) $450,000 for Fiscal Year 1997, which amount shall be increased by the CPI Percentage for each Fiscal Year thereafter. "Expense Deposit" has the meaning set forth in Section 7.1(c). --------------- "Fiscal Year" means January 1 of each year through and including December ----------- 31 of such year except that, for purposes of calculating the Debt Service Coverage Ratio or any other calculation requiring reference to Gross Revenues, Net Operating Income or other amounts calculated with reference to the Accounting Periods, "Fiscal Year" shall mean the fiscal year of the Manager, as defined in the Management Agreement. "GAAP" means generally accepted accounting principles in the United States ---- of America (as such principles may change from time to time) applied on a consistent basis (except for changes in application in which the Borrower's independent certified public accountants concur), both as to classification of items and amounts. "General Partner" means Marriott FIBM One Corporation, a Delaware --------------- corporation. 7 "Governmental Authority" means any court, agency, authority, board ---------------------- (including, without limitation, environmental protection, planning and zoning), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States or the state, county or city where each Property is located or any political subdivision of any of the foregoing, whether now or hereafter in existence, or any officer or official thereof, having jurisdiction over the Borrower or the General Partner or any of the Properties or any portion thereof. "Grant" means to issue, grant, sell, remise, convey, assign, and/or ----- transfer. "Gross Revenues" means, with regard to the Properties, for any period, all -------------- revenues and receipts of every kind derived from or otherwise relating to the Properties and all departments and parts thereof during such period, including, but not limited to: income (from both cash and credit transactions), before commissions and discounts for prompt or cash payments, from rental of rooms, meeting rooms and space of every kind; license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires); income from vending, facsimile and copy machines; wholesale and retail sales of merchandise (except as otherwise provided in the Management Agreement), service charges, and proceeds, if any, from business interruption or other loss of income insurance, all determined in accordance with generally accepted accounting principles; excluding, however, (i) gratuities to employees of the Inns, (ii) federal, state or municipal excise, sales or use taxes or similar assessments or Impositions collected directly from patrons or guests or included as part of the sales price of any goods or services, (iii) Net Refinancing Proceeds or Net Sales Proceeds, (iv) proceeds from the sale of FF&E, (v) interest received or accrued with respect to the funds in the FF&E Reserve or the other operating accounts of the Inns, or (vi) any refunds, rebates, discounts and credits of a similar nature, given, paid or returned in the course of obtaining Gross Revenues or components thereof (including, without limitation, commissions and discounts for prompt or cash payments). "Ground Leases" means the leases described in Schedule 2 hereto relating to ------------- ---------- the Properties as the same may be amended, modified, supplemented or replaced from time to time in compliance with the Transaction Documents. "Ground Leases Subordination Agreement" means the Subordination, Estoppel, ------------------------------------- Consent and Amendment of Ground Leases, dated the Closing Date, between the Borrower, MII, Big Boy Properties, Inc. and Essex House Condominium Corporation. "Ground Rent" means the rental payments payable under the Ground Leases. ----------- 8 "Ground Rent Reserve Account" has the meaning set forth in Section 5.2 of --------------------------- the Cash Management Procedures. "Host Marriott" means Host Marriott Corporation, a Delaware corporation. ------------- "Impositions" has the meaning set forth in the applicable Mortgage. ----------- "Indebtedness" means for any Person (a) obligations for borrowed money ------------ (including, without limitation, in the case of the Borrower, the Debt), (b) obligations under letters of credit, (c) obligations relating to Purchase Money Security Interests, (d) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now owned by such Person, (e) obligations for trade credit or acceptances incurred in the ordinary course of business which are 60 days past due, and (f) obligations of another Person of the type set forth in clauses (a) through (e) above which such Person has guaranteed or in respect of which such Person is liable, contingently or otherwise, including, without limitation, by way of agreement to purchase property or services, to provide funds to or otherwise invest in such other Person, or otherwise to assure a creditor of such other Person against loss. "Indemnified Parties" shall have the meaning set forth in Section 7.2(a). ------------------- "Independent Director" means a person who is not, and has not within the -------------------- past five years been, (i) an officer, director, employee, partner, stockholder or beneficial-interest holder of the General Partner or the Borrower; (ii) an officer, director, employee, partner, member, beneficial-interest holder or stockholder of any Affiliate (as defined below) of the General Partner or the Borrower; (iii) a customer or supplier of the Borrower or any Affiliate thereof (other than a hotel guest or a customer or supplier that does not derive more than 10% of its revenues from its activities with the Borrower or any Affiliate thereof); or (iv) a spouse, parent, sibling, or child of any person described in (i), (ii), or (iii); provided, however, that a person shall not be deemed to be -------- ------- a director of an Affiliate solely by reason of such person being a director of a single-purpose entity which would otherwise be deemed an Affiliate. For the purpose of this definition alone, "Affiliate" means any person or entity (i) which owns beneficially, directly or indirectly, more than 10 percent of the outstanding shares of the common stock of the General Partner or which is otherwise in control of the General Partner, (ii) of which more than 10% of the outstanding voting securities are owned beneficially, directly or indirectly, by any person or entity described in clause (i) above, or (iii) which is controlled by, or under common control with, any person or entity described in clause (i) above; the terms "control" and "controlled 9 by" shall have the meanings assigned to them in Rule 405 under the Securities Act of 1933. "Individual Material Adverse Effect" means a material adverse effect on the ---------------------------------- condition (financial or otherwise), business, prospects, assets, liabilities, management, financial position or results of operations of any Property. "Initial Debt Service Coverage Ratio" means 1.6:1. ----------------------------------- "Inns" means the Fairfield Inn by Marriott hotels and the hotel operations ---- located at the Properties. "Insolvency Law" has the meaning set forth in Section 4.1A(g)(A)(1). -------------- "Insurance Proceeds" has the meaning set forth in the applicable Mortgage. ------------------ "Insurance Requirements" means all terms of any insurance policy required ---------------------- by the applicable Mortgage covering or applicable to a particular Property or any part thereof and all requirements of the insurance carrier, all as more fully described in such Mortgage. "IRC" means the Internal Revenue Code of 1986, as amended from time to --- time, and the rules and regulations promulgated thereunder, or any successor statute(s). "Leases" means the respective written or unwritten agreements pursuant to ------ which lessees, tenants or other third parties are occupying any portion of the Properties excluding, however, the letting of rooms and other facilities to hotel guests in the ordinary course of business. "Legal Requirements" has the meaning set forth in the applicable Mortgage. ------------------ "Lien" means any security interest, mortgage, pledge, lien, restriction on ---- transferability, claim, charge, encumbrance, title retention agreement or analogous instrument, in, of or on the Properties or any of them. "Lender" means Nomura Asset Capital Corporation and its assigns and ------ successors. "Loan" means the loan evidenced by the Note. ---- "Local Account" has the meaning set forth in Section 3 of the Cash ------------- Management Procedures. "Lockbox Account" has the meaning set forth in Section 7.1.2 of the Cash --------------- Management Procedures. 10 "Lockbox Event" has the meaning set forth in Section 7 of the Cash ------------- Management Procedures. "Lockbox Period" has the meaning set forth in Section 7 of the Cash -------------- Management Procedures. "Management Agreement" means the Management Agreement dated as of November -------------------- 17, 1989, by the Borrower and the Manager, as amended by the First Amendment to Management Agreement, dated July 31, 1990, by the Borrower and the Manager, as further amended by the Second Amendment to Management Agreement dated as of the date hereof by and between the Borrower and the Manager, and as amended by that certain Modification, Subordination and Non-Disturbance Agreement, Estoppel and Consent, dated as of the date hereof, among the Manager, the Borrower and the Lender, and any other management agreement entered into by the Borrower as required or permitted herein. "Management Expenses" means, for any Inn, (a) the cost of sales including ------------------- salaries, wages (including accruals for periodic bonuses to Inn employees), fringe benefits, payroll taxes and other costs related to Inn employees (the foregoing costs shall not include salaries and other employee costs of executive personnel of the Manager who do not work at one of the Inns on a regular basis); (b) departmental expenses, administrative and general expenses and the cost of Inn advertising, central reservations, local marketing, and business promotion, heat, light and power, and routine repairs, maintenance and minor alterations treated as Deductions under Section 8.01 of the Management Agreement; (c) credit card and travel agent commissions; (d) the cost of Inventories and Fixed Asset Supplies consumed in the operation of each Inn (as such terms are defined in the Management Agreement); (e) reasonable bad debt expense (or a reasonable reserve) for uncollectible accounts receivable as determined by the Manager; (f) all costs and fees of independent accountants or other third parties retained by the Manager who perform services required or permitted hereunder; (g) the cost and expense of technical consultants and operational experts retained by the Manager (or retained by the Borrower and approved by the Manager) for specialized services in connection with non-routine Inn work or other specialized services not covered by the Base Management Fee or the System Fee (as such terms are defined in the Management Agreement); (h) the Base Management Fee payable after giving effect to Section 5.01D of the Management Agreement; (i) the System Fee; (j) the Inn's pro rata share of costs and expenses incurred by the Manager in providing Chain Services and the national reservations system (as defined in the Management Agreement); (k) insurance costs and expenses (including Inn Retention or other deductibles) as provided in Article XII of the Management Agreement; (l) taxes, if any, payable by or assessed against the Manager related to the Management Agreement or to the Manager's operation of the Inns (exclusive of the Manager's income taxes) and all Impositions; (m) contributions to the FF&E Reserve which are required pursuant to Section 8.02 of the Management 11 Agreement; (n) contributions to the Marketing Fund (as such term is used in the Management Agreement); (o) amortization of the amounts described in Section 8.02 of the Management Agreement; (p) rent payable under any equipment leases not funded out of the FF&E Reserve; (q) such other costs and expenses as are specifically provided for elsewhere in the Management Agreement or as otherwise reasonably necessary for the proper and efficient operation of the Inns. "Manager" means Fairfield FMC Corporation, a Delaware corporation, or any ------- entity that is an Affiliate of MII and any property manager appointed as permitted herein. "Manager's Account" has the meaning set forth in Section 1.2 of the Cash ----------------- Management Procedures. "Master Account" has the meaning set forth in Section 1.2 of the Cash -------------- Management Procedures. "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- Borrower's ability to enter into or fulfill its material obligations under the Transaction Documents or to effect the transactions contemplated thereby or (b) a material adverse effect on the condition (financial or otherwise), business, prospects, assets, liabilities, management, financial position or results of operations of the Borrower or the Properties. "Maturity Date" shall mean the earliest to occur of (1) January 11, 2017 or ------------- (2) such date to which the maturity of the Debt may be accelerated upon an Event of Default or as otherwise provided in any Transaction Document. "MII" means Marriott International, Inc., a Delaware corporation. --- "MII Cash Management Conditions" means the following conditions: (i) the ------------------------------ Properties are managed by the Manager under the Management Agreement and (ii) the Manager is MII or a wholly owned, direct or indirect, subsidiary of MII. "MII Debt" has the meaning set forth in Section 6 of the Cash Management -------- Procedures. "Monthly Debt Service Payment" has the meaning set forth in Section 4.3(B) ---------------------------- of the Cash Management Procedures, as modified by Section 12.6 of the Cash Management Procedures. "Mortgage" means, with regard to each Property, the mortgage, deed of trust -------- or other security instrument creating a first mortgage lien on such Property, dated as of the Closing Date, from the Borrower to or for the benefit of the Lender. "NACC" means Nomura Asset Capital Corporation. ---- 12 "Net Operating Income" means, in respect of any fiscal period, Gross -------------------- Revenues less the sum of, without duplication, (A) Management Expenses and (B) any Ground Rent, Impositions or insurance premiums paid or reserved for payment with respect to the Properties. "Non-Recourse" means, with respect to the Debt, that the Debt is limited in ------------ recourse solely to the Pledged Property and is not guaranteed directly or indirectly by any Partner or the Manager and no Partner or the Manager or any shareholder, member, director, officer, employee or agent of any Partner or the Manager, either directly or indirectly, shall be personally liable in any respect (except to the extent of their respective interests in the Pledged Property) for (i) the payment of any Debt, (ii) the performance of any covenant or obligation under any Transaction Document or (iii) monetary damages for the breach of performance of any covenant or obligation contained in any Transaction Document; provided, however, that in the event of any fraud, material -------- ------- misrepresentation or misappropriation of funds under any Transaction Document or under the Management Agreement, nothing herein or in such other documents shall estop the Lender from prosecuting an Action against the party or parties committing such fraud, misappropriation or material misrepresentation, or misappropriating such funds, or the recipient or beneficiary of such fraud, material misrepresentation or misappropriation, whether or not such party, recipient or beneficiary is the Borrower or a Partner or the Manager, to the extent of losses relating to or arising from such fraud, material misrepresentation or misappropriation of funds under any Transaction Document; provided, further, that the Borrower's obligations in respect of the - -------- ------- Environmental Indemnity Agreement and the covenants, indemnities, representations and warranties relating to environmental matters contained in any Transaction Document shall not be Non-Recourse to the Borrower (but shall be Non-Recourse to its Partners other than the General Partner). The foregoing provisions shall not (a) prevent recourse to the Pledged Property or constitute a waiver, release or discharge of any Debt, and the same shall continue until paid or discharged, (b) limit the right of any Person, if required by applicable law, to name the Borrower or any successor or assign of the Borrower as a party defendant in any Action in the exercise of any remedy under any Transaction Document, so long as no judgment seeking the performance of any act requiring the expenditure of money shall be sought against the Borrower or any such successor or assign and so long as any monetary judgment seeking the expenditure of money is payable only from the Pledged Property or (c) impair any right of the Lender to obtain a deficiency judgment against the Borrower or any such successor or assign in any Action where necessary as a matter of law to preserve the rights and remedies of the Lender against the Pledged Property, provided that such deficiency judgment may only be enforced against the Pledged Property. Notwithstanding the foregoing, under no circumstances shall the Debt be recourse to any limited partner of the Partnership in its capacity as such. 13 "Note" means that certain Secured Promissory Note, dated the Closing Date, ---- from the Borrower to the Lender in the principal sum of $165,400,000. "Officer's Certificate" means a certificate signed by any officer of the --------------------- General Partner who is authorized to act hereunder on behalf of the Borrower. "Operating Account" has the meaning set forth in Section 7.7 of the Cash ----------------- Management Procedures. "Operating Budget" has the meaning set forth in Section 5.2(d)(vi). ---------------- "Operating Profit" has the meaning set forth in the Management Agreement. ---------------- "Operating Profit Payment Date" means the last Business Day of the third ----------------------------- week in each Accounting Period. "Operational Agreements" means the Management Agreement, the Property ---------------------- Agreements, the Equipment Leases, the Ground Leases, the Leases, if any, and any assignment and assumption agreements or other agreements related thereto. "Optional Prepayment Date" means January 11, 2007. ------------------------ "Paid-in-Full" means at such time as the Debt is not outstanding. ------------ "Partners" means the limited partners of the Borrower as constituted from -------- time to time and the General Partner, in their capacities as such. "Permits" means all permits, licenses, certificates, approvals, ------- authorizations and other documents necessary for the construction, use, operation or maintenance of the Inns and the Properties. "Permitted Exceptions" has the meaning set forth in the Mortgages. -------------------- "Permitted Investments" has the meaning set forth in Exhibit D hereto. --------------------- --------- "Person" means any individual, corporation, partnership, joint venture, ------ association, limited liability company, joint stock company, estate, trust, unincorporated organization or other business entity or Governmental Authority. "Phase-In Period" has the meaning set forth in Section 1.2 of the Cash --------------- Management Procedures. 14 "Plan(s)" means an employee benefit or other plan established or maintained ------- by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions and which is covered by Title IV of ERISA or Section 302 of ERISA or Section 412 of the IRC. "Pledged Property" means the Properties and the other collateral in which a ---------------- security interest is being granted pursuant to the Security Documents. "Potential Event of Default" means an event which, with the giving of any -------------------------- applicable notice and/or lapse of any applicable time period, would become an Event of Default. "Principal Payment" means the difference between a Monthly Debt Service ----------------- Payment and the Base Rate Interest paid for the applicable Debt Service Period. "Property" or "Properties" means any or all of those 50 Fairfield Inn by -------- ---------- Marriott hotels at the locations set forth in Exhibit E hereto, or, as the --------- context may require, the fee or leasehold estate owned by the Borrower therein, including the Borrower's ownership interest in all improvements thereon, fixtures thereto, direct interests therein, and personal property related thereto or included therein; provided, however, that "Property" or "Properties" -------- ------- shall not include (i) any property owned by tenants, guests, licensees or concessionaires of or to such Property or Properties, or (ii) any Property or Properties released from the Lien of the Security Documents pursuant to the provisions of Section 2.3 or 2.6 of this Agreement or any Security Document. "Property Agreements" means all material agreements, contracts and other ------------------- documents not specifically referred to herein relating to the operation of the Inns other than agreements for services performed by third parties which services are generally available from other third parties and which agreements can be terminated on not more than 30 days' prior notice without payment of any damages or penalty. "Purchase Money Security Interest" means purchase money mortgages or -------------------------------- security interests, conditional sale arrangements and other similar security interests on furniture, fixtures or equipment acquired by the Borrower in the ordinary course of business (and not inconsistent with customary industry practices), with the proceeds of the indebtedness secured thereby; provided, -------- however, that (i) any Purchase Money Security Interest shall attach only to the - ------- furniture, fixtures or equipment acquired in such transaction (and any proceeds, as defined in the Uniform Commercial Code, thereof), and (ii) such indebtedness shall not exceed the cost of such furniture, fixtures or equipment. 15 "Rating Agencies" means one or more of S&P, Fitch Investors Services Inc., --------------- DCR and Moody's Investors Service, Inc. that are, at the time of determination, selected by NACC to rate the Securities. "Rating Comfort Letter" a letter from each Rating Agency pursuant to which --------------------- it confirms that the taking of the action referred to therein will not result in a withdrawal, qualification or reduction of the then existing ratings of the Securities. "Release Date" has the meaning set forth in Section 2.3(a)(i). ------------ "Release Price" means the amount of the proceeds of the Loan allocated to ------------- each Property as set forth in Exhibit F annexed hereto. Release Prices for the --------- Properties will be adjusted as follows: If the principal amount of the Note is prepaid as a result of (i) the release of a property pursuant to Section 2.6, (ii) the application of U.S. Obligations pursuant to Section 2.3(g), or (iii) optional prepayment pursuant to the last sentence of Section 3.1, the Release Price for each Property that will be subject to the lien of any Mortgage immediately after such repayment shall equal the product of (x) a fraction the numerator of which is the Release Price of such Property immediately before such adjustment and the denominator of which is the aggregate Release Prices for all Properties, the lien of which is not being released, immediately before such adjustment, times (y) the outstanding principal amount of the Note immediately after such adjustment. "REMIC" has the meaning set forth in Section 2.3(a). ----- "Required Amount" has the meaning set forth in Section 8.6 of the Cash --------------- Management Procedures. "S&P" means Standard & Poor's Rating Services. --- "Securities" has the meaning set forth in Section 6.1. ---------- "Securities Act" means the Securities Act of 1933, as amended from time to -------------- time, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. "Securitization" has the meaning set forth in Section 6.1. -------------- "Security Documents" means (a) the Mortgages, (b) the collateral assignment ------------------ of documents and property rights, dated as of the Closing Date, by the Borrower to the Lender, (c) the assignments of leases, rents and profits, dated as of the Closing Date, by the Borrower to the Lender, (d) the collateral account agreement, dated as of the Closing Date, among the Servicer, the Borrower and the Lender, (e) the Environmental Indemnity Agreement, (f) all Uniform Commercial Code financing statements relating to the Debt and (g) any other documents securing the Debt. 16 "Servicer" means any nationally recognized servicer of commercial mortgage -------- loans selected by the Lender, its assigns and successors. "Servicing Expenses" has the meaning set forth in Section 4.3B of the Cash ------------------ Management Procedures. "SNDA" means the Modification, Subordination and Non-Disturbance ---- Agreements, Estoppels, Assignments and Consents, dated as of the Closing Date, among the Manager, the Borrower and the Lender. "Subordinate Debt" means Indebtedness incurred by the Borrower after ---------------- January 11, 1999 that is expressly subordinate in right of payment to the Debt pursuant to the provisions of the Mortgages and with respect to which evidence is provided satisfactory to the Lender that the pro forma Debt Service Coverage --- ----- Ratio on its date of issuance is at least 2.25:1 and as to which the Rating Agencies deliver a Rating Comfort Letter. For the purpose of calculating such Debt Service Coverage Ratio, Debt Service Expense shall be the difference between (i) the aggregate amount of scheduled interest and principal payable on the proposed subordinate indebtedness and any other Indebtedness secured by any assets of the Borrower and (ii) the payments received from or with respect to U.S. Obligations purchased by the Lender with the Defeasance Deposits paid to it by the Borrower pursuant to Section 2.3 and then held as security for the Note. "Substantive Consolidation Opinion" has the meaning set forth in Section --------------------------------- 6.1(b). "Successor Entity" has the meaning set forth in Section 2.3(e). ---------------- "Third Party Payors" has the meaning set forth in Section 1.2 of the Cash ------------------ Management Procedures. "Transaction Documents" means this Agreement, the Security Documents, the --------------------- Note and all other documents executed and delivered by the Borrower in favor of the Lender in connection with the Loan, including, without limitation, all agreements, instruments and documents pursuant to which the Pledged Property is assigned, collaterally assigned and/or pledged to the Lender hereunder. "Transition Period" has the meaning set forth in Section 7.1.2 of the Cash ----------------- Management Procedures. "Trustee" means the trustee to which NACC assigns its interest in the ------- Transaction Documents in connection with a Securitization. "Uncontrollable Circumstances" means circumstances causing delay due to ---------------------------- acts of God, governmental restrictions (other than arising from the Borrower's failure to comply with applicable law), 17 enemy acts, civil commotion or other causes beyond the reasonable control of the Borrower. "United States" means the United States of America (including the States ------------- and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "U.S. Obligations" has the meaning set forth in Section 2.3(f). ---------------- "USAH" means the Uniform System of Accounts for Hotels, Eighth Edition, or ---- any other subsequent edition as may be determined by the accountants for the Borrower to be applicable to the operations of the Borrower, or if USAH is no longer published, GAAP. "Welfare Plan" means an employee welfare benefit plan, as defined in ------------ Section 3(1) of ERISA. "Work" has the meaning set forth in Section 8.1 of the Cash Management ---- Procedures. "Yield Maintenance Premium" shall mean an amount in cash that would be ------------------------- necessary to purchase U.S. Obligations in an amount that would be sufficient, together with U.S. Obligations that could be purchased with the unpaid principal of and accrued interest on the Note paid to the Lender upon an acceleration of the Note pursuant to Section 4.2, to provide the payments due on or prior to, but as close as possible to, all successive Debt Service Payment Dates after the receipt of such amount in respect of (i) the remaining Monthly Debt Service Payments that would be required under the Note through and including January 11, 2007 and (ii) a balloon payment of the outstanding principal balance of the Note and accrued and unpaid interest as of such date as if such balloon payment were then due and payable. ARTICLE II PROVISIONS CONCERNING THE ACCOUNTS AND PLEDGED PROPERTY Section 2.1 Cash Management Procedures. -------------------------- The provisions of Exhibit B are incorporated herein by reference. --------- Section 2.2 Right to Contest. To the extent consistent with the ---------------- Mortgages, the Borrower at its expense may contest, by appropriate Action conducted in good faith and with due diligence, the amount or validity or application, in whole or in part, of any Imposition or Lien therefor or any Legal Requirement or Insurance Requirement or the application of any instrument of record affecting the Pledged Property or any part thereof or any claims or 18 judgments of mechanics, materialmen, suppliers or vendors or Liens therefor, and may direct the Manager or the Servicer, as the case may be, to withhold payment of the same pending such Action if permitted by law; provided, however, that (a) -------- ------- in the case of any Impositions or Liens therefor or any claims or judgments of mechanics, materialmen, suppliers or vendors or Liens therefor, such Action shall suspend the enforcement thereof and the accrual of penalties thereon payable by the Borrower, the Manager and the Servicer and otherwise with respect to the Pledged Property, (b) neither the Pledged Property nor any part thereof or interest therein could be in any danger of being sold, forfeited or lost if the Borrower pays the amount or satisfies the condition being contested, and the Borrower would have the opportunity to so pay or satisfy if the Borrower fails to prevail in the contest and (c) in the case of an Insurance Requirement, the failure of the Borrower to comply therewith shall not impair the validity of any insurance required to be maintained by the Borrower under the applicable Mortgage or the right to full payment of any claims thereunder. Section 2.3 Defeasance. ---------- (a) At any time after the date which is the earlier of (i) two years after the "startup day," within the meaning of Section 860G(a)(9) of the IRC, of a "real estate mortgage investment conduit," within the meaning of Section 860D of the IRC (a "REMIC"), that holds the Note (if the Note has been transferred to a ----- REMIC prior to January 11, 1999) and (ii) January 11, 2001, but prior in either case to the Optional Prepayment Date, and provided no Event of Default has occurred and is continuing (other than an Event of Default that will be cured by the release of a Property or Properties from the Lien of the Security Documents pursuant to the provisions of clause (e) of Section 4.1A), the Borrower may defease such Lien to cause the release of one or more Properties from such Lien by providing the Lender with funds in an amount equal to the Defeasance Deposit for that portion of the Note which the Borrower wishes to defease, upon the satisfaction of the following conditions: (i) not less than 30 days' notice to the Lender specifying a Debt Service Payment Date (the "Release Date") on which the Defeasance Deposit is to ------------ be made; (ii) the payment to the Lender of interest accrued and unpaid on the principal balance of the Note and all other Debt due through and including the Release Date; (iii) the payment to the Lender of the Defeasance Deposit; and (iv) the delivery to the Lender of: 19 (A) a security agreement (the "Defeasance Security Agreement"), ----------------------------- in form and substance satisfactory to the Lender, creating a first priority perfected security interest in favor of the Lender in the Defeasance Deposit and the U.S. Obligations purchased with the Defeasance Deposit in accordance with this subsection (a) (together, the "Defeasance Collateral"); ---------- ---------- (B) form(s) of release of the Property(ies) to be released from the Lien of the Security Documents (for execution by the Lender) appropriate for the jurisdiction(s) in which such Property(ies) are located; (C) an Officer's Certificate certifying that the requirements set forth in subsections (a) (ii)-(iv) have been satisfied; (D) an opinion of counsel for the Borrower (which may be a "reasoned" opinion), in form and substance satisfactory to the Lender, that (i) the transfer of the Defeasance Collateral in exchange for release(s) of the Property(ies) to be released will not constitute an avoidable preference under Section 547 of the United States Bankruptcy Code in the event of a filing of a petition for relief under the United States Bankruptcy Code for or against the Borrower, (ii) the Defeasance Collateral has been duly and validly transferred and assigned to the Trustee for the benefit of the holders of the Securities, (iii) the Trustee holds a first priority perfected security interest in the Defeasance Collateral for the benefit of such holders, (iv) such transfer will not result in a deemed exchange of the Securities pursuant to Section 1001 of the IRC, (v) such transfer will not, by itself, adversely affect the status of the Securities as indebtedness for federal income tax purposes and (vi) such transfer will not adversely affect the status of the entity holding the Debt as a REMIC (assuming for such purposes that such entity otherwise qualifies as a REMIC and that the Note was transferred to such REMIC not later than two years prior to the Release Date); (E) a certificate of a certified public accountant acceptable to the Lender that the Defeasance 20 Collateral complies with the requirements set forth in subsection (b) below; (F) such other certificates, documents or instruments as the Lender may reasonably request; (G) evidence satisfactory to the Lender that the Defeasance Debt Service Coverage Ratio will be maintained for the twelve full months commencing immediately after the Release Date at the greater of (x) the Initial Debt Service Coverage Ratio and (y) the ratio of the Net Operating Income for the thirteen (13) full Accounting Periods next preceding the Release Date divided by the difference between (i) Debt Service Expense for such period and (ii) the payments received for such period from or with respect to U.S. Obligations purchased by the Lender with the Defeasance Deposits paid to it by the Borrower pursuant to this Section 2.3(a) and then held as security for the Note for such period; and (H) If the defeasance is made after the Securitization, the Rating Agencies deliver a Rating Comfort Letter. (b) If, following the release of the subject Property(ies), less than all of the Properties shall have been released, the Lender shall use the Defeasance Deposit to purchase U.S. Obligations that provide payments on or prior to, but as close as possible to, all successive Debt Service Payment Dates after the Release Date that would be required with respect to an assumed promissory note in a principal amount equal to 125% of the Release Price(s) of the Property(ies) to be released from the Lien of the Security Documents on such Release Date. Such assumed promissory note shall be in the same form (including with respect to term and interest rate) as the Note but shall provide for a mandatory prepayment thereof in full on the Optional Prepayment Date, including through the application by the Servicer of U.S. Obligations pursuant to the provisions of subsection (g) of this Section 2.3. In order to secure the release, in addition to the U.S. Obligations referred to in the preceding sentence, the Borrower may, at its election, purchase U.S. Obligations for delivery to the Servicer that provide additional payments of the type referred to herein in order to satisfy the Defeasance Debt Service Coverage Ratio requirement in Section 2.3(a)(iv)(G). If any Property is released pursuant to this Section 2.3 as a result of a condemnation or casualty, the payments provided for in this subsection (b) shall be equal to the greater of (A) the Release Price and (B) the lesser of (x) 125% of the Release Price and (y) the net Condemnation Proceeds or the net Insurance Proceeds 21 received on account of such Property. The Lender shall deliver such U.S. Obligations to the Servicer for application pursuant to Sections 4.3(B) and 7.9(A) of the Cash Management Procedures. (c) If, as a result of the release of the subject Property(ies), all of the Properties shall have been released, the Lender shall use the Defeasance Deposit to purchase U.S. Obligations that provide, together with any U.S. Obligations purchased in connection with any prior releases of Properties, payments on or prior to, but as close as possible to, all successive Debt Service Payment Dates after the Release Date that would be required with respect to an assumed promissory note in a principal amount equal to the aggregate outstanding principal balance of the Note and accrued and unpaid interest thereon on the Release Date. Such assumed promissory note shall be in the same form (including with respect to term and interest rate) as the Note but shall provide for a mandatory prepayment thereof in full on the Optional Prepayment Date, including through the application by the Servicer of U.S. Obligations pursuant to the provisions of subsection (g) of this Section 2.3. The Lender shall deliver such U.S. Obligations to the Servicer for application pursuant to Sections 4.3(B) and 7.9(A) of the Cash Management Procedures. (d) Upon compliance with the requirements of this Section 2.3, each Property to be released shall be released from the Lien of the Security Documents and shall not be deemed a Property hereunder, and the U.S. Obligations shall constitute substitute collateral, which, together with the Security Documents applicable to the remaining Properties, shall secure the Debt. (e) If all the Properties have been released, the Borrower may assign its obligations under the Note together with the U.S. Obligations to a successor entity (the "Successor Entity") designated by the Lender and thereupon be ---------------- released fully from all obligations relating to the Debt. In such event the opinion of counsel provided for in clause (a)(iv)(D) of this Section 2.3 shall provide that upon such assignment the Defeasance Collateral will not be part of the estate of the Borrower under Section 541 of the United States Bankruptcy Code. The Lender shall retain its obligation to designate a Successor Entity notwithstanding the transfer of the Note unless such obligation is specifically assumed by the transferee. In consideration for the payment of $1,000 by the Borrower, such Successor Entity shall assume the Borrower's obligations under the Note and the Defeasance Security Agreement, the Borrower shall be relieved of its obligations thereunder and the Debt of the Borrower shall not be deemed outstanding for any purpose of this Agreement. If required by the applicable Rating Agencies, the Borrower shall also deliver or cause to be delivered a Substantive Consolidation Opinion with respect to the Successor Entity in form and substance satisfactory to the Lender and the applicable Rating Agencies. 22 (f) For purposes of this Section 2.3, "Defeasance Deposit" shall mean an ------------------ amount in cash necessary to purchase U.S. Obligations whose cash flows are in an amount sufficient (i) to make the payments required under subsections (b) or (c), as the case may be, plus any costs and expenses incurred or to be incurred in making such purchase and (ii) to make the additional monthly payments necessary to cause the Defeasance Debt Service Coverage Ratio requirement in Section 2.3(a)(iv)(G) to be satisfied; "U.S. Obligations" shall mean obligations ---------------- or securities not subject to prepayment, call or early redemption which are direct obligations of, or obligations fully guaranteed as to timely payment by, the United States of America or any agency or instrumentality of the United States of America, the obligations of which are backed by the full faith and credit of the United States of America; and "Defeasance Debt Service Coverage -------------------------------- Ratio" shall mean, in respect of any fiscal period, the ratio of (i) Net - ----- Operating Income for such period of the Properties remaining after a defeasance pursuant to this Section 2.3 to (ii) the difference between (x) Debt Service Expense for such period and (y) the payments to be received from or with respect to U.S. Obligations then held as security for the Note for such period, including, without limitation, U.S. Obligations purchased by the Borrower pursuant to the third sentence of subsection (b) above. (g) If the payment of accrued and unpaid interest and principal of the Note and any other Debt has not been made in full by the Optional Prepayment Date, payments from or with respect to U.S. Obligations then held by the Lender and such payments received by the Lender thereafter shall be applied on the date such payment is received (i) first, to payment of accrued and unpaid interest on the Note and (ii) second, to prepayment of the Principal Payments in inverse order of maturity. (h) Notwithstanding the provisions of subsection (a) of this Section 2.3 setting forth the time period during which a Property may be defeased, the Borrower may defease the Lien of the Security Documents to cause the release of a Property for the purpose set forth in clause (e) of Section 4.1A prior to the date set forth in such subsection (a) if it provides to the Lender an opinion in form and substance, and from a firm, acceptable to the Lender in the exercise of its sole discretion, that such release will not adversely affect the status of the entity holding the Debt as a REMIC (assuming for such purpose that such entity otherwise qualifies as a REMIC). Section 2.4 Sale of all the Properties. Provided that no Event of -------------------------- Default has occurred and is continuing, upon at least 60 days' notice to the Lender, the Borrower has the right to sell all the Properties, subject to the Debt, to any Person so long as (a) such Person is approved by the Lender, and, after the Securitization, by NACC, such approval not to be unreasonably withheld, and (b) the Rating Agencies deliver a Rating Comfort 23 Letter. It is understood that the Rating Agencies may require, as a condition to such delivery, matters equivalent to those contained in clauses (i) and (ii) of Section 2.5. Upon such approval and delivery, the Lender shall deliver to the Borrower for execution and delivery such instruments as may be reasonably required to effect an assignment and assumption of the Debt and a release of the obligations of the Borrower under the Transaction Documents, including, without limitation, a new Note as to which the purchaser of the Properties shall be the obligor, in a principal amount equal to the then outstanding principal amount of the Note. Section 2.5 Change of Control. There shall be no Change of Control; ----------------- provided, however, that if no Event of Default has occurred and is continuing - -------- ------- there can be a Change of Control if (i) the Borrower submits to the Lender an opinion in form and substance and from a firm satisfactory to the Lender, with respect to the requested Change of Control, to the same effect as the Substantive Consolidation Opinion, (ii) the organizational documents of the Person involved in the requested Change of Control are approved by the Lender and (iii) after the Securitization, the Rating Agencies deliver a Rating Comfort Letter. Section 2.6 Partial Release after the Optional Prepayment Date. On the -------------------------------------------------- Optional Prepayment date and each Debt Service Payment Date thereafter, upon the sale of any Property to any Person, the Borrower may cause the release of such Property from the Lien of the Security Documents upon the satisfaction of the following conditions: (a) not less than 30 days' notice to the Lender specifying a Debt Service Payment Date on which the amount set forth in clause (c) below is to be provided to the Servicer, which notice shall be accompanied by an Officer's Certificate to the effect that no Potential Event of Default or Event of Default has occurred and is continuing (or, in the case of a Potential Event of Default or Event of Default that shall be cured or avoided by the release of the affected Property, describing the nature of such Potential Event of Default or Event of Default, and certifying that such Potential Event of Default or Event of Default shall be cured by such release) and that such Release will comply with all applicable requirements of this Section 2.6; (b) the payment to the Lender of interest accrued and unpaid on the principal balance of the Note and all other sums due under the Transaction Documents, through and including such Debt Service Payment Date; (c) the payment to the Lender, to be applied to prepayment of the Principal Payments in inverse order of maturity, of an amount equal to 125% of the Release Price of such Property; provided, however, that if a Property is -------- ------- released pursuant to this Section 24 2.6 as a result of a condemnation or casualty (and the Borrower in accordance with the applicable Mortgage determines in good faith that such Property cannot be restored to substantially the condition that existed prior to the condemnation or casualty), such payment shall be an amount equal to the greater of (a) and (b), in which (a) is the Release Price for such Property and (b) is the lesser of (x) 125% of such Release Price and (y) the net Condemnation Proceeds or net Insurance Proceeds received on account of such Property; (d) delivery to the Lender for execution of forms of release of such Property from the Lien of the Security Documents appropriate for the jurisdiction in which such Property is located; and (e) delivery to the Lender of evidence satisfactory to the Lender that the ratio of (i) Net Operating Income for the thirteen full Accounting Periods immediately succeeding the release date to (ii) the difference between (y) the Debt Service Expense for such Accounting Periods and (z) the payments to be received for such Accounting Periods from or with respect to U.S. Obligations then held as security for the Note will be maintained at the greater of (x) the Initial Debt Service Coverage Ratio and (y) the ratio of (i) the Net Operating Income for the thirteen full Accounting Periods next preceding the release date to (ii) the difference between (y) the Debt Service Expense for such Accounting Periods and (z) the payments received for such Accounting Periods from or with respect to U.S. Obligations then held as security for the Note. ARTICLE III PAYMENTS Section 3.1 Payments on the Note. All payments made on the Note shall -------------------- be made in the manner, and subject to the conditions, provided in this Agreement and the Note. The Note shall not be prepayable except as expressly provided for in this Section 3.1, Section 2.3 hereof, Section 2.6 hereof and Sections 4.4 and 7.10 of the Cash Management Procedures. In addition, on the Optional Prepayment Date and each Debt Service Payment Date thereafter, the Note may be prepaid, at the option of the Borrower, in full or in part, without penalty or premium. Section 3.2 Interest. -------- (a) Except as set forth in Sections 3.4(b) and 3.4(d), the Debt shall bear interest for each Debt Service Period at the Base Rate. 25 (b) Calculations of interest shall be made on the basis of a 360-day year and actual days elapsed during each Debt Service Period. Section 3.3 Payments without Deduction, etc. All payments of the Debt -------------------------------- to the Lender shall be absolute and unconditional, shall be paid strictly in accordance with the terms of the Transaction Documents without being subject to any claim, set-off, defense or other right which the Borrower may have against the Lender or any other Person, whether in connection with this Agreement, the transactions contemplated herein or any other circumstance or happening whatsoever. The Borrower shall pay such payments to the Lender free and clear of, and without deduction for, any and all present or future taxes, levies, imposts, deductions, charges, penalties or withholdings, and any liabilities with respect thereto, by whomever imposed, other than present or future taxes on the income of the Lender or franchise taxes imposed on the Lender as a result of its conducting business in specific jurisdictions. The Borrower shall pay and indemnify and hold the Lender harmless from and against, any present or future claim for liability for United States, state or local taxes or assessments on the ownership by the Lender of the debt obligations of the Borrower evidenced by the Note, the Mortgages or on the principal, interest, fees or other amounts payable under any Transaction Document or otherwise in respect of the Debt (other than income or franchise taxes imposed on the Lender or its Affiliates by any jurisdiction). The obligations of the Borrower hereunder shall survive repayment of the Debt and termination of the Transaction Documents. Section 3.4 Periodic Payments. ----------------- (a) On February 11, 1997, the Borrower shall pay to the Lender (i) interest on the Note at the Base Rate for the period beginning on January 13, 1997 and ending on February 10, 1997, in an amount equal to $1,119,206.67, and (ii) a principal payment in an amount equal to $228,535.11. (b) On each Debt Service Payment Date occurring after February 11, 1997, the Borrower shall pay $1,424,928.44 to the Lender. Such amount shall be applied (i) first, to the payment of the Base Rate Interest on the Note then due and payable for the applicable Debt Service Period, and (ii) next, to the Principal Payment. Following the Maturity Date and while an Event of Default has occurred and is continuing, the Monthly Debt Service Payment shall be increased to reflect payment of interest at the Default Rate; provided, however, that for the purposes of this sentence, an Event of Default shall be considered to have occurred and be continuing until such Event of Default has been cured, including, without limitation, pursuant to the provisions of Section 4.1B. 26 (c) If any Principal Payment or a portion thereof is prepaid on any Debt Service Payment Date by the application by the Servicer of payments received (i) from or with respect to U.S. Obligations held by the Servicer on the Optional Prepayment Date as a result of a release of any Property from the Lien of the Security Documents pursuant to Section 2.3, (ii) from the release of a Property from the Lien of the Security Documents pursuant to Section 2.6, or (iii) on and after the Optional Prepayment Date, pursuant to the last sentence of Section 3.1 hereof, the Monthly Debt Service Payment payable on each Debt Service Payment Date thereafter shall be reduced in an amount equal to the percentage reduction in the principal amount payable under the Note effected by such prepayment. (d) Subsequent to the Optional Prepayment Date and in accordance with the Cash Management Procedures, the Borrower shall pay to the Lender on each Debt Service Payment Date (without duplication) any Excess Cash Flow for all Accounting Periods for which the Operating Profit Payment Date occurred during the Debt Service Period immediately preceding such Debt Service Payment Date, which payments shall be applied (A) first, to prepayment of each Principal Payment required to be made on each Debt Service Payment Date, in inverse order of maturity until the principal of the Note has been paid in full, and (B) next, to payment of the difference, if any, between (y) the sum of (i) interest accrued and unpaid on the Note calculated at the Adjusted Rate and (ii) interest on such accrued and unpaid amount at the Adjusted Rate and (z) the Base Rate Interest paid on each Debt Service Payment Date. ARTICLE IV DEFAULT; REMEDIES; ENFORCEMENT Section 4.1A Events of Default. Any of the following shall constitute a ----------------- default under this Agreement (an "Event of Default"): ---------------- (a) failure by the Borrower to pay on the due date any interest or principal due and payable on the Note as set forth therein; or (b) failure by the Borrower to make any other payment due under any Transaction Document within ten (10) days after demand therefor shall have been made; or (c) any representation or warranty of the Borrower contained in any Transaction Document (other than the representations and warranties contained in Sections 5.1(l) and 5.1(t) shall have been untrue or incorrect when made in any respect that may have a Material Adverse Effect or a representation or warranty contained in Sections 5.1(l) and 5.1(t) shall have been untrue or incorrect when made; provided, however, that for the purpose of this clause (c) the words "To -------- ------- the Best Knowledge of the Borrower" shall be 27 deleted, where used, from the provisions of each representation and warranty contained in Section 5.1 (other than Sections 5.1(e), 5.1(f), 5.1(aa) and 5.1(an); or (d) failure by the Borrower to perform its covenants in Section 5.2(d), and such failure continues unremedied for ten days after notice thereof by the Lender to the Borrower requiring the same to be remedied; or (e) failure by the Borrower to perform or observe (i) any other of its covenants under any Transaction Document (other than the covenants contained in Sections 5.2(g)(i) and (ii), 5.3(f), 5.3(j), 5.3(l) and 5.3(n)) that has a Material Adverse Effect, or (ii) its covenants contained in Sections 5.2(g)(i) and (ii), 5.3(f) 5.3(j), 5.3(l) and 5.3(n), and in each case such failure continues unremedied for 30 days after notice thereof by the Lender to the Borrower requiring the same to be remedied or such shorter period as shall be provided in such Transaction Document; provided, however, that it shall not be -------- ------- an Event of Default if (a) such failure is curable but is not reasonably capable of being cured within such 30-day or shorter period and the Borrower shall have commenced to cure such failure within such 30-day or shorter period and thereafter shall diligently pursue such cure to completion, but in no event later than 180 days after the date on which the Borrower received such notice from the Lender or (b) such failure affects one or more but not all of the Properties and the Borrower, within thirty (30) days after its receipt of such notice from the Lender, gives notice to the Lender of its intent to release such Property(ies) from the Lien of the Security Documents pursuant to the provisions of Section 2.3 or 2.6 and, thereafter diligently pursues efforts to take such action and, within 180 days after the date on which it received such notice from the Lender, effects such release pursuant to the provisions of Section 2.3 or 2.6, as the case may be; or (f) an order (that has not been vacated or stayed within 60 days from the entry thereof) is made for, or the Partners take any action with regard to, the winding up of the Borrower or the General Partner except a winding up for the purpose of a merger, restructuring or contribution, the terms of which have previously been consented to by the Lender; or (g) (A) the Borrower or the General Partner shall commence any Action (1) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors (collectively, "Insolvency Law") seeking to have an order for relief entered -------------- with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (2) seeking appointment of a receiver, trustee, custodian or other similar official (each a "Bankruptcy Custodian") for it or for all or substantially all of its -------------------- assets, 28 or the Borrower or the General Partner shall make a general assignment for the benefit of its creditors; or (B) there shall be commenced against the Borrower or the General Partner any Action of a nature referred to in clause (A) above which (1) results in the entry of any order for relief or any such adjudication or appointment and (2) remains undismissed, undischarged or unbonded for a period of 60 days; or (C) there shall be commenced against the Borrower or the General Partner any Action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or substantially all of its assets which results in the entry of an order for any such relief that shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within 60 days from the entry thereof; or (D) the Borrower or the General Partner shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (h) Unless (a) the Borrower causes all of the Properties to come under management by another nationally recognized hotel operator acceptable to the Lender, in the exercise of its reasonable discretion, (b) such Properties are operated as part of a comparable nationally recognized hotel system acceptable to the Lender and (c) each of the Rating Agencies delivers to the Lender a Rating Comfort Letter with respect thereto: (A) the Manager shall commence any Action (1) under any Insolvency Law seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (2) seeking appointment of a Bankruptcy Custodian for it or for all or substantially all of its assets, or the Manager shall make a general assignment for the benefit of its creditors; or (B) there shall be commenced against the Manager any Action of a nature referred to in clause (A) above which (1) results in the entry of any order for relief or any such adjudication or appointment and (2) remains undismissed, undischarged or unbonded for a period of 60 days; or (C) there shall be commenced against the Manager any Action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or substantially all of its assets which results in the entry of an order for any such relief that shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within 60 days from the entry thereof; or (D) the Manager shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (i) one or more judgments or decrees, not covered by insurance, in an aggregate amount exceeding $2,000,000 in the case of the Borrower and $1,000,000 in the case of the General Partner shall be entered against the Borrower or the General Partner, and such judgments or decrees shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within 60 days from the entry thereof; or 29 (j) there is a Change of Control, unless permitted under Section 2.5; or (k) any statement, representation or warranty set forth in the Officer's Certificate (as such term is defined in the opinion (the "Opinion") of Hogan & Hartson L.L.P., dated this date, with respect to issues of "substantive consolidation" under the Bankruptcy Code) shall have been untrue, incorrect or misleading in any material respect on the date hereof, or if the General Partner breaches in any material respect the agreement attached hereto as Exhibit K, and --------- the Borrower fails (a) to cause the entity responsible for such untrue, incorrect, or misleading statement, representation or warranty (the "Offending Party"); the Offending Party may be the Borrower or the General Partner) to take such action as may be required within 30-days after notice (each a "Notice") of the untruth, inaccuracy or misleading nature thereof by the Lender to the Borrower to "cure" such failure such that such statement, representation or warranty would not have been untrue, incorrect or misleading in any material respect if such "cure" had been in effect on the date hereof or (b) to cause such breach to be cured within 30 days after Notice; provided, however, that it shall not be an "Event of Default" if such "cure" is not reasonably capable of being implemented within such 30-day period and the Offending Party shall have commenced such "cure" within such 30-day period and thereafter shall diligently pursue such cure to completion, but in no event later than 180 days after the date on which the Borrower received Notice. Section 4.1B Event of Default Cure. None of the foregoing shall --------------------- constitute an Event of Default if after the occurrence thereof, the Borrower tenders a cure for such Event of Default or a plan to cure such Event of Default and the Lender accepts such tender, such acceptance to contain such conditions as the Lender, in the exercise of its sole discretion, may require. If the Borrower tenders to the Lender all sums, the non-payment of which constituted an Event of Default under clauses (a) or (b) of Section 4.1A, and the Lender accepts such sums, such non-payment shall not constitute an Event of Default. If the Lender does not accept any such payment or tender, the Event of Default shall be continuing. The Lender shall be deemed to have accepted a tender of cash if the Lender does not return such cash to the Borrower within 10 Business Days of its receipt thereof. Except as contemplated by the preceding sentence, if the Lender fails to respond to the Borrower within 30 days of its receipt of such tender, it shall be deemed to be rejected. Section 4.2 Remedies. If an Event of Default shall have occurred and be -------- continuing, the Lender shall have the right, in its sole discretion, by notice to the Borrower (with a copy to the Manager) (except upon the occurrence of an Event of Default under clauses (f) or (g) of Section 4.1A, in which case all principal and accrued interest thereon will be immediately due and payable on the 30 Note without any declaration or other act on the part of the Lender) to take one or more of the following actions: (a) To declare the principal of and all amounts accrued but unpaid under the Note and the Transaction Documents, together with the Yield Maintenance Premium, if the Event of Default occurs and is continuing prior to the Optional Prepayment Date, to be immediately due and payable, and such amounts shall thereupon become immediately due and payable, without presentment, demand, protest or notice of any kind, other than any notice specifically required by this Section 4.2, all of which are hereby expressly waived by Borrower; (b) Pursue such rights and remedies against the Borrower, or otherwise, as are provided under and pursuant to the Mortgages or any of the other Transaction Documents and as may be available to the Lender at law or in equity, including, without limitation, during such time as the Lender may be considering a tender of a cure or a plan pursuant to Section 4.1B; provided, however, that the Lender -------- ------- shall not initiate foreclosure proceedings unless five (5) Business Days' prior notice of such intention is given to Borrower and the tender of a cure or a plan therefor shall not have been accepted by the Lender pursuant to the provisions of Section 4.1B before the end of such 5 Business Day period; and (c) If the Event of Default involves the Borrower's failure to pay any Imposition or to comply with the Insurance Requirements, or to perform or observe any other covenant, condition or term in any Transaction Document or in the Management Agreement, the Lender may, at its option, without waiving or affecting any of its rights or remedies hereunder, pay,perform or observe the same, and, in connection therewith, the Lender shall be entitled to rely on any representations and statements of the Manager under the Management Agreement in regard to alleged breaches or violations thereof, and all payments made or costs or expenses incurred by the Lender in connection therewith shall be repaid by Borrower to the Lender within fifteen (15) days after demand therefor, and shall be added to and become a part of the Debt. The Lender is hereby empowered to enter and to authorize others to enter upon any Property for the purpose of performing or observing any such defaulted covenant, condition or term, without thereby becoming liable to Borrower or any Person in possession holding under Borrower. Section 4.3 Remedies Cumulative; Delay or Omission Not a Waiver. To the --------------------------------------------------- extent permitted by law, every remedy given hereunder or in any other Transaction Document to the Lender shall not be exclusive of any other remedy or remedies, and every such remedy shall be cumulative and in addition to every remedy provided by statute, law, equity or otherwise. The Lender may exercise all or any of the powers, rights or remedies given to it hereunder or which may be now or hereafter given by statute, law, equity or otherwise, in its absolute discretion. No course of dealing 31 between the Borrower and the Lender or any delay or omission of the Lender to exercise any power, right or remedy accruing upon any Event of Default shall impair any power, right or remedy or shall be construed to be a waiver of any such Event of Default or acquiescence therein, and every power, right and remedy given by each Transaction Document to the Lender may, to the extent permitted by law, be exercised from time to time and as often as may be deemed expedient by the Lender. ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS Section 5.1 Representations and Warranties of the Borrower. ---------------------------------------------- The Borrower represents and warrants to, and covenants with the Lender, that, as of the Closing Date, except as set forth on the Disclosure Report: (a) Exhibit G hereto sets forth the organizational structure of the --------- Borrower, and the equity interests and holders therein. The Borrower is a limited partnership validly existing and in good standing under the laws of the State of Delaware and is qualified to do business in each jurisdiction where the nature of its business or location of the Properties requires it to be so qualified. The General Partner is a corporation validly existing and in good standing under the laws of the State of Delaware and is qualified to do business in each jurisdiction where the nature of its business or location of the Properties requires it to be so qualified. Neither the General Partner nor the Borrower has engaged in any business unrelated to the ownership of the Properties. Neither the General Partner nor the Borrower has assets other than those related to the Properties; (b) The Borrower has, and at relevant times has had, the requisite power and authority to own its assets and conduct its business, to execute and deliver each of the Transaction Documents and all Operational Agreements to which the Borrower is a party and to carry out the transactions contemplated thereby; (c) The execution, delivery and performance by the Borrower of (i) each of the Transaction Documents and (ii) the Operational Agreements to which the Borrower is a party have been duly and validly authorized by all necessary actions and proceedings on the part of the General Partner and the Borrower, and no further approvals or filings of any kind, including, without limitation, any approval of or filing with any Governmental Authority, are required as a condition thereof; (d) Neither the execution and delivery of each of the Transaction Documents and the Operational Agreements, nor the fulfillment of or compliance with the terms and conditions thereof: 32 (i) will conflict with or result in any breach or violation of any law, rule or regulation issued by any Governmental Authority, or any judgment or order applicable to the Borrower or the General Partner, or to which the Borrower or the General Partner or any of the Properties are subject; (ii) will conflict with or result in any breach or violation of, or constitute a default under, any of the provisions of the Amended and Restated Agreement of Limited Partnership of the Borrower, the Restated Certificate of Incorporation of the General Partner, or any agreement or instrument to which the Borrower or the General Partner is a party or to which the Borrower or the General Partner or any of the Properties is subject; or (iii) will result in or require the creation of any Lien on any of the Properties except Permitted Exceptions and Liens in favor of the Lender; (e) Each of (i) the Transaction Documents and (ii) the Operational Agreements to which the Borrower is a party, and, to the Best Knowledge of the Borrower, each of the Operational Agreements, if any, to which the Borrower is not a party, has been duly executed and delivered by the Borrower and to the Best Knowledge of the Borrower, the other parties thereto and constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms subject to the effects of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law) To the Borrower's Best Knowledge, each of the Operational Agreements to which it is not a party has been duly executed and delivered by the parties thereto; (f) There is no Action pending to which the Borrower or the General Partner is a party or to which any Property is subject, directly or indirectly, and, to the Best Knowledge of the Borrower and, based on a certification to the Borrower by the Manager, of the Manager, no such Action is threatened or contemplated by any Person, in each case, other than an Action that does not involve an amount in controversy in excess of $25,000; (g) The Borrower has not received notice of, and does not have any knowledge of, any violations of any Legal Requirements affecting any Property or the construction, development, use, operation, maintenance or management thereof, except as set forth in the Exhibits and Schedules to this Agreement; (h) Neither the Borrower nor the General Partner has any subsidiaries; 33 (i) Except for the Debt, since its inception, the Borrower has not incurred Indebtedness other than Purchase Money Security Interests and the debt to the Sumitomo Trust Bank Co., Ltd., New York Branch, described in the Disclosure Report, which has been paid in full; (j) The Borrower does not have any employees; (k) A true and complete copy of each Ground Lease (including all amendments, agreements, side letters and documents relating thereto) has been delivered to the Lender. Each Ground Lease is unmodified and in full force and effect and there is no material default by the Borrower thereunder nor, to the Borrower's Best Knowledge, by the lessor thereunder, and, to the Borrower's Best Knowledge, no event has occurred and is continuing which, with the passage of time and/or the giving of notice, would constitute a default or event of default under any Ground Lease; (l) True and complete copies of the Operational Agreements (including all amendments, agreements, side letters and all other material documents relating thereto other than those effected in the ordinary course of business and which individually or in the aggregate do not have an Individual Material Adverse Effect) have been made available to the Lender; each such agreement is unmodified and in full force and effect; to the Best Knowledge of the Borrower, there is no default by any party thereunder; and no event has occurred and is continuing which, with the passage of time and/or the giving of notice, would constitute a default or event of default by the Borrower thereunder in such circumstances that such default or event of default might have an Individual Material Adverse Effect. All necessary consents to the transactions described in the Transaction Documents required by such agreements have been obtained. Since its inception, neither the Borrower nor the General Partner has entered into any agreements or obligations other than the Transaction Documents, the Operational Agreements and other agreements relating to the Properties entered into in the ordinary course of business; (m) All necessary governmental consents, if any, to the transactions described in the Transaction Documents have been obtained; (n) The Operating Budget annexed hereto as Exhibit H contains all --------- anticipated operating expenses for the Properties for the year ending December 31, 1997. The Capital Budget annexed hereto as Exhibit I contains all --------- anticipated Capital and FF&E Expenditures for the Properties for the year ending December 31, 1997; (o) All Permits material to the operations of each Property have been obtained and are in full force and effect and are in the Borrower's name or available for its use; 34 (p) Each Property has available to it adequate parking to comply with all Legal Requirements and to permit the operation of the Property as a hotel conforming to at least the standards applicable to Fairfield Inn by Marriott hotels and is in compliance with the Management Agreement; (q) The Borrower is not subject to any United States or state income, unincorporated business, capital, franchise or similar gross income or income based taxes; (r) (i) Neither the Borrower, nor any ERISA Affiliate of the Borrower, maintains, sponsors, contributes to or is obligated to contribute to, or during the five (5) years ending on the date of the execution and delivery of this Agreement, has maintained, sponsored, contributed to or was obligated to contribute to, any Plan; (ii) The Borrower does not, and is not obligated to, maintain, sponsor or contribute to any Welfare Plan; (iii) The assets of the Borrower are not nor are they deemed "plan assets", whether by operation of law or under regulations promulgated under ERISA; (s) The Borrower (1) has not entered into any Transaction Document with the actual intent to hinder, delay, or defraud any creditor and (2) has received reasonably equivalent value in exchange for its obligations under the Transaction Documents. The fair saleable value of the Borrower's assets is and immediately after the execution and delivery of the Transaction Documents will be greater than the Borrower's probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and matured. The Borrower's assets do not and immediately after the execution and delivery of the Transaction Documents will not constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. The Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of the Borrower); (t) The Borrower has not sustained any loss or interference with its business from fire, explosion, flood or other calamity, or from any labor dispute or governmental action, order or decree, nor has there been any material adverse change, nor any other development or event that, in each case, may have an Individual Material Adverse Effect; 35 (u) The Security Documents, when duly executed and delivered, and (to the extent required or contemplated) filed or recorded, will create a valid and enforceable first priority perfected security interest in the Borrower's right, title and interest in and to the rights and properties described therein, as to which perfection may be effected by such filing or recording, for the benefit of the Lender, subject only to Permitted Exceptions; (v) The Borrower is not (1) an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, (2) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of either a "holding company" or a "subsidiary company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, nor (3) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money; (w) There exists no Event of Default or Potential Event of Default; (x) To the Best Knowledge of the Borrower, no representation or warranty by the Borrower made in any Transaction Document, and no schedule, exhibit, certificate, written statement, list, document or other material furnished or to be furnished to the Lender pursuant to or in connection with any Transaction Document or any of the transactions contemplated thereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading; (y) There is no offset, defense, counterclaim or right to rescission with respect to the Note or the other Transaction Documents; (z) All taxes and governmental assessments currently due and owing in respect of, and affecting, the Properties, have been paid, or an escrow of funds in an amount sufficient to cover such assessments has been established with the Servicer or title insurance company; (aa) There is no Action pending, or, to the Best Knowledge of the Borrower, for the total or partial condemnation of any Property, and except for ADA Compliance Work, Deferred Maintenance Work and Environmental Remediation Work, each Property is in good repair and free and clear of any damage that could affect materially and adversely the value of such Property as security for the Note or the use for which such Property is intended; (ab) Insurance required to be maintained pursuant to the Mortgages is in effect; and the Properties and the use and operation thereof constitute a legal use under applicable zoning 36 regulations and comply in all respects with all applicable Legal Requirements; (ac) To the Best Knowledge of the Borrower, the amounts deposited in the Capital Expenditure and FF&E Reserve Account for ADA Compliance Work, Deferred Maintenance Work and Environmental Remediation Work are sufficient for their intended purposes; (ad) None of the Properties is listed in or, to the Best Knowledge of the Borrower and, based on a certification to the Borrower by the Manager, of the Manager, proposed for listing in the United States Environmental Protection Agency's National Priorities List of sites or any other comparable list of sites maintained by any state or local governmental agency; (ae) None of the Properties is subject to any Lien or claim for Lien in favor of any Governmental Authority or any other Person as a result of any Hazardous Substance (as such term is defined in the Environmental Indemnity Agreement) on, in or affecting the Property; (af) None of the Properties is subject to any collective bargaining or other union contracts; (ag) Except as indicated in the last two sentences of this subsection, each of the Borrower and the General Partner has (a) not sought or consented to any dissolution, winding up, liquidation, consolidation, merger or sale of all or substantially all of its assets, (b) not failed to correct any known misunderstanding regarding its separate identity, (c) maintained its accounts, books and records separate from those of any other Person (except that, for accounting and reporting purposes, the Borrower or the General Partner may be included in the consolidated financial statements of Host Marriott in accordance with generally accepted accounting principles), (d) maintained its books, records, resolutions and agreements as official records, (e) not commingled its funds or other assets with those of any other Person (except as specifically contemplated by the Cash Management Procedures) and has held its assets in its own name, (f) conducted its business in its name (except that all the Properties are operated under the name "Fairfield Inn by Marriott"), (g) maintained its financial statements, accounting records and other corporate or partnership documents separate from those of any other Person (except that, for accounting and reporting purposes, the Borrower or the General Partner may be included in the consolidated financial statements of Host Marriott in accordance with generally accepted accounting principles), (h) observed all partnership and corporate formalities, as the case may be, (i) not assumed or guaranteed or become obligated for the debts of any other Person or held out its credit as being available to satisfy the obligations of any other Person (other than as permitted by the Transaction Documents), (j) not acquired obligations or securities of its partners or shareholders, as the case may be (other than, with respect to the 37 General Partner, a note of its corporate parent, Host Marriott), (k) participated in the fair and reasonable allocation of any overhead expenses and other common expenses for facilities, goods or services provided to multiple entities and used its own stationery, invoices and checks (except when acting in a representative capacity), (l) not pledged any of its assets for the benefit of any other Person other than the Lender (except for Purchase Money Security Interests or as otherwise permitted by the Transaction Documents), (m) held and identified itself as a separate and distinct entity under its own name and not as a division or part of any other Person (i.e., an integral component of such ---- other Person, as distinguished from a separate entity) (except for inclusion of the Borrower and the General Partner in consolidated financial statements of Host Marriott), (n) not made any loans to any other Person, (o) not identified its partners or shareholders, as the case may be, or any of its Affiliates as a division or part of it (i.e., an integral component of such entity, as ---- distinguished from a separate entity), (p) not entered into or become a party to any transaction with its partners or shareholders, as the case may be, or any of its Affiliates except in the ordinary course of its business and on terms which are fair and are no less favorable to it than would be obtained in a comparable arms' length transaction with an unrelated third party, (q) not filed a bankruptcy or insolvency petition or otherwise instituted insolvency proceedings with respect to itself or to any other entity in which it has a direct or indirect legal or beneficial ownership interest, (r) maintained adequate capital in light of its contemplated business operations, (s) not engaged in any business activity other than as stated in Section 2.03 of the Amended and Restated Agreement of Limited Partnership of the Borrower and Article THIRD of the Restated Certificate of Incorporation of the General Partner, as the case may be, (t) maintained an arms' length relationship with partners, affiliates and any other party furnishing services to it, (u) paid its own liabilities out of its own funds and other assets, and (v) held its assets in its own name. Separate financial statements for the General Partner have not previously been produced on a regular basis, but the financial records of the General Partner have been and will remain adequate to permit production of such separate financial statements (including a balance sheet and statements of income and cash flows) for past periods if it hereafter becomes necessary to produce such financial statements, and separate financial statements for the General Partner will hereafter be prepared on an annual basis and separate deposit accounts in the name of the General Partner shall be established and maintained, consistent with the covenants contained in Sections 5.1(ag) and 5.2(z) herein. Certain transaction and overhead costs incurred by Host Marriott, the Borrower and the General Partner heretofore have not been fully allocated among Host Marriott, the Borrower and the General Partner but such costs hereafter will be allocated in the manner described in clause (k) above. 38 (ah) The Permitted Exceptions do not materially and adversely affect (1) the ability of the Borrower to pay in full the principal and interest on the Note in a timely manner or (2) the use of any Property for the use currently being made thereof, the operation of any Property as currently being operated or the value of any Property; (ai) [Intentionally omitted] (aj) To the Best Knowledge of the Borrower, the Borrower has no material contingent liabilities; (ak) The Borrower has no material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Borrower is a party or by which the Borrower or any Property is bound, other than obligations incurred in the ordinary course of the operation of the Properties and under the Transaction Documents; (al) The Borrower has not borrowed or received debt financing that has not been heretofore or contemporaneously herewith repaid in full, other than Purchase Money Security Interests permitted by the provisions of this Loan Agreement; (am) To the Borrower's Best Knowledge, none of its principals, or the General Partner, or officer authorized to execute and deliver an Officer's Certificate, has ever been indicted and/or convicted of a felony under any federal, state or foreign laws; (an) There are no pending or, to the Best Knowledge of the Borrower, proposed, special or other assessments for public improvements or otherwise affecting any of the Properties, nor, to the Best Knowledge of the Borrower and, based on a certification to the Borrower by the Manager, to the Best Knowledge of the Manager, are there any contemplated improvements to any of the Properties or that may result in such special or other assessment; (ao) All of the rooms at each of the Inns are in service, except for rooms that are temporarily out of service for routine maintenance and repair; (ap) The Borrower has or anticipates that it will have sufficient funds available to it for implementing the reasonably anticipated Capital and FF&E Expenditures. Section 5.2 Affirmative Covenants. So long as any of the Debt remains --------------------- outstanding as an obligation of the Borrower, the Borrower shall: (a) do all things necessary to keep in full force and effect its valid existence as a limited partnership and to qualify to do business in each jurisdiction in which such qualification is 39 necessary to the conduct of its business or to protect the validity and enforceability of the Transaction Documents; (b) do all things necessary to enable it to comply with all applicable legal, fiscal and accounting rules and regulations; (c) keep proper books of account and records in which full, true and correct entries in accordance with GAAP shall be made of all transactions in relation to its business and activities; allow the Lender access to such books of account and records at all reasonable times during normal business hours upon reasonable notice; and permit the Lender to discuss the affairs, finances and accounts of the Borrower with any of the management employees of the General Partner or the Manager; (d) furnish to the Lender: (i) not later than 120 days after the end of each Fiscal Year, audited financial statements (including balance sheet, income statement and statement of cash flows of the Borrower), prepared in accordance with GAAP consistently applied, audited by a "Big Six" accounting firm; (ii) not later than 27 days after the end of each Accounting Period (i) unaudited financial statements substantially in the form of Exhibit J(1) attached hereto, covering such Accounting Period ------------ and the annual amount for the period to date showing in detail, for each Inn separately, sales, house profit, average room and average occupancy rates, each of the foregoing with a comparison to the prior year, and (ii) an unaudited profit and loss statement and escrow analysis on a consolidated basis in the form of Exhibit J(2) attached hereto; ------------ (iii) not later than 60 days after the end of each Accounting Quarter, quarterly and year-to-date unaudited financial statements (including, without limitation, the Borrower's balance sheets, income statements, statements of cash flows and such other quarterly financial information as is provided to the limited partners of the Borrower); (iv) such other reports and other documents as shall be replacements of the foregoing, which reports and other documents shall not contain less detail than that provided for in clauses (i), (ii) and (iii) above; (v) together with the financial statements provided for in clauses (ii) and (iii) above, an Officer's 40 Certificate of a senior executive of the General Partner stating that such financial statements fairly present the financial position and results of operations of the Borrower and stating whether or not the signer thereof knows of any Event of Default; (vi) on or before February 15 of each year commencing on February 15, 1997, an annual plan (the "Annual Plan") for such year for ----------- each Property which Annual Plan shall include a detailed operating budget (an "Operating Budget") and a detailed capital ---------------- expenditure budget (a "Capital Budget"), reflecting the -------------- Manager's best good faith estimate of the anticipated results of operations of the Properties, including revenues from all sources, house profit, average room rate and average occupancy and Capital and FF&E Expenditures. The Annual Plan shall also contain a Consolidated Operating Budget for the Borrower with provisions for deposit into the Capital Expenditure and FF&E Reserve Account of an aggregate amount equal to at least 7% of projected Gross Revenues for each year; (vii) copies of all rent letters, rent letter detail, Format 90s and other monthly reports prepared by the manager relating to the Properties promptly upon receipt thereof; and (viii) such other information and reports as shall be reasonably requested by the Lender or the Rating Agencies; (e) (i) if the Borrower has the right under the Management Agreement to approve any aspect of each Annual Operating Projection or the Repairs and Equipment Estimate (as such terms are defined in the Management Agreement) or any other budget, submit each of the foregoing to the Lender for its approval; (ii) submit to the Lender for its approval the Building Estimate (as such term is defined in the Management Agreement); and (iii) the Lender's review and approval of each of the foregoing shall not be unreasonably withheld or delayed; (f) take all reasonable actions necessary so that the Borrower is not required to register as an investment company under the Investment Company Act of 1940, as amended; 41 (g) promptly inform the Lender in writing of the following: (i) the Borrower becoming aware of the commencement of any rule making or disciplinary proceeding or the promulgation of any proposed or final rule affecting the Borrower or any Property (other than a rule or proceeding which has general applicability to Persons including the Borrower and is not likely to have a Material Adverse Effect); (ii) the Borrower becoming aware of the commencement of any Action by or against the Borrower or with respect to any Property before any Governmental Authority or arbitration board, or the written threat of any such Action, in each case which would have an Individual Material Adverse Effect; (iii) the receipt of written notice from any Governmental Authority that (1) the Borrower is being placed under regulatory supervision, (2) any Permit material to the conduct of the Borrower's business is to be suspended or revoked or (3) the Borrower is to cease and desist any practice, procedure or policy employed by the Borrower in the conduct of its business; (iv) the receipt of written notice from the Manager that the Borrower has not complied with any of its obligations under the Management Agreement or altering in any material respect the rules, standards and requirements of the Manager thereunder; and (v) the Borrower becoming aware of any facts or circumstances which with the giving of notice or the lapse of time or both would give rise to a default under any Ground Lease and all written notices from any ground lessor with respect to a default, potential default or event of default under any Ground Lease; (h) generally pay its debts as they become due; (i) do or cause to be done all things necessary to establish, perfect, maintain and continue the perfection and first priority (subject to Permitted Exceptions) of the security interest of the Lender in the Pledged Property and pay the costs and expenses of all filings and recordings and all searches necessary to establish and determine the validity and the priority of such security interest; (j) subject to Section 2.2, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, all 42 taxes, assessments and governmental charges levied or imposed upon the Borrower or upon the income, profits or property of the Borrower (including the Properties); (k) subject to Section 2.2, pay or cause to be paid all operating expenses and all other costs and expenses associated with the operation and maintenance of the Properties in accordance with the Annual Operating Projection, Repairs and Equipment Estimate, and Building Estimate in accordance with the provisions of the Management Agreement; (l) complete all items of deferred maintenance work, ADA compliance work and Capital and FF&E Expenditures as set forth in the Capital Budget for the year ended December 31, 1997, attached hereto as Exhibit I, from funds deposited in the Capital Expenditure and FF&E Reserve Account prior to March 31, 1998 and, to the extent necessary for such completion, from Excess Cash Flow; (m) pay over to the Servicer for application pursuant to the applicable Mortgage, Insurance Proceeds and Condemnation Proceeds; (n) complete as promptly as possible all Deferred Maintenance Work, ADA Compliance Work and Environmental Remediation Work (under the supervision of a licensed architect or engineer, if the item of Work requires the expenditure of at least $50,000 or if such supervision is required by Legal Requirements), and in a good and workmanlike manner, using materials comparable in quality to the original installation and all items of Capital and FF&E Expenditures as set forth in the Capital Budget for the year ending December 31, 1997 attached hereto as Exhibit I and the then effective Building Estimate, or Repairs and Equipment Estimate (as such terms are defined in the Management Agreement) under the supervision of a licensed architect or engineer or comparable professional, as appropriate, and in all events, complete all such work as required under the Management Agreement and this Agreement and any additional work that shall be necessary to maintain standards at least as high as those standards apply generally to inns in the "Fairfield Inn by Marriott" system. Any work to be completed in accordance with this provision shall be completed despite the insufficiency, if any, of funds in the Capital Expenditure and FF&E Reserve Account to complete such work; (o) promptly on request, furnish to the Lender copies of all material contracts, bills of sale, statements, receipted vouchers and agreements in its possession or control under which the Borrower claims title to any materials, fixtures or articles of personal property used in construction at or operation of the Properties; (p) cause the Manager to operate the Properties as hotels open for business under the Management Agreement; 43 (q) promptly on request, from time to time, deliver to the Lender a statement setting forth all of the accounts maintained by the Borrower or the Manager with respect to the Inns and the Properties, the purposes of such accounts and the balances thereof; (r) maintain or cause to be maintained each of the Transaction Documents and Operational Agreements relating to each of the Properties to which it is a party in full force and effect, and observe and perform or cause to be observed or performed all of its obligations thereunder; (s) [Intentionally omitted]; (t) comply with and cause each Property to be in compliance with all Legal Requirements and all Insurance Requirements; (u) give the Lender prompt notice upon the discovery, to the Best Knowledge of the Borrower, of the occurrence of any Potential Event of Default or Event of Default; (v) give the Lender prompt notice of any event that would constitute a Change of Control; (w) ensure that the Manager pays all trade indebtedness within 60 days of the date incurred except for such trade indebtedness that is subject to a bona ---- fide dispute; - ---- (x) ensure that the General Partner shall have an Independent Director acceptable to the Lender at all times, or if the Independent Director has resigned, shall not take any action which may not be taken pursuant to the organizational documents of the General Partner without the consent of the Independent Director; (y) provide to the Lender not less than (10) days prior to the execution thereof, a true and complete copy of any proposed amendment to the Amended and Restated Partnership Agreement of the Borrower (other than amendments of a ministerial nature that will not have any adverse impact on the Lender, the value of the Pledged Property, the validity or priority of the Lender's security interest therein, or any of the Lender's rights or remedies under the Transaction Documents); (z) ensure that the representations and warranties contained in Section 5.1(a) and 5.1(ag) remain true and accurate at all times with respect to itself; (aa) operate each of the Properties in accordance with the then effective Annual Plan; provided, however, that the Borrower may make Emergency Expenditures not reflected in the then effective Annual Plan if it gives the Lender notice of any such Emergency Expenditures promptly after they are made; and 44 (ab) comply with the terms and provisions of each of the Ground Leases. Section 5.3 Negative Covenants. So long as any portion of the Debt ------------------ shall remain outstanding as an obligation of the Borrower, except as expressly permitted in this Agreement, the Borrower shall not, without the prior consent of the Lender: (a) purchase any real properties other than the Properties, have any assets or liabilities other than assets or liabilities derived from or related to the Properties, or engage in any business or undertake any activity other than as permitted herein, including, without limitation, the operation, as a lessee or otherwise, of any property other than the Properties; (b) have any subsidiaries; (c) amend, supplement or otherwise modify its Second Amended and Restated Partnership Agreement (the "Partnership Agreement") in any way that would cause a breach of the covenants in this Agreement; (d) Grant any of the Pledged Property other than as permitted in the Transaction Documents and pursuant to the Permitted Exceptions; provided, -------- however, that the Borrower may sell or otherwise dispose of personalty or - ------- fixtures from time to time constituting portions of any Property so long as such personalty or fixtures are replaced by personalty or fixtures of equal or better quality to those sold or otherwise disposed of and except for immaterial amounts of personalty disposed of in the ordinary course of business and items that need not be replaced to continue the then existing level of quality of operation; (e) dissolve, liquidate, merge or consolidate with any Person (and the Borrower agrees that upon any dissolution, liquidation, merger or consolidation in breach of this clause (e), the Pledged Property shall continue to be held under and otherwise subject to the Lien of the Security Documents until the Debt is paid in full); (f) permit the validity or effectiveness of any of the Transaction Documents or, unless replaced with other necessary agreements that do not have an Individual Material Adverse Effect, any of the Operational Agreements to be impaired or permit the Lien of the Security Documents to be amended, hypothecated, subordinated, terminated or discharged or permit any Liens to be created on or extend to or otherwise arise upon or burden the Pledged Property or any part thereof or any interest therein or the proceeds thereof (other than any Permitted Exceptions); (g) take any action if such action is likely to interfere with the enforcement of any rights of the Lender under the agreements or instruments relating to any of the Pledged Property; 45 (h) incur any Indebtedness other than (a) the Note, (b) Subordinate Debt, or (c) unsecured Indebtedness incurred (i) in connection with capitalized equipment leases as expressly permitted by Section 8.02(C) of the Management Agreement or (ii) to provide (a) working capital (such as for trade payables and including loans for such purpose that may be made by the Manager and/or the General Partner), in an aggregate amount, which when added to the outstanding balance of previous indebtedness incurred and outstanding for such purpose, shall not exceed the average amount of the Management Expenses for each Accounting Period during the preceding full 13 Accounting Periods and (b) funds (including loans for such purpose that may be made by the Manager and/or the General Partner) to the Servicer where required to pay the Monthly Debt Service Payment and other amounts permitted under the Cash Management Procedures; provided, however, that in the case of indebtedness incurred pursuant to clause - -------- ------- (ii) the payee of such indebtedness shall agree not to assert any remedies with respect to the non-payment thereof so long as the Debt is outstanding or (d) Indebtedness covered by Purchase Money Security Interests, in an aggregate amount not to exceed $3,000,000, in the aggregate for all Properties and $100,000 for each Property, in each case outstanding at any time; provided, --------- however, that if any Property is released from the Lien of the Security - ------- Documents pursuant to Section 2.3 or 2.6, such aggregate amount shall be reduced by an amount equal to the percentage reduction in the aggregate Release Prices effected by such release; (i) enter into any Equipment Lease other than solely with the supplier of the furnishings, fixtures or equipment subject to such lease or sell any such furnishings, fixtures, or equipment to any third party under a "Sale Leaseback" arrangement; (j) terminate, amend or modify any Operational Agreements if the same would have an Individual Material Adverse Effect; (k) (a) maintain, sponsor, contribute to or become obligated to contribute to, or suffer or permit any ERISA Affiliate of the Borrower to, maintain, sponsor, contribute to or become obligated to contribute to, any Plan or any Welfare Plan or (b) permit the assets of the Borrower to become "plan assets," whether by operation of law or under regulations promulgated under ERISA; (l) engage in any transactions with its Affiliates except, on terms at least as favorable to the Borrower as those obtainable from unrelated third parties acting in their own best interests and without duress and which, taken singly or in the aggregate, would not reasonably be expected to have an Individual Material Adverse Effect; (m) (A) cancel, release, terminate or surrender the Management Agreement or permit any cancellation, release, termination or surrender thereof or (B) amend, modify or alter the terms of the Management Agreement in any material respect; 46 provided, however, that the Borrower may cancel, release, terminate, surrender, - -------- ------- amend, modify or alter the Management Agreement in connection with the replacement of the Manager if, before the date on which the Manager ceases to be the Manager of any Inn, (i) the Borrower causes such Inn to come under management by a nationally recognized hotel operator acceptable to the Lender, in the exercise of its reasonable discretion, (ii) such Inn continues to be part of a comparable nationally recognized hotel system acceptable to the Lender, and (iii) each of the Rating Agencies delivers to the Lender a Rating Comfort Letter; (n) Modify, amend or waive any terms or provisions of any of the Ground Leases other than to cure any ambiguity or to effect any other ministerial change therein; provided, however, that such action shall not adversely affect the interests of the Lender; (o) permit the ground lessor under any of the Ground Leases to make payments on the Debt; (p) permit the General Partner to amend its Restated Certificate of Incorporation (other than amendments of a ministerial nature that will not have an adverse impact on the Lender, the value of any of the Properties or its obligations under this Agreement or the other Transaction Documents); (q) make any distributions of cash to its partners, except as expressly contemplated by the Cash Management Procedures, if in the reasonable judgment of the General Partner such funds will be necessary for expenses to be borne by the Borrower pursuant to Section 8.03 of the Management Agreement or for expenses contemplated by Section 8.02 of the Management Agreement for which funds are not available in the Capital Expenditure and FF&E Reserve Account; (r) take any action in furtherance of, or stating its consent to, approval of, or acquiescence in, any of the acts set forth above; or (s) engage (either as transferor or transferee) in any material transaction with any Affiliate other than for fair value and on terms similar to those obtainable in arms' length transactions with unaffiliated Persons or engage in any transaction with any Affiliate involving any intent to hinder, delay or defraud any entity. Section 5.3A General Partner Covenant. So long as any portion of the ------------------------ Debt shall remain outstanding, the General Partner shall not (a) incur any Indebtedness except in its capacity as the general partner of the Borrower or (b) withdraw as a general partner of the Borrower unless the remaining or substitute general partner satisfies the single purpose entity criteria of the Rating Agencies and the Rating Agencies have delivered a Rating Comfort Letter. 47 Section 5.4 Further Assurances. The Borrower shall execute and deliver or ------------------ cause to be executed and delivered, all such additional instruments, and do, or cause to be done, all such additional acts as (i) may be necessary or proper, to carry out the purposes of this Agreement and to make subject to the Lien of the Security Documents any property intended so to be subject, including, without limitation, the delivery of such instruments and documents, including confirmatory and corrective Mortgages, financing statements and continuation statements under the Uniform Commercial Code of each applicable jurisdiction, and the delivery of such updated mortgagee's title insurance policies or endorsements (or commitments therefor) in favor of the Lender as may be reasonably required to confirm and/or secure continued coverage under the title policies issued to the Lender in respect of the Properties or the Mortgages, including payment of all fees and title insurance premiums required to maintain such continuity of title insurance coverage, (ii) may be necessary or proper to transfer to any assignee of the Lender the estate, powers, instruments and funds held in trust hereunder and to confirm the Security Documents (including, without limitation, any documents necessary to sever and modify the Transaction Documents in the event of an assignment of any of the Mortgages as provided in Paragraph 53 of each of the Mortgages), or (iii) the Lender may reasonably request in connection with the Loan; provided, however, that such instruments -------- ------- shall contain express unconditional exculpations of the Partners and the Borrower's officers, employees or agents and any of their successors or assigns exculpating such Persons from any liability arising under or by reason of their obligations, covenants, representations, warranties and agreements contained in such instruments, subject to the exceptions set forth in the definition of Non- Recourse. If, in connection with the Securitization, the Borrower is required to furnish newly issued title policies with respect to the Properties, the Lender shall bear the cost thereof. Section 5.5 Representations, Warranties and Covenants of NACC. NACC ------------------------------------------------- represents and warrants to, and agrees with the Borrower, that, as of the Closing Date: (i) it has the power and authority to perform its obligations under this Agreement and the other Transaction Documents, (ii) this Agreement and the other Transaction Documents have been duly authorized, executed and delivered by NACC, and constitute valid and legally binding instruments enforceable against NACC in accordance with their respective terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law), and (iii) it has such knowledge, sophistication and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Note, is able to bear the economic risk of an investment in the Note and is an "accredited investor" within the meaning of Section 2(15) of the 48 Securities Act and (iv) no part of the Loan shall be deemed "plan assets" within the meaning of ERISA. Section 5.6 Other. ----- (a) Neither the Borrower nor any Person acting on behalf of the Borrower has dealt with any broker or any other Person entitled to a fee or commission in connection with the Loan and the Borrower agrees to indemnify and hold NACC and its Affiliates harmless from and against any claims or commissions, finder's fee and other payments, no matter how described, and against any and all costs and expenses including, without limitation, attorneys' fees relating to any such claim. (b) The provisions of Section 14 of the SNDA are hereby incorporated by reference. ARTICLE VI SECURITIZATION Section 6.1 Securitization. The Borrower and the General Partner shall -------------- use commercially reasonable best efforts to cooperate with NACC in its activities in connection with the sale of the Loan as a whole loan or any securitization of the Loan (the "Securitization"), including obtaining ratings -------------- by the Rating Agencies. The Securitization will involve the issuance of rated single- or multi-class securities secured by or evidencing ownership interests in the Transaction Documents (the "Securities"). Such cooperation shall ---------- include, without limitation, the obligation to: (a) maintain the ownership of the Properties in an entity that permits the Borrower to comply with its obligations under clauses (x) and (z) of Section 5.2; (b) to the extent permitted under its existing partnership agreement without the consent of its limited partners, structure and maintain the organizational, operational and financial affairs of the Borrower and the General Partner, (collectively, the "Entities") to enable its counsel to render -------- a reasoned opinion if requested by the Rating Agencies in form and substance customary or required for rating the Securities (the "Substantive Consolidation ------------------------- Opinion") that upon a petition for bankruptcy by or against Host Marriott (or - ------- the General Partner) under the United States Bankruptcy Code, neither Host Marriott as a debtor in possession nor its bankruptcy trustees nor creditors nor any other party in interest would have sufficient basis to cause a court to order the substantive consolidation of the assets and liabilities of the General Partner or the Borrower in the case of a Host Marriott bankruptcy, or of the Borrower, in the case of a General Partner 49 bankruptcy, with those of the debtor in bankruptcy, which counsel and which opinion shall be satisfactory to NACC and the Rating Agencies; (c) provide such financial and other information with respect to each Property, the Borrower, and, if such information is reasonably available to the Borrower, the Manager, as may be requested by the Rating Agencies or as may be reasonably requested by NACC, including, without limitation, audits or agreed- upon procedures of operating cash flow and Net Operating Income on an individual and aggregate Property basis, occupancy statistics, and average rents and quarterly and annual financial statements for each Property (reviewed and in the case of annual financial statements audited) by a firm of certified public accountants acceptable to NACC and the Rating Agencies to the extent customarily given in similar transactions; (d) prepare and deliver such agreements and instruments relating to the Note, the Securities, the Properties and the Entities, including (A) agreements to indemnify the Rating Agencies, NACC and any servicer or trustee, to the extent customarily given in commercial mortgage-backed securities transactions, and (B) amendments of any of the Transaction Documents that are necessary to effect the Securitization, in form and scope satisfactory to the Rating Agencies and reasonably satisfactory to NACC; (e) perform or permit to be performed such appraisals, surveys, site inspections, market studies, current environmental reviews and reports (Phase I's, including, without limitation, testing for asbestos, lead paint or radon gas and Phase II's and other environmental investigations recommended by environmental consultants), structural engineering reports (which shall include an analysis of requirements for deferred maintenance and ongoing capital expenditure and furniture, fixtures and equipment reserve requirements), reviews of property, casualty, business interruption, earthquake, flood, liability and title insurance and other due diligence items customarily requested by nationally recognized underwriters in connection with the origination and securitization of comparably sized commercial real estate loans or by the Rating Agencies in connection with rating the Loan or the Securities; provided, -------- however, NACC shall use its best efforts to limit the circumstances under which - ------- the Borrower or the General Partner will be required to duplicate its efforts or third party costs in complying with its obligations under this clause (e); (f) provide business plans and budgets relating to the Properties as may be requested by the Rating Agencies; (g) cause counsel to render opinions (which may be reasoned opinions) with respect to the Properties, the Entities, and the Transaction Documents as to bankruptcy remoteness and other matters customary in securitization transactions, which may be requested by 50 the Rating Agencies in form and substance customary or required for Rating the Securities which counsel and which opinion shall be satisfactory to the Rating Agencies and reasonably satisfactory to NACC; provided, however, that if the -------- ------- Rating Agencies request opinions subsequent to the Closing Date in connection with the Securitization that are materially different from the opinions delivered on the Closing Date, the Lender shall bear the fees and expenses incurred by counsel in rendering such opinions; (h) make such representations and warranties with respect to the Properties, the Entities, and the Transaction Documents as are customary in securitization transactions and as may be requested by the Rating Agencies and reasonably requested by NACC and consistent with the facts covered by such representations and warranties as they exist on the date thereof, including the representations and warranties made in the Transaction Documents; (i) cooperate with the Lender in providing to the Rating Agencies such information as is customarily provided in connection with annual reviews conducted in commercial mortgage backed securities transactions similar to the Securitization; (j) cooperate with NACC in the preparation, at NACC's cost, of a private placement memorandum, prospectus, prospectus supplement or other disclosure document to be used by NSI or any of its Affiliates to privately place or publicly distribute the Loan as a whole loan or the Securities in a manner and to the extent that the same satisfy the requirements of the Securities Act and applicable state securities laws; and (k) subject to the provisions of Section 5.6(B), permit NACC to provide to the Rating Agencies, potential investors in the Securities and others as may be required to effect the Securitization or the sale of the Loan as a whole loan, the information provided to NACC by the Borrower and the Manager and their respective Affiliates in connection with the transactions contemplated by this Agreement. Any and all due diligence materials (including without limitation appraisals, engineering reports and environmental reports) shall be addressed to and shall run to the benefit of NACC and its successors and assigns, the Rating Agencies and the Borrower, and shall, upon delivery, become the property of NACC, its successors and assigns and the Borrower. 51 ARTICLE VII PAYMENT OF FEES AND EXPENSES; INDEMNIFICATION Section 7.1 Fees and Expenses. ----------------- (a) The Borrower shall pay or reimburse NACC and after the Securitization, NACC and the Lender (in each case, without duplication), on demand, without set- off, withholding or deduction, for the payment of all of the reasonable fees, costs and expenses incurred by NACC in connection with the underwriting, negotiation, documentation and closing of the Loan, including, without limita tion, the finder's fee due to NACC as provided for in that certain Commitment Letter and Summary of Terms of Transaction, dated January 9, 1997, between the Borrower and NACC, and the fees, costs and expenses of the following: (i) title insurance, transfer taxes (if any), mortgage taxes and recording fees; (ii) counsel and local counsel to the Borrower; (iii) counsel and local counsel to NACC, which shall be reasonable; (iv) due diligence activities of NACC including, without limitation, auditors, lien searches, surveys, appraisals, environmental reports, engineering reports, insurance reviews and site inspections; (v) bank charges relating to the operation of the Ground Rent Reserve Account, Debt Service Reserve Account, Lockbox Account, Capital Expenditure and FF&E Reserve Account, Tax and Insurance Account, the Cash Collateral Account and Operating Account; (vi) initial and ongoing activity of any special servicer incurred as a result of an Event of Default; and (vii) the Rating Agencies (for the annual ratings reviews); (b) The Lender shall pay the initial and regular ongoing fees of the Servicer and the Trustee; (c) The Borrower has provided $400,000 to NACC for deposit in an interest bearing account(the "Expense Deposit") for the payment of the fees, --------------- costs and expenses payable pursuant to Section 7.1(a) of this Agreement. If any portion of the Expense Deposit remains after payment of such fees, costs and expenses, NACC shall pay such portion to the Borrower within 30 days after the closing of the Loan. The establishment of the Expense Deposit shall not limit the 52 Borrower's obligations to pay the fees, costs and expenses described in Section 7.1(a). Section 7.2 Indemnification. --------------- (a) The Borrower, for itself and all those claiming under or through the Borrower, to the fullest extent permitted by law, hereby releases and shall defend, hold harmless and indemnify NACC and after the Securitization, NACC and the Lender, and its respective directors, officers, agents and employees, (together, the "Indemnified Parties") from and against any and all liabilities, ------------------- claims, charges, losses, expenses or damages of any kind or nature, including reasonable attorneys' fees and disbursements, which may arise in connection with (i) the performance or non-performance by the Borrower of any of the Transaction Documents, or the operation of the Properties by the Borrower and (ii) any breach or failure by the Borrower to comply with any representation, warranty or covenant made by the Borrower herein or in any other document furnished by the Borrower in connection with the transactions contemplated by the Transaction Documents, except to the extent caused by the willful acts or omissions,the gross negligence or bad faith of any Indemnified Party. It is understood that if the Borrower performs its obligations set forth in the Transaction Documents strictly in accordance with the terms and provisions thereof, the provisions of clause (i) of the foregoing sentence in so far as they relate to the "performance ... by the Borrower of any of the Transaction Documents," shall not be applicable. The Borrower shall appear in and defend any Action that might in any way in the good faith judgment of the Lender affect the value of the Properties, the title to the Properties, the priority of the Mortgages or the rights and powers of the Lender. Any sums due under this Section 7.2 shall be payable by the Borrower within 10 days of demand therefor with evidence of the amount due and, if not paid within such 10-day period, shall bear interest from the date of demand to the date of payment at the Default Rate (as defined in the Note). The Borrower shall pay the cost of suit, cost of evidence of title and reasonable attorneys' fees and disbursements in any Action brought by the Lender to foreclose any Mortgage, including trial and any appeal with respect to any such Action; (b) The Borrower hereby indemnifies and holds NACC and its controlling persons and Affiliates, including, without limitation, Nomura Securities International, Inc., harmless against all costs, expenses and damages incurred by NACC and its controlling persons and Affiliates (including, without limitation, all liabilities under all applicable federal and state securities laws) as a direct result of any untrue statement of a material fact contained in the offering documents used in connection with the Securitization based on information provided by the Borrower or the Manager, which describes the Borrower or the Manager, the Properties (and the management thereof) or any aspect of the Loan or the parties 53 directly involved therein, or as a result of any untrue statement of a material fact in any of the financial statements of the Borrower or the Manager incorporated into such offering documents or the failure to include in such financial statements or in such offering documents any material fact relating to the Borrower or the Manager, the Properties (and the management thereof) and any aspect of the Loan necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, --------- however, that the Borrower shall have had an opportunity to review, comment on - ------- and approve the relevant portions of such offering documents. The Borrower shall act reasonably and promptly in connection with its approval of the relevant portions of the offering documents. The Borrower shall not indemnify NACC for any cost, expense or damage incurred as a result of the inclusion of any erroneous or misleading information in such offering documents, or the omission of material information from the offering documents, provided that the Borrower or its counsel shall have previously indicated to NACC or its counsel the erroneous or misleading nature of such information or the omission of material information, as the case may be. At the time of the use of such offering documents, NACC shall execute and deliver to the Borrower an instrument (in form and substance reasonably satisfactory to the Borrower) indemnifying and holding each of the Borrower, the General Partner (and the officers and directors thereof), and its agents and employees harmless against all costs, expenses and damages (other than costs and expenses specifically agreed by the Borrower to be borne by it) incurred by them (including, without limitation, all liabilities under all applicable federal and state securities laws) caused by and directly relating to the offering described in such Offering Documents; provided, however, that such indemnification shall not apply if any such costs, expenses or damages arise out of or are based upon an untrue statement of a material fact or an omission to state a material fact in such offering documents or in the Borrower's financial statements for which the Borrower is providing indemnification as provided above; (c) The obligations of the Borrower under this Section 7.2 shall survive termination of this Agreement; (d) The provisions of the sixth and seventh paragraphs of that certain Commitment Letter, dated January 9, 1997 are incorporated herein by reference to the extent such provisions impose indemnification obligations on the Borrower and NACC that are more burdensome than those contained in this Section 7.2. 54 ARTICLE VIII IMMUNITY Section 8.1 Partners, Employees and Agents of the Borrower Immune from Liability ---------------------------------- Notwithstanding anything to the contrary herein, including, without limitation, Article Seven, the obligations under each Transaction Document shall be Non-Recourse. ARTICLE IX MISCELLANEOUS PROVISIONS Section 9.1 Notices. All notices, requests, demands, consents, reports ------- or other communications, including, without limitation, a tender of a cure pursuant to Section 4.1B, to or upon the respective parties hereto shall be in writing and be deemed to have been duly given or made when received, addressed to the party to which such notice, request, demand, consent, report or other communication is being given at its address set forth below, or at such other address as any of the parties hereto may hereafter notify the others by notice given hereunder: If to NACC: Nomura Asset Capital Corporation 2 World Financial Center, Building B New York, New York 10281 Attention: Daniel S. Abrams, Director Telecopier: (212) 667-1022 With a copy to: Rosenman & Colin LLP 575 Madison Avenue New York, New York 10022 Attention: Robert I. Fisher, Esq. Telecopier: (212) 940-8776 and: Nomura Asset Capital Corporation 2 World Financial Center, Building B New York, New York 10281 Attention: Sheryl McAfee Telecopier: (212) 667-1206 55 If to the Borrower: Fairfield Inn by Marriott Limited Partnership c/o Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Attention: Law Department 923/Deputy General Counsel, Asset Management Telecopier: (301) 380-6332 With a copy to: Fairfield Inn by Marriott Limited Partnership c/o Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Attention: Asset Management Department 908 Telecopier: (301) 380-8260 Evidence of such receipt shall include personal delivery, electronic confirmation (hard copy to be sent by regular mail) and the failure to accept a communication sent by registered or certified U.S. mail, postage prepaid. Section 9.2 Benefit of Agreement. This Agreement shall be binding upon, -------------------- inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights or obligations hereunder without the consent of the Lender which may be withheld in the sole discretion of the Lender. Except as expressly provided otherwise in the Agreement, any such assignment or transfer shall not release the Borrower from any obligations or liabilities hereunder. The Lender's interests under the Transaction Documents shall be freely assignable and transferrable. No party other than the parties hereto and their permitted assigns shall be deemed to have any benefits or obligations under this Agreement. Section 9.3 Governing Law. This Agreement and the rights and ------------- obligations of the parties under the Transaction Documents (except for the Mortgages and the assignments of leases, rents and profits, dated the Closing Date, from the Borrower to the Lender which shall be governed by the jurisdiction in which the Property covered thereby is located) shall be governed by the internal laws of the State of New York. Section 9.4 Counterparts. This Agreement may be executed in any number ------------ of counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 56 Section 9.5 Index, Descriptive Headings. The Index to this Agreement --------------------------- and the descriptive headings of the several Sections and Articles of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. In the preparation of the Transaction Documents indistinguishable contributions were made by representatives of both NACC and the Borrower, and each of the Lender and the Borrower waives any and all rights, either at law or in equity, to have the provisions of any Transaction Document interpreted in favor of one over the other based on a claim that representatives of one or the other were the principal draftsmen thereof. Section 9.6 Amendment or Waiver; Integration. No provision of this -------------------------------- Agreement may be amended, changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the amendment, change, waiver, discharge or termination is sought. This Agreement and the other Transaction Documents set forth the entire agreement and understanding of the parties with respect to the subject matter hereof and thereof, and supersede any and all prior agreements and understandings of the parties hereto with respect to the subject matter hereof and thereof including, without limitation, that certain Commitment Letter, dated January 9, 1997 and is between the Borrower and NACC, which prior agreements and understandings are terminated in all respects. Section 9.7 Survival of Representations and Warranties; Reliance. All ---------------------------------------------------- representations and warranties contained in this Agreement and the indemnification provisions hereof shall survive the execution and delivery of this Agreement and the making of the Loan and shall be considered to have been relied upon by the Lender regardless of any investigation made by or on behalf of it. Section 9.8 Returned Payments. If after receipt of any payment of all ----------------- or any part of the Debt, the Lender is for any reason compelled to surrender such payment to any Person because such payment is determined to be void or voidable as a preference, an impermissible set-off, a diversion of trust funds or for any other reason, this Agreement shall continue in full force, and the Borrower shall be liable to, and shall indemnify and hold the Lender harmless for, the amount of such payment surrendered until the Lender shall have been finally and irrevocably paid in full. The provisions of the foregoing sentence shall be and remain effective notwithstanding any contrary action which may have been taken by the Lender in reliance upon such payment, and any such contrary action so taken shall be without prejudice to the Lender's rights under this Agreement and shall be deemed to have been conditioned upon such payment having become final and irrevocable. 57 SECTION 9.9 JURISDICTION AND SERVICE; WAIVER OF JURY TRIAL. EACH OF THE ---------------------------------------------- GENERAL PARTNER AND THE BORROWER HEREBY (I) IRREVOCABLY CONSENTS AND SUBMITS ITSELF AND ACKNOWLEDGES AND RECOGNIZES THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK LOCATED IN NEW YORK COUNTY AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR PURPOSES OF ANY ACTION ARISING OUT OF, UNDER, OR IN CONNECTION WITH, RELATING TO, OR BASED UPON ANY TRANSACTION DOCUMENT OR THE SUBJECT MATTER THEREOF, (II) AGREES THAT SUCH COURTS SHALL BE THE SOLE AND EXCLUSIVE COURTS AND FORUMS FOR THE PURPOSE OF ANY SUCH ACTION AND (III) WAIVES AND AGREES NOT TO ASSERT, AS A DEFENSE OR OTHERWISE, IN ANY SUCH ACTION, ANY CLAIM THAT SUCH COURTS DO NOT HAVE JURISDICTION OVER IT OR THAT SUCH ACTION IS BROUGHT IN AN INCONVENIENT FORUM; PROVIDED, HOWEVER, THAT NOTHING CONTAINED HEREIN SHALL LIMIT, IN ANY MANNER, THE RIGHT OF THE LENDER TO INSTITUTE OR TAKE ANY ACTION IN ANY COURT IN ANY JURISDICTION FOR THE PURPOSE OF PROTECTING, PRESERVING OR REALIZING UPON ANY COLLATERAL, IF ANY, SECURING THE DEBT OR ENFORCING ANY JUDGMENT OBTAINED BY IT IN CONNECTION WITH ANY TRANSACTION DOCUMENT OR THE SUBJECT MATTER THEREOF. EACH OF THE GENERAL PARTNER, THE BORROWER AND THE LENDER HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION ARISING OUT OF, UNDER, OR IN CONNECTION WITH, RELATING TO, OR BASED UPON ANY TRANSACTION DOCUMENT OR THE SUBJECT MATTER THEREOF, AND AGREES THAT PROCESS IN ANY SUCH ACTION, IN ADDITION TO ANY OTHER METHOD PERMITTED BY LAW, MAY BE SERVED UPON IT BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO THE GENERAL PARTNER OR THE BORROWER OR THE LENDER AT THE ADDRESS SET FORTH IN SECTION 9.1 OR AT SUCH OTHER ADDRESS AS THE GENERAL PARTNER OR THE BORROWER OR THE LENDER MAY DESIGNATE BY NOTICE, AND SUCH SERVICE SHALL BE DEEMED EFFECTIVE AS IF PERSONAL SERVICE HAD BEEN MADE UPON IT WITHIN NEW YORK COUNTY. Section 9.10 Enforceability. Any provision of this Agreement which is -------------- prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the Borrower hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. Section 9.11 Conflicting Terms. In the event of any direct conflict ----------------- between any provision of this Agreement and any provision of any other Transaction Document, this Agreement shall govern; provided, however, that (a) notwithstanding the foregoing, the remedies contained in the Mortgages and any other Transaction Document shall govern in the event of any direct conflict with any remedy contained in this Agreement, and (b) the parties intend that the terms and provisions of each of the Transaction Documents be 58 given full effect, and, accordingly, the provisions of the other Transaction Documents, to the fullest extent possible, shall be construed to be additional and supplementary to, and not in conflict with or in derogation of, the provisions of this Agreement. Section 9.12 Relationship of Parties. The relationship of the Borrower ----------------------- to the Lender is strictly and solely that of borrower and lender and mortgagor and mortgagee and nothing contained in any Transaction Document is intended to create, or shall in any event or under any circumstance be construed as creating, a partnership, joint venture, tenancy-in-common, joint tenancy or other relationship of any nature whatsoever between the Borrower and the Lender other than as borrower and lender and mortgagor and mortgagee. The Borrower acknowledges that (a) NACC engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse to or competitive with the business of the Borrower or its Affiliates, (b) it is represented by competent counsel and has consulted counsel before executing this Agreement and (c) it shall rely solely on its own judgement and advisors in entering into the transactions contemplated hereby without relying in any manner on any statements, representations or recommendations of NACC or any Affiliate of NACC except as set forth in Section 5.6. (Signature page follows) 59 IN WITNESS WHEREOF, each of the Borrower and NACC has caused this Agreement to be signed and delivered, all as of the day and year first above written. NOMURA ASSET CAPITAL CORPORATION By:---------------------------------- Daniel S. Abrams Director FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP By: Marriott FIBM One Corporation, General Partner By:---------------------------------- Bruce D. Wardinski Vice President 60 EX-10.H 10 EXHIBIT 10.H EXHIBIT 10.h ================================================================================ ================================================================================ SECURED PROMISSORY NOTE made by FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP (the "Maker") ----- to NOMURA ASSET CAPITAL CORPORATION (the "Payee") ----- Dated: As of January 13, 1997 ================================================================================ ================================================================================ SECURED PROMISSORY NOTE $165,400,000 New York, New York January 13, 1997 FOR VALUE RECEIVED, FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a Delaware limited partnership (the "Maker"), promises to pay to NOMURA ASSET ----- CAPITAL CORPORATION, a Delaware corporation (together with its successors and assigns, the "Payee"), or order, the principal amount of ONE HUNDRED SIXTY-FIVE ----- MILLION FOUR HUNDRED THOUSAND DOLLARS ($165,400,000) (the "Loan"), in the manner ---- set forth herein; together with interest on the unpaid principal amount of this Note at the Base Rate (as adjusted pursuant to Paragraph 4(e) hereof) or Default Rate, as applicable; together with payments with respect to amortization of principal as described in Paragraph 4 hereof; together with the Yield Maintenance Premium, if any, due and payable under the Loan Agreement; and together with all other amounts due (including, without limitation, all items of Debt) hereunder or under any of the other Transaction Documents. 1. Definitions. For the purposes of this Note, each of the ----------- following terms shall have the meaning specified with respect thereto (a) "Accounting Period" has the meaning set forth in the Loan ----------------- Agreement. (b) "Adjusted Rate" means the Base Rate adjusted in accordance ------------- with Paragraph 4(e) of this Note. (c) "Base Rate" means 8.40% per annum. --------- (d) "Business Day" means a day on which banks and foreign ------------ exchange markets are open for business in New York, New York. (e) "Debt" has the meaning set forth in the Loan Agreement. ---- (f) "Debt Service Payment Date" means the 11th day of each ------------------------- month. (g) "Debt Service Period" means the period from and including ------------------- the eleventh (11th) day of the calendar month immediately preceding each Debt Service Payment Date to and including the tenth (10th) day of the calendar month in which such Debt Service Payment Date occurs. (h) "Default Rate" means a rate per annum equal to the lesser of ------------ (aa) two percent (2%) above the Base Rate or Adjusted Rate, as applicable, and (bb) the maximum rate allowed by law. (i) "Event of Default" has the meaning set forth in the Loan ---------------- Agreement. (j) "Excess Cash Flow" has the meaning set forth in the Loan ---------------- Agreement. (k) "Loan Agreement" means that certain Loan Agreement, dated as -------------- of the date hereof, between the Maker and the Payee. (l) "Maturity Date" shall mean the earliest to occur of: ------------- (1) January 11, 2017; or (2) such date to which the maturity of the Debt may be accelerated upon an Event of Default or as otherwise provided in any Transaction Document. (m) "Monthly Debt Service Payment" means the constant monthly ---------------------------- payment set forth in Paragraph 4(b) hereof, as such payment may be adjusted as set forth in Paragraph 4(c) hereof. (n) "Non-Recourse" has the meaning set forth in the Loan ------------ Agreement. (o) "Optional Prepayment Date" means January 11, 2007. ------------------------ (p) "Transaction Documents" has the meaning set forth in the --------------------- Loan Agreement. (q) "Yield Maintenance Premium" has the meaning set forth in the ------------------------- Loan Agreement. Certain additional terms are defined in the less particular provisions of this Note to which they pertain or in which they are initially used. 2. Payment of Debt. --------------- The Maker shall punctually pay the Debt at the time and in the manner provided for its payment in this Note and the other Transaction Documents. It is expressly agreed that the entire Debt may, at the Payee's election (or automatically upon the occurrence of the events described in clauses (f) and (g) of Section 4.1A of the Loan Agreement) become immediately due and payable upon the occurrence of an Event of Default, as set forth in the Loan Agreement. 3. Interest Rate. ------------- (a) Except as set forth below, including Paragraph 4(b) hereof, the Debt shall bear interest, for each Debt Service Period, at the Base Rate. (b) Following the Maturity Date and for each Debt Service Period or portion thereof occurring from the date of the occurrence of an Event of Default and while it is continuing or, if later, the date the Lender has given notice to the Maker pursuant to Section 4.2(a) of the Loan Agreement, if such notice is required, the Debt shall bear interest at the Default Rate. (c) Calculations of interest shall be made on the basis of a 360-day year and actual days elapsed during each Debt Service Period. 4. Periodic Payments. ----------------- (a) On February 11, 1997 the Maker shall pay to the Payee (i) interest on the Note at the Base Rate for the period beginning on January 13, 1997 and ending on February 10, 1997, in an amount equal to $1,119,206.67, and (ii) a principal payment in an amount equal to $228,535.11. 2 (b) On each Debt Service Payment Date occurring after February 11, 1997, the Maker shall pay to the Payee an amount equal to $1,424,928.44, being the constant monthly payment applicable to this Note up to the Maturity Date. Such amount shall be applied (i) first, to the payment of interest (the "Base ---- Rate Interest") on this Note at the Base Rate or the Default Rate, as - ------------- applicable, then due and payable for the applicable Debt Service Period, and (ii) next, to the payment of principal on this Note in reduction of such principal in the amount of the difference between the Monthly Debt Service Payment and the Base Rate Interest paid pursuant to subclause (i) above (each, a "Principal Payment"). Following the Maturity Date and while an Event of ----------------- Default has occurred and is continuing, the constant monthly payment set forth in the first sentence of this Paragraph 4(b) shall be increased to reflect payment of interest at the Default Rate. (c) If any Principal Payment or a portion thereof is prepaid on any Debt Service Payment Date by the application by the Payee of payments received (i) from or with respect to U.S. Obligations held by the Payee on the Optional Prepayment Date as a result of a release of any Property by the Maker pursuant to Section 2.3(g) of the Loan Agreement, (ii) from the release of a Property by the Maker from the Lien of the Security Documents (as such terms are defined in the Loan Agreement) pursuant to Section 2.6(c) of the Loan Agreement, or (iii) on and after the Optional Prepayment Date, pursuant to the last sentence of Section 3.1 of the Loan Agreement, the Monthly Debt Service Payment payable on each Debt Service Payment Date thereafter shall be reduced in an amount equal to the percentage reduction in the principal amount payable under this Note effected by such prepayment. (d) On the Maturity Date, the Maker shall pay to the Payee an amount equal to the then outstanding principal balance of the Loan, plus interest accrued and unpaid thereon and any other Debt then due and payable. (e) (i) On the Optional Prepayment Date and on each anniversary thereof, the interest rate applicable to the Debt shall be set at the greater of (xx) the Base Rate plus 2% per annum and (yy) the yield, calculated by linear interpolation (rounded to three decimal places), of the yields of United States Treasury Constant Maturities with the terms (one longer and one shorter) most nearly approximating those of noncallable United States Treasury obligations having maturities as close as possible to the tenth anniversary of the Optional Prepayment Date, as determined by the Payee on the basis of Federal Reserve Statistical Release H.15 - Selected Interest Rates under the heading U.S. Governmental Security/Treasury Constant Maturities, or other recognized source of financial market information selected by the Payee in each case on the last Business Day of the week immediately prior to the Optional Prepayment Date and each anniversary thereof, as the case may be, plus 3.755% per annum (any such increased rate being hereinafter referred to as the "Adjusted Rate"). The Maker shall thereafter pay to the Payee the Monthly Debt Service Payment on each Debt Service Payment Date in the manner and at the place established pursuant to this Note. Such Monthly Debt Service Payment shall be applied (i) first, to the payment of interest on this Note at the Base Rate then due and payable for the applicable Debt Service Period and (ii) next, to the payment of the Principal Payment then due and payable. (ii) Additionally, on each Debt Service Payment Date subsequent to the Optional Prepayment Date, the Maker shall pay to the Payee any Excess Cash Flow for all of the Accounting Periods the Operating Profit Payment Dates (as defined in the Loan Agreement) for which occurred during the Debt Service Period immediately preceding such Debt Service Payment Date, which Excess Cash Flow payments shall be applied (A) first, to prepayment of each Principal Payment required to be made on each Debt Service Payment Date in inverse order of maturity until the principal of this Note has been paid in full, and (B) next, to payment of the difference, if any, between (y) the sum of (i) interest accrued and unpaid on this Note calculated at the Adjusted Rate and (ii) interest on such accrued and unpaid amount at the Adjusted Rate and (z) the Base Rate interest paid on each Debt Service Payment Date. 3 (f) A11 payments (including prepayments) to be made by the Maker on account of principal, interest and all other amounts payable with respect to the Debt, shall be made by wire transfer to the Payee without set-off or counterclaim, in lawful money of the United States of America and in immediately available funds, not later than 2 p.m. (New York time) on the dates such payments are due, by payment to: Mellon Bank, Pittsburgh ABA #043000261 NACC (P&I Remittances) Account #109-2525 Reference: Fairfield Inn by Marriott Limited Partnership (P&I Remittances) or at such other place as the Payee may, from time to time, designate in writing. (g) If any payment hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to such payments, interest (at the applicable rate hereunder) thereon shall be payable during such extension. Any payments received after 2 p.m. (New York time) shall be deemed received on the following Business Day. 5. Prepayments. ----------- (a) The Maker shall have the right to prepay the unpaid principal amount of this Note on a Debt Service Payment Date to the extent set forth in the last sentence of Section 3.1 of the Loan Agreement. (b) If the Maturity Date occurs as a result of an Event of Default and the Maker tenders payment of the Debt or any part thereof to the Payee, such tender shall require the payment by the Maker of all sums required pursuant to Section 4.2 of the Loan Agreement, including, without limitation, the Yield Maintenance Premium. 6. Cost of Collection. The Maker shall pay all costs of collection ------------------ when incurred, including, without limitation, the reasonable attorneys' fees and disbursements of the Payee's counsel and court costs, which costs may be added to the indebtedness evidenced hereby and must be paid within fifteen (15) days after written demand. Such costs shall bear interest at the Base Rate from the date of incurrence and interest at the Default Rate from and after delivery of written demand. 7. Usury. It is the intent of the Payee and the Maker to comply at ----- all times with applicable usury laws. If at any time such laws would render usurious any amounts called for under this Note, then it is the Maker's and the Payee's express intention that such excess amount be immediately credited on the principal balance of this Note (or, if this Note has been fully paid, refunded by the Payee to the Maker, and the Maker shall accept such refund), and the provisions hereof be immediately deemed to be reformed and the amounts thereafter collectible hereunder reduced to comply with the then applicable laws, without the necessity of the execution of any further documents, but so as to permit the recovery of the fullest amount otherwise called for hereunder. To the extent permitted by law, any such crediting or refund shall not cure or waive any default by the Maker under this Note. If at any time following any such reduction in the interest rate payable by the Maker, there remains unpaid any principal amounts under this Note and the maximum interest rate permitted by applicable law is increased or eliminated, then the interest rate payable hereunder shall be readjusted, to the extent permitted by applicable law, so that the total dollar amount of interest payable hereunder shall be equal to the dollar amount of interest which would have been paid by the Maker without giving 4 effect to the reduction in interest resulting from compliance with the applicable usury laws theretofore in effect. The Maker agrees, however, that in determining whether or not any interest payable under this Note exceeds the highest rate permitted by law, any non-principal payment (except payments specifically stated in this Note to be "interest"), including, without limitation, prepayment fees and late charges, shall be deemed to the extent permitted by law, to be an expense, fee or premium rather than interest. 8. Applicable Law. This Note has been negotiated, executed, made -------------- and delivered in the Borough of Manhattan, City, County and State of New York. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 9. Waivers; Security. ----------------- (a) The Maker and any endorsers, sureties and guarantors hereof or hereon, and all parties now or hereafter liable with respect to this Note, hereby jointly and severally waive presentment for payment, demand, protest, notice of non-payment or dishonor and of protest, and agree to remain bound until the Debt is paid in full notwithstanding any extensions of time for payment which may be granted even though the period of extension be indefinite, and notwithstanding any inaction by, or failure to assert any legal right available to, the Payee. (b) The Maker and any endorsers, sureties and guarantors hereof or hereon, and all parties now or hereafter liable with respect to this Note, further expressly agree that any waiver by the Payee, other than a waiver in writing signed by the Payee, of any term or provision hereof or of any of the other Transaction Documents or of any right, remedy or option under this Note or any of the other Transaction Documents shall not be controlling, nor shall it prevent or estop the Payee from thereafter enforcing such term, provision, right, remedy or option, and the failure or refusal of the Payee to insist in any one or more instances upon the strict performance of any of the terms or provisions of this Note or any of the other Transaction Documents shall not be construed as a waiver or relinquishment for the future of any such term or provision, but the same shall continue in full force and effect, it being understood and agreed that the Payee's rights, remedies and options under this Note and the other Transaction Documents are and shall be cumulative and are in addition to all other rights, remedies and options of the Payee in law or in equity or under any other agreement. (c) The Maker and the Payee hereby irrevocably waive all rights to trial by jury in any action or other proceeding arising out of or relating to this Note, and the Maker also waives the right in such action or other proceeding to interpose any counterclaims (except to the extent such counterclaims are compulsory and may not be brought in a separate action) or set-offs of any kind or description. (d) This Note is secured by, among other things, the Mortgages (as defined in the Loan Agreement) made by the Maker in favor of the Payee encumbering the Properties (as defined in the Loan Agreement). 10. Non-Recourse. The obligations of the Maker under this Note shall ------------ be Non-Recourse (as defined in the Loan Agreement). 11. Miscellaneous. ------------- (a) This Note may not be changed, waived, modified, discharged or terminated orally, but only by an agreement in writing, signed by the party against whom enforcement of any such change, waiver, modification, discharge or termination is sought. 5 (b) The term "Payee" shall mean the then holder of this Note, from time to time, and its successors and assigns. (c) If any provision of this Note or the application thereof to the Maker or any circumstance in any jurisdiction governing this Note shall, to any extent, be invalid or unenforceable under any applicable statute, regulation or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to such statute, regulation or rule of law, and the remainder of this Note and the application of any such invalid or unenforceable provision to parties, jurisdictions or circumstances other than to whom or to which it is held invalid or unenforceable shall not be affected thereby, nor shall the same affect the validity or enforceability of any other provision of this Note. (d) Time is of the essence as to all dates set forth in this Note, subject to any applicable notice or grace period provided herein or in any other Transaction Document. (e) The Maker hereby agrees to perform and comply with each of the terms, covenants and provisions contained in this Note and in any instrument evidencing or securing the indebtedness evidenced by this Note on the part of the Maker to be observed and/or performed hereunder and thereunder. No release of any security for the principal amount due under this Note, or of any portion thereof, and no alteration, amendment or waiver of any provision of this Note or of any such instrument (including the Transaction Documents) made by agreement between the Payee and any other person shall release, discharge, modify, change or affect the liability of the Maker under this Note or under such instrument. (f) No act of commission or omission of any kind or at any time upon the part of the Payee in respect of any matter whatsoever shall in any way impair the rights of the Payee to enforce any right, power or benefit under this Note, and no set-off, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which the Maker has against the Payee shall be available hereunder to the Maker. (g) All notices and other communications given hereunder shall not be deemed to have been duly given or made unless given or made in the manner provided for in the Loan Agreement. (h) The captions preceding the text of the various Paragraphs contained in this Note are provided for convenience only and shall not be deemed to in any way affect or limit the meaning or construction of any of the provisions hereof. 6 IN WITNESS WHEREOF, the Maker has caused this Note to executed as of the day and year first above written. FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP, a Delaware limited partnership By: Marriott FIBM One Corporation, General Partner By: /s/ Bruce D. Wardinski ------------------------------- Bruce D. Wardinski Vice President 7 EX-27 11 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000855103 MARRIOTT FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP 1,000 U.S. DOLLAR 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1.00 10,028 0 3,079 0 0 7,737 250,444 (86,296) 184,992 18,379 164,847 0 0 0 1,766 184,992 0 47,065 0 0 29,749 0 15,896 1,420 0 0 0 0 0 1,420 0 0
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