-----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, Hkt0nKxQlTyRhKWRFRFDH4Shy6fEhuqM0W7GPcwI4N01F8G2KBJibqvo8c6SIF5T z0aAr4/2uD3dXATns+JJkQ== 0000950144-97-003386.txt : 19970430 0000950144-97-003386.hdr.sgml : 19970430 ACCESSION NUMBER: 0000950144-97-003386 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RFS HOTEL INVESTORS INC CENTRAL INDEX KEY: 0000906408 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 621534743 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12011 FILM NUMBER: 97569005 BUSINESS ADDRESS: STREET 1: 889 RIDGE LAKE BLVD SUITE 100 CITY: MEMPHIS STATE: TN ZIP: 38120 BUSINESS PHONE: 9017675154 MAIL ADDRESS: STREET 1: 889 RIDGE LAKE BLVD STREET 2: STE 100 CITY: MEMPHIS STATE: TN ZIP: 38120 10-K 1 RFS HOTEL INVESTORS, INC. FORM 10-K 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - - --- ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - - --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ____________ TO ____________ Commission File Number 34-0-22164 RFS HOTEL INVESTORS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TENNESSEE 62-1534743 (STATE OR OTHER INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 850 RIDGE LAKE BOULEVARD, SUITE 220 MEMPHIS, TENNESSEE 38120 (901) 767-7005 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE AND TELEPHONE NUMBER) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value (Title of Class) New York Stock Exchange (Name of Market) ----------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ______ The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $417,865,000 based on the last sale price in the New York Stock Exchange for such stock on March 14, 1997. The number of shares of the Registrant's Common Stock, outstanding was 24,389,000 as of March 14, 1997. Documents Incorporated by Reference Portions of the RFS Hotel Investors, Inc. Proxy Statement dated March 24, 1997 and filed with the Securities and Exchange Commission on March 24, 1997 with respect to the Annual Meeting of Shareholders to be held on April 24, 1997 are incorporated by reference into Part I and Part III. The financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report to Shareholders' for the year ended December 31, 1996 are incorporated into Part II and Part IV. =============================================================================== 2 PART I ITEM 1. BUSINESS (a) General Development of Business RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee on June 1, 1993 and is a self-administered real estate investment trust ("REIT"). The Company contributed substantially all of the net proceeds of its public offerings to RFS Partnership, L.P. (the "Partnership") in exchange for the sole general partnership interest in the Partnership. The Partnership began operations in August 1993. At December 31, 1996, the Company owned an approximately 98.7% interest in the Partnership. (b) Financial Information About Industry Segment The Company is in the business of acquiring equity interests in hotel properties. See the Consolidated Financial Statements and notes thereto included in Item 8 of this Annual Report on Form 10-K for certain financial information required in Item 1. (c) Narrative Description of Business General. At December 31, 1996, the Company owned, through the Partnership and other subsidiaries, 53 hotels (the "Hotels") containing 7,387 rooms located in 23 states. In order to qualify as a REIT for federal income tax purposes, neither the Company nor the Partnership can operate hotels. As a result, the Partnership leases all of its hotel properties to RFS, Inc. and other wholly-owned subsidiaries of Doubletree Corporation (collectively, the "Lessees") pursuant to leases (the "Percentage Leases") as described in Item 2 below. Strategies. The Company seeks to increase funds from operations and enhance shareholder value through its strategies for internal growth and acquisitions. Internal Growth Strategy. The Company's strategy for internal growth includes participating in increased revenue at the Hotels through Percentage Leases, limiting leverage, an extensive renovation program and affiliations with national franchises. The Percentage Leases provide for the payment of (i) fixed monthly base rent and (ii) quarterly percentage rent based on a percentage of gross room revenue, food revenue and beverage revenue, if any, at the Hotels. The use of Percentage Leases allows the Company to participate in increased revenue at the Hotels. See Item 2 for further information with respect to the Percentage Leases. The Company recognizes the potential competitive advantage gained by owning hotel properties with little or no debt. High leverage may impair the ability of management to renovate, 3 3 maintain and effectively manage properties. The Board of Directors of the Company has adopted a policy limiting the amount of indebtedness that the Company will incur to an amount not in excess of approximately 40% of the Company's investment in hotel properties, at cost, after giving effect to the Company's use of proceeds from any indebtedness and accounting for all investments in hotel properties under the purchase method of accounting. The Company budgeted $12.1 million for capital improvements in 1996 at the 53 hotels owned at December 31, 1996. At December 31, 1996, the Partnership had spent $11.0 million of the budgeted amounts. The Company intends to fund the remaining $1.1 million to complete these capital improvements during 1997. The Company has budgeted an additional $13.8 million to be spent on capital improvements at 52 of the 53 Hotels owned at December 31, 1996 during 1997. The capital improvements are primarily designed to enhance revenues and the guests' experience and include replacing such items as carpets and drapes, renovating common areas and hotel exteriors. This does not include one Hotel at which extensive renovations are being contemplated or the four Sheraton hotels acquired in January 1997. All but one of the Hotels are licensed to operate under nationally franchised brands. The Company believes that franchised properties generally have higher levels of occupancy and average daily rate ("ADR") than properties which are unfranchised due to access to national reservation systems and advertising and marketing programs provided by franchisors. Acquisition Strategy. The Company intends to acquire equity interests in existing hotel properties, to develop hotels and to enter into contracts to acquire properties from third parties after development. The Company considers investments in hotel properties which meet one or more of the following criteria: - Favorable market characteristics - Long-term asset quality - Prospects of increasing profitability - National franchises - Diversification-geographically, by brand and by segment - Return on investment The Company's current investment and acquisition policies provide that no more than 25% of the Company's total assets may be invested in any one property at the time of investment. The Company's current policies also provide that the Company will not invest in luxury properties, budget hotels or resorts. The Company's investment and acquisition policies may be changed by the Board of Directors without shareholder approval. 4 4 Property Management. RFS, Inc. has managed hotel properties since 1974 and, as of December 31, 1996, managed 62 hotels with 10,062 rooms in 23 states, including 48 of the Hotels. One Hotel is managed by another wholly-owned subsidiary of Doubletree Corporation. Three Hotels are managed by Alpha Inn Management Company ("Alpha") and one by TMH, Inc. ("TMH") pursuant to management agreements between the Lessees and Alpha and TMH, respectively. Alpha has managed hotel properties since 1985 and currently manages 7 properties with 692 rooms in 6 states. TMH has managed hotel properties since 1984 and currently manages 4 properties with 352 rooms in 3 states. The Lessees, Alpha and TMH are generally required to perform all operational and management functions necessary to operate the Hotels. Such functions include but are not limited to ordering supplies, advertising and marketing, maid service, laundry and maintenance. Alpha and TMH are paid a fee by RFS, Inc. under management agreements equal to 3% of the gross revenues of the Hotels, plus reimbursement of out-of-pocket expenses. The Lessees manage other hotel properties in addition to the Hotels and are not required to devote all of their time and efforts to the Hotels. Operating Practices. The Lessees utilize a centralized accounting and data processing system for the Hotels which facilitates financial statement and budget preparation, payroll management, internal auditing and other support functions for the on-site hotel management team. The Lessees provide centralized control over purchasing and project management (which can create economies of scale in purchasing) while emphasizing local discretion within specific guidelines. The Lessees develop a written marketing plan for the Hotels with a strong emphasis on room revenue, market segmentation and yield management. The Lessees corporate staff assists in developing corporate sales programs and negotiating national contracts where appropriate. The Lessees monitor each sales employee on a continuing basis. Operating multiple properties allows participation in numerous marketing programs that might be unavailable or not cost-efficient for an individual hotel. Each hotel property employs a general manager who is responsible for the overall operations of the hotel. General managers report to regional managers, who generally have responsibility for up to fifteen hotels. Daily operations are managed with a centralized approach through regional managers who report to the Lessees' central office. The Lessees' strategy is to encourage decision-making by those people closest to the hotel operation at the lowest administrative cost. Competition. Substantially all of the Hotels are located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy and ADR of the Hotels or at hotel properties acquired in the future. New, competing hotels may be opened in the Company's markets which could materially and adversely affect hotel operations. Employees. At December 31, 1996, the Company had a total of 24 employees. 5 5 Seasonality. The hotel industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in the percentage rent. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import. Such forward-looking statements relate to future events, the future financial performance of the Company, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Readers should specifically consider the various factors identified in this report which could cause actual results to differ. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Business Issues. The Hotels are subject to all operating risks common to the hotel industry. These risks include, among other things: competition from other hotels; recent over-building in the hotel industry which has adversely affected occupancy and room rates; increases in operating costs due to inflation and other factors; significant dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and adverse effects of general and local economic conditions. These factors could adversely affect the Lessees' ability to make lease payments and therefore the Company's ability to make expected distributions to shareholders. Further, decreases in room revenues of the Hotels will result in decreased revenues to the Partnership under the Percentage Leases. The Company must rely on the Lessees to generate sufficient cash flow from the operation of the Hotels to enable the Lessees to meet the rent obligations under the Percentage Leases. The rent obligations under the Percentage Leases are unsecured and are not guaranteed by Doubletree. At December 31, 1996, the Lessees are in compliance with the provisions of the Percentage Leases. The Company's investments are subject to varying degrees of risk generally incident to the ownership of real property. The underlying value of the Company's real estate investments and the Company's income and ability to make distributions to its shareholders is dependent upon the ability of the Lessees to operate the Hotels in a manner sufficient to maintain or increase revenues and to generate sufficient income in excess of operating expenses to make rent payments under the Percentage Leases. Income from the Hotels may be adversely affected by adverse changes in national economic conditions, adverse changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, competition from other hotel properties, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, particularly in older structures, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes and other natural disasters (which may result in uninsured losses), acts of war, adverse changes in zoning laws, and other factors which are beyond the control of the Company and the Lessees. 6 6 Environmental Issues. Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment a hazardous substance at another property may be liable for the costs of removal or remediation of hazardous substances released into the environment at the property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. Thus, if such liability were to arise in connection with the ownership and operation of the Hotels, the Company, the Partnership, the Lessees, Alpha or TMH, as the case may be, may be potentially liable for such costs. Phase I Environmental Survey Assessments ("ESA's") have been obtained on all of the Hotels from independent environmental engineering firms. The Phase I ESA's were intended to identify potential sources on contamination for which the Hotels may be responsible and to assess the status of environmental regulatory compliance. No assurance can be given that the Phase I ESA's identified all significant environmental problems or that no additional environmental liabilities exist. The Phase I ESA's included historical reviews of the Hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screening for the presence of asbestos, PCBs, wetlands and underground storage tanks, and the preparation and issuance of a written report. The Phase I ESA's did not include invasive procedures, such as soil or ground water sampling and analysis. The Phase I ESA reports indicated that several of the Hotels have asbestos containing materials (ACM) on or in insulation, floor or ceiling coverings and various other structural and non-structural items. While the precise amounts of ACM contained in the Hotels cannot be accurately determined without incurring substantial expense, the Company believes, based on its review of the Phase I ESA reports, that overall levels are low. The Phase I ESA on the Clayton, Missouri Hotel indicated further testing of ACM was necessary in certain locations within the hotel. The Phase II ESA revealed that ACM was present and recommended that some of the ACM be removed to simplify an asbestos management program. A portion of the ACM will be removed at a cost of approximately $46,000. The partnership which sold the Clayton Hotel to the Partnership will bear the cost of such removal and has escrowed funds to cover such costs. The remaining material will be managed in-place as recommended in the Phase II ESA report in accordance with federal, state and local laws and regulations. The Company also believes that, given the condition and location of ACM in the other Hotels, risks to human health are at acceptable levels. The Company has no plans, and is not required by law, to remove ACM unless it would be affected by proposed renovation or demolition work. Absent such scheduled work, ACM will be managed in-place in accordance with federal, state and local laws and regulations. If any ACM in the Hotels becomes damaged, deteriorates, or is in an area scheduled for renovation or demolition work, asbestos could be released into the air and the Company may incur substantial costs to remove, encapsulate, or enclose the asbestos in accordance with applicable law and to reduce risks to human health. Elevated levels of airborne asbestos can create a health hazard for workers and, to a lesser degree because of the typically short duration of their stays, guests. 7 7 Increased health hazards increase the probability that the Partnership will incur liability for health-related claims. The partnership formerly owning the hotel in Columbia, South Carolina received notice in October 1992 regarding potential liability under the federal Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") for cleanup of contamination at a site in Greer, South Carolina. The relevant Phase I ESA report indicated that the Columbia Hotel contributed approximately 500 pounds of a hazardous substance to the site. This compares to an estimated total of 42 million pounds of hazardous substances disposed of at the site, contributed by more than 700 potential responsible parties ("PRP's") identified currently. Under Superfund, each PRP, including the Columbia Hotel, may be jointly and severally liable for the entire cost of the site-cleanup. On the Greer site, removal costs alone were approximately $18 million. A PRP Group has been formed to conduct removal action at the site, allocate liability among the PRP's, and generally work to resolve matters at the site. The partnership which sold the Columbia Hotel to the Partnership has agreed to remain liable for all costs and claims incurred by the Partnership arising as a result of the Greer Superfund site and has escrowed $5,000 to defray such costs and claims. In response to a demand for payment from the PRP Group, a payment of $1,127 has been made from such escrowed funds for the cost of removing drums, cylinders, and other waste materials found on the surface of the Superfund site and the government's oversight costs associated with the removal. In addition, a separate claim for the cost of investigating and remediating soil and groundwater contamination associated with the Superfund site is expected. There have been no remediation costs or estimates thereof to date. The PRP Group's approach to the allocation is such that the ultimate liability of each PRP is generally expected to be proportionate to its relative contribution of hazardous substances. In certain cases, state and federal regulators overseeing cleanup of Superfund sites will permit de minimis PRP's to pay an agreed upon amount and obtain a release from further liability. No such releases have yet been authorized or granted with respect to the Greer site. While the Company believes that such a release may in the future be available with respect to liability resulting from any contributions of hazardous substances from the Columbia Hotel, there is no assurance that a release will be obtained. Unless and until such a release is obtained, the Partnership may potentially incur liability for the entire cost of the cleanup of the site. However, based on the Phase I ESA reports and other information obtained by the Company regarding the relative amount and nature of the Columbia Hotels contribution to the Greer site, the Company believes that the liability for the hotel's substances will be only a very small portion of the total costs of removal and remediation. To the extent that any of the major PRP's declare bankruptcy or otherwise are unable to pay their share of removal and remediation costs, liability for the Columbia Hotel's substances may increase. In all but two cases where Phase I ESA reports recommended specific remedial action, either the prior owner or the Company has taken, provided for, or scheduled the recommended action. the Company has decided not to undertake the consultant's recommended actions in two cases. First, the Company has determined that testing of the soil near the transformers at the Columbia hotel site is unnecessary because (1) South Carolina Electric & Gas Co. tested the transformers, determined that they did contain PCBs and removed the transformers and (2) the consultant found no evidence (e.g. stained soil or stressed vegetation) that PCBs were released 8 8 from the transformers. Second, at the Clayton, Missouri Hotel site, the Company does not intend to train employees in handling ACM because, if such an activity becomes necessary at any of its properties, the Company will use licensed asbestos contractors, not employees, in handling ACM. The Phase I ESA for the Hampton Inn - Airport in Indianapolis, indicated that the Indianapolis Hotel disposes of approximately 10% of its solid waste at a facility that is a state Superfund site. Such a site may be subject to investigation and remediation under the federal and state Superfund laws, and persons that sent hazardous substances to the site may be jointly and severally liable for the costs of the that work. The Phase I ESA report states that solid waste from the Indianapolis Hotel was disposed of into a domestic waste cell of the facility. A state official informed the engineering firm conducting the Phase I ESA that this domestic waste cell is segregated by a containment structure and is adjacent to, but not part of, the Superfund site. The Phase I audit did not indicate that the Indianapolis Hotel has arranged for the disposal of any hazardous substances at this facility. If the Indianapolis Hotel in fact arranged for such disposal, however, it could be found liable for at least a part of any response costs. Each former owner of the Hotels has represented that it knows of no hazardous substance or PCBs in, on, or under the hotels or the real property upon which the Hotels are situated. With respect to the Hotels each such former owner will remain liable for all claims and costs arising from a breach of such representation. In addition, the seller of the Hotels will remain liable for all costs and claims incurred by the Partnership arising as a result of the Greer Superfund site and (other than as described above) items with respect to which the Phase I ESA reports recommended corrective or remedial action, specifically (i) removal by the former owner of the Hotel in Clayton, Missouri of ACM, and (ii) removal by the former owner of the Hotel in Franklin, Tennessee of debris dumped or buried in a corner of the real property upon which such Hotel is situated and erection of a fence around the area to prevent further dumping. The Company believes the former owners of the Hotels have, and will have, sufficient assets to satisfy their obligations to the Partnership which might reasonably be expected to arise under the contacts pursuant to which such properties were acquired by the Partnership. There can be no assurances, however, that such former owners will be able to satisfy any of such obligations. Except as noted specifically above, the Phase I ESA reports have not revealed an environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of an such liability or compliance concerns. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or compliance concerns or that there are material environmental liabilities or compliance concerns of which the Company is unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Hotels will not be affected by the condition of the properties in the vicinity of the Hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Partnership or the Company. The Company believes that the Hotels are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances and other environmental matters. Except as noted above with respect to the hotels in Columbia, South Carolina and Indianapolis, Indiana, neither the Company nor, to the knowledge of the 9 9 Company, any of the former owners of the Hotels has been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of its present or former properties. Tax Status. The Company has elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code, commencing with its taxable period ended December 31, 1993. The Company generally will not be subject to federal income tax to the extent it distributes at least 95% of its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. The Company is subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income. Executive Officers. Information with respect to Robert M. Solmson, Chairman of the Board and Chief Executive Officer of the Company is incorporated by reference to the Company's Proxy Statement. See Item 10. Information with respect to Minor W. Perkins, President of the Company, is incorporated by reference to the Company's Proxy Statement. See Item 10. J. William Lovelace (age 58) is Executive Vice President of the Company. From 1991 to June 1994, he was an officer of RFS, Inc. and Subsidiaries. From 1984 to 1991, Mr. Lovelace served as President of Dominion Hospitality Management, Inc., a hotel management company. Mr. Lovelace has been active in the hotel/motel industry for over 30 years. Mr. Lovelace is a graduate of the University of Missouri. Michael J. Pascal (age 38) is Secretary, Treasurer and Chief Financial Officer of the Company. From 1991 to June 1994, he was Chief Financial Officer of RFS, Inc. From 1990 to 1991, he was Controller and General Counsel for Dominion Hospitality Management, Inc., a hotel management company. From 1985 to 1990, he was General Counsel and Chief Financial Officer for The McDowell Company. Mr. Pascal holds a B.S. and a J.D. degree from Memphis State University. Mr. Lovelace is Mr. Pascal's father-in-law. ITEM 2. PROPERTIES The following table sets forth certain pro forma information for the year ended December 31, 1996 with respect to the Hotels. For hotels acquired during 1996, this information includes the actual operating results both prior and subsequent to acquisition by the Partnership.
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------- AVERAGE REVENUE PER DATE NUMBER ROOM DAILY AVAILABLE OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM ------ -------- --------- --------- ------- ----------- HAMPTON INN HOTELS: Denver, CO (Airport) 1985 138 $ 904,084 71.5% $59.42 $42.46 Detroit (Warren), MI 1988 124 776,398 66.9% 54.19 36.25 Ft. Lauderdale, FL 1986 122 2,133,164 76.4% 62.57 47.79 Hattiesburg, MS 1988 155 $2,187,265 75.2% $53.65 $40.35 Houston, TX (Hobby) (1) 1996 119 92,354 31.2% 50.08 15.64 Indianapolis, IN 1988 131 2,360,332 76.9% 64.05 49.23
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FOR THE YEAR ENDED DECEMBER 31, 1996 AVERAGE REVENUE PER DATE NUMBER ROOM DAILY AVAILABLE OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM ------ -------- --------- --------- ------- ---------- HAMPTON INN HOTELS, CONT'D.: Lakewood (Denver), CO 1987 150 2,764,313 80.8% 62.34 50.35 Lansing, MI 1985 109 1,450,606 66.2% 54.87 36.35 Laredo, TX 1995 120 1,748,268 71.7% 55.51 39.81 Lincoln, NE 1983 111 1,815,855 80.3% 55.68 44.70 Memphis, TN 1992 120 2,297,681 82.3% 63.57 52.32 Minneapolis, MN (Airport) 1985 135 2,509,844 78.3% 64.88 50.80 Minneapolis (Milwaukee), MN 1990 127 1,964,348 70.6% 59.88 42.26 Oklahoma City, OK 1986 134 2,276,591 75.7% 61.35 46.42 Omaha, NE 1985 129 2,146,618 74.1% 61.33 45.47 Plano, TX (1) 1996 131 821,222 58.8% 62.72 36.88 Tulsa, OK 1986 148 2,092,427 68.7% 56.21 38.63 RESIDENCE INN HOTELS: Ann Arbor, MI 1985 72 1,911,589 87.1% 83.52 72.74 Charlotte, NC 1984 80 2,080,103 89.1% 79.91 71.24 Fishkill, NY 1988 136 3,956,081 89.3% 89.24 79.70 Fort Worth, TX 1983 120 3,161,884 85.4% 84.53 72.19 Kansas City, MO 1987 96 2,195,444 77.3% 81.08 62.66 Providence, RI 1989 96 2,835,701 91.8% 88.14 80.93 Torrance, CA 1984 248 6,452,706 85.1% 83.74 71.28 Tyler, TX 1985 128 2,528,310 82.0% 66.01 54.12 Wilmington, DE 1989 120 3,010,911 90.5% 76.00 68.74 Perimeter West (Atlanta), GA 1987 128 3,514,907 76.2% 98.44 75.03 Orlando, FL 1984 176 4,654,030 83.8% 86.26 72.25 Sacramento, CA 1987 176 4,267,876 78.5% 86.99 68.31 HOLIDAY INN HOTELS: Clayton, MO 1965 253 5,134,804 76.9% 72.14 55.45 Columbia, SC 1969 175 2,529,266 71.6% 55.13 39.49 Flint, MI 1990 171 4,268,137 81.0% 84.15 68.18 Lafayette, LA 1983 242 4,034,039 78.4% 58.13 45.55 Louisville, KY 1970 169 2,384,577 75.9% 50.78 38.55 Crystal Lake (Chicago), IL 1988 196 4,531,345 77.2% 81.86 63.17 COMFORT INN HOTELS: Clemson, SC 1989 122 1,469,631 66.5% 49.50 32.91 Conyers, GA 1989 83 1,431,222 74.6% 63.14 47.11 Detroit (Farmington Hills), MI 1987 135 1,970,082 70.0% 56.94 39.87 Fort Mill, SC (Charlotte, NC) 1987 153 2,509,643 75.8% 59.10 44.82 Grand Rapids, MI 1982 109 1,609,293 76.0% 53.08 40.34 Marietta, GA 1989 185 2,923,866 67.9% 63.56 43.18
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FOR THE YEAR ENDED DECEMBER 31, 1996 AVERAGE REVENUE PER DATE NUMBER ROOM DAILY AVAILABLE OPENED OF ROOMS REVENUE OCCUPANCY RATE ROOM ------ -------- --------- --------- ------- ---------- HOLIDAY INN EXPRESS HOTELS: Austin, TX 1992 125 $2,077,857 71.6% $63.42 $45.42 Chicago (Arlington Heights), IL 1989 125 2,279,018 74.2% 67.18 49.81 Chicago (Downers Grove), IL 1984 123 2,072,129 70.4% 65.36 46.03 Franklin, TN 1969 100 1,383,901 72.2% 52.38 37.81 Milwaukee (Wauwatosa), WI 1984 122 1,772,683 72.7% 54.61 39.70 Minneapolis (Bloomington), MN (Airport) 1987 142 2,624,073 78.2% 64.57 50.49 Tupelo, MS 1963 124 1,224,217 56.6% 47.68 26.97 HAWTHORN SUITES HOTEL: Atlanta, GA 1984 200 5,711,041 73.7% 96.26 70.93 DOUBLETREE HOTEL: Del Mar, CA 1990 220 4,943,196 79.1% 77.64 61.39 EXECUTIVE INN HOTEL: Tupelo, MS 1982 115 1,224,217 68.4% 52.94 36.20 COURTYARD BY MARRIOTT HOTEL: Flint, MI (1) 1996 102 18,417 13.2% 78.04 $10.30 HOMEWOOD SUITES HOTEL: Salt Lake City, UT (1) 1996 98 78,251 18.3% 81.01 $14.79
(1) Represents operations since the opening of hotel in July 1996 for the Hampton Inn in Plano, TX, in November 1996 for the Homewood Suites in Salt Lake City, UT, and in December 1996 for the Hampton Inn in Houston, TX and the Courtyard by Marriott in Flint, MI. Recent Acquisitions and Pending Developments. The Partnership acquired four Sheraton Hotels in California with a total of 814 rooms on January 2, 1997 for an aggregate purchase price of approximately $91 million, consisting of cash and 2,244,934 operating partnership units. The Partnership is developing six hotels in the following areas: Jacksonville, FL, Chandler, AZ (2), Plano, TX, Sedona, AZ and Crystal Lake, IL. Completion of these hotels is expected during 1997. Master Agreement. The Company and the Partnership have entered into a master agreement, (the "Master Agreement"), with the Lessees. Under the Master Agreement, the Company and the Partnership have granted to the Lessees, a right of first offer and right of first refusal (the "Right of First Refusal") to lease hotels acquired by the Partnership or the Company until February 27, 2006 (the "Term"), subject to certain exceptions described below. 12 12 During the Term, the Partnership and the Company must deliver to the Lessees a written notice specifying the proposed Base Rent and Percentage Rent upon which the Partnership would be willing to lease a proposed acquisition or development hotel to the Lessees. In the event the Lessees do not agree within 15 days to lease the particular hotel pursuant to the rent terms set forth in the notice, the Partnership may seek an alternative lessee; provided, however, that before executing a lease with such alternative lessee, the Partnership must send a second notice to the Lessees setting forth the final rent terms of the proposed lease between the Partnership and such alternative lessee. The Lessees will then have 5 days to elect to lease the hotel from the Partnership upon the terms set forth in the second notice. If the Lessees do not make such election, the Partnership may enter into a lease with the alternative lessee upon the terms set forth in the second notice. The Partnership may terminate the Right of First Refusal at any time following February 27, 2003, in the event the hotels leased by the Lessees throughout such seven-year period fail to meet certain financial performance goals. The Partnership may also terminate the Right of First Refusal: (i) upon the occurrence under a lease of an "Event of Default" by the Lessees; (ii) in the event the Company's status as a real estate investment trust is terminated and the leases are terminated by the Company, and the Company (a) redeems all outstanding Series A Preferred Stock owned by the RFS, Inc. at a price per share equal to the greater of (A) $19.00 or (B) the average sales prices for the Company's Common Stock for the ten trading days prior to the closing date, (b) the Partnership pays the Lessees the fair market value of the remaining terms of the leases and (c) if such termination occurs prior to February 27, 2006, the Partnership pays the Lessees an amount equal to $5,000,000 minus $41,667 for each calendar month which has expired since February 27, 1996; or (iii) if RFS, Inc. fails to maintain a minimum net worth of $15,000,000 during the term of any lease or defaults under the terms of the Master Agreement. The Right of First Refusal will not apply to hotels acquired or developed by the Partnership where the seller requires, after the Partnership's reasonable efforts to obtain a price at which the lease or management of the hotel could be bought out or to obtain a price for the hotel without the seller's continued management, that the seller or an affiliate of the seller be the lessee or the manager of the hotel following acquisition by the Partnership ("Excluded Hotels"). The aggregate purchase prices for the Excluded Hotels cannot, in the aggregate, exceed 20% of the aggregate purchase prices for all hotels acquired by the Partnership during the Term. The Right of First Refusal also will not apply to the acquisition by the Partnership of any hotel (a "Subject Hotel") located in proximity to a hotel (a "Competing Hotel") owned, leased, managed or franchised by the Lessees or an affiliate of the Lessees such that the ownership, lease, management or franchise of the Competing Hotel would violate the non-competition provisions of the lease with respect to the Subject Hotel if a lease were entered into between the Partnership and the Lessees. The foregoing exception to the Right of First Refusal will not apply if the ownership, lease, management or franchise of the Competing Hotel is pursuant to a lease or other agreement with the Partnership, and even if the exception is applicable, the Partnership must notify the Lessee of its proposed acquisition of the Subject Hotel so that the Lessees have the opportunity to terminate its ownership, lease, management or franchise of the Competing Hotel, or take such other action as is necessary, in order to allow the Lessees to enter into a percentage lease with respect to the Subject Hotel without violating the non-competition restrictions. 13 13 The Right of First Refusal is also inapplicable to any hotels acquired by the Partnership from a real estate investment trust other than the Company in connection with the acquisition by the Partnership of substantially all of the hotels of such other real estate investment trust, whether by merger, purchase of assets or otherwise. RFS, Inc. is required to maintain a $15,000,000 tangible net worth during the terms of the Leases. The Master Agreement provides that there can be no change in control of the Lessees without prior consent of the Partnership. The Percentage Leases. Each hotel owned by the Partnership is separately leased to the Lessees under a Percentage Lease. Effective February 27, 1996, each of the Percentage Leases between the Partnership and RFS, Inc. was amended to provide the following among other things: (i) the term of each Percentage Lease was increased to 15 years from the date of inception; (ii) the non-compete provisions were amended to preclude the Lessees or its Affiliates from owning, leasing, operating, managing or franchising any hotel or motel within a five-mile radius of any hotel in which the Partnership or an Affiliate of the Partnership has an interest, as compared to a previous 20-mile radius restriction; (iii) events of default shall include, among others, (a) the failure of the Lessees to pay quarterly percentage rent when due and payable and continuing for a 10-day period after receipt of notice from the Partnership, as compared to the previous 90-day period and (b) occurrence of an event of default under the Master Agreement (iv) the Lessees shall be required, not later than 60 days prior to commencement of each lease year, to prepare and submit to the Partnership an operating budget and marketing plan; (v) the termination of any Percentage Lease due to total condemnation will not affect any other Percentage Leases then in effect between the Lessee and the Partnership; (vi) any management fee payable to an Affiliate of the Lessees shall be subordinate to the payment of rent to the Partnership under the leases; (vii) future leases entered into between the Lessees and the Partnership will not be subject to cross-default provisions in regard to the existing percentage leases or other future leases; (viii) the Lessees will have an extended right (120 days as compared to 90 days) to cure defaults under the franchise agreements; (ix) the respective obligations of the parties relating to capital expenditures and repairs and maintenance were clarified and amended, (x) the Partnership will have 120 days to tender a substitute lease to the Lessee upon sale of a hotel by the Partnership, as compared to 90 days previously, and, (xi) percentage rent is payable within 35 days following the end of the first three calendar quarters and on or before February 10 with respect to the fourth calendar quarter. On November 21, 1996, a new limited purpose subsidiary of the Partnership issued $75,000,000 of commercial mortgage bonds secured by 15 of the Hotels. In connection with the issuance of the bonds, the Master Agreement was amended and new Percentage Leases were entered into for the 15 Hotels by subsidiaries of the Partnership and the existing Lessee under terms substantially similar to the existing Percentage Leases. The Percentage Leases for the 15 Hotels are not cross-defaulted with the Percentage Leases for the other Hotels. Percentage Lease Terms. Fifteen of the Percentage Leases have terms expiring on December 31, 2011 and each of the other Percentage Leases has a term expiring fifteen years from the date of inception. Each Percentage Lease is subject to earlier termination upon the occurrence of certain contingencies described in the Percentage Lease. Amounts Payable Under the Percentage Leases. During the term of each Percentage Lease, the Lessee is obligated to pay (i) the greater of Base Rent or Percentage Rent and (ii) certain other amounts, including interest accrued on any late payments or charges (the "Additional Charges"). Base Rent accrues and is required to be paid monthly; Percentage Rent is payable quarterly, on or before the 35th day following the end of each of the first three calendar quarters in each fiscal year and on or before February 10 of the next year, with respect to the fourth calendar quarter of each 14 14 fiscal year, and is calculated by multiplying fixed percentages by room revenue and, with respect to the full service Hotels, beverage revenue and food revenue. For the year ended December 31, 1996, room revenue for each of the Hotels exceeded the amount required to trigger the top tier of room revenue payable as Percentage Rent. The following table summarizes the percentages of room revenues in excess of certain levels payable as Percentage Rent under the Percentage Leases.
FIRST TIER MIDDLE TIER TOP TIER ------------ ----------- ---------- Full Service (1)................. 17% to 41.5% 30% to 70% 50% to 70% Extended Stay.................... 24% to 41% 45% to 50% 60% to 72% Limited Service.................. 20% to 41.5% N/A 50% to 76.5%
(1) Percentage Rent formula also includes 20% of beverage revenue and 5% of food revenue. The rent terms for the leases for each Hotel are set forth in Exhibit 10.2(a) to this Form 10-K. Under the Percentage Leases for all of the hotels acquired since March 1994, beginning in 1995 and for each year thereafter, the Base Rent and Percentage Rent thresholds for each year will be adjusted to reflect any year-to-year changes in the consumer price index ("CPI") in the two preceding years. Additionally, the Company anticipates the Percentage Leases for hotels acquired in the future will have a similar provision. Other than real estate taxes, casualty insurance and maintenance of underground utilities and structural elements, which are obligations of the Partnership, the Percentage Leases require the Lessees to pay rent, personal property taxes, all costs and expenses and all utility and other charges incurred in the operation of the Hotels. The Percentage Leases also provide for rent reductions and abatements in the event of a partial taking of any Hotel or six months after occurrence of an event causing damage or destruction to any Hotel. Maintenance and Modifications. Under the Percentage Leases, the Partnership is required to maintain the underground utilities and the structural elements of the improvements, including exterior walls (excluding plate glass) and the roof of each Hotel. The Partnership is required to fund capital improvements at the Hotels subject to (i) the Partnership's right to approve capital budgets and (ii) the Partnership's right in its sole discretion to refuse to make any capital expenditures required by a franchisor. Otherwise, the Lessees are required, at their expense, to maintain the Hotels in good order and repair, except for ordinary wear and tear, and to make non-structural, foreseen and unforeseen, and ordinary and extraordinary, repairs which may be necessary and appropriate to keep the Hotels in good order and repair. The Lessees, at their expense and with the Lessor's prior consent, may make non-capital and capital additions, modifications or improvements to the Hotels, provided that such action does not significantly alter the character or purposes of the Hotels or significantly detract from the value or operating efficiencies of the Hotels. All such alterations, replacements and improvements are 15 15 subject to all the terms and provisions of the Percentage Leases and will become the property of the Partnership upon termination of the Percentage Leases. The Partnership owns substantially all personal property (other than inventory, linens, and other nondepreciable personal property) not affixed to or deemed a part of, the real estate or improvements thereon comprising the Hotels, except to the extent that ownership of such personal property would cause the rents under the Percentage Leases not to qualify as "rents from real property" for REIT income test purposes. Insurance and Property Taxes. The Partnership is responsible for paying real estate taxes and casualty insurance premiums on the Hotels. The Lessees are required to pay or reimburse the Partnership for all other insurance on the Hotels, which must include extended coverage, comprehensive general public liability, workers' compensation and other insurance appropriate and customary for properties similar to the Hotels and name the Partnership as an additional insured. Indemnification. Under each of the Percentage Leases, the Lessees have agreed to indemnify, and are obligated to hold harmless, the Partnership and its Affiliates, including the Company, from and against all liabilities, costs and expenses (including reasonable attorneys' fees and expenses) incurred by, imposed upon or asserted against the Partnership or its Affiliates, on account of, among other things, (i) any accident or injury to person or property on or about the Hotels; (ii) any misuse by the Lessees or any of its agents of the leased property; (iii) any environmental liability resulting from conditions caused or resulting from any action or negligence of the Lessees; (iv) taxes and assessments in respect of the Hotels (other than real estate taxes and income taxes of the Company or Partnership on income attributable to the Hotels); (v) liability resulting from the sale or consumption of alcoholic beverages on or in the real property or improvements thereon; or (vi) any breach of the Percentage Leases by Lessees; provided, however, that such indemnification will not be construed to require the Lessees to indemnify the Company and the Partnership against the Company's or Partnership's own grossly negligent acts or omissions or willful misconduct. Assignment and Subleasing. The Lessees are not permitted to sublet all or any part of the Hotels or assign its interest under any of the Percentage Leases, other than to an Affiliate of the Lessees, without the prior written consent of the Partnership. Damage to Hotels. In the event of damage to or destruction of any Hotel covered by insurance, whether or not such damage or destruction renders the Hotel unsuitable for the Lessees' use and occupancy , the Lessees are obligated to the extent of any insurance proceeds made available to the Lessee and any other sums advanced by the Partnership, to repair, rebuild, or restore the Hotel on the terms set forth in the applicable Percentage Lease. If the insurance proceeds are not adequate to restore the Hotel, each of the Lessees and the Partnership has the right to terminate the Percentage Lease without affecting any other Percentage Leases in effect between the Lessees and the Partnership, by giving notice to the other. The Partnership will retain the insurance proceeds. If the Lessees terminate the Percentage Lease due to the inadequacy of the insurance proceeds, the Partnership may nullify the termination and keep the Percentage Lease in full force by providing within 30 days after receipt of notice of termination the Partnership's unconditional, legally binding obligation to be responsible for restoration costs in excess of the insurance proceeds. If the Percentage Lease is terminated by either the Lessees or the Partnership due to the inadequacy of the insurance proceeds and the inadequacy of insurance proceeds was the 16 16 result of the Partnership's failure to maintain the proper insurance coverage as required, the Partnership must, within 180 days, pay the Lessee the fair market value of the applicable Percentage Lease on the date of termination or offer other percentage leases to the Lessees having an aggregate fair market value of no less than the fair market value of the applicable Percentage Lease. If damage or destruction of a Hotel is not covered by insurance, the provisions of the Percentage Lease which govern inadequacy of coverage apply. The Percentage Lease shall remain in full force and effect during the first six months of any period required for repair or restoration of any damaged or destroyed Hotel, after which time, rent will be equitably abated. Condemnation of Hotels. In the event of a total condemnation of a Hotel, the relevant Percentage Lease will terminate with respect to such Hotel as of the date of taking the Partnership and the Lessees will be entitled to their shares of any condemnation award in accordance with the provision of the Percentage Lease. In the event of a partial taking which does not render the Hotel unsuitable for the Lessees' use, the Lessees shall restore the untaken portion of the Hotel to a complete architectural unit but only to the extent of any condemnation awards made available to Lessee or amounts advanced by Partnership. If the condemnation award is not adequate to restore a Hotel, each of the Lessees and Partnership have the right to terminate the Percentage Lease on the Hotel without affecting the other leases between the Lessees and the Partnership then in effect.. Events of Default. Events of Default under the Percentage Leases include, among others, the following: (i) the occurrence of an Event of Default under any other lease between the Partnership and the Lessees or any Affiliate of the Lessees (with respect to the leases entered into prior to February 27, 1996); (ii) The failure by the Lessees to pay Base Rent when due and the continuation of such failure for a period of 10 days after receipt by the Lessees of notice from the Partnership thereof; (iii) the failure by the Lessees to pay the excess of Percentage Rent over Base Rent when due and continuation of such failure for a period of 10 days after receipt by the Lessee of Notice from the Partnership thereof; (iv) the failure by the Lessees to observe or perform any other term of a Percentage Lease and the continuation of such failure for a period of 30 days after receipt by the Lessees of notice from the Partnership thereof, unless such failure cannot be cured within such period and the Lessees commence appropriate action to cure such failure within said 30 days and thereafter acts, with diligence, to correct such failure within such time as is necessary; (v) if the Lessees shall file a petition in bankruptcy or reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessees as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessees shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within 60 17 17 days after the entry of an order in respect thereof, or if a receiver of the Lessees or of the whole or substantially all of the assets of the Lessees shall be appointed in any proceeding brought by the Lessees or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessees shall not be vacated or set aside or stayed within 60 days after such appointment; (vi) if the Lessees voluntarily discontinue operations of a Hotel for more than 30 days, except as a result of damage, destruction, or condemnation; or (vii) if the franchise agreement with respect to a Hotel is terminated by the franchisor as a result of any action or failure to act by the Lessees or its agents, other than a failure to complete a capital improvement required by the franchisor as a result of the Company's failure to fund the capital improvement; or (viii) if the Lessees default under the Master Agreement. If an Event of Default occurs and continues beyond any curative period, the Partnership will have the option of terminating the Percentage Lease and may terminate any other Percentage Lease which is subject to a cross-default with such Percentage Lease by giving the Lessees ten days' written notice of the date for termination of the Percentage Leases and, unless such Event of Default is cured prior to the termination date set forth in said notice, the Percentage Leases shall terminate on the date specified in the Company's notice and the Lessee is required to surrender possession of the affected Hotels. Termination of Percentage Leases on Disposition of the Hotels. In the event the Partnership enters into an agreement to sell or otherwise transfer a Hotel, the Partnership will have the right to terminate the Percentage Lease with respect to such Hotel and either (i) pay the Lessees the fair market value of the Lessees' leasehold interest in the remaining term of the Percentage Lease to be terminated or (ii) within 120 days of termination of the lease, offer to lease to Lessees a substitute hotel on terms that would create a leasehold interest in such Hotel with a fair market value equal to or exceeding the fair market value of the Lessees' remaining leasehold interest under the Percentage Lease to be terminated. Franchise License. The Lessees are the licensee under the franchise licenses on the hotels currently owned by the Partnership and are expected to hold the franchise licenses for future hotels leased from the Partnership. Upon the occurrence of certain events of default by the Lessees under a franchise license, each franchisor has agreed to transfer the franchise license for the hotel to the Partnership (or its designee). The Company anticipates that the franchisors of the hotels currently under contract will agree to a similar arrangement. In exchange, the Partnership has guaranteed all of the Lessees' franchise payments under the franchise agreements. Other Lease Covenants. The Lessees have agreed that during the term of the Percentage Leases it will maintain a ratio of total debt to consolidated net worth (as defined in the Percentage Leases) of not more than 50%, exclusive of capitalized leases. Management fees paid to affiliates of the Lessees are subordinated to the lease payments. 18 18 Breach by Partnership. If the Partnership fails to cure a breach by it under a Percentage Lease, the Lessees may purchase the relevant Hotel from the Partnership for a purchase price equal to at least the Hotel's then fair market value. Upon notice from the Lessees that the Partnership has breached the Lease, the Partnership has 30 days to cure the breach or proceed to cure the breach, which period may be extended in the event of certain specified, unavoidable delays. Inventory. All inventory required in the operation of the Hotels is purchased and owned by the Lessee at its expense. The Partnership has the option to purchase all inventory related to a particular Hotel at its fair market value upon termination of the related Percentage Lease. Franchise Agreements. All but one of the Hotels, the Executive Inn in Tupelo, Mississippi, are licensed to operate under a franchise license. Seventeen Hotels are licensed as Hampton Inn hotels, twelve are licensed as Residence Inn hotels, six are licensed as Comfort Inn hotels, seven are licensed as Holiday Inn Express hotels, six are licensed as Holiday Inn hotels, one is licensed as a Hawthorn Suites hotel, one is licensed as a Doubletree hotel, one is licensed as a Homewood Suites, one is licensed as a Courtyard by Marriott and one is licensed as a Ramada Hotel. Holiday Inn and Holiday Inn Express are registered trademarks of Holiday Inn, Inc. Ramada Hotel is a registered trademark of Franchise System Holdings, Inc. Comfort Inn is a registered trademark of Choice Hotels International, Inc. Residence Inn and Courtyard by Marriott are registered trademarks of Marriott Corporation. Hampton Inn and Homewood Suites are registered trademarks of The Promus Companies, Inc. Hawthorn Suites is a registered trademark of Hawthorn Suites Hotels. Doubletree is a registered trademark of Doubletree Corporation. The franchise licenses generally specify certain management, operational, recordkeeping, accounting, reporting and marketing standards and procedures with which the Lessees, Alpha and TMH as applicable, must comply. The franchise licenses obligate the Lessees to comply with the franchisor' standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided by the Lessee, display of signage, and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. The Lessees hold the franchise license for each Hotel. The Partnership paid the franchise license application fees with respect to the Hotels. The franchisors may require the Partnership to complete certain capital improvements to certain of the Hotels. The Partnership will fund the costs of the improvements and will own the improvements. The Company estimates that all of such required improvements to Hotels will be completed by the middle of 1997. The franchisors of any Hotels on which improvements have been required will permit the operation of such Hotels prior to completion of the improvements under conditional franchise license. Each franchise license gives the Lessees the right to operate the particular Hotel under a franchise for a period of from ten to 20 years. The franchise agreements provide for termination at the franchisor's option upon the occurrence of certain events, including the Lessees' failure to pay royalties and fees or perform its other covenants under the license agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the license without the consent of the franchisor, or failure to comply with applicable law in the operation of the relevant hotel. The Lessees are entitled to terminate the franchise license only by giving at least 12 months 19 19 notice and paying a specified amount of liquidated damages. The license agreements will not renew automatically upon expiration. The Lessees are responsible for making all payments under the franchise agreements to the franchisors. Under the Holiday Inn franchise agreements, the Lessees are required to pay a franchise fee of 4% of room revenue (plus additional fees) from the Hotels operating as Holiday Inn hotels and a franchise fee ranging from 4-5% of room revenue (plus additional fees) from the Hotels operating as Holiday Inn Express hotels. Under the Ramada franchise agreement, the Lessees are required to pay a franchise fee of 3% of revenue from the Ramada Hotel, plus fees for use of the reservation system and other miscellaneous fees. Under the Comfort Inn franchise agreements, the Lessees are required to pay a franchise fee ranging from 4-5% of revenue for the Hotels operating as Comfort Inn hotels plus fees for use of the reservation system and other miscellaneous fees. Under the Promus Companies, Inc. franchise agreements, the Lessees are required to pay a franchise fee ranging from 4-5% of room revenue (plus additional fees) from the Hotels operating as Hampton Inn hotels and 5% from the Hotels operating as Homewood Suites hotels. Under the Marriott Corporation franchise agreement, the Lessees are required to pay a franchise fee ranging from 3-5% of room revenue (plus additional fees) from the Hotels operating as Residence Inn hotels and 5% from the Hotels operating as Courtyard by Marriott hotels. Under the Hawthorn Suites franchise agreement, the Lessees are required to pay a franchise fee of 4% of room revenue (plus additional fees) from the Hotels operating as Hawthorn Suites. Under the Doubletree Corporation franchise agreement, the Lessees are required to pay 3% from the Hotels operating as Doubletree hotels. The franchisors have agreed that, in the event of a default by the Lessees under a franchise agreement with respect to a franchised Hotel currently owned by the Partnership, the franchise license for that Hotel will be assigned to the Partnership or a designee of the Partnership acceptable to the franchisor. The Partnership anticipates that the franchisors of future hotels acquired will agree to similar arrangements. The Partnership will be obligated to pay the franchisor's actual costs of investigating the Partnership's designee and processing the transfer, but will pay no transfer fee. In consideration of the franchisors' agreements to transfer the franchise licenses upon default by the Lessees as described above, the Partnership has agreed to guarantee the Lessees' obligations to make the franchise fee payments to the franchisors under the franchise agreements. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor the Partnership currently is involved in any material litigation nor, to the Company's knowledge, is any material litigation currently threatened against the Company or the Partnership. The Lessees, Alpha and TMH have advised the Company that they currently are not involved in any material litigation, other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's shareholders during the fourth quarter of 1996. 20 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS (A) MARKET INFORMATION The Company's common stock began trading on the New York Stock Exchange ("NYSE") under the symbol "RFS" on September 7, 1996. It previously traded on the Nasdaq Stock Market under the symbol "RFSI". The high and low sales prices for the shares on The Nasdaq Stock Market prior to September 6, 1996 and on the NYSE subsequent to September 5, 1996 and the dividends declared per share since August 13, 1993, the date of inception, are as follows:
Stock Price Dividend High Low Per Share ---- --- --------- First Quarter 1995 15.87 13.00 0.29 Second Quarter 1995 16.25 14.12 0.30 Third Quarter 1995 16.25 13.75 0.31 Fourth Quarter 1995 15.75 14.37 0.33 First Quarter 1996 18.50 15.37 0.34 Second Quarter 1996 18.00 14.87 0.36 Third Quarter 1996 17.12 14.75 0.36 Fourth Quarter 1996 19.75 14.87 0.36
(b) Holders The number of holders of record of shares of common stock was 197 as of March 14, 1997. (c) Dividend The Company intends to pay regular quarterly dividends, which are dependent upon receipt of distributions from the Partnership, in order to maintain its REIT status under the Internal Revenue Code. 21 21 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth (i) selected historical financial data for the Company; (ii) selected historical financial data for RFS, Inc.; and (iii) selected financial data for the Company's predecessor. The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and all of the financial statements and notes thereto included elsewhere, and incorporated by reference. (in thousands, except per share data)
THE COMPANY --------------------------------------- 1996 1995 1994 1993(1) ---- ---- ---- ---- Total revenue $ 61,986 $ 48,307 $ 23,354 $ 2,011 Income before minority interest 35,087 31,085 14,351 1,236 Net income 34,587 30,646 14,156 1,208 Net income per share 1.37 1.26 0.94 0.25 Cash dividends per share 1.39 1.18 1.02 0.11 Funds from operations 45,723 39,663 18,109 1,576 Total assets 499,129 376,962 346,870 80,754 Total debt 133,064 30,186 2,420 0
RFS, INC. --------------------------------------- 1996 1995 1994 1993 ---- ---- ---- ---- Total revenue $151,503 $122,818 $ 62,616 $10,536 Income from continuing operations 6,668 2,129 759 639 Net income 6,668 2,129 657 565 Total assets 39,217 14,134 11,601 5,636 Total debt 324 672 1,511 1,625
THE INITIAL HOTELS (2) ---------------------- 1993 1992 ---- ---- Hotels' total revenue 11,668 $ 19,596 Income before interest, depreciation and amortization 2,020 3,136 Income (loss) before minority interest or extraordinary gain (911) (1,329) Net income (loss) (911) (1,060) Total assets n/a 27,923 Total debt n/a 23,772
(1) For the period August 13, 1993 (inception of the Company) through December 31, 1993. (2) Information for the Initial Hotels relates to periods prior to August 13, 1993, the date of acquisition of the Initial Hotels by the Company. Under the rules and regulations of the Securities and Exchange Commission, the Initial Hotels are deemed to be the predecessor to the Company. 22 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) Following is Management's Discussion and Analysis of Financial Condition and Results of Operations for the Company and the Lessee. THE COMPANY Incorporated herein by reference to the Company's Annual Report for the year ended December 31, 1996 and filed as Exhibit 13.1 to this Form 10-K. THE LESSEE BACKGROUND The Partnership leases all of its hotels to RFS, Inc. (the "Lessee") pursuant to Percentage Leases as described above. Effective February 27, 1996, the Lessee was acquired by and became a wholly-owned subsidiary of Doubletree Corporation ("Doubletree") in a business combination accounted for as a pooling of interests. The Lessee generates substantially all of its revenues from operating and managing hotels leased to it by the Partnership. As of December 31, 1996, the Lessee manages and/or leases 62 hotels, 52 of which are leased from the Partnership. RESULTS OF OPERATIONS Year Ended December 31, 1996 Compared with Year Ended December 31, 1995 Total revenues increased $28.7 million or 23% to $151.5 million for the year ended December 31, 1996 compared to $122.8 million for the year ended December 31, 1995. The increase in hotel revenues of $26.4 million was attributable to the net addition of four leased properties as compared to the 1995 period and an increase of approximately $5 in average daily rate to $68 on a same store basis while occupancy remained stable at approximately 77%. Additionally, revenues in the current year include the full year results of seven hotels that commenced operations in 1995. The margin on hotel results (hotel revenues less leased hotel expenses and lease expenses) increased $3.0 million or 37% from $8.2 million to $11.2 million reflecting the improved operating performance of the hotels partially offset by increased lease payments to the lessor attributable to increased revenues. Management and consulting fees increased 81% to $0.8 million reflecting the net addition of eight management contracts that commenced in the first half of 1995. Other fees and income increased $1.9 million principally attributable to interest income on invested cash balances and loans made to the owners of certain of the managed hotels and dividend income generated from the investment in the convertible preferred stock of the Company. 23 23 General and administrative expenses decreased 35% or $2.0 million primarily due to a reduction in headcount realized after the acquisition of the Lessee by Doubletree Corporation in February 1996. Business combination expenses of $1.0 million incurred in connection with the acquisition of the Lessee by Doubletree, principally consisted of legal, professional and accounting fees, and certain other expenses. The nominal increase in depreciation and amortization reflects the amortization of the franchise application fees paid in connection with the acquisition. The provision for income taxes in 1996 reflects a 35% effective tax rate, the consolidated effective tax rate for Doubletree Corporation in 1995 and 1996. Prior to its acquisition by Doubletree Corporation, the Lessee was a Subchapter S Corporation, and generally was not subject to income taxes. Excluding the business combination expenses and utilizing an effective tax rate of 35% for 1995, net income would have increased $4.6 million from $2.1 million or 223%. Year Ended December 31, 1995 Compared with Year Ended December 31, 1994 Total revenues increased $60.1 million or 96% to $122.8 million for the year 1995 compared to $62.7 million for the year ended 1994. The increase in hotel revenues of $60.4 million was attributable to the net addition of seven leased properties as compared to those leased as of December 31, 1994 plus the full year results of 31 hotels that the Lessee commenced leasing during 1994. Additionally, the portfolio experienced increases in occupancy and the average daily rate for guest rooms as compared to the prior year. The margin on hotel results (hotel revenues less leased hotel expenses and lease expenses) increased $4.4 million or 117% from $3.8 million to $8.2 million reflecting the increased number of hotels, improved operating results and the fixed nature of certain expenses that do not increase in proportion to increases in revenues. General and administrative expenses increased 65% or $2.1 million primarily due to an increase in headcount and other corporate expenses directly attributable to the growth in the number of hotels managed and/or leased as compared to 1994. Depreciation and amortization increased nominally. The provision for income taxes in 1995 reflects the Lessee's election, commencing January 1, 1995, to be taxed as a Subchapter S Corporation. Accordingly, the Lessee was generally not subject to income taxes. For the year ended December 31, 1994, the Lessee's effective tax rate was approximately 42% which more closely resembles the statutory federal and state income tax rates. Excluding the business combination expenses and utilizing an effective tax rate of 35% for 1995, net income would have increased $1.4 million from $0.7 million or 213%. LIQUIDITY AND CAPITAL RESOURCES The principal source of cash to the Lessee, other than capital contributions from Doubletree Corporation, will come from operations. Since inception, the Lessee, has been able to meet its rent obligations under the Percentage Leases. During 1996, the Lessee generated cash flow from operations of $3.7 million as compared to $6.2 million during 1995. The decrease was principally attributable to changes in the Lessee's receivable and payables offset by an increase of $4.5 million in net income. The Lessee expects that its cash flow from operations will be sufficient to meet its liquidity and capital requirements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference to the Company's Annual Report to Shareholders for the year ended December 31, 1996. 24 24 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder RFS, Inc. and Subsidiary: We have audited the accompanying consolidated balance sheet of RFS, Inc. and Subsidiary (a wholly-owned subsidiary of Doubletree Corporation) ("Company") as of December 31, 1996 and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The financial statements of RFS, Inc. as of December 31, 1995 and for each of the years in the two-year period then ended, were audited by other auditors whose report was dated February 2, 1996, except for a subsequent events note dated February 27, 1996, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RFS, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Memphis, Tennessee January 20, 1997 26 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
ASSETS 1996 1995 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $7,108 9,238 Trade receivables (net of an allowance for doubtful accounts of $62 and $40 at December 31, 1996 and 1995, respectively) 3,287 2,507 Inventories 168 173 Prepaid expenses 354 192 Due from parent 1,749 - ------- ------ TOTAL CURRENT ASSETS 12,666 12,110 Investments in RFS Hotel Investors, Inc. 20,032 1,379 Note receivable 3,000 - Leasehold improvements and office equipment, net 300 334 Capitalized franchise costs 2,563 - Deferred costs and other assets, net 656 311 ------ ------ $39,217 14,134 ====== ====== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Note payable $ 324 - Current maturities of long-term debt - 53 Accounts payable and accrued expenses 6,350 7,071 Lease payable 6,775 5,795 Other - 185 ------ ------ TOTAL CURRENT LIABILITIES 13,449 13,104 Net deficit in partnerships and ventures 314 312 Long-term debt, less current maturities - 619 Deferred income taxes 61 36 ------ ------ TOTAL LIABILITIES 13,824 14,071 ------ ------
(Continued) 2 27 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) CONSOLIDATED BALANCE SHEETS, CONTINUED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
1996 1995 ---- ---- STOCKHOLDER'S EQUITY: Common stock, no par value; 5,000 shares authorized; 100 and 896 shares issued and outstanding at December 31, 1996 and 1995, respectively $ 282 282 Additional paid-in capital 18,500 - Unearned employee compensation (141) (211) Unrealized gain on marketable equity securities, net of income taxes 114 22 Retained earnings (accumulated deficit) 6,638 (30) ------ ------ TOTAL STOCKHOLDER'S EQUITY 25,393 63 ------ ------ Commitments and contingencies ------ ------ $39,217 14,134 ====== ======
See accompanying notes to consolidated financial statements. 3 28 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- REVENUES: Hotel revenue $148,699 122,253 61,825 Management and consulting fees 817 452 666 Other 1,987 113 221 --------- ------- ------ TOTAL REVENUES 151,503 122,818 62,712 --------- ------- ------ EXPENSES: Hotel expenses: Salary and benefits 30,299 25,847 15,654 Franchise costs 10,153 8,315 4,078 Advertising and promotion 5,069 4,294 2,749 Utilities 7,090 6,151 3,317 Repair and maintenance 7,088 6,006 3,194 Leases, insurance and taxes 1,214 1,603 650 Other operating costs 16,486 14,624 6,756 --------- ------- ------ 77,399 66,840 36,398 General and administrative 3,430 5,386 3,257 Business combination expenses - 1,007 - Depreciation and amortization 266 172 77 Lease expense 60,148 47,249 21,666 --------- ------- ------ TOTAL OPERATING EXPENSES 141,243 120,654 61,398 --------- ------- ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 10,260 2,164 1,314 Income taxes (3,592) (35) (555) --------- ------- ------ INCOME FROM CONTINUING OPERATIONS 6,668 2,129 759 Loss on discontinued operations, net of related tax benefit of $57 in 1994 - - (102) --------- ------- ------ NET INCOME $ 6,668 2,129 657 ========= ======= ======
See accompanying notes to consolidated financial statements. 4 29 PAGE 5 STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) 5 30 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,668 2,129 657 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 290 172 147 Equity in loss of partnerships - 198 - Provision for bad debts 22 40 131 Net gain on sale of partnership interests - - (96) Deferred income tax provision - (158) (1) (Increase) decrease in accounts receivable (766) 163 (989) (Increase) decrease in other assets (1,818) 121 (182) Increase (decrease) in accounts payable and accrued expenses (733) 3,582 6,105 ------- ------ ----- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,663 6,247 5,772 ------- ------ ----- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in RFS Hotel Investors, Inc. (18,500) - - Investments in partnerships and ventures (175) (270) (185) Distributions from partnerships and ventures 2 1 84 Franchise application fees (2,626) - - Purchase of furniture and equipment (79) (241) (56) Loan to owners of managed hotels (3,000) - - Purchase of marketable securities - (516) - Increase in deferred costs and other assets (90) (82) 76 ------- ------ ----- NET CASH USED BY INVESTING ACTIVITIES (24,468) (1,108) (81) ------- ------ ----- CASH FLOWS FROM FINANCING ACTIVITIES: Contribution of paid-in capital from parent 18,500 - - Payments on notes payable 175 (839) (414) Payment of preferred stock dividends - - (34) Distributions to common stockholders - (2,055) - Purchase of preferred and common stock - - (182) ------- ------ ----- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 18,675 (2,894) (630) ------- ------ -----
(Continued) 6 31 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- NET INCREASE (DECREASE) IN CASH $(2,130) 2,245 5,061 Cash and cash equivalents: Beginning of year 9,238 6,993 1,932 ------ ----- ----- End of year $ 7,108 9,238 6,993 ====== ===== ===== SUPPLEMENTAL DISCLOSURES: Interest paid $ 19 100 150 ====== ===== ===== Income taxes paid $ 3,666 123 424 ====== ===== =====
NON-CASH INVESTING AND FINANCING ACTIVITIES: On January 2, 1995, the Company issued 12 shares of common stock to employees at an estimated fair value on the date of grant of $281,000. In 1995, furniture and equipment with cost and accumulated depreciation of $250,000 was retired. In 1994, furniture and equipment with cost and accumulated depreciation of $250,000 was retired. The Company retired $100,000 of preferred stock purchased during 1994. On December 31, 1994, the Company converted $440,000 in preferred stock to common stock. See accompanying notes to consolidated financial statements. 7 32 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) ORGANIZATION AND PRESENTATION Effective February 27, 1996, RFS, Inc. (the "Company") became a wholly-owned subsidiary of Doubletree Corporation ("Doubletree") in a transaction accounted for as a pooling of interests. The Company generates substantially all of its revenue from operating and managing leased hotels owned by RFS Partnership, L.P. (the "Partnership"). The Partnership is 98% owned by RFS Hotel Investors, Inc. (the "REIT"). Substantially all of the hotels owned by the Partnership (the "Hotels") are separately leased by the Partnership to the Company under individual lease agreements (collectively, the Percentage Leases). The Percentage Leases provide for the payment of annual rent equal to the greater of (i) fixed base rent or (ii) percentage rent based on a percentage of gross room revenue, food revenue and beverage revenue at the Hotels. In connection with the February 27, 1996 merger with Doubletree, the Company amended each of the individual Percentage Leases. The significant amendments include extending the terms of the leases, clarifying the Company's and the Partnership's responsibilities with respect to repairs and maintenance at the hotels and clarifying certain other provisions of the Percentage Leases. These provisions include the Partnership granting the Company a 10-year right of first refusal to manage and lease future hotels acquired or developed by the Partnership. At December 31, 1996, the Company leased 52 hotels from the Partnership. At December 31, 1996, the Company operated 62 hotels. Three Hotels are operated by Alpha Inn Management Company and one by TMH, Inc. pursuant to management agreements between the Lessee and Alpha Inn Management Company and TMH, Inc. Additionally, the Company manages 10 hotels for unrelated entities. The Company leases and/or manages hotel properties in 22 states, primarily in the Southeast and Midwest and substantially all are affiliated with a nationally recognized franchise. Prior to December 31, 1994, the Company was the parent corporation of six subsidiaries which were involved in various real estate development and management activities. Effective December 31, 1994, these six subsidiaries were merged into the Company. This merger has been treated as a combination of entities under common control and is accounted for in a manner similar to that of a pooling of interests. 8 33 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) REVENUE RECOGNITION Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectible. (b) LEASE EXPENSE Lease expense is recognized as due to the Partnership under the Percentage Leases commencing on the date a lease is executed between the Partnership and the Company. (c) CAPITALIZED FRANCHISE COSTS In connection with the Company's acquisition by Doubletree, franchise application fees were paid to various franchisors of the Hotels. These fees are amortized over the remaining lives of the franchise agreements. The recoverability of the franchise application fees are periodically evaluated to determine whether such costs will be recovered from future operations. The initial cost of obtaining the franchise licenses is paid by the Partnership, and the ongoing franchise fees are paid by the Company. These fees are generally computed as a percentage of room revenue for each respective hotel in accordance with the franchise agreements. (d) LEASEHOLD IMPROVEMENTS AND OFFICE EQUIPMENT Improvements to office leaseholds are amortized over the shorter of the lives of the assets or the terms of the related leases. Office furniture and equipment is depreciated using the straight-line basis over their estimated useful lives, which is 7 years for furniture and 5 years for equipment. Accumulated depreciation at December 31, 1996 and 1995 was approximately $431,000 and $318,000, respectively. 9 34 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Maintenance and repairs are charged to operations as incurred; major renewals and betterments at the hotels are the responsibility of the Partnership. When furniture and equipment are sold, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is credited or charged to operations. (e) INVENTORIES Inventories consisting of food and beverages are stated at the lower of cost (generally first-in, first-out) or market. (f) INVESTMENTS Investments in partnerships and ventures in which the Company controls the assets of the partnership are accounted for using the equity method. All other investments are accounted for using the cost method with the exception of marketable equity securities which are classified as available-for-sale and recorded at fair value with unrealized gains or losses reflected in stockholder's equity pursuant to FASB Statement No. 115. (g) INCOME TAXES Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets, including net operating loss carryforwards, and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's parent, Doubletree, files a consolidated federal income tax return. The intercompany settlement of taxes paid is based on an informal tax sharing agreement which allocates taxes to the Company based upon a proportionate allocation of Doubletree's consolidated current and deferred tax expenses. Prior to its acquisition by Doubletree the Company elected Subchapter S corporation status for federal income tax purposes and certain states effective January 1, 1995. The Company's Subchapter S corporation election was revoked upon the Company's acquisition by Doubletree. 10 35 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (h) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of the statement of cash flows. (i) 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. (j) RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to 1996 presentation. (3) INVESTMENTS IN RFS HOTEL INVESTORS, INC. The Company has the following investments in RFS Hotel Investors, Inc. and its related entity RFS Partnership, L.P. (in thousands):
1996 1995 ---- ---- RFS HOTEL INVESTORS, INC. Series A Convertible Preferred Stock $18,500 - Common Stock 691 538 RFS PARTNERSHIP, L.P. Partnership Units 841 841 ------ ----- $20,032 1,379 ====== =====
On February 27, 1996, the Company received from the REIT 973,684 shares of the REIT's Series A Convertible Preferred Stock ("Series A Preferred Stock") for an aggregate purchase price of $18.5 million or $19.00 per share. The Series A Preferred Stock has an initial preference value of $19.00 per share ("Stated Value"), a par value of $.01, and is senior to the REIT's common stock as to dividends and upon liquidation of the REIT. Each 11 36 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS share of Series A Preferred Stock has one vote and is convertible into one share of the REIT's common stock after the seventh anniversary of the issuance. The shares of Series A Preferred Stock are entitled to a $1.45 cumulative dividend per share. The Series A Preferred Stock has mandatory redemption rights upon the occurrence of certain events which are under the REIT's control. The REIT can redeem the Series A Preferred Stock after the seventh anniversary of issuance at the Stated Value, together with all accrued and unpaid dividends. The Company's investment in the Partnership units is carried at the amount of cash consideration the Company could have received in lieu of Partnership units which is approximately $841,000 on 77,904 units owned. At present, there is no market for the Partnership units. However, the Partnership units are convertible into REIT common stock. The Company owns 35,000 shares of REIT common stock carried at their market value of $691,020 and $538,125 at December 31, 1996 and 1995, respectively. (4) INVESTMENTS IN PARTNERSHIPS Information with respect to the Company's investments in partnerships at December 31, 1996 and 1995 is as follows:
CARRYING VALUE % TYPE OF (IN THOUSANDS) ENTITY OWNERSHIP INTEREST 1996 1995 ------ --------- -------- ---- ---- Devonshire Associates 10% General $ 1 $ 1 SF Partners 2% General - 1 Highland Plaza Partners, Ltd. 5% General 1 1 DDP Partners, L.P. 5% General 13 14 ---- ---- 15 17 Shelby Distribution Partners, L.P. 46% General (329) (329) --- --- $(314) $(312) === ===
(5) NOTE RECEIVABLE In June 1996, the Company obtained management agreements for eight hotel properties owned by entities unrelated to the Company. In connection with obtaining these contracts, the Company loaned $3 million to the owners, principally for renovations. The note is unsecured, bears interest at 10% and is repayable as follows: $300,000 on December 31, 1998, $600,000 on December 31, 1999, $300,000 on December 31, 2000, $1,800,000 on December 31, 2001. 12 37 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) DEBT At December 31, 1996 and 1995, debt consists of the following (in thousands):
1996 1995 ---- ---- Notes payable on premium financing contracts, monthly payments of approximately $47,000 including interest at 5.25% due September 1997, uncollateralized $324 - Note payable to stockholder, monthly payments of approximately $9,000 including interest at 8% due through May 2011, uncollateralized, paid-off in February 1996 - 672 --- --- $324 672 === ===
(7) PREFERRED AND COMMON STOCK In connection with the Company's acquisition by Doubletree, the Company retired all its issued and outstanding common stock and issued 100 new shares to Doubletree. In addition, Doubletree made a $18,500,000 capital contribution to the Company. The proceeds from this capital contribution were used to acquire Series A Preferred Stock issued by the REIT as discussed in note 3. In 1995, the Company granted a total of 12 shares of common stock to certain employees. These shares were recorded at the estimated fair value on the date of grant. These shares vest ratably over the next four years. Such vesting requirements are contingent upon the employees' continued employment with the Company. In 1994, the Company converted 56 shares of Series A preferred stock and 108 shares of Series B preferred stock into 164 shares of common stock. During 1994, the Company declared and paid dividends of $321,000 and $100,000 per share on each outstanding share of Series A and B preferred stock, respectively. Simultaneously, with the conversion of the preferred stock, the Company retired 280 shares of common stock held in treasury. 13 38 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) DISCONTINUED OPERATIONS During 1994, the construction division and the property management division of a former subsidiary and the operations of another former subsidiary were sold to related parties at nominal selling prices. The disposal date for the construction division was June 30, 1994; the disposal date for the property management division and the operations of the former subsidiary was December 31, 1994. No gains or losses were recognized on these sales. The net 1994 and 1993 results of the operations for these three activities have been presented in the accompanying statement of income in the caption "loss on discontinued operations." On a combined basis, these three activities had revenue of $5,014,000 for 1994 and total assets of $179,000 at December 31, 1994. (9) INCOME TAXES Effective February 27, 1996, the Company's results of operations are included in Doubletree's consolidated U.S. Federal income tax return. Under the terms of an informal agreement, the Company makes payments to Doubletree for a proportionate allocation of Doubletree's consolidated current and deferred income tax expense. During 1996, income tax expense of approximately $3,592,000 was recorded and the Company remitted $3,666,000 to Doubletree for income tax payments. At December 31, 1996, $75,000 was due from the Parent in settlement of the 1996 tax estimates. The following represents the significant components of income tax expense and the effect of recognizing deferred tax assets and liabilities on various temporary differences for years prior to 1996 (in thousands):
1995 1994 ---- ---- Federal: Current $ - 502 Deferred - (39) Change in tax status (161) - --- --- (161) 463 --- --- State: Current 193 54 Deferred 3 (9) Utilization of net operating loss carryforwards - 47 --- --- 196 92 --- --- $ 35 555 === ===
14 39 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company income tax provision for 1995 and 1994 was calculated as follows (in thousands):
1995 1994 ---- ---- Tax at federal statutory rate $ - 447 Non-deductible expenses - 23 State income taxes, net of federal benefit 196 69 Reduction in federal deferred tax liability due to change in tax status (161) - Other - 16 Income tax provision $ 35 555 ==== ===
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1995 are as follows (in thousands):
1995 Deferred tax liabilities: ---- Furniture and equipment $ 4 Investments in partnerships 48 ---- 52 Deferred tax assets: ---- Allowance for doubtful accounts 2 Accruals for certain employee benefits 14 Net operating loss carryforwards 180 ---- 196 Valuation allowance for deferred tax assets (180) ---- 16 Net deferred tax liabilities $ 36 ====
15 40 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) COMMITMENTS AND CONTINGENCIES The Company leases office space and equipment under noncancelable operating lease agreements expiring at varying intervals through 2002. The future minimum rental payments required under these leases as of December 31, 1996 are as follows (in thousands):
YEAR AMOUNT ---- ------ 1997 $ 301 1998 301 1999 312 2000 315 2001 315 Thereafter 79 ------- $1,623
Rental expense, except for the lease expense described below, was approximately $301,000 $431,000 and $211,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company has future lease commitments to the Partnership under the Percentage Leases through 2011. At December 31, 1996, minimum future rental payments under the Percentage Leases are as follows (in thousands):
YEAR AMOUNT ---- ------ 1997 $ 26,979 1998 26,925 1999 26,925 2000 26,925 2001 26,925 Thereafter 201,632 ------- $336,311
The Company paid base rents of approximately $25,255,000, $21,995,000 and $10,705,000 and percentage rents in excess of base rents of approximately $34,893,000, $25,254,000 and $10,961,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the Company had a net payable to the Partnership of $6,775,000 and $5,795,000, respectively, for percentage rents and other transactions. 16 41 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has management agreements with two hotel operators to manage four of the leased hotels. The management agreements have terms ranging from ten to twenty years and provide for a fee based on a percentage of each hotel's revenue. (11) RELATED PARTY TRANSACTIONS Certain of the partnerships in which the Company has an interest and certain former stockholders owed the Company approximately $439,000 and $197,000 for advances and other transactions at December 31, 1996 and 1995, respectively. At December 31, 1995 and 1994, the Company owed the Chairman of the Board approximately $672,000 and $902,000, respectively, under a promissory note for the purchase of common stock of a former subsidiary. Interest expense related to this note was approximately $63,000 and $73,000 for the years ended December 31, 1995 and 1994, respectively. The promissory note was repaid in February 1996. The Company has recognized, as income, approximately $1,340,956 and $176,000 of distributions received from the Partnership with respect to Series A Preferred Stock, Partnership units and REIT common stock owned by the Company for the years ended December 31, 1996 and 1995, respectively. On December 31, 1994, the Company entered into a consulting agreement ("Agreement") with Hospitality Advisory Services, Inc. ("HAS"). The Agreement requires monthly payments of $40,000 to HAS beginning January 1, 1995 through December 31, 1995 with the term of the Agreement extended for one additional year. The Agreement also provides for incentive fees at the discretion of the Company. The owners of HAS are officers of RFSI and were stockholders of the Company. Total fees paid to HAS during 1995 were approximately $780,000. The Agreement was terminated effective February 27, 1996 and was replaced with new consulting agreements with two former officers of the Company. These consulting agreements may be terminated by the Company on or after February 27, 1997. Total fees paid on these consulting agreements was $175,000 in 1996. (12) EMPLOYEE BENEFIT PLANS In January 1995, the Company adopted an employee savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all full-time employees of the Company who are 21 years of age and have completed at least one year of continuous service. The participants' maximum contributions are limited under applicable IRS regulations were approximately $9,000 per participant. The Company currently contributes 50% of 17 42 RFS, INC. AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION) NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AND UNIT DATA) employee contributions to the plan, up to a maximum of 2% of employee compensation. Company contributions generally vest at 20% per year becoming fully vested in the seventh year of service. Contribution expense related to this plan was approximately $41,000 and $195,000 for the years ended December 31, 1996 and 1995, respectively. The Company maintains a self-insured group health plan. Aggregate and stop loss insurance exists at amounts which limit the Company's exposure. Liabilities are included in accrued expenses for estimated incurred but not reported claims. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, note receivables, investments in partnerships and ventures, accounts payable and accrued expenses, each as included in the balance sheets under such captions. With the exception of note receivable, investments in partnerships and ventures, and the investments in RFS Partnership, L.P. units, the carrying amounts of all other classes of financial instruments approximate fair value due to the short maturity of those instruments or, in the case of marketable equity securities they are carried at their estimated fair value. The Company has determined that the fair value of its note receivable is not significantly different from their carrying value based on interest rate and payment terms the Company would currently offer on notes with similar security to borrowers of similar creditworthiness. The fair value of the partnership interests, which are carried at cost, are estimated based upon the residual value to the Company in the respective partnership's net assets. RFS Partnership, L.P. units, which are convertible into REIT common shares, have a carrying value of $841,000 and an estimated fair value of approximately $1,539,000 and $1,197,000 at December 31, 1996 and 1995, respectively. 18 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to the sections entitled "Election of Class I and Class III Directors" and "Executive Compensation" in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Shareholders to be held on April 24, 1997 (the "Proxy Statement"). See also Item 1. Business-Executive Officers. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to the section entitled "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the sections entitled "Ownership of the Company's Common Stock" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement. 25 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The following financial statements included in the Company's Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Income for years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements The following financial statement schedules and report of independent accountants on the financial statement schedules are included in this report on Form 10-K: Report of Independent Accountants on the Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation for RFS Hotel Investors, Inc. Schedule IV - Mortgage Loans on Real Estate The following financial statements of RFS, Inc. are included in this report on Form 10-K: Independent Auditors' Report ConsolidatedBalance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Operations for years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholder's Equity for years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for year ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (b) Reports on Form 8-K No filings of Form 8-K were made during the last quarter of 1996. (c) Exhibits
Exhibit Number Exhibit 3.1 - Amended and Restated Charter of the Registrant (previously filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated March 6, 1995 and incorporated herein by reference).
26 45 3.2 - By-Laws of the Registrant (previously filed as Exhibit 3.2 to the Company's Form S-11 Registration Statement, Registration No. 33-63696 and incorporated herein by reference). 3.3 - Second Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P., (previously filed as Exhibit 3.3 to the Company's Form S-3 Registration Statement, Registration No. 33-83450 and incorporated herein by reference). 3.3(a) - Third Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P., (previously filed as Exhibit 4.3 to the Company's Form S-3 Registration Statement, Registration No. 333-3307 and incorporated herein by reference). * 3.3(b) - Fourth Amended and Restated Agreement of Limited Partnership. 10.1 - Consolidated Lease Amendment (previously filed as Exhibit 10.3 to the Company's current report on Form 8-K, dated February 27, 1996 and incorporated herein by reference). 10.2 - Form of Future Percentage Lease (previously filed as Exhibit 10.4 to the Company's Current Report on Form 8-K, dated February 27, 1996 and incorporated herein by reference). *10.2(a) - Schedule of terms of Percentage Leases 10.3 - Form of Sale and Purchase Agreement (previously filed as Exhibit 10.2 to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). *10.3(a) - Schedule of terms of Sale and Purchase Agreements *10.4 - Employment Agreement between RFS Managers, Inc. and Robert M. Solmson *10.5 - Employment Agreement between RFS Managers, Inc. and Minor W. Perkins *10.6 - Employment Agreement between RFS Managers, Inc. and J. William Lovelace *10.7 - Employment Agreement between RFS Managers, Inc. and Michael J. Pascal *10.8 - First Amended Revolving Credit and Term Loan Agreement *10.8(a) - First Modification to First Amended Revolving Credit and Term Loan Agreement
27 46 10.9 - Master Agreement, dated February 1, 1996 (previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated February 27, 1996 and incorporated herein by reference). *10.9(a) - First Amendment to Master Agreement dated as of November 21, 1996. *10.10 - Indenture dated as of November 21, 1996. *10.11 - Form of Deed of Trust dated as of November 21, 1996. *13.1 - Annual Report to Shareholders for the year ended December 31, 1996 *21.1 - List of Subsidiaries of the Registrant *23.1 - Consent of Coopers & Lybrand *23.2 - Consent of KPMG Peat Marwick LLP *27 - Financial Data Schedule (for SEC use only)
- - ---------------- * Filed herewith 28 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant as duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RFS HOTEL INVESTORS, INC. By: /s/ Robert M. Solmson Robert M. Solmson Chairman of the Board and Chief Executive Officer Date: March 26, 1997 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 in the capacities and on the dates indicated:
SIGNATURES TITLE DATE /s/ Robert M. Solmson - - ------------------------------- Robert M. Solmson Chairman of the Board, March 26, 1997 and Chief Executive Officer /s/ Minor W. Perkins - - ------------------------------- Minor W. Perkins President March 26, 1997 /s/ Michael J. Pascal - - ------------------------------- Michael J. Pascal Chief Financial Officer March 26, 1997 Secretary and Treasurer /s/ H. Lance Forsdick - - ------------------------------- H. Lance Forsdick, Sr. Director March 26, 1997 /s/ Bruce E. Campbell, Jr. - - ------------------------------- Bruce E. Campbell, Jr. Director March 26, 1997 - - ------------------------------- Michael E. Starnes Director /s/ John W. Stokes, Jr. - - ------------------------------- John W. Stokes, Jr. Director March 26, 1997 /s/ Harry W. Phillips, Sr. - - ------------------------------- Harry W. Phillips, Sr. Director March 26, 1997 - - ------------------------------- R. Lee Jenkins Director
29 48 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of RFS Hotel Investors, Inc. is included on page _____ of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule in the index on page 31 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Memphis, Tennessee January 22, 1997 49 RFS HOTEL INVESTORS, INC. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION (IN THOUSANDS) AS OF DECEMBER 31, 1996
Cost Capitalized Gross Amount at Which Carried Initial Cost Subsequent to Acquisition at end of Period -------------------------------------------------------- ----------------------------- Buildings and Buildings and Buildings and Description Encumbrances Land Improvements Land Improvements Land Improvements ----------- ------------ ---- ------------- ---- ------------- ---- ------------- Holiday Inn Franklin, TN (2) $ 737 $2,094 $ 227 $ 737 $2,321 Holiday Inn Clayton, MO (2) 1,599 4,968 1,342 1,599 6,310 Holiday Inn Columbia, SC (2) 790 3,573 443 790 4,016 Holiday Inn Express Louisville, KY none 1,328 3,808 454 1,328 4,262 Holiday Inn Express Tupelo, MS(1) (2) 477 2,449 138 477 1,919 Executive Inn Tupelo, MS (2) 686 2,603 176 686 2,779 Comfort Inn Conyers, GA (2) 440 2,866 (36) 27 404 2,893 Comfort Inn Marietta, GA (3) 989 5,509 108 989 5,617 Holiday Inn Lafayette, LA (2) 700 8,858 498 700 9,356 Residence Inn Kansas City, MO (2) 392 5,344 68 392 5,412 Comfort Inn Ft. Mill, SC (3) 763 6,612 94 763 6,706 Comfort Inn Clemson, SC (2) 201 4,901 56 201 4,957 Hampton Inn Ft. Lauderdale, FL (2) 590 4,664 107 590 4,771 Holiday Inn Express Arlington Heights, IL (2) 350 4,121 369 350 4,490 Hampton Inn Denver, CO none 500 8,098 334 500 8,432 Holiday Inn Express Downers Grove, IL (2) 400 5,784 292 400 6,076 Comfort Inn Farmington Hills, MI (2) 525 4,118 183 525 4,301 Comfort Inn Grand Rapids, MI (2) 400 3,176 40 400 3,216 Hampton Inn Indianapolis, IN (2) 475 8,008 250 475 8,258 Hampton Inn Lansing, MI (2) 500 3,647 268 500 3,915
Life Upon Which Accumulated Net Book Depreciation in Depreciation Value Latest Income Buildings and Buildings and Date of Statement is Total Improvements Improvements Acquisition Calculated ----- ------------- ------------- ----------- ---------- Holiday Inn Franklin, TN $3,058 $190 $2,131 1993 40 Holiday Inn Clayton, MO 7,909 489 5,821 1993 40 Holiday Inn Columbia, SC 4,806 329 3,687 1993 40 Holiday Inn Express Louisville, KY 5,590 343 3,919 1993 40 Holiday Inn Express Tupelo, MS(1) 2,396 209 1,710 1993 40 Executive Inn Tupelo, MS 3,465 228 2,551 1993 40 Comfort Inn Conyers, GA 3,297 237 2,656 1993 40 Comfort Inn Marietta, GA 6,606 424 5,193 1993 40 Holiday Inn Lafayette, LA 10,056 732 8,624 1993 40 Residence Inn Kansas City, MO 5,804 387 5,025 1994 40 Comfort Inn Ft. Mill, SC 7,469 451 6,255 1994 40 Comfort Inn Clemson, SC 5,158 342 4,615 1994 40 Hampton Inn Ft. Lauderdale, FL 5,361 321 4,450 1994 40 Holiday Inn Express Arlington Heights, IL 4,840 271 4,219 1994 40 Hampton Inn Denver, CO 6,932 516 7,916 1994 40 Holiday Inn Express Downers Grove, IL 6,476 369 5,707 1994 40 Comfort Inn Farmington Hills, MI 4,826 263 4,038 1994 40 Comfort Inn Grand Rapids, MI 3,616 203 3,013 1994 40 Hampton Inn Indianapolis, IN 8,733 513 7,745 1994 40 Hampton Inn Lansing, MI 4,415 235 3,680 1994 40
continued 50 RFS HOTEL INVESTORS, INC. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED (IN THOUSANDS) AS OF DECEMBER 31, 1996
Cost Capitalized Gross Amount at Which Carried Initial Cost Subsequent to Acquisition at end of Period -------------------------------------------------------- ----------------------------- Buildings and Buildings and Buildings and Description Encumbrances Land Improvements Land Improvements Land Improvements ----------- ------------ ---- ------------- ---- ------------- ---- ------------- Hampton Inn Lincoln, NE (2) $ 350 $4,829 $ 319 $ 350 $5,149 Hampton Inn Minneapolis, MN (2) 375 8,657 102 375 8,759 Holiday Inn Express Minneapolis, MN (2) 780 6,910 150 780 7,060 Hampton Inn Minnetonka, MN (2) 475 5,066 109 475 5,175 Hampton Inn Oklahoma City, OK (3) 530 6,826 296 530 7,124 Hampton Inn Omaha, NE (3) 450 6,362 329 450 6,691 Hampton Inn Tulsa, OK (2) 350 5,715 372 350 6,087 Hampton Inn Warren, MI (2) 500 2,814 204 500 3,018 Holiday Inn Express Wauwatosa, WI (2) 700 4,926 398 700 5,324 Residence Inn Fiskill, NY $2,420 2,280 10,484 77 2,280 10,561 Residence Inn Providence, RI (3) 1,385 7,742 41 1,385 7,783 Residence Inn Tyler, TX none 855 6,212 195 855 6,407 Hampton Inn Memphis, TN (2) 980 6,157 47 980 6,204 Residence Inn Ft. Worth, TX (3) 985 10,726 39 985 10,765 Residence Inn Wilmington, DE (2) 1,100 8,488 317 1,100 8,805 Residence Inn Torrance, CA (2) 2,600 17,789 733 2,600 18,522 Residence Inn Ann Arbor, MI (3) 525 4,461 119 525 4,580 Holiday Inn Flint, MI (2) 1,200 11,994 190 1,220 12,184 Resdience Inn Charlotte, NC (3) 850 3,844 153 850 3,997 Hawthorne Suites Atlanta, GA none 3,000 12,886 638 3,000 13,524
Life Upon Which Accumulated Net Book Depreciation in Depreciation Value Latest Income Buildings and Buildings and Date of Statement is Total Improvements Improvements Acquisition Calculated ----- ------------- ------------- ----------- ---------- Hampton Inn Lincoln, NE $5,498 $312 $4,836 1994 40 Hampton Inn Minneapolis, MN 9,134 551 8,208 1994 40 Holiday Inn Minneapolis, MN 7,840 440 6,620 1994 40 Holiday Inn Express Minnetonka, MN 5,650 323 4,852 1994 40 Hampton Inn Oklahoma City, OK 7,654 435 6,689 1994 40 Hampton Inn Omaha, NE 7,141 409 6,282 1994 40 Hampton Inn Tulsa, OK 6,437 371 5,716 1994 40 Hampton Inn Warren, MI 3,518 180 2,838 1994 40 Holiday Inn Express Wauwatosa, WI 6,024 315 5,009 1994 40 Residence Inn Fiskill, NY 12,841 623 9,938 1994 40 Residence Inn Providence, RI 9,168 460 7,323 1994 40 Residence Inn Tyler, TX 7,262 370 6,037 1994 40 Hampton Inn Memphis, TN 7,184 354 5,850 1994 40 Residence Inn Ft. Worth, TX 11,750 592 10,173 1994 40 Residence Inn Wilmington, DE 9,905 474 8,331 1994 40 Residence Inn Torrance, CA 21,122 997 17,525 1994 40 Residence Inn Ann Arbor, MI 5,105 247 4,333 1994 40 Holiday Inn Flint, MI 13,404 665 11,519 1994 40 Resdience Inn Charlotte, NC 4,847 205 3,792 1994 40 Hawthorne Suites Atlanta, GA 16,524 665 12,859 1994 40
continued 51 RFS HOTEL INVESTORS, INC. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED (IN THOUSANDS) AS OF DECEMBER 31, 1996
Gross Amount at Which Cost Capitalized Carried Initial Cost Subsequent to Acquisition at end of Period -------------------------------------------------------- ----------------------------- Buildings and Buildings and Buildings and Description Encumbrances Land Improvements Land Improvements Land Improvements ----------- ------------ ---- ------------- ---- ------------- ---- ------------- Holiday Inn Express Austin, TX (3) $ 500 $ 4,737 $ 79 $ 500 $4,816 Hampton Inn Lakewood, CO (3) 957 6,790 58 957 6,648 Hampton Inn Hattiesburg, MS (3) 785 4,653 1,501 785 6,154 Hampton Inn Laredo, TX none 1,037 4,116 (6) 1,037 4,110 Residence Inn Atlanta, GA $5,875 1,306 10,200 1 1,306 10,201 Holiday Inn Crystal Lake, IL (3) 1,685 10,932 (11) 1,685 10,921 Residence Inn Orlando, FL (3) 1,045 8,880 1 1,045 8,881 Residence Inn Sacramento, CA (3) 1,000 13,122 1,000 13,122 Doubletree Hotel Del Mar, CA (3) 1,500 13,535 1,500 13,535 Hampton Inn Plano, TX none 959 5,178 959 5,178 Courtyard by Marriott Flint, MI none 600 4,852 600 4,852 Homewood Suites Salt Lake City, UT none 791 5,546 791 5,546 Unimproved Land Chandler, AZ none 961 961 0 Unimproved Land Plano, TX none 864 864 0 Unimproved Land Crystal Lake, IL none 252 252 0 Unimproved Land Sedona, AZ none 1,386 1,386 0 Unimproved Land Ann Arbor, MI none 223 223 0 Unimproved Land Jacksonville, FL none 1,318 1,318 0 ------------------------------------------------------------------------------------------------------ Totals $8,255 $50,301 $340,630 ($36) $11,927 $50,265 $351,689 ======================================================================================================
Life Upon Which Accumulated Net Book Depreciation in Depreciation Value Latest Income Buildings and Buildings and Date of Statement is Total Improvements Improvements Acquisition Calculated ----- ------------- ------------- ----------- ---------- Holiday Inn Express Austin, TX $5,316 $237 $4,579 1995 40 Hampton Inn Lakewood, CO 7,805 304 6,544 1995 40 Hampton Inn Hattiesburg, MS 6,939 224 5,930 1995 40 Hampton Inn Laredo, TX 5,147 146 3,964 1995 40 Residence Inn Atlanta, GA 11,507 319 9,882 1995 40 Holiday Inn Crystal Lake, IL 12,606 341 10,580 1995 40 Residence Inn Orlando, FL 9,926 277 8,604 1995 40 Residence Inn Sacramento, CA 14,122 328 12,794 1996 40 Doubletree Hotel Del Mar, CA 15,035 224 13,311 1996 40 Hampton Inn Plano, TX 6,137 65 5,113 1996 40 Courtyard by Marriott Flint, MI 5,452 10 4,842 1996 40 Homewood Suites Salt Lake City, UT 6,337 12 5,534 1996 40 Unimproved Land Chandler, AZ 961 N/A 0 1995 N/A Unimproved Land Plano, TX 864 N/A 0 1995 N/A Unimproved Land Crystal Lake, IL 252 N/A 0 1995 N/A Unimproved Land Sedona, AZ 1,386 N/A 0 1996 N/A Unimproved Land Ann Arbor, MI 223 N/A 0 1996 N/A Unimproved Land Jacksonville, FL 1,318 N/A 0 1996 N/A ---------------------------------------------------- $402,154 $16,527 $333,362 ====================================================
(1) A write-down under Statement of Financial Accounting Standards #121 of $668 was recorded in 1996. (2) Property is collateral for the Credit Line. (3) Property is collateral for commercial Mortgage Bonds Payable. 31 EX-3.3.B 2 AGREEMENT OF LIMITED PARTNERSHIP 1 Exhibit 3.3(b) FOURTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF RFS PARTNERSHIP, L.P. 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINED TERMS..................................................................... 1 ARTICLE II PARTNERSHIP CONTINUATION AND IDENTIFICATION....................................... 9 2.01 Continuation..................................................... 9 2.02 Name, Office and Registered Agent................................ 9 2.03 Partners......................................................... 9 2.04 Term and Dissolution............................................. 9 2.05 Filing of Certificate and Perfection of Limited Partnership...... 10 ARTICLE III BUSINESS OF THE PARTNERSHIP....................................................... 10 ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS................................................ 11 4.01 Capital Contributions............................................ 11 4.02 Additional Capital Contributions and Issuances of Additional Partnership Interests............................................ 11 4.03 General Partner Loans............................................ 14 4.04 Capital Accounts................................................. 15 4.05 PERCENTAGE INTERESTS............................................. 15 4.06 No Interest on Contributions..................................... 15 4.07 Return of Capital Contributions.................................. 16 4.08 No Third Party Beneficiary....................................... 16 ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS................................................. 16 5.01 Allocation of Profit and Loss.................................... 16 5.02 Distribution of Cash............................................. 20 5.03 REIT Distribution Requirements................................... 20 5.04 No Right to Distributions in Kind................................ 21 5.05 Limitations on Return of Capital Contributions................... 21 5.06 Distributions Upon Liquidation................................... 21 5.07 Substantial Economic Effect...................................... 22
- i - 3 ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER..................................................... 22 6.01 Management of the Partnership.................................... 22 6.02 Delegation of Authority.......................................... 24 6.03 Indemnification and Exculpation of Indemnitees................... 25 6.04 Liability of the General Partner................................. 26 6.05 Expenditures by the Partnership.................................. 27 6.06 Outside Activities............................................... 27 6.07 Optional Conversion of Series A Preferred Shares................. 28 6.08 Redemption Right With Respect To Preferred Partnership Units..... 28 6.09 Employment or Retention of Affiliates............................ 30 6.10 Loans to the Partnership......................................... 30 6.11 Loans to the General Partner..................................... 30 6.12 General Partner Participation.................................... 30 ARTICLE VII CHANGES IN GENERAL PARTNER........................................................ 31 7.01 Transfer of the General Partner's Partnership Interest........... 31 7.02 Admission of a Substitute or Successor General................... 32 7.03 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner.................................................. 33 7.04 Removal of a General Partner..................................... 33 ARTICLE VIII RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS........................................................... 34 8.01 Management of the Partnership.................................... 34 8.02 Power of Attorney................................................ 35 8.03 Limitation on Liability of Limited Partners...................... 35 8.04 Ownership by Limited Partner of Corporate General Partner or Affiliate........................................................ 35 8.05 Limited Partner Redemption Right................................. 35 8.06 Registration..................................................... 37 ARTICLE IX TRANSFERS OF LIMITED PARTNERSHIP INTERESTS........................................ 42 9.01 Purchase for Investment.......................................... 42 9.02 Restrictions on Transfer of Limited Partnership Interests........ 42 9.03 Admission of Substitute Limited Partner.......................... 43
- ii - 4 9.04 Rights of Assignees of Partnership Interests..................... 45 9.05 Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner.................................................. 45 9.06 Joint Ownership of Interests..................................... 45 ARTICLE X BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS........................................ 46 10.01 Books and Records................................................ 46 10.02 Custody of Partnership Funds; Bank Accounts...................... 46 10.03 Fiscal and Taxable Year.......................................... 46 10.04 Annual Tax Information and Report................................ 46 10.05 Tax Matters Partner; Tax Elections; Special Basis Adjustments.... 47 10.06 Reports to Limited Partners...................................... 47 ARTICLE XI AMENDMENT OF AGREEMENT............................................................ 48 ARTICLE XII GENERAL PROVISIONS................................................................ 48 12.01 Notices.......................................................... 48 12.02 Survival of Rights............................................... 49 12.03 Additional Documents............................................. 49 12.04 Severability..................................................... 49 12.05 Entire Agreement................................................. 49 12.06 Pronouns and Plurals............................................. 49 12.07 Headings......................................................... 49 12.08 Counterparts..................................................... 49 12.09 Governing Law.................................................... 49
- iii - 5 FOURTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF RFS PARTNERSHIP, L.P. RECITALS RFS Partnership, L.P. (the "Partnership") was formed as a limited partnership under the laws of the State of Tennessee by a Certificate of Limited Partnership filed with the Secretary of State of the State of Tennessee on August 3, 1993. The Partnership was governed originally by an agreement of limited partnership maintained at the offices of the Partnership (the "Original Agreement"). The parties to the Original Agreement were RFS Hotel Investors, Inc., a Tennessee corporation (the "Company" and in its capacity as the General Partner, the "General Partner"), and RFS, Inc. (in its capacity as the Original Limited Partner, the "Original Limited Partner"). The Original Agreement was amended and restated on August 13, 1993 (the "First Amended and Restated Agreement") (i) to admit Limited Partners to the Partnership and (ii) to provide for the withdrawal of the Original Limited Partner. The First Amended and Restated Agreement was amended on November 19, 1993 (the "First Amendment to the First Amended and Restated Agreement") to change the cash distribution provisions. The First Amendment to the First Amended and Restated Agreement was amended and restated on August 24, 1994 (the "Second Amended and Restated Agreement") to admit additional Limited Partners (the "Class B Limited Partners") to the Partnership. The Second Amended and Restated Agreement was amended and restated on February 27, 1996 (the "Third Amended and Restated Agreement") to (i) issue to itself a preferred general partnership interest and (ii) to restate the Second Amended and Restated Agreement in its entirety. The General Partner now desires to (i) admit additional Class B Limited Partners to the Partnership, (ii) amend certain provisions relating to allocations of items of income, gain and loss on liquidation of the Partnership and (iii) to restate the Third Amended and Restated Agreement in its entirety. NOW, THEREFORE, in consideration of the foregoing, of mutual covenants between the parties hereto, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Third Amended and Restated Agreement to read in its entirety as follows: ARTICLE I DEFINED TERMS The following defined terms used in this Agreement shall have the meanings specified below: 6 "ACT" means the Tennessee Revised Uniform Limited Partnership Act, as it may be amended from time to time. "ADMINISTRATIVE EXPENSES" means (i) all administrative and operating costs and expenses incurred by the Partnership, (ii) all administrative costs and expenses of the General Partner, including any salaries or other payments to directors, officers and/or employees of the General Partner, and any accounting and legal expenses of the General Partner, which expenses, the Partners have agreed, are expenses of the Partnership and not the General Partner, and (iii) to the extent not included in clause (ii) above, REIT Expenses; provided, however, that Administrative Expenses shall not include any administrative expenses incurred by the General Partner that are attributable to Properties owned by the General Partner directly, or to activities of the General Partner not related to the Partnership, the allocation of such administrative expenses between the Partnership and the General Partner shall be determined by the Partnership's independent accounting firm. "AFFILIATE" means, (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, 5% or more of the outstanding capital stock, shares or equity interests of such Person, or (iii) any officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. "AGREED VALUE" means the fair market value of a Partner's non-cash Capital Contribution as of the date of its contribution to the Partnership as agreed to by the contributing Partner and the General Partner. For purposes of this Agreement, unless the General Partner in its sole discretion determines otherwise, the Agreed Value of a Partner's non-cash Capital Contribution shall be equal to the number of Partnership Units received by such Partner in exchange for such contribution, multiplied by the "Market Price" on the date of contribution calculated in accordance with the second and third sentences of the definition of "Cash Amount." The names and addresses of the Partners, the number of Partnership Units issued to each Partner, and the Agreed Value of non-cash Capital Contributions is set forth on Exhibit A attached hereto ("Exhibit A"). "AGREEMENT" means this Fourth Amended and Restated Agreement of Limited Partnership of the Partnership. "CAPITAL ACCOUNT" has the meaning provided in Section 4.04 hereof. - 2 - 7 "CAPITAL CONTRIBUTION" means the total amount of capital initially contributed or agreed to be contributed, as the context requires, to the Partnership by each Partner pursuant to the terms of the Agreement. Any reference to the Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Partnership Interest of such Partner. The paid-in Capital Contribution shall mean the cash amount or the Agreed Value of other assets actually contributed by each Partner to the capital of the Partnership. "CAPITAL TRANSACTION" means the refinancing, sale, exchange, condemnation, recovery of a damage award or insurance proceeds (other than business or rental interruption insurance proceeds not reinvested in the repair or reconstruction of Properties), or other disposition of any Property (or the Partnership's interest therein). "CASH AMOUNT" means an amount of cash per Partnership Unit equal to the value of the REIT Shares Amount on the date of receipt by the General Partner of a Notice of Redemption. The value of the REIT Shares Amount shall be based on the average of the daily market price of REIT Shares for the ten consecutive trading days immediately preceding the date of such valuation. The market price for each such trading day shall be: (i) if the REIT Shares are listed or admitted to trading on any securities exchange or the Nasdaq-Stock Market, the sale price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices, regular way, on such day, (ii) if the REIT Shares are not listed or admitted to trading on any securities exchange or the Nasdaq-National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or (iii) if the REIT Shares are not listed or admitted to trading on any securities exchange or the Nasdaq-National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided that if there are no bid and asked prices reported during the ten days prior to the date in question, the value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the REIT Shares Amount includes rights that a holder of REIT Shares would be entitled to receive, then the value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. "CERTIFICATE" means any instrument or document that is required under the laws of the State of Tennessee, or any other jurisdiction in which the Partnership conducts business, to be signed and sworn to by the Partners of the Partnership (either by themselves or pursuant to the power-of-attorney granted to the General Partner in Section 8.02 hereof) and filed for recording in the appropriate public offices within the State of Tennessee or such - 3 - 8 other jurisdiction to perfect or maintain the Partnership as a limited partnership, to effect the admission, withdrawal, or substitution of any Partner of the Partnership, or to protect the limited liability of the Limited Partners as limited partners under the laws of the State of Tennessee or such other jurisdiction. "CHARTER" means the Charter of the General Partner filed with the Secretary of State of the State of Tennessee on August 3, 1993, as amended and restated on August 3, 1993, January 31, 1995, and February 27, 1996, and as further amended or restated from time to time. "CLASS A LIMITED PARTNER" means any Person named as a Class A Limited Partner on Exhibit A, and any Person who becomes a Substitute or additional Class A Limited Partner, in such Person's capacity as a Class A Limited Partner in the Partnership. "CLASS B LIMITED PARTNER" means any Person named as a Class B Limited Partner on Exhibit A, and any Person who becomes a Substitute or additional Class B Limited Partner, in such Person's capacity as a Class B Limited Partner in the Partnership. "CODE" means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular provision of the Code shall mean that provision in the Code as of the date hereof and any successor provision of the Code. "COMMISSION" means the United States Securities and Exchange Commission. "COMPANY" means RFS Hotel Investors, Inc., a Tennessee corporation. "CONVERSION FACTOR" means one (1), provided that in the event that the General Partner (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on such date. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. "EVENT OF BANKRUPTCY" as to any Person means the filing of a petition for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978 or similar provision of law of any jurisdiction (except if such petition is contested by such Person and has been dismissed within 90 days); insolvency or bankruptcy of such Person as finally determined by a court proceeding; filing by such Person of a petition or application to accomplish the same - 4 - 9 or for the appointment of a receiver or a trustee for such Person or a substantial part of his assets; commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement, insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by another, provided that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within 90 days. "GENERAL PARTNER" means RFS Hotel Investors, Inc. and any Person who becomes a substitute or additional General Partner as provided herein, and any of their successors as General Partner. "GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by a General Partner that is a general partnership interest. "HOTELS" means hotel properties owned by the Partnership from time to time. "INDEMNITEE" means (i) any Person made a party to a proceeding by reason of his status as the General Partner or a director or officer of the Partnership or the General Partner, and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time, in its sole and absolute discretion. "INDEPENDENT DIRECTOR" means a Director of the Company who is not an officer or employee of the Company or an Affiliate of (i) any advisor to the Company under an advisory agreement, (ii) any lessee of any Property, (iii) any subsidiary of the Company, or (iv) any partnership which is an Affiliate of the Company. "LIMITED PARTNER" means any Person named as a Class A Limited Partner or a Class B Limited Partner on Exhibit A, and any Person who becomes a Substitute or additional Class A Limited Partner or Class B Limited Partner, in such Person's capacity as a Class A Limited Partner or a Class B Limited Partner in the Partnership. "LIMITED PARTNER REDEMPTION RIGHT" has the meaning provided in Section 8.05(a) hereof. "LIMITED PARTNERSHIP INTEREST" means the ownership interest of a Limited Partner in the Partnership at any particular time, including the right of such Limited Partner to any and all benefits to which such Limited Partner may be entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of this Agreement and of such Act. "LOSS" has the meaning provided in Section 5.01(h) hereof. - 5 - 10 "MINIMUM LIMITED PARTNERSHIP INTEREST" means the lesser of (i) 1% or (ii) if the total Capital Contributions to the Partnership exceed $50 million, 1% divided by the ratio of the total Capital Contributions to the Partnership to $50 million; provided, however, that the Minimum Limited Partnership Interest shall not be less than 0.2% at any time. "NOTICE OF REDEMPTION" means the Notice of Exercise of Redemption Right substantially in the form attached as Exhibit B hereto. "PARTNER" means any General Partner or Limited Partner. "PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(i)(5). "PARTNERSHIP INTEREST" means an ownership interest in the Partnership held by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. "PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations Section 1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of Partnership Minimum Gain is determined by first computing, for each Partnership nonrecourse liability, any gain the Partnership would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability, and then aggregating the separately computed gains. A Partner's share of Partnership Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(g)(1). "PARTNERSHIP RECORD DATE" means the record date established by the General Partner for the distribution of cash pursuant to Section 5.02 hereof, which record date shall be the same as the record date established by the General Partner for a distribution to its shareholders of some or all of its portion of such distribution. "PARTNERSHIP REDEMPTION RIGHT" has the meaning provided in Section 6.08(b) hereof. "PARTNERSHIP UNIT" means a fractional, undivided share of the Partnership Interests of all Partners issued hereunder. The allocation of Partnership Units among the Partners shall be as set forth on Exhibit A, as may be amended from time to time. "PERCENTAGE INTEREST" means the percentage ownership interest in the Partnership of each Partner, as determined by dividing the Partnership Units owned by such Partner by the total number of Partnership Units then outstanding. The Percentage Interest of each Partner shall be as set forth on Exhibit A, as may be amended from time to time. - 6 - 11 "PERSON" means any individual, partnership, corporation, joint venture, trust or other entity. "PREFERENCE VALUE PER UNIT" means, with respect to the Preferred Partnership Units held by the General Partner, the initial preference value of $19 per Preferred Partnership Unit. "PREFERRED PARTNERSHIP INTEREST" means an ownership interest in the Partnership held by the General Partner and includes any and all benefits to which the holder of such a Preferred Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. "PREFERRED PARTNERSHIP UNIT" means a fractional, undivided share of the Preferred Partnership Interests issued hereunder. The allocation of Preferred Partnership Units among the Partners shall be as set forth on Exhibit A, as may be amended from time to time. "PREFERRED RETURN" means a fixed per annum rate of $1.45 per Preferred Partnership Unit. The General Partner's Preferred Return (i) shall be cumulative, (ii) if unpaid, shall accrue interest at an annual rate of 7.6%, and (iii) shall be prorated for any partial calendar quarter. "PREFERRED SHARE" means a share of preferred stock of the General Partner. "PROFIT" has the meaning provided in Section 5.01(h) hereof. "PROPERTY" means any hotel property or other investment in which the Partnership holds an ownership interest. "REDEEMING LIMITED PARTNER" has the meaning provided in Section 8.05(a) hereof. "REDEMPTION AMOUNT" means either the Cash Amount or the REIT Shares Amount, as selected by the General Partner in its sole discretion pursuant to Section 8.05(b) hereof. "REGULATIONS" means the Federal Income Tax Regulations issued under the Code, as amended and as hereafter amended from time to time. Reference to any particular provision of the Regulations shall mean that provision of the Regulations on the date hereof and any successor provision of the Regulations. "REIT" means a real estate investment trust under Sections 856 through 860 of the Code. "REIT EXPENSES" means (i) costs and expenses relating to the formation and continuity of existence of the General Partner and any Subsidiaries thereof (which Subsidiaries shall, for purposes of this definition, be included within the definition of General - 7 - 12 Partner), including taxes, fees and assessments associated therewith, any and all costs, expenses or fees payable to any director, officer, or employee of the General Partner, (ii) costs and expenses relating to the public offering and registration of securities by the General Partner and all statements, reports, fees and expenses incidental thereto, including underwriting discounts and selling commissions applicable to any such offering of securities, (iii) costs and expenses associated with the preparation and filing of any periodic reports by the General Partner under federal, state or local laws or regulations, including filings with the Commission, (iv) costs and expenses associated with compliance by the General Partner with laws, rules and regulations promulgated by any regulatory body, including the Commission, and (v) all other operating or administrative costs of the General Partner incurred in the ordinary course of its business on behalf of the Partnership. "REIT SHARE" means a share of the common stock of the General Partner, par value $.01 per share. "REIT SHARES AMOUNT" shall mean a number of REIT Shares equal to the product of the number of Partnership Units offered for redemption by a Redeeming Limited Partner, multiplied by the Conversion Factor; provided that in the event the General Partner issues to all holders of REIT Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the "rights"), then the REIT Shares Amount shall also include such rights that a holder of that number of REIT Shares would be entitled to receive. "SERIES A PREFERRED SHARE" means a share of convertible preferred stock, Series A, of the General Partner. "SERVICE" means the Internal Revenue Service. "SPECIFIED REDEMPTION DATE" means the first business day of the month that is at least 5 business days after the receipt by the General Partner of the Notice of Redemption (or any other date agreed to by the General Partner and the Redeeming Limited Partner). "SUBSIDIARY" means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. "SUBSTITUTE LIMITED PARTNER" means any Person admitted to the Partnership as a Limited Partner pursuant to Section 9.03 hereof. - 8 - 13 ARTICLE II PARTNERSHIP CONTINUATION AND IDENTIFICATION 2.01 CONTINUATION. The Partners hereby agree to continue the Partnership pursuant to the Act and upon the terms and conditions set forth in this Agreement. 2.02 NAME, OFFICE AND REGISTERED AGENT. The name of the Partnership shall be RFS Partnership, L.P. The specified office and place of business of the Partnership shall be 889 Ridge Lake Blvd., Suite 100, Memphis, Shelby County, Tennessee 38120. The General Partner may at any time change the location of such office, provided the General Partner gives notice to the Partners of any such change. The name and address of the Partnership's registered agent is Robert M. Solmson, 889 Ridge Lake Blvd., Suite 100, Memphis, Shelby County, Tennessee 38120. The sole duty of the registered agent as such is to forward to the Partnership any notice that is served on him as registered agent. 2.03 PARTNERS. (a) The General Partner of the Partnership is RFS Hotel Investors, Inc. Its principal place of business shall be the same as that of the Partnership. (b) The Limited Partners shall be those Persons identified as Limited Partners on Exhibit A, as amended from time to time. 2.04 TERM AND DISSOLUTION. (a) The term of the Partnership shall continue in full force and effect until December 31, 2050, except that the Partnership shall be dissolved upon the happening of any of the following events: (i) The occurrence of an Event of Bankruptcy as to a General Partner or the dissolution, death or withdrawal of a General Partner unless the business of the Partnership is continued pursuant to Section 7.03(b) hereof; provided that if a General Partner is on the date of such occurrence a partnership, the dissolution of such General Partner as a result of the dissolution, death, withdrawal, removal or Event of Bankruptcy of a partner in such partnership shall not be an event of dissolution of the Partnership if the business of such General Partner is continued by the remaining partner or partners, either alone or with additional partners, and such General Partner and such partners comply with any other applicable requirements of this Agreement; (ii) The passage of 90 days after the sale or other disposition of all or substantially all the assets of the Partnership (provided that if the - 9 - 14 Partnership receives an installment obligation as consideration for such sale or other disposition, the Partnership shall continue, unless sooner dissolved under the provisions of this Agreement, until such time as such note or notes are paid in full); (iii) The redemption of all Limited Partnership Interests (other than any of such interests held by the General Partner); or (iv) The election by the General Partner that the Partnership should be dissolved. (b) Upon dissolution of the Partnership (unless the business of the Partnership is continued pursuant to Section 7.03(b) hereof), the General Partner (or its trustee, receiver, successor or legal representative) shall amend or cancel the Certificate and liquidate the Partnership's assets and apply and distribute the proceeds thereof in accordance with Section 5.06 hereof. Notwithstanding the foregoing, the liquidating General Partner may either (i) defer liquidation of, or withhold from distribution for a reasonable time, any assets of the Partnership (including those necessary to satisfy the Partnership's debts and obligations), or (ii) distribute the assets to the Partners in kind according to the order of priority set forth in Section 5.06 hereof. 2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP. The General Partner shall execute, acknowledge, record and file at the expense of the Partnership, the Certificate and any and all amendments thereto and all requisite fictitious name statements and notices in such places and jurisdictions as may be necessary to cause the Partnership to be treated as a limited partnership under, and otherwise to comply with, the laws of each state or other jurisdiction in which the Partnership conducts business. ARTICLE III BUSINESS OF THE PARTNERSHIP The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act; provided, however, that such business shall be limited and conducted in such a manner as to permit the General Partner at all times to be classified as a REIT, unless the General Partner otherwise ceases to qualify as a REIT, (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing and (iii) to do anything necessary or incidental to the foregoing. The General Partner shall also be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a "publicly traded partnership" for purposes of Section 7704 of the Code. - 10 - 15 ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS 4.01 CAPITAL CONTRIBUTIONS. The General Partner has contributed to the capital of the Partnership cash in the amounts set forth on Exhibit A. The Class A Limited Partners have contributed the Class A Limited Partners' proportionate ownership interests in certain Hotels to the capital of the Partnership. The Class B Limited Partners have contributed the Class B Limited Partners' proportionate ownership interests in certain Hotels to the capital of the Partnership. The Agreed Values of the Partners' Capital Contributions are as set forth opposite their names on Exhibit A. 4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS. Except as provided in this Section 4.02 or in Section 4.03 hereof, the Partners shall have no right or obligation to make any additional Capital Contributions or loans to the Partnership. The General Partner may contribute additional capital to the Partnership, from time to time, and receive additional Partnership Interests in respect thereof, in the manner contemplated in this Section 4.02. (a) Issuances of Additional Partnership Interests. (i) General. The General Partner is hereby authorized to cause the Partnership to issue such additional Partnership Interests in the form of Partnership Units for any Partnership purpose at any time or from time to time, to the Partners (including the General Partner) or to other Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any Limited Partners. Any additional Partnership Interests issued thereby may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests, all as shall be determined by the General Partner in its discretion based upon its good faith determination that the Partnership will receive adequate consideration therefor and without the approval of any Limited Partner, subject to Tennessee law, including, without limitation, (i) the allocation of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; provided, however, that no additional Partnership Interests shall be issued to the General Partner unless either: - 11 - 16 (1)(A) the additional Partnership Interests are issued in connection with an issuance of shares of or other interests in the General Partner, which shares or interests have designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner by the Partnership in accordance with this Section 4.02 and (B) except as provided in Section 4.02(a)(ii) hereof, the General Partner shall make a Capital Contribution to the Partnership in an amount equal to the proceeds raised in connection with the issuance of such shares of or other interests in the General Partner, or (2) the additional Partnership Interests are issued to all Partners in proportion to their respective Percentage Interests. Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership. (ii) Upon Issuance of New Securities. The General Partner shall not issue any additional REIT Shares (other than REIT Shares issued in connection with a redemption pursuant to Section 8.05 hereof), Preferred Shares, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares (collectively, "New Securities") other than to all holders of REIT Shares or Preferred Shares, respectively, unless (A) the General Partner shall cause the Partnership to issue to the General Partner, Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights, all such that the economic interests are substantially similar to those of the New Securities, and (B) the General Partner contributes the proceeds from the issuance of such New Securities and from the exercise of rights contained in such New Securities to the Partnership; provided, however, that the General Partner is allowed to issue New Securities in connection with an acquisition of a property to be held directly by the General Partner, but if and only if, such direct acquisition and issuance of New Securities have been approved and determined to be in the best interests of the General Partner and the Partnership by a majority of the Independent Directors. Without limiting the foregoing, the General Partner is expressly authorized to issue New Securities for less than fair market value, and to cause the Partnership to issue to the General Partner corresponding Partnership Interests, so long as (x) the General Partner concludes in good faith that such issuance is in the best interests of each of the General Partner - 12 - 17 and the Partnership (for example, and not by way of limitation, the issuance of REIT Shares and corresponding Partnership Units pursuant to an employee stock purchase plan providing for employee purchases of REIT Shares at a discount from fair market value or employee stock options that have an exercise price that is less than the fair market value of the REIT Shares, either at the time of issuance or at the time of exercise), and (y) the General Partner contributes all proceeds from such issuance to the Partnership. By way of example, in the event the General Partner issues REIT Shares for a cash purchase price and contributes all of the proceeds of such issuance to the Partnership as required hereunder, the General Partner shall be issued a number of additional Partnership Units equal to the product of (A) the number of such REIT Shares issued by the General Partner the proceeds of which were so contributed, multiplied by (B) a fraction, the numerator of which is one, and the denominator of which is the Conversion Factor in effect on the date of such contribution. (b) Certain Deemed Contributions of Proceeds of Issuance of Shares. In connection with any and all issuances of REIT Shares and Preferred Shares, the General Partner shall make a Capital Contribution to the Partnership of the proceeds raised in connection with such issuance as required above, provided that if the proceeds actually received by the General Partner are less than the gross proceeds of such issuance as a result of any underwriter's discount or other expenses paid or incurred in connection with such issuance, then the General Partner shall be deemed to have made a Capital Contribution to the Partnership in the amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have paid such underwriting discount and offering expenses in connection with the required issuance of additional Partnership Units to General Partner for such Capital Contribution pursuant to Section 4.02(a) hereof. (c) Minimum Limited Partnership Interest. In the event that either a redemption pursuant to Section 8.05 hereof or an additional Capital Contribution by the General Partner would result in the Limited Partners, in the aggregate, owning less than the Minimum Limited Partnership Interest, the General Partner and the Limited Partners shall form another partnership and contribute sufficient Limited Partnership Interests together with such other Limited Partners so that such partnership owns at least the Minimum Limited Partnership Interest. (d) 1993 Plan. The General Partner has established the Amended and Restated 1993 Restricted Stock and Stock Option Plan and may from time to time establish other compensation or other incentive plans to provide incentives to directors, executive officers and certain key employees of the General Partner or its subsidiaries. The following examples are illustrative of the operation of the provisions of Section 4.02(a)(ii) with respect to issuances of New Securities to such directors, officers and employees: - 13 - 18 (i) If the General Partner awards REIT Shares to any such director, officer or other employee (A) the General Partner shall, as soon as practicable, contribute to the Partnership (to be thereafter taken into account for the purposes of calculating any cash distributable to the Partners) an amount equal to the price, if any, paid to the General Partner by such party for such REIT Shares, and (B) the General Partner shall be issued by the Partnership a number of additional Partnership Units equal to the product of (1) the number of such REIT Shares issued by the General Partner, multiplied by (2) a fraction, the numerator of which is one hundred percent (100%), and the denominator of which is the Conversion Factor in effect on the date of such contribution. (ii) If the General Partner awards an option or warrant relating to REIT shares, whether or not qualifying as an incentive stock option under the Code, to any director, officer or other employee, then the Partnership shall grant to the General Partner a corresponding option or warrant to acquire Partnership Units. Upon the exercise of such option or warrant, (A) the General Partner shall, as soon as practicable after such exercise, contribute to the capital of the Partnership (to be thereafter taken into account for the purposes of calculating distributable cash) an amount equal to the exercise price, if any, paid to the General Partner by such exercising party in connection with the exercise of the option or warrant, and (B) the General Partner shall be issued by the Partnership a number of additional Partnership Units equal to the product of (1) the number of REIT Shares issued by the General Partner in satisfaction of such exercised option or warrant, multiplied by (2) a fraction, the numerator of which is one hundred percent (100%), and the denominator of which is the Conversion Factor in effect on the date of such contribution. (iii) If the General Partner grants any director, officer or employee share appreciation rights, performance share awards or other similar rights ("Incentive Rights"), then simultaneously, the Partnership shall grant to the General Partner corresponding and economically equivalent rights. Consequently, upon the cash payment by General Partner to its directors, officers or employees pursuant to such Incentive Rights, the Partnership shall make an equal cash payment to the General Partner. 4.03 GENERAL PARTNER LOANS. The General Partner may from time to time advance funds to the Partnership for any proper Partnership purpose as a loan ("Funding Loan"), provided that any such funds must first be obtained by the General Partner from a third party lender, and then all of such funds must be loaned by the General Partner to the Partnership on the same terms and conditions, including principal amount, interest rate, repayment schedule and costs and expenses, as shall be applicable with respect to or incurred in connection with such loan from such third party lender. Except for Funding Loans, the - 14 - 19 General Partner shall not incur any indebtedness for borrowed funds; provided, however, that upon a majority vote of the Independent Directors, any loan proceeds received by the General Partner may be distributed to its shareholders or other equity holders if such loan and distribution have been determined by a majority of the Independent Directors to be necessary to enable the General Partner to maintain its status as a REIT under Sections 856-860 of the Code. 4.04 CAPITAL ACCOUNTS. A separate capital account (a "Capital Account") shall be established and maintained for each Partner in accordance with Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires additional Partnership Units in exchange for more than a de minimis Capital Contribution, (ii) the Partnership distributes to a Partner more than a de minimis amount of Partnership property in redemption or liquidation of Partnership Units, or (iii) the Partnership is liquidated within the meaning of Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the property of the Partnership to its fair market value (as determined by the General Partner and taking into account Section 7701(g) of the Code) in accordance with Regulations Section 1.704-1(b)(2)(iv)(f). When the Partnership's property is revalued by the General Partner, the Capital Accounts of the Partners shall be adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g), which generally require such Capital Accounts to be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the Capital Accounts previously) would be allocated among the Partners pursuant to Section 5.01 hereof if there were a taxable disposition of such property for its fair market value (as determined by the General Partner and taking into account Section 7701(g) of the Code) on the date of the revaluation. 4.05 PERCENTAGE INTERESTS. If the number of outstanding Partnership Units increases or decreases during a taxable year, each Partner's Percentage Interest shall be adjusted to a percentage equal to the number of Partnership Units held by such Partner divided by the aggregate number of outstanding Partnership Units. If the Partners' Percentage Interests are adjusted pursuant to this Section 4.05, the Profits and Losses for the taxable year in which the adjustment occurs shall be allocated between the part of the year ending on the day when the Partnership's property is revalued by the General Partner and the part of the year beginning on the following day either (i) as if the taxable year had ended on the date of the adjustment or (ii) based on the number of days in each part. The General Partner, in its sole discretion, shall determine which method shall be used to allocate Profits and Losses for the taxable year in which the adjustment occurs. The allocation of Profits and Losses for the earlier part of the year shall be based on the Percentage Interests before adjustment, and the allocation of Profits and Losses for the later part shall be based on the adjusted Percentage Interests. 4.06 NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to interest on its Capital Contribution. - 15 - 20 4.07 RETURN OF CAPITAL CONTRIBUTIONS. No Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or to receive any distribution from the Partnership, except as specifically provided in this Agreement. Except as otherwise provided herein, there shall be no obligation to return to any Partner or withdrawn Partner any part of such Partner's Capital Contribution for so long as the Partnership continues in existence. 4.08 NO THIRD PARTY BENEFICIARY. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners. In addition, it is the intent of the parties hereto that no distribution to any Limited Partner shall be deemed a return of money or other property in violation of the Act. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to return such money or property, such obligation shall be the obligation of such Limited Partner and not of the General Partner. Without limiting the generality of the foregoing, a deficit Capital Account of a Partner shall not be deemed to be a liability of such Partner nor an asset or property of the Partnership. ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS 5.01 ALLOCATION OF PROFIT AND LOSS. (a) Profit. Profit of the Partnership for each fiscal year of the Partnership shall be allocated as follows: (i) First, if the Partners previously have been allocated Loss under Section 5.01(b)(v), to the Partners in accordance with their respective Percentage Interests until the aggregate amount of Profit allocated under this Section 5.01(a)(i) equals the aggregate amount of Loss allocated under Section 5.01(b)(v); (ii) Second, if the General Partner previously has been allocated Loss under Section 5.01(b)(iv), to the General Partner until the aggregate amount of - 16 - 21 Profit allocated under this Section 5.01(a)(ii) equals the aggregate amount of Loss allocated under Section 5.01(b)(iv); (iii) Third, if the General Partner and the Class B Limited Partners previously have been allocated Loss under Section 5.01(b)(iii), to the General Partner and the Class B Limited Partners in proportion to their Percentage Interests until the aggregate amount of Profit allocated under this Section 5.01(a)(iii) equals the aggregate amount of Loss allocated under Section 5.01(b)(iii); (iv) Fourth, if the Class A Limited Partners previously have been allocated Loss under Section 5.01(b)(ii), to the Class A Limited Partners in proportion to their Percentage Interests until the aggregate amount of Profit allocated under this Section 5.01(a)(iv) equals the aggregate amount of Loss allocated under Section 5.01(b)(ii); (v) Fifth, to the General Partner until the aggregate amount of Profit allocated to the General Partner under this Section 5.01(a)(v) for the current and all prior years equals the aggregate amount of cash distributed to the General Partner under Section 5.02(a)(i) for the current and all prior years; (vi) Sixth, to the General Partner and the Class B Limited Partners in proportion to their Percentage Interests until the aggregate amount of Profit allocated to the General Partner and the Class B Limited Partners under this Section 5.01(a)(vi) for the current and all prior years equals the aggregate amount of cash distributed to the General Partner and the Class B Limited Partners under Section 5.02(a)(ii) for the current and all prior years; (vii) Seventh, to the Class A Limited Partners in proportion to their Percentage Interests until the aggregate amount of Profit allocated to the Class A Limited Partners under this Section 5.01(a)(vii) for the current and all prior years equals the aggregate amount of cash distributed to the Class A Limited Partners under Section 5.02(a)(iii) for the current and all prior years; and (viii) Thereafter, any remaining Profit shall be allocated among the Partners in accordance with their respective Percentage Interests. (b) Loss. Loss of the Partnership for each fiscal year of the Partnership shall be allocated as follows: (i) First, if the Partners previously have been allocated Profit under Section 5.01(a)(viii), Loss shall be allocated among the Partners in accordance with their respective Percentage Interests until the aggregate amount of Loss - 17 - 22 allocated under this Section 5.01(b)(i) equals the aggregate amount of Profit allocated under Section 5.01(a)(viii); (ii) Second, if the Class A Limited Partners previously have been allocated Profit under Section 5.01(a)(vii), Loss shall be allocated to the Class A Limited Partners in proportion to their Percentage Interests until the aggregate amount of Loss allocated under this Section 5.01(b)(ii) equals the aggregate amount of Profit allocated under Section 5.01(a)(vii); (iii) Third, if the General Partner and the Class B Limited Partners previously have been allocated Profit under Section 5.01(a)(vi), Loss shall be allocated to the General Partner and the Class B Limited Partners in proportion to their Percentage Interests until the aggregate amount of Loss allocated under this Section 5.01(b)(iii) equals the aggregate amount of Profit allocated under Section 5.01(a)(vi); (iv) Fourth, if the General Partner previously has been allocated Profit under Section 5.01(a)(v), Loss shall be allocated to the General Partner until the aggregate amount of Loss allocated under this Section 5.01(b)(iv) equals the aggregate amount of Profit allocated under Section 5.01(a)(v); and (v) Thereafter, any remaining Loss shall be allocated among the Partners in accordance with their respective Percentage Interests. (c) Depreciation and Amortization Deductions. Depreciation and amortization deductions for each fiscal year of the Partnership shall be allocated among the Partners in accordance with their respective Percentage Interests. (d) Minimum Gain Chargeback. Notwithstanding any provision to the contrary, (i) any expense of the Partnership that is a "nonrecourse deduction" within the meaning of Regulations Section 1.704-2(b)(1) shall be allocated among the Partners in accordance with their respective Percentage Interests, (ii) any expense of the Partnership that is a "partner nonrecourse deduction" within the meaning of Regulations Section 1.704-2(i)(2) shall be allocated in accordance with Regulations Section 1.704-2(i)(1), (iii) if there is a net decrease in Partnership Minimum Gain within the meaning of Regulations Section 1.704-2(f)(1) for any Partnership taxable year, items of gain and income shall be allocated among the Partners in accordance with Regulations Section 1.704-2(f) and the ordering rules contained in Regulations Section 1.704-2(j), and (iv) if there is a net decrease in Partner Nonrecourse Debt Minimum Gain within the meaning of Regulations Section 1.704-2(i)(4) for any Partnership taxable year, items of gain and income shall be allocated among the Partners in accordance with Regulations Section 1.704-2(i)(4) and the ordering rules contained in Regulations Section 1.704-2(j). A Partner's "interest in partnership profits" for purposes of determining its share of the nonrecourse liabilities of the Partnership within the meaning of Regulations Section 1.752-3(a)(3) shall be such Partner's Percentage Interest. - 18 - 23 (e) Qualified Income Offset. If a Limited Partner receives in any taxable year an adjustment, allocation, or distribution described in subparagraphs (4), (5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases a negative balance in such Partner's Capital Account that exceeds the sum of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain, as determined in accordance with Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially for such taxable year (and, if necessary, later taxable years) items of income and gain in an amount and manner sufficient to eliminate such negative Capital Account balance as quickly as possible as provided in Regulations Section 1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain to a Limited Partner in accordance with this Section 5.01(e), to the extent permitted by Regulations Section 1.704-1(b) and Section 5.01(f), items of expense or loss shall be allocated to such Partner in an amount necessary to offset the income or gain previously allocated to such Partner under this Section 5.01(e). (f) Capital Account Deficits. Loss shall not be allocated to a Limited Partner to the extent that such allocation would cause a deficit in such Partner's Capital Account (after reduction to reflect the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain. Any Loss in excess of that limitation shall be allocated to the General Partner. After the occurrence of an allocation of Loss to the General Partner in accordance with this Section 5.01(f), to the extent permitted by Regulations Section 1.704-1(b), Profit shall be allocated to such Partner in an amount necessary to offset the Loss previously allocated to such Partner under this Section 5.01(f). (g) Allocations Between Transferor and Transferee. If a Partner transfers any part or all of its Partnership Interest, and the transferee is admitted as a substitute Partner as provided herein, the distributive shares of the various items of Profit and Loss allocable among the Partners during such fiscal year of the Partnership shall be allocated between the transferor and the substitute Partner either (i) as if the Partnership's fiscal year had ended on the date of the transfer, or (ii) based on the number of days of such fiscal year that each was a Partner without regard to the results of Partnership activities in the respective portions of such fiscal year in which the transferor and the transferee were Partners. The General Partner, in its sole discretion, shall determine which method shall be used to allocate the distributive shares of the various items of Profit and Loss between the transferor and the substitute Partner. (h) Definition of Profit and Loss. "Profit" and "Loss" and any items of income, gain, expense, or loss referred to in this Agreement shall be determined in accordance with federal income tax accounting principles, as modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss shall not include items of income, gain and expense that are specially allocated pursuant to Section 5.01(c), 5.01(d), 5.01(e), 5.01(f), or 5.06(a)(ii). All allocations of income, Profit, gain, Loss, and expense (and all items contained therein) for federal income tax purposes shall be identical to all allocations of such items set forth in this Section 5.01, except as otherwise required by Section 704(c) of the - 19 - 24 Code and Regulations Section 1.704-1(b)(4). The General Partner shall have the authority to elect the method to be used by the Partnership for allocating items of income, gain, and expense as required by Section 704(c) of the Code and such election shall be binding on all Partners. 5.02 DISTRIBUTION OF CASH. (a) The General Partner shall distribute cash on a quarterly (or, at the election of the General Partner, more frequent) basis, in an amount determined by the General Partner in its sole discretion, to the Partners who are Partners on the Partnership Record Date with respect to such quarter (or other distribution period), as follows: (i) First, to the General Partner until the General Partner has received an amount equal to the excess, if any, of (A) its cumulative Preferred Return for the current and all prior years over (B) the sum of all prior distributions to the General Partner pursuant to this Section 5.02(a)(i); (ii) Second, to the General Partner and the Class B Limited Partners in proportion to their Percentage Interests until the General Partner has received, on a cumulative basis, an amount sufficient to provide the General Partner with Funds From Operations (net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures) each year equal to $1.00 per share of common stock of the General Partner, based on the weighted average number of such shares outstanding during such year; (iii) Third, to the Class A Limited Partners in proportion to their Percentage Interests until the Class A Limited Partners have received, on a cumulative basis, an amount per Partnership Unit equal to the amount per Partnership Unit received by the General Partner and Class B Limited Partners under Section 5.02(a)(ii) hereof; and (iv) Thereafter, to the Partners in accordance with their respective Percentage Interests. (b) In no event may a Partner receive a distribution of cash with respect to a Partnership Unit if such Partner is entitled to receive a dividend with respect to a REIT Share for which all or part of such Partnership Unit has been or will be exchanged. 5.03 REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use its reasonable efforts to cause the Partnership to distribute amounts sufficient to enable the General Partner (i) to meet its distribution requirement for qualification as a REIT as set - 20 - 25 forth in Section 857(a)(1) of the Code and (ii) to avoid any federal income or excise tax liability imposed by the Code. 5.04 NO RIGHT TO DISTRIBUTIONS IN KIND. No Partner shall be entitled to demand property other than cash in connection with any distributions by the Partnership. 5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS. Notwithstanding any of the provisions of this Article V, no Partner shall have the right to receive and the General Partner shall not have the right to make, a distribution which includes a return of all or part of a Partner's Capital Contributions, unless after giving effect to the return of a Capital Contribution, the sum of all Partnership liabilities, other than the liabilities to a Partner for the return of his Capital Contribution, does not exceed the fair market value of the Partnership's assets. 5.06 DISTRIBUTIONS UPON LIQUIDATION. (a) Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any Partner loans, any remaining assets of the Partnership shall be distributed to all Partners with positive Capital Accounts in accordance with their respective positive Capital Account balances. For purposes of this Section 5.06(a), the Capital Account of each Partner shall be determined (i) after all adjustments made in accordance with Sections 5.01 and 5.02 hereof resulting from Partnership operations and from all sales and dispositions of all or any part of the Partnership's assets and (ii), if the General Partner's cumulative Preferred Return for the current and all prior years exceeds the sum of all prior distributions to the General Partner pursuant to Section 5.02(a)(i) hereof, after the General Partner has been allocated income or gain equal to such excess. Any distributions pursuant to this Section 5.06 shall be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). To the extent deemed advisable by the General Partner, appropriate arrangements (including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations of the Partnership. (b) If the General Partner has a negative balance in its Capital Account following a liquidation of the Partnership, as determined after taking into account all Capital Account adjustments in accordance with Sections 5.01 and 5.02 hereof resulting from Partnership operations and from all sales and dispositions of all or any part of the Partnership's assets, the General Partner shall contribute to the Partnership an amount of cash equal to the negative balance in its Capital Account and such cash shall be paid or distributed by the Partnership to creditors, if any, and then to the Limited Partners in accordance with Section 5.06(a). Such contribution by the General Partner shall be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). - 21 - 26 5.07 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that the allocations of Profit and Loss under the Agreement have substantial economic effect (or be consistent with the Partners' interests in the Partnership in the case of the allocation of losses attributable to nonrecourse debt) within the meaning of Section 704(b) of the Code as interpreted by the Regulations promulgated pursuant thereto. Article V and other relevant provisions of this Agreement shall be interpreted in a manner consistent with such intent. ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER 6.01 MANAGEMENT OF THE PARTNERSHIP. (a) Except as otherwise expressly provided in this Agreement, the General Partner shall have full, complete and exclusive discretion to manage and control the business of the Partnership for the purposes herein stated, and shall make all decisions affecting the business and assets of the Partnership. Subject to the restrictions specifically contained in this Agreement, the powers of the General Partner shall include, without limitation, the authority to take the following actions on behalf of the Partnership: (i) to acquire, purchase, own, lease and dispose of any real property and any other property or assets that the General Partner determines are necessary or appropriate or in the best interests of the business of the Partnership; (ii) to construct buildings and make other improvements on the properties owned or leased by the Partnership; (iii) to borrow money for the Partnership, issue evidences of indebtedness in connection therewith, refinance, guarantee, increase the amount of, modify, amend or change the terms of, or extend the time for the payment of, any indebtedness or obligation to the Partnership, and secure such indebtedness by mortgage, deed of trust, pledge or other lien on the Partnership's assets; (iv) to pay, either directly or by reimbursement, for all operating costs and general administrative expenses of the General Partner or the Partnership, to third parties or to the General Partner as set forth in this Agreement; (v) to lease all or any portion of any of the Partnership's assets, whether or not the terms of such leases extend beyond the termination date of - 22 - 27 the Partnership and whether or not any portion of the Partnership's assets so leased are to be occupied by the lessee, or, in turn, subleased in whole or in part to others, for such consideration and on such terms as the General Partner may determine; (vi) to prosecute, defend, arbitrate, or compromise any and all claims or liabilities in favor of or against the Partnership, on such terms and in such manner as the General Partner may reasonably determine, and similarly to prosecute, settle or defend litigation with respect to the Partners, the Partnership, or the Partnership's assets; provided, however, that the General Partner may not, without the consent of all of the Partners, confess a judgment against the Partnership; (vii) to file applications, communicate, and otherwise deal with any and all governmental agencies having jurisdiction over, or in any way affecting, the Partnership's assets or any other aspect of the Partnership business; (viii) to make or revoke any election permitted or required of the Partnership by any taxing authority; (ix) to maintain such insurance coverage for public liability, fire and casualty, and any and all other insurance for the protection of the Partnership, for the conservation of Partnership assets, or for any other purpose convenient or beneficial to the Partnership, in such amounts and such types, as it shall determine from time to time; (x) to determine whether or not to apply any insurance proceeds for any property to the restoration of such property or to distribute the same; (xi) to retain legal counsel, accountants, consultants, real estate brokers, and such other persons, as the General Partner may deem necessary or appropriate in connection with the Partnership business and to pay therefor such reasonable remuneration as the General Partner may deem reasonable and proper; (xii) to retain other services of any kind or nature in connection with the Partnership business, and to pay therefor such remuneration as the General Partner may deem reasonable and proper; (xiii) to negotiate and conclude agreements on behalf of the Partnership with respect to any of the rights, powers and authority conferred upon the General Partner; - 23 - 28 (xiv) to maintain accurate accounting records and to file promptly all federal, state and local income tax returns on behalf of the Partnership; (xv) to distribute Partnership cash or other Partnership assets in accordance with this Agreement; (xvi) to form or acquire an interest in, and contribute property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity interest from time to time); (xvii) to establish Partnership reserves for working capital, capital expenditures, contingent liabilities, or any other valid Partnership purpose; and (xviii) to take such other action, execute, acknowledge, swear to or deliver such other documents and instruments, and perform any and all other acts the General Partner deems necessary or appropriate for the formation, continuation and conduct of the business and affairs of the Partnership and to possess and enjoy all of the rights and powers of a general partner as provided by the Act. Except as otherwise provided herein, to the extent the duties of the General Partner require expenditures of funds to be paid to third parties, the General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to authorize or require the General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Partnership. (b) In no event shall the General Partner incur or allow to exist as of the end of any month Indebtedness (as defined below) in an amount in excess of thirty percent (30%) of the General Partner's investment in hotel properties, at cost, after giving effect to the General Partner's use of proceeds from any Indebtedness. For purposes of the foregoing restrictions, "Indebtedness" of the General Partner shall mean all obligations of the General Partner, the Partnership or any other subsidiaries or partnerships in which the General Partner serves as general partner, for borrowed money (including all notes payable and drafts accepted representing extensions of credit) and all obligations evidenced by bonds, debentures, notes or other similar instruments on which interest charges are customarily paid, including obligations under capital leases. 6.02 DELEGATION OF AUTHORITY. The General Partner may delegate any or all of its powers, rights and obligations hereunder, and may appoint, employ, contract or otherwise deal with any Person for the transaction of the business of the Partnership, which Person - 24 - 29 may, under supervision of the General Partner, perform any acts or services for the Partnership as the General Partner may approve. 6.03 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES. (a) The Partnership shall indemnify an Indemnitee from and against any and all losses, claims, damages, liabilities (joint or several), expenses (including reasonable legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership as set forth in this Agreement in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, unless it is established that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 6.03(a). The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee acted in a manner contrary to that specified in this Section 6.03(a). Any indemnification pursuant to this Section 6.03 shall be made only out of the assets of the Partnership. (b) The Partnership may reimburse an Indemnitee for reasonable expenses incurred by an Indemnitee who is a party to a proceeding in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 6.03 has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. (c) The indemnification provided by this Section 6.03 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity. (d) The Partnership may purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. - 25 - 30 (e) For purposes of this Section 6.03, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 6.03; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. (f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. (g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.03 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (h) The provisions of this Section 6.03 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. 6.04 LIABILITY OF THE GENERAL PARTNER. (a) Notwithstanding anything to the contrary set forth in this Agreement, the General Partner shall not be liable for monetary damages to the Partnership or any Partners for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted in good faith. (b) The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the General Partner's shareholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. (c) Subject to its obligations and duties as General Partner set forth in Section 6.01 hereof, the General Partner may exercise any of the powers granted to it under this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith. - 26 - 31 (d) Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the General Partner to continue to qualify as a REIT or (ii) to prevent the General Partner from incurring any taxes under Section 857, Section 4981, or any other provision of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. (e) Any amendment, modification or repeal of this Section 6.04 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 6.04 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted. 6.05 EXPENDITURES BY THE PARTNERSHIP. The General Partner is hereby authorized to pay compensation for accounting, administrative, legal, technical, management and other services rendered to the Partnership. All of the aforesaid expenditures (including Administrative Expenses) shall be made on behalf of the Partnership, and the General Partner shall be entitled to reimbursement by the Partnership for any expenditure (including Administrative Expenses) incurred by it on behalf of the Partnership which shall be made other than out of the funds of the Partnership. The Partnership shall also assume, and pay when due, all Administrative Expenses. 6.06 OUTSIDE ACTIVITIES; REDEMPTION/TENDER OFFER OF REIT SHARES. (a) Subject to Section 6.12 hereof, the Charter and any agreements entered into by the General Partner or its Affiliates with the Partnership or a Subsidiary, any officer, director, employee, agent, trustee, Affiliate or shareholder of the General Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities substantially similar or identical to those of the Partnership. Neither the Partnership nor any of the Limited Partners shall have any rights by virtue of this Agreement in any such business ventures, interests or activities. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any such business ventures, interests or activities, and the General Partner shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures, interests and activities to the Partnership or any Limited Partner, even if such opportunity is of a character which, if presented to the Partnership or any Limited Partner, could be taken by such Person. - 27 - 32 (b) In the event the General Partner redeems any REIT Shares, then the General Partner shall cause the Partnership to purchase from it a number of Partnership Units as determined based on the application of the Conversion Factor on the same terms that the General Partner redeemed such REIT Shares. Moreover, if the General Partner makes a cash tender offer or other offer to acquire REIT Shares, then the General Partner shall cause the Partnership to make a corresponding offer to the General Partner to acquire an equal number of Partnership Units held by the General Partner. In the event any REIT Shares are redeemed by the General Partner pursuant to such offer, the Partnership shall redeem an equivalent number of the General Partner's Partnership Units for an equivalent purchase price based on the application of the Conversion Factor. 6.07 OPTIONAL CONVERSION OF SERIES A PREFERRED SHARES. In the event any holder of the Series A Preferred Shares exercises its option to convert its Series A Preferred Shares into REIT Shares on or after February 27, 2003, then the General Partner shall cause the Partnership to convert an equivalent number of the Preferred Partnership Units held by the General Partner into Partnership Units held by such Partner. The portion of Preferred Partnership Units to be converted shall be determined based on the same ratio pursuant to which the Series A Preferred Shares were converted into REIT Shares. Upon the conversion of all of the Series A Preferred Shares into REIT Shares, the General Partner shall no longer hold Preferred Partnership Units and, thus, shall no longer be entitled to distribution under Sections 5.02(a)(i) hereof. 6.08 REDEMPTION RIGHT WITH RESPECT TO PREFERRED PARTNERSHIP UNITS. (a) Mandatory Redemption. In the event the General Partner redeems all of the Series A Preferred Shares as a result of the termination of the General Partner's status as a REIT, the Partnership shall redeem all of the Series A Preferred Partnership Units held by the General Partner at a redemption price per Series A Preferred Partnership Unit equal to the greater of (i) the Series A Preference Value per Unit plus the excess, if any, of (A) the General Partner's cumulative Preferred Return for the current and all prior years (up to and including the date of redemption) with respect to the Preferred Partnership Unit over (B) the sum of all prior distributions to with respect to such Unit pursuant to Section 5.02(a)(i) hereof, or (ii) the product of (A) the weighted average of the sales prices for a REIT Share as reported on the NASDAQ-National Market System, or the principal exchange on which REIT Shares are then traded, for the ten (10) business days prior to the second business day preceding the date of repurchase, or if the REIT Shares no longer traded on the Nasdaq-Stock Market or a recognized exchange, the fair market value thereof as determined by the General Partner and the holders of the Series A Preferred Shares for purposes of the redemption of the Series A Preferred Shares, multiplied by (B) the number of REIT Shares into which a Series A Preferred Share would be convertible, if converted on the business day preceding the date of redemption. (b) Optional Redemption. On and after February 27, 2003, the Partnership may, at its option following notice as described below, redeem at any time all or a portion of - 28 - 33 the Preferred Partnership Units held by the General Partner (the "Partnership Redemption Right") at a redemption price per Preferred Partnership Unit, payable in cash, equal to the sum of (i) the Preference Value per Preferred Partnership Unit and (ii) the excess, if any, of (A) the General Partner's cumulative Preferred Return for the current and all prior years (up to and including the date of redemption) with respect to the Preferred Partnership Unit over (B) the sum of all prior distributions to the General Partner with respect to such Unit pursuant to Section 5.02(a)(i) hereof. The Partnership shall exercise the Partnership Redemption Right by notifying the General Partner of the redemption not less than 30 nor more than 60 days prior to the redemption date and by specifying in such notice the redemption date, the redemption price, and the number of Preferred Partnership Units to be redeemed. The Partnership Redemption Right may be exercised with respect to any number of Preferred Partnership Units held by the General Partner. If the General Partner exercises its optional redemption right with respect to the Series A Preferred Shares, then the exercise of the Partnership Redemption Right will become mandatory. Similarly, if the Partnership exercises the Partnership Redemption Right, the General Partner agrees to redeem a corresponding portion of the Series A Preferred Shares. (c) On and after the redemption date, the Preferred Return will no longer accrue or accumulate with respect to the Preferred Partnership Units redeemed by the Partnership. In addition, the General Partner shall have no right, with respect to the Preferred Partnership Units so redeemed, to receive any distribution payable after the redemption date unless the General Partner was the holder of record of such Units on the record date of the distribution. - 29 - 34 6.09 EMPLOYMENT OR RETENTION OF AFFILIATES. (a) Any Affiliate of the General Partner may be employed or retained by the Partnership and may otherwise deal with the Partnership (whether as a buyer, lessor, lessee, manager, furnisher of goods or services, broker, agent, lender or otherwise) and may receive from the Partnership any compensation, price, or other payment therefor which the General Partner determines to be fair and reasonable. (b) The Partnership may lend or contribute to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. (c) The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions as the General Partner deems are consistent with this Agreement and applicable law. (d) Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are on terms that are fair and reasonable to the Partnership. 6.10 LOANS TO THE PARTNERSHIP. If additional funds are required by the Partnership for any purpose relating to the business of the Partnership or for any of its obligations, expenses, costs, or expenditures, including operating deficits, the Partnership may borrow such funds as are needed from the General Partner or any Affiliate of the General Partner for such period of time and on such terms as the General Partner or its Affiliate may agree, provided that the terms shall be substantially equivalent to the terms that could be obtained from a third party on an arm's-length basis. 6.11 LOANS TO THE GENERAL PARTNER. If additional funds are required by the General Partner for any purpose relating to the business of the General Partner or for any of its obligations, expenses, costs, or expenditures, including operating deficits, the General Partner may borrow such funds as are needed from the Partnership or any Affiliate of the Partnership for such period of time and on such terms as the Partnership or its Affiliate may agree, provided that the terms shall be substantially equivalent to the terms that could be obtained from a third party on an arm's-length basis. 6.12 GENERAL PARTNER PARTICIPATION. The General Partner agrees that all business activities of the General Partner, including activities pertaining to the acquisition, development and/or ownership of hotels or other property, shall be conducted through the Partnership; provided, however, that the General Partner is allowed to make a direct - 30 - 35 acquisition, but if and only if, such acquisition is made in connection with the issuance of New Securities, which direct acquisition and issuance have been approved and determined to be in the best interests of the General Partner and the Partnership by a majority of the Independent Directors. The General Partner also agrees that all borrowings shall constitute Funding Loans, subject to the exception set forth in Section 4.03 hereof. ARTICLE VII CHANGES IN GENERAL PARTNER 7.01 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST. (a) The General Partner may not transfer any of its General Partnership Interest or Limited Partnership Interest or withdraw as General Partner except as provided in Section 7.01(c) or in connection with a transaction described in Section 7.01(d). (b) The General Partner agrees that it will at all times own at least a 20% Partnership Interest. (c) Except as otherwise provided in Section 6.06(b) or Section 7.01(d) hereof, the General Partner shall not engage in any merger, consolidation or other combination with or into another Person or sale of all or substantially all of its assets, or any reclassification, or any recapitalization or change of outstanding REIT Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination of REIT Shares (a "Transaction"), unless (i) the Transaction also includes a merger of the Partnership or sale of substantially all of the assets of the Partnership as a result of which all Limited Partners will receive for each Partnership Unit an amount of cash, securities, or other property equal to the product of the Conversion Factor and the greatest amount of cash, securities or other property paid in the Transaction to a holder of one REIT Share in consideration of one REIT Share, provided that if, in connection with the Transaction, a purchase, tender or exchange offer ("Offer") shall have been made to and accepted by the holders of more than 50 percent of the outstanding REIT Shares, each holder of Partnership Units shall be given the option to exchange its Partnership Units for the greatest amount of cash, securities, or other property which a Limited Partner would have received had it (A) exercised its Limited Partner Redemption Right and received REIT shares and (B) sold, tendered or exchanged such REIT shares pursuant to the Offer the REIT Shares received upon exercise of the Limited Partner Redemption Right immediately prior to the expiration of the Offer; and (ii) no more than 75 percent of the equity securities of the acquiring Person in such Transaction shall be owned, after consummation of such Transaction, by the General Partner or Persons who were Affiliates of the Partnership or the General Partner immediately prior to the date on which the Transaction is consummated. - 31 - 36 (d) Notwithstanding Section 7.01(c), the General Partner may merge into or consolidate with another entity if immediately after such merger or consolidation (i) substantially all of the assets of the successor or surviving entity (the "Surviving General Partner"), other than Partnership Units held by the General Partner, are contributed to the Partnership as a Capital Contribution in exchange for Partnership Units with a fair market value equal to the value of the assets so contributed by the Surviving General Partner in good faith and (ii) the Surviving General Partner expressly agrees to assume all obligations of the General Partner hereunder. Upon such contribution and assumption, the Surviving General Partner shall have the right and duty to amend this Agreement as set forth in this Section 7.01(d). The Surviving General Partner shall in good faith arrive at a new method for the calculation of the Cash Amount and Conversion Factor for a Partnership Unit after any such merger or consolidation so as to approximate the existing method for such calculation as closely as reasonably possible. Such calculation shall take into account, among other things, the kind and amount of securities, cash and other property that was receivable upon such merger or consolidation by a holder of REIT Shares and/or options, warrants or other rights relating thereto, and to which a holder of Partnership Units could have acquired had such Partnership Units been redeemed immediately prior to such merger or consolidation. Such amendment to this Agreement shall provide for adjustment to such method of calculation which shall be as nearly equivalent as may be practicable to the adjustments provided for with respect to the Conversion Factor. The above provisions of this Section 7.01(d) shall similarly apply to successive mergers or consolidations permitted hereunder. 7.02 ADMISSION OF A SUBSTITUTE OR SUCCESSOR GENERAL PARTNER. A Person shall be admitted as a substitute or successor General Partner of the Partnership only if the following terms and conditions are satisfied: (a) the Person to be admitted as a substitute or additional General Partner shall have accepted and agreed to be bound by all the terms and provisions of this Agreement by executing a counterpart thereof and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner, and a certificate evidencing the admission of such Person as a General Partner shall have been filed for recordation and all other actions required by Section 2.05 hereof in connection with such admission shall have been performed; (b) if the Person to be admitted as a substitute or additional General Partner is a corporation or a partnership it shall have provided the Partnership with evidence satisfactory to counsel for the Partnership of such Person's authority to become a General Partner and to be bound by the terms and provisions of this Agreement; and (c) counsel for the Partnership shall have rendered an opinion (relying on such opinions from other counsel and the state or any other jurisdiction as may be necessary) that the admission of the person to be admitted as a substitute or additional General Partner is in conformity with the Act, that none of the actions taken in connection with the admission of such Person as a substitute or additional General Partner will cause (i) the Partnership to - 32 - 37 be classified other than as a partnership for federal income tax purposes or (ii) the loss of any Limited Partner's limited liability. 7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of Bankruptcy as to a General Partner (and its removal pursuant to Section 7.04(a) hereof) or the withdrawal, removal or dissolution of a General Partner (except that, if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such partnership shall be deemed not to be a dissolution of such General Partner if the business of such General Partner is continued by the remaining partner or partners), the Partnership shall be dissolved and terminated unless the Partnership is continued pursuant to Section 7.03(b) hereof. (b) Following the occurrence of an Event of Bankruptcy as to a General Partner (and its removal pursuant to Section 7.04(a) hereof) or the withdrawal, removal or dissolution of a General Partner (except that, if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such partnership shall be deemed not to be a dissolution of such General Partner if the business of such General Partner is continued by the remaining partner or partners), the Limited Partners, within 90 days after such occurrence, may elect to reconstitute the Partnership and continue the business of the Partnership for the balance of the term specified in Section 2.04 hereof by selecting, subject to Section 7.02 hereof and any other provisions of this Agreement, a substitute General Partner by unanimous consent of the Limited Partners. If the Limited Partners elect to reconstitute the Partnership and admit a substitute General Partner, the relationship with the Partners and of any Person who has acquired an interest of a Partner in the Partnership shall be governed by this Agreement. 7.04 REMOVAL OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of Bankruptcy as to, or the dissolution of, a General Partner, such General Partner shall be deemed to be removed automatically; provided, however, that if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or removal of a partner in such partnership shall be deemed not to be a dissolution of the General Partner if the business of such General Partner is continued by the remaining partner or partners. (b) If a General Partner has been removed pursuant to this Section 7.04 and the Partnership is continued pursuant to Section 7.03 hereof, such General Partner shall promptly transfer and assign its General Partnership Interest in the Partnership (i) to the substitute General Partner approved by a majority-in-interest of the Limited Partners in accordance with Section 7.03(b) hereof and otherwise admitted to the Partnership in accordance with Section 7.02 hereof. At the time of assignment, the removed General - 33 - 38 Partner shall be entitled to receive from the substitute General Partner the fair market value of the General Partnership Interest of such removed General Partner as reduced by any damages caused to the Partnership by such General Partner. Such fair market value shall be determined by an appraiser mutually agreed upon by the General Partner and a majority-in-interest of the Limited Partners within 10 days following the removal of the General Partner. In the event that the parties are unable to agree upon an appraiser, the General Partner and a majority-in-interest of the Limited Partners each shall select an appraiser. Each such appraiser shall complete an appraisal of the fair market value of the General Partner's General Partnership Interest within 30 days of the General Partner's removal, and the fair market value of the General Partner's General Partnership Interest shall be the average of the two appraisals; provided, however, that if the higher appraisal exceeds the lower appraisal by more than 20% of the amount of the lower appraisal, the two appraisers, no later than 40 days after the removal of the General Partner, shall select a third appraiser who shall complete an appraisal of the fair market value of the General Partner's General Partnership Interest no later than 60 days after the removal of the General Partner. In such case, the fair market value of the General Partner's General Partnership Interest shall be the average of the two appraisals closest in value. (c) The General Partnership Interest of a removed General Partner, during the time after default until transfer under Section 7.04(b), shall be converted to that of a special Limited Partner; provided, however, such removed General Partner shall not have any rights to participate in the management and affairs of the Partnership, and shall not be entitled to any portion of the income, expense, profit, gain or loss allocations or cash distributions allocable or payable, as the case may be, to the Limited Partners. Instead, such removed General Partner shall receive and be entitled to retain only distributions or allocations of such items which it would have been entitled to receive in its capacity as General Partner, until the transfer is effective pursuant to Section 7.04(b) hereof. (d) All Partners shall have given and hereby do give such consents, shall take such actions and shall execute such documents as shall be legally necessary and sufficient to effect all the foregoing provisions of this Section. ARTICLE VIII RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS 8.01 MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not participate in the management or control of Partnership business nor shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, such powers being vested solely and exclusively in the General Partner. - 34 - 39 8.02 POWER OF ATTORNEY. Each Limited Partner hereby irrevocably appoints the General Partner his true and lawful attorney-in-fact, who may act for each Limited Partner and in his name, place and stead, and for his use and benefit, to sign, acknowledge, swear to, deliver, file and record, at the appropriate public offices, any and all documents, certificates, and instruments as may be deemed necessary or desirable by the General Partner to carry out fully the provisions of this Agreement and the Act in accordance with their terms, which power of attorney is coupled with an interest and shall survive the death, dissolution or legal incapacity of the Limited Partner, or the transfer by the Limited Partner of any part or all of his Interest in the Partnership. 8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS. No Limited Partner shall be liable for any debts, liabilities, contracts or obligations of the Partnership. A Limited Partner shall be liable to the Partnership only to make payments of his Capital Contribution, if any, as and when due hereunder. After his Capital Contribution is fully paid, no Limited Partner shall, except as otherwise required by the Act, be required to make any further Capital Contributions or other payments or lend any funds to the Partnership. 8.04 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR AFFILIATE. No Limited Partner shall at any time, either directly or indirectly, own any stock or other interest in the General Partner or in any Affiliate thereof, if such ownership by itself or in conjunction with other stock or other interests owned by other Limited Partners would, in the opinion of counsel for the Partnership, jeopardize the classification of the Partnership as a partnership for federal income tax purposes. The General Partner shall be entitled to make such reasonable inquiry of the Limited Partners as is required to establish compliance by the Limited Partners with the provisions of this Section. 8.05 LIMITED PARTNER REDEMPTION RIGHT. (a) Subject to Section 8.05(c), on or after January 1, 1995, each Class A Limited Partner shall have the right to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units held by such Class A Limited Partner at a redemption price equal to and in the form of the Redemption Amount. Subject to Section 8.05(c), the Class B Limited Partners shall have the right to require the Partnership to redeem on a Specified Redemption Date the Partnership Units held by such Class B Limited Partners, at a redemption price equal to and in the form of the Redemption Amount subject to any restriction agreed to in writing between the Redeeming Limited Partner and the General Partner. The redemption right described in this Section 8.05 shall be referred to as the "Limited Partner Redemption Right." The Limited Partner Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Limited Partner who is exercising the Limited Partner Redemption Right (the "Redeeming Limited Partner"). A Limited Partner may not exercise the Limited Partner Redemption Right for less than three hundred (300) Partnership Units or, if such Limited Partner holds less than three hundred (300) Partnership Units, all of the Partnership Units held by such Partner. The Redeeming Limited Partner shall have no right, with respect to - 35 - 40 any Partnership Units so redeemed, to receive any distribution paid with respect to Partnership Units if the record date for such distribution is on or after the Specified Redemption Date. (b) Notwithstanding the provisions of Section 8.05(a), the General Partner may, in its sole and absolute discretion, assume directly and satisfy a Limited Partner Redemption Right by paying to the Redeeming Limited Partner the Redemption Amount on the Specified Redemption Date, whereupon the General Partner shall acquire the Partnership Units offered for redemption by the Redeeming Limited Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. In the event the General Partner shall exercise its right to satisfy the Limited Partner Redemption Right in the manner described in the preceding sentence, the Partnership shall have no obligation to pay any amount to the Redeeming Limited Partner with respect to such Redeeming Limited Partner's exercise of the Limited Partner Redemption Right, and each of the Redeeming Limited Partner, the Partnership, and the General Partner shall treat the transaction between the General Partner and the Redeeming Limited Partner as a sale of the Redeeming Limited Partner's Partnership Units to the General Partner for federal income tax purposes. Each Redeeming Limited Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of REIT Shares upon exercise of the Limited Partner Redemption Right. (c) The Partnership or the General Partner, as the case may be, shall pay the Cash Amount to a Redeeming Limited Partner as the Redemption Amount for such Partner if (i) the acquisition of REIT Shares by such Partner on the Specified Redemption Date would (A) result in such Partner or any other person owning, directly or indirectly, REIT Shares in excess of the "Ownership Limit," as defined in the Charter and calculated in accordance therewith, except as provided in the Charter, (B) result in REIT Shares being owned by fewer than 100 persons (determined without reference to any rules of attribution), except as provided in the Charter, (C) result in the General Partner being "closely held" within the meaning of Section 856(h) of the Code, (D) cause the General Partner to own, directly or constructively, 10% or more of the ownership interests in a tenant of the General Partner's or the Partnership's real property, within the meaning of Section 856(d)(2)(B) of the Code, or (E) cause the acquisition of REIT Shares by such Partner to be "integrated" with any other distribution of REIT Shares for purposes of complying with the registration provisions of the Securities Act of 1933, as amended, or (ii) the Partnership or the General Partner, as the case may be, so elects in its sole discretion. Any Cash Amount or REIT shares to be paid to a redeeming Limited Partner pursuant to this Section 8.05 shall be paid within five (5) business days after the initial date of receipt by the General Partner of the Notice of Redemption relating to the Partnership Units to be redeemed; provided, however, that such five (5) day period may be extended for up to an additional one hundred eighty (180) day period to the extent required for the General Partner to cause additional REIT Shares to be issued to provide financing to be used to make such payment of the Cash Amount and provided further, that the Partnership shall pay interest at the Prime Rate as published in The Wall Street Journal, Eastern Edition, from time to time on the Cash Amount from the - 36 - 41 expiration of the five day period to the date of payment. Notwithstanding the foregoing, the General Partner and the Partnership agree to use their best efforts to cause the closing of the acquisition of redeemed Partnership Units hereunder to occur as quickly as reasonably possible. If a Class B Limited Partner exercises its Limited Partner Redemption Right and the Partnership or the General Partner, as the case may be, elects to pay the REIT Shares Amount rather than the Cash Amount, the REIT Shares received by such Class B Limited Partner shall be properly registered under the Securities Act of 1933, as amended. (d) Each certificate, if any, evidencing REIT Shares that may be issued in redemption of Partnership Units under this Section 8.05 (the "Redemption Shares") shall bear a restrictive legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities law. No transfer of the Shares represented by this certificate shall be valid or effective unless (A) such transfer is made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), or (B) the holder of the securities proposed to be transferred shall have delivered to the company either a no-action letter from the Securities and Exchange Commission or an opinion of counsel (who may be an employee of such holder) experienced in securities matters to the effect that such proposed transfer is exempt from the registration requirements of the act which opinion shall be reasonably satisfactory to the company." 8.06 REGISTRATION. (a) Shelf Registration. At the request of a Class B Limited Partner, the General Partner agrees to file with the Commission, no later than November 1, 1995, a shelf registration statement under Rule 415 of the Securities Act, or any similar rule that may be adopted by the Commission (the "Shelf Registration"), with respect to all of the REIT Shares that may be issued in redemption of Partnership Units under Section 8.05 above (the "Redemption Shares"). The General Partner will use its best efforts to have the Shelf Registration declared effective under the Securities Act no later than January 1, 1996 (the "Target Effective Date") to permit the disposition of the Redemption Shares by the holders thereof in accordance with the method or methods of disposition specified by the holders, and to keep the Shelf Registration continuously effective until the earlier of (i) January 1, 1998 (the "Shelf Registration Period"), (ii) the date when all of the Redemption Shares are sold thereunder, or (iii) the date on which all of the holders of Redemption Shares, pursuant to Rule 144(k) under the Securities Act, may sell the Redemption Shares without registration under the Securities Act of 1933, as amended (the "Securities Act"). The General Partner further agrees to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder for the Shelf Registration. Notwithstanding the foregoing, if for any reason the effectiveness of the Shelf - 37 - 42 Registration is delayed or suspended or it ceases to be available for sales of Redemption Shares thereunder, the Shelf Registration Period shall be extended by the aggregate number of days of such delay, suspension or unavailability. (b) Registration and Qualification Procedures. The General Partner is required by the provisions of Section 8.06(a) hereof to use its best efforts to have the Shelf Registration declared effective under the Securities Act by January 1, 1996. Accordingly, the General Partner will: (i) prepare and file with the Commission a registration statement, including amendments thereof and supplements relating thereto, with respect to the Redemption Shares, in connection with which the General Partner will give each holder of Redemption Shares, their underwriters, if any, and their counsel and accountants a reasonable opportunity to participate in the preparation thereof and will give such persons reasonable access to its books, records, officers and independent public accountants; (ii) use its best efforts to cause the registration statement to be declared effective by the Commission; (iii) keep the registration statement effective and the related prospectus current throughout the Shelf Registration Period; provided, however, that the General Partner shall have no obligation to file any amendment or supplement at its own expense more than ninety (90) days after the effective date of the registration statement; (iv) furnish to each holder of Redemption Shares such numbers of copies of prospectuses, and supplements or amendments thereto, and such other documents as such holder reasonably requests; (v) register or qualify the securities covered by the registration statement under the securities or blue sky laws of such jurisdictions within the United States as any holder of Redemption Shares shall reasonably request, and do such other reasonable acts and things as may be required of it to enable such holders to consummate the sale or other disposition in such jurisdictions of the Redemption Shares; provided, however, that the General Partner shall not be required to (i) qualify as a foreign corporation or consent to a general and unlimited service or process in any jurisdictions in which it would not otherwise be required to be qualified or so consent or (ii) qualify as a dealer in securities; (vi) furnish, at the request of the holders of Redemption Shares, on the date Redemption Shares are delivered to the underwriters for sale pursuant to such registration, or, if such Shares are not being sold through underwriters, on the date the Shelf Registration with respect to such Redemption Shares becomes effective, (A) a securities opinion of counsel representing the General Partner for the purposes of such registration covering such legal matters as are customarily included in such opinions and (B) letters of the firm of independent public accountants that certified the financial statements included in - 38 - 43 the registration statement, addressed to the underwriters, covering substantially the same matters as are customarily covered in accountant's letters delivered to underwriters in underwritten public offerings of securities and such other financial matters as such holders (or the underwriters, if any) may reasonably request; (vii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its shareholders as soon as reasonably practicable, but not later than sixteen (16) months after the effective date of the Shelf Registration, an earnings statement covering a period of at least twelve (12) months beginning after the effective date of the Shelf Registration, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (viii) enter into and perform an underwriting agreement with the managing underwriter, if any, selected as provided herein, containing customary (A) terms of offer and sale of the securities, payment provisions, underwriting discounts and commissions and (B) representations, warranties, covenants, indemnities, terms and conditions; and (ix) keep the holders of Redemption Shares advised as to the initiation and progress of the registration. (c) Allocation of Expenses. The Partnership shall pay all expenses in connection with the Shelf Registration, including without limitation (i) all expenses incident to filing with the National Association of Securities Dealers, Inc., (ii) registration fees, (iii) printing expenses, (iv) accounting and legal fees and expenses, except to the extent holders of Redemption Shares elect to engage accountants or attorneys in addition to the accountants and attorneys engaged by the General Partner, (v) accounting expenses incident to or required by any such registration or qualification and (vi) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualification; provided, however, the Partnership shall not be liable for (A) any discounts or commissions to any underwriter or broker attributable to the sale of Redemption Shares, or (B) any fees or expenses incurred by holders of Redemption Shares in connection with such registration which, according to the written instructions of any regulatory authority, the Partnership is not permitted to pay. (d) Indemnification. (i) In connection with the Shelf Registration, the General Partner and the Partnership agree to indemnify holders of Redemption Shares within the meaning of Section 15 of the Securities Act, against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement of a material fact contained in the Shelf Registration, preliminary prospectus or prospectus (as amended or supplemented if the General Partner shall have furnished any amendments or supplements thereto) or caused by any omission, or alleged omission, to state therein a material fact required to be stated therein or necessary to make the statements - 39 - 44 therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by any untrue statement, alleged untrue statement, omission, or alleged omission based upon information furnished to the General Partner expressly for use therein. The General Partner and each officer, director and controlling person of the General Partner shall be indemnified by each holder of Redemption Shares covered by the Shelf Registration for all such losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any such untrue, or alleged untrue, statement or any such omission, or alleged omission, based upon information furnished to the General Partner expressly for use therein in a writing signed by the holder. (ii) Promptly upon receipt by a party indemnified under this Section 8.06(d) of notice of the commencement of any action against such indemnified party in respect of which indemnity or reimbursement may be sought against any indemnifying party under this Section 8.06(d), such indemnified party shall notify the General Partner in writing of the commencement of such action, but the failure to so notify the General Partner shall not relieve it of any liability which it may have to any indemnified party otherwise than under this Section 8.06(d) unless such failure shall materially adversely affect the defense of such action. In case notice of commencement of any such action shall be given to the General Partner as above provided, the General Partner shall be entitled to participate in and, to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and reasonably satisfactory to such indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the indemnified party unless (i) the General Partner or the Partnership agrees to pay the same, (ii) the General Partner fails to assume the defense of such action with counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel that representation of such indemnified party and the General Partner by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the General Partner shall not have the right to assume the defense of such action on behalf of such indemnified party). No indemnifying party shall be liable for any settlement entered into without its consent. (e) Contribution. (i) If for any reason the indemnification provisions contemplated by Section 8.06(d) are either unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then the party that would otherwise be required to provide indemnification or the indemnifying party (in either case, for purposes of this Section 8.06(e), the "Indemnifying Party") in respect of such losses, claims, damages or liabilities, shall contribute to the amount paid or payable by the party that would otherwise be entitled to indemnification or the indemnified party (in either case, for purposes of this Section 8.06(e), the "Indemnified Party") as a result of such losses, claims, damages, liabilities or expense, in such proportion as is appropriate to reflect the - 40 - 45 relative fault of the Indemnifying Party and the Indemnified Party, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact related to information supplied by the Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party. In no event shall any holder of Redemption Shares covered by the Shelf Registration be required to contribute an amount greater than the dollar amount of the proceeds received by such holder from the sale of Redemption Shares pursuant to the registration giving rise to the liability. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8.06(e) were determined by pro rata allocation (even if the holders or any underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person or entity determined to have committed a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (iii) The contribution provided for in this Section 8.06(e) shall survive the termination of this Agreement and shall remain in full force and effect regardless of any investigation mae by or on behalf of any Indemnified Party. (f) Listing on Securities Exchange. If the General Partner shall list or maintain the listing of any shares of Common Stock on any securities exchange or national market system, it will at its expense and as necessary to permit the registration and sale of the Redemption Shares hereunder, list thereon, maintain and, when necessary, increase such listing to include such Redemption Shares. 8.07 OTHER AGREEMENTS. The provisions of Sections 8.05 and 8.06 are applicable only to certain Limited Partners admitted to the Partnership prior to _____________ 1996. The rights of certain Limited Partners with respect to the redemption of Units issued on and after ____________ 1996, the registration of REIT Shares issued upon redemption of such Units and certain other matters specific to some but not all Partners, may be included in agreements other than this Agreement. The existence and operation of such agreements shall not modify or terminate the rights, benefits or obligations of any Partner who is not a party to such agreements under this Agreement or applicable law. - 41 - 46 8.08 OUTSIDE ACTIVITIES OF CLASS A LIMITED PARTNERS. (a) No Class A Limited Partner or director, shareholder or Affiliate of a Class A Limited Partner may (i) invest in any motel or hotel property or (ii) manage or agree to manage a motel or hotel property, except for a Property or any other hotel or motel property in which the General Partner or the Partnership has an ownership interest, that, at the time such management is undertaken or agreement to manage is entered into, is located within a 20-mile radius of a Property or any other motel or hotel property in which the General Partner has an ownership interest. (b) The General Partner, in its sole discretion, may waive the restrictions on Class A Limited Partners set forth in Section 8.08(a) above as to (i) any particular business venture in which a Limited Partner proposes to engage or (ii) any particular Class A Limited Partner. ARTICLE IX TRANSFERS OF LIMITED PARTNERSHIP INTERESTS 9.01 PURCHASE FOR INVESTMENT. (a) Each Limited Partner hereby represents and warrants to the General Partner and to the Partnership that the acquisition of his Partnership Interest is made as a principal for his account for investment purposes only and not with a view to the resale or distribution of such Partnership Interest. (b) Each Limited Partner agrees that he will not sell, assign or otherwise transfer his Partnership Interest or any fraction thereof, whether voluntarily or by operation of law or at judicial sale or otherwise, to any Person who does not make the representations and warranties to the General Partner set forth in Section 9.01(a) above and similarly agree not to sell, assign or transfer such Partnership Interest or fraction thereof to any Person who does not similarly represent, warrant and agree. 9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS. (a) Except as otherwise provided in Section 9.02(d) hereof, no Limited Partner may offer, sell, assign, hypothecate, pledge or otherwise transfer his Limited Partnership Interest, in whole or in part, whether voluntarily or by operation of law or at judicial sale or otherwise (collectively, a "Transfer") without the written consent of the General Partner, which consent may be withheld in the sole discretion of the General Partner. The General Partner may require, as a condition of any Transfer, that the transferor assume all costs incurred by the Partnership in connection therewith. - 42 - 47 (b) No Limited Partner may effect a Transfer of his Limited Partnership Interest, in whole or in part, if, in the opinion of legal counsel for the Partnership, such proposed Transfer would require the registration of the Limited Partnership Interest under the Securities Act of 1933, as amended, or would otherwise violate any applicable federal or state securities or "Blue Sky" law (including investment suitability standards). (c) No transfer by a Limited Partner of his Partnership Units, in whole or in part, may be made to any Person if (i) in the opinion of legal counsel for the Partnership, the transfer would result in the Partnership's being treated as an association taxable as a corporation (other than a qualified REIT subsidiary within the meaning of Section 856(i) of the Code), 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. (d) Section 9.02(a) shall not apply to the following transactions, except that the General Partner may require that the transferor assume all costs incurred by the Partnership in connection therewith: (i) any Transfer by a Limited Partner pursuant to the exercise of its Limited Partner Redemption Right under Section 8.05 hereof; (ii) any Transfer by a Limited Partner that is a corporation or other business entity to any of its Affiliates or subsidiaries or to any successor in interest of such Limited Partner; or (iii) any donative Transfer by an individual Limited Partner to his immediate family members or any trust in which the individual or his immediate family members own, collectively, 100% of the beneficial interests. For purposes of this Section 9.02(c)(iii), the term "immediate family member" shall be deemed to include only an individual Limited Partner's spouse, children (including step-children and adopted children) and grandchildren. (e) Any Transfer in contravention of any of the provisions of this Article IX shall be void and ineffectual and shall not be binding upon, or recognized by, the Partnership. 9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER. (a) Subject to the other provisions of this Article IX, an assignee of the Limited Partnership Interest of a Limited Partner (which shall be understood to include any purchaser, transferee, donee, or other recipient of any disposition of such Limited Partnership Interest) shall be deemed admitted as a Limited Partner of the Partnership only upon the satisfactory completion of the following: - 43 - 48 (i) The assignee shall have accepted and agreed to be bound by the terms and provisions of this Agreement by executing a counterpart or an amendment thereof, including a revised Exhibit A, and such other documents or instruments as the General Partner may require in order to effect the admission of such Person as a Limited Partner. (ii) To the extent required, an amended Certificate evidencing the admission of such Person as a Limited Partner shall have been signed, acknowledged and filed for record in accordance with the Act. (iii) The assignee shall have delivered a letter containing the representation set forth in Section 9.01(a) hereof and the agreement set forth in Section 9.01(b) hereof. (iv) If the assignee is a corporation, partnership or trust, the assignee shall have provided the General Partner with evidence satisfactory to counsel for the Partnership of the assignee's authority to become a Limited Partner under the terms and provisions of this Agreement. (v) The assignee shall have executed a power of attorney containing the terms and provisions set forth in Section 8.02 hereof. (vi) The assignee shall have paid all reasonable legal fees of the Partnership and the General Partner and filing and publication costs in connection with his substitution as a Limited Partner. (vii) The assignee has obtained the prior written consent of General Partner to its admission as a Substitute Limited Partner, which consent may be given or denied in the exercise of General Partner's sole and absolute discretion. (viii) The assignee shall surrender to the General Partner any certificate evidencing the Limited Partnership Interest properly endorsed for transfer. (b) For the purpose of allocating profits and losses and distributing cash received by the Partnership, a Substitute Limited Partner shall be treated as having become, and appearing in the records of the Partnership as, a Partner upon the filing of the Certificate described in Section 9.03(a)(ii) hereof or, if no such filing is required, the later of the date specified in the transfer documents, or the date on which the General Partner has received all necessary instruments of transfer and substitution. (c) The General Partner shall cooperate with the Person seeking to become a Substitute Limited Partner by preparing the documentation required by this Section and - 44 - 49 making all official filings and publications. The Partnership shall take all such action as promptly as practicable after the satisfaction of the conditions in this Article IX to the admission of such Person as a Limited Partner of the Partnership. 9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS. (a) Subject to the provisions of Sections 9.01 and 9.02 hereof, except as required by operation of law, the Partnership shall not be obligated for any purposes whatsoever to recognize the assignment by any Limited Partner of his Partnership Interest until the Partnership has received notice thereof. (b) Any Person who is the assignee of all or any portion of a Limited Partner's Limited Partnership Interest, but does not become a Substitute Limited Partner and desires to make a further assignment of such Limited Partnership Interest, shall be subject to all the provisions of this Article IX to the same extent and in the same manner as any Limited Partner desiring to make an assignment of his Limited Partnership Interest. 9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A LIMITED PARTNER. The occurrence of an Event of Bankruptcy as to a Limited Partner, the death of a Limited Partner or a final adjudication that a Limited Partner is incompetent (which term shall include, but not be limited to, insanity) shall not cause the termination or dissolution of the Partnership, and the business of the Partnership shall continue if an order for relief in a bankruptcy proceeding is entered against a Limited Partner, the trustee or receiver of his estate or, if he dies, his executor, administrator or trustee, or, if he is finally adjudicated incompetent, his committee, guardian or conservator, shall have the rights of such Limited Partner for the purpose of settling or managing his estate property and such power as the bankrupt, deceased or incompetent Limited Partner possessed to assign all or any part of his Partnership Interest and to join with the assignee in satisfying conditions precedent to the admission of the assignee as a Substitute Limited Partner. 9.06 JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be acquired by two individuals as joint tenants with right of survivorship, provided that such individuals either are married or are related and share the same home as tenants in common. The written consent or vote of both owners of any such jointly held Partnership Interest shall be required to constitute the action of the owners of such Partnership Interest; provided, however, that the written consent of only one joint owner will be required if the Partnership has been provided with evidence satisfactory to the counsel for the Partnership that the actions of a single joint owner can bind both owners under the applicable laws of the state of residence of such joint owners. Upon the death of one owner of a Partnership Interest held in a joint tenancy with a right of survivorship, the Partnership Interest shall become owned solely by the survivor as a Limited Partner and not as an assignee. The Partnership need not recognize the death of one of the owners of a jointly-held Partnership Interest until it shall have received notice of such death. Upon notice to the General Partner from either owner, the General Partner shall cause the Partnership Interest to be divided into two equal - 45 - 50 Partnership Interests, which shall thereafter be owned separately by each of the former owners. ARTICLE X BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS 10.01 BOOKS AND RECORDS. At all times during the continuance of the Partnership, the Partners shall keep or cause to be kept at the Partnership's specified office true and complete books of account in accordance with generally accepted accounting principles, including: (a) a current list of the full name and last known business address of each Partner, (b) a copy of the Certificate of Limited Partnership and all certificates of amendment thereto, (c) copies of the Partnership's federal, state and local income tax returns and reports, (d) copies of the Agreement and any financial statements of the Partnership for the three most recent years and (e) all documents and information required under the Act. Any Partner or his duly authorized representative, upon paying the costs of collection, duplication and mailing, shall be entitled to inspect or copy such records during ordinary business hours. The corporate Secretary of the General Partner shall serve as the transfer agent for the certificates representing the Partnership Units. 10.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS. (a) All funds of the Partnership not otherwise invested shall be deposited in one or more accounts maintained in such banking or brokerage institutions as the General Partner shall determine, and withdrawals shall be made only on such signature or signatures as the General Partner may, from time to time, determine. (b) All deposits and other funds not needed in the operation of the business of the Partnership may be invested by the General Partner in investment grade instruments (or investment companies whose portfolio consists primarily thereof), government obligations, certificates of deposit, bankers' acceptances and municipal notes and bonds. The funds of the Partnership shall not be commingled with the funds of any other Person except for such commingling as may necessarily result from an investment in those investment companies permitted by this Section 10.02(b). 10.03 FISCAL AND TAXABLE YEAR. The fiscal and taxable year of the Partnership shall be the calendar year. 10.04 ANNUAL TAX INFORMATION AND REPORT. Within 75 days after the end of each fiscal year of the Partnership, the General Partner shall furnish to each person who was a Limited Partner at any time during such year the tax information necessary to file such Limited Partner's individual tax returns as shall be reasonably required by law. - 46 - 51 10.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS. (a) The General Partner shall be the Tax Matters Partner of the Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax Matters Partner, the General Partner shall have the right and obligation to take all actions authorized and required, respectively, by the Code for the Tax Matters Partner. The General Partner shall have the right to retain professional assistance in respect of any audit of the Partnership by the Service and all out-of-pocket expenses and fees incurred by the General Partner on behalf of the Partnership as Tax Matters Partner shall constitute Partnership expenses. In the event the General Partner receives notice of a final Partnership adjustment under Section 6223(a)(2) of the Code, the General Partner shall either (i) file a court petition for judicial review of such final adjustment within the period provided under Section 6226(a) of the Code, a copy of which petition shall be mailed to all Limited Partners on the date such petition is filed, or (ii) mail a written notice to all Limited Partners, within such period, that describes the General Partner's reasons for determining not to file such a petition. (b) All elections required or permitted to be made by the Partnership under the Code shall be made by the General Partner in its sole discretion. (c) In the event of a transfer of all or any part of the Partnership Interest of any Partner, the Partnership, at the option of the General Partner, may elect pursuant to Section 754 of the Code to adjust the basis of the Properties. Notwithstanding anything contained in Article V of this Agreement, any adjustments made pursuant to Section 754 shall affect only the successor in interest to the transferring Partner and in no event shall be taken into account in establishing, maintaining or computing Capital Accounts for the other Partners for any purpose under this Agreement. Each Partner will furnish the Partnership with all information necessary to give effect to such election. 10.06 REPORTS TO LIMITED PARTNERS. (a) The books of the Partnership shall be audited annually as of the end of each fiscal year of the Partnership by accountants selected by the General Partner, who shall be the same accountants responsible for the examination of the General Partner's books. The General Partner shall determine and prepare an annual balance sheet, a statement of partners' capital as of the end of such year, as well as statements of cash flow and income, all in accordance with generally accepted accounting principles and accompanied by an independent auditor's report (collectively, the "Financial Statements"), together with all supplementary schedules and information prepared by the accountants related thereto. As a note to such Financial Statements, the General Partner shall prepare a schedule of all loans to the Partnership. Such schedule shall demonstrate that loans have been made, used, carried on the books of the Partnership (and repaid, if applicable) in accordance with the provisions of this Agreement. Within 90 days after the end of each fiscal year, the General Partner shall transmit the Financial Statements to the Limited Partners. The General Partner also shall - 47 - 52 prepare quarterly unreviewed Financial Statements and shall transmit such statements to the Limited Partners within 45 days of the end of each fiscal quarter of the Partnership. (b) Any Partner shall further have the right to a private audit of the books and records of the Partnership, provided such audit is made for Partnership purposes, at the expense of the Partner desiring it and is made during normal business hours. ARTICLE XI AMENDMENT OF AGREEMENT The General Partner, without the consent of the Limited Partners, may amend this Agreement in any respect; provided, however, that the following amendments shall require the consent of each Limited Partner adversely affected thereby: (a) any amendment affecting the operation of the Conversion Factor or the Limited Partner Redemption Right; (b) any amendment that would adversely affect the rights of the Limited Partners to receive the distributions payable to them hereunder; (c) any amendment that would adversely affect the rights of the Limited Partners to receive allocations of Profit and Loss; or (d) any amendment that would impose on the Limited Partners any obligation to make additional Capital Contributions to the Partnership. The foregoing shall not limit the Partnership's or the General Partner's rights to issue Additional Partnership Interests and New Securities pursuant to Section 4.02. ARTICLE XII GENERAL PROVISIONS 12.01 NOTICES. All communications required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or upon deposit in the United States mail, registered, postage prepaid return receipt requested, to the Partners at the addresses set forth in Exhibit A; provided, however, that any Partner may specify a different address by notifying the General Partner in writing of such different address. Notices to the Partnership shall be delivered at or mailed to its specified office. - 48 - 53 12.02 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting transfers, this Agreement shall be binding upon and inure to the benefit of the Partners and the Partnership and their respective legal representatives, successors, transferees and assigns. 12.03 ADDITIONAL DOCUMENTS. Each Partner agrees to perform all further acts and execute, swear to, acknowledge and deliver all further documents which may be reasonable, necessary, appropriate or desirable to carry out the provisions of this Agreement or the Act. 12.04 SEVERABILITY. If any provision of this Agreement shall be declared illegal, invalid, or unenforceable in any jurisdiction, then such provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or unenforceability shall not affect the remainder hereof. 12.05 ENTIRE AGREEMENT. This Agreement and exhibits attached hereto constitute the entire Agreement of the Partners and supersede all prior written agreements and prior and contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. 12.06 PRONOUNS AND PLURALS. When the context in which words are used in the Agreement indicates that such is the intent, words in the singular number shall include the plural and the masculine gender shall include the neuter or female gender as the context may require. 12.07 HEADINGS. The Article headings or sections in this Agreement are for convenience only and shall not be used in construing the scope of this Agreement or any particular Article. 12.08 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart. 12.09 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. - 49 - 54 IN WITNESS WHEREOF, the parties hereto have hereunder affixed their signatures to this Fourth Amended and Restated Agreement of Limited Partnership, all as of January 3, 1997. GENERAL PARTNER: RFS HOTEL INVESTORS, INC., a Tennessee corporation By: /s/ Michael J. Pascal -------------------------------- Michael J. Pascal, Secretary, Treasurer and Chief Financial Officer CLASS A LIMITED PARTNERS: * ------------------------------------ ROBERT M. SOLMSON * ------------------------------------ H. LANCE FORSDICK * ------------------------------------ RFS, INC., a Tennessee corporation THE ROBERT M. SOLMSON TRUST * By: --------------------------------- - 50 - 55 CLASS B LIMITED PARTNERS: * ------------------------------------ Michael H. Dubroff * ------------------------------------ Charles Dubroff Michel Family Partnership * By: -------------------------------- DubFam, Inc. * By: -------------------------------- Dubroff Family Partnership By: RFS Hotel Investors, Inc., an attorney-in-fact for the named Parties By: /s/ Michael J. Pascal -------------------------------- Michael J. Pascal, Secretary, Treasurer and Chief Financial Officer /s/ Gordon Gund by David Prescott ------------------------------------ GORDON GUND - 51 - 56 /s/ Grant Gund by David Prescott ------------------------------------- GRANT GUND /s/ G. Zachary Gund by David Prescott ------------------------------------- G. ZACHARY GUND /s/ Hugh Scott by David Prescott ------------------------------------- HUGH SCOTT /s/ Robert Hecker by David Prescott ------------------------------------- ROBERT HECKER GIC PARTNERS: By: /s/ David Prescott GIC PARTNERS II: By: /s/ David Prescott GORDON GUND-GRANT GUND TRUST: By: /s/ Llura Gund by David Prescott -------------------------------- Llura Gund, Trustee - 52 - 57 GORDON GUND-G. ZACHARY GUND TRUST By: /s/ Llura Gund by David Prescott ------------------------------------- Llura Gund, Trustee - 53 - 58 EXHIBIT A, dated as of January 2, 1997
=========================================================================================================== Amount or Agreed Value of Preferred Partner Capital Partnership Partnership Percentage and Address Contributions Units Units Interest - - ----------------------------------------------------------------------------------------------------------- General Partner: - - ----------------------------------------------------------------------------------------------------------- RFS Hotel Investors, Inc. c/o 889 Ridge Lake Blvd. Suite 100 Memphis, TN 38120 $414,528,000 973,684 24,384,000 90.46655% - - ----------------------------------------------------------------------------------------------------------- Class A Limited Partners: - - ----------------------------------------------------------------------------------------------------------- H. Lance Fordsick, Sr. c/o 889 Ridge Lake Blvd. Suite 100 Memphis, TN 38120 $ 349,741 -- 20,573 .07633% - - ----------------------------------------------------------------------------------------------------------- Robert M. Solmson c/o 889 Ridge Lake Blvd. Suite 100 Memphis, TN 38120 $ 95,353 -- 5,609 .02081% - - ----------------------------------------------------------------------------------------------------------- The Robert M. Solmson Trust c/o 889 Ridge Lake Blvd. Suite 100 Memphis, TN 38120 $ 120,462 -- 7,086 .02629% - - ----------------------------------------------------------------------------------------------------------- RFS, Inc. c/o 889 Ridge Lake Blvd. Suite 100 Memphis, TN 38120 $ 1,324,351 -- 77,903 .28903% - - ----------------------------------------------------------------------------------------------------------- Class B Limited Partners: - - ----------------------------------------------------------------------------------------------------------- Dubfam Inc. c/o Residence Inn Route 9, Interstate 84 Fishkill, NY 12524 $ 24,429 -- 1,437 .00533% - - ----------------------------------------------------------------------------------------------------------- Michael H. Dubroff c/o Residence Inn Route 9, Interstate 84 Fishkill, NY 12524 $ 637,551 -- 37,503 .13914% - - ----------------------------------------------------------------------------------------------------------- The Dubroff Family Partnership c/o Residence Inn Route 9, Interstate 84 Fishkill, NY 12524 $ 806,089 -- 47,417 .17592% - - -----------------------------------------------------------------------------------------------------------
59 - - ----------------------------------------------------------------------------------------------------------- The Michel Family Partnership c/o Residence Inn Route 9, Interstate 84 Fishkill, NY 12524 $ 1,534,998 -- 90,294 .33500% - - ----------------------------------------------------------------------------------------------------------- Charles M. Dubroff c/o Residence Inn Route 9, Interstate 84 Fishkill, NY 12524 $ 626,501 -- 36,853 .13673% - - ----------------------------------------------------------------------------------------------------------- Gordon Gund 14 Nassau Street Princeton, NJ 08542 $ 17,145,656 -- 1,008,568 3.74187% - - ----------------------------------------------------------------------------------------------------------- Grant Gund 14 Nassau Street Princeton, NJ 08542 $ 4,838,948 -- 284,644 1.05605% - - ----------------------------------------------------------------------------------------------------------- G. Zachary Gund 14 Nassau Street Princeton, NJ 08542 $ 4,838,948 -- 284,644 1.05605% - - ----------------------------------------------------------------------------------------------------------- Gordon Gund-Grant Gund Trust c/o Llura Gund, Trustee 14 Nassau Street Princeton, NJ 08542 $ 2,548,980 -- 149,940 .55629% - - ----------------------------------------------------------------------------------------------------------- Gordon Gund-G. Zachary Gund Trust c/o Llura Gund, Trustee 14 Nassau Street -- Princeton, NJ 08542 $ 2,548,980 149,940 .55629% - - ----------------------------------------------------------------------------------------------------------- G.I.C. Partners 114 Nassau Street Princeton, NJ 08542 $ 1,362,125 -- 80,125 .29727% - - ----------------------------------------------------------------------------------------------------------- G.I.C. Partners II 14 Nassau Street Princeton, NJ 08542 $ 143,446 -- 8,438 .03131% - - ----------------------------------------------------------------------------------------------------------- Hugh C. Scott #5 West Shore Road Belvedere, CA 94920 $ 3,422,032 -- 201,296 .74682% - - ----------------------------------------------------------------------------------------------------------- Robert M. Hecker 611 Washington Street Suite 2302 San Francisco, CA 94111 $ 1,314,763 -- 77,339 .28693% - - ----------------------------------------------------------------------------------------------------------- Total $458,211,353 -- 26,953,609 100% ===========================================================================================================
- 55 - 60 EXHIBIT B NOTICE OF EXERCISE OF REDEMPTION RIGHT The undersigned hereby irrevocably (i) presents for redemption ______ units of limited partnership interest ("Units") in RFS Partnership, L.P. (the "Partnership") in accordance with the terms of the Agreement of Limited Partnership ("Agreement") of the Partnership and the "Limited Partner Redemption Right" defined therein, (ii) surrenders such Units and all right, title and interest therein, (iii) surrenders herewith any certificate or other writing evidencing the Units (and requests that any Units so evidenced that are not redeemed be evidenced by the issuance of a new certificate or writing) and (iv) directs that the "Cash Amount" or "REIT Shares Amount" (as determined by the General Partner), as defined in the Agreement, deliverable upon exercise of the Limited Partner Redemption Rights be delivered to the address specified below, and if REIT Shares are to be delivered, such REIT Shares be registered or placed in the name(s) and at the address(es) specified below. Dated: ---------------- Name of Limited Partner: ------------------------------ (Signature of Limited Partner) ------------------------------ (Street Address) ------------------------------ (City) (State) (Zip Code) Signature Guaranteed by: ------------------------------ If REIT Shares are to be issued, issue to: - - ---------------------------- - - ---------------------------- - - ---------------------------- Please provide social security or identifying number: - - --------------- - 56 - 61 ACCEPTANCE OF GENERAL PARTNER: RFS Hotel Investors, Inc., as General Partner of the Partnership, hereby accepts the Units described above for redemption in accordance with the Agreement, and by its execution hereof evidences conclusively that the Limited Partner has satisfied all of the requirements under the Agreement for exercise of the Limited Partner Redemption Right, or that some or all of such requirements have been waived, such waiver being in the sole discretion of the General Partner RFS Hotel Investors, Inc. By: _____________________ Robert M. Solmson Its: President Dated: ____________________ - 57 - EX-10.2.A 3 TERMS OF PERCENTAGE LEASES 1 Exhibit 10.2(a) RFS HOTEL INVESTORS, INC. TERMS OF PERCENTAGE LEASES FOR THE YEAR ENDED DECEMBER 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------ Part Year CPI Base 1st Tier Name City ST Inception Termination Factor Factor Rent Amount - - ------------------------------------------------------------------------------------------------------------------------------------ Holiday Inn Express Tupelo MS 08/13/93 08/13/2008 1.0000 1.0000 245,836 1,014,503 Holiday Inn Express Franklin TN 08/13/93 08/13/2008 1.0000 1.0000 237,642 1,000,000 Holiday Inn Louisville KY 08/13/93 08/13/2008 1.0000 1.0000 409,727 1,537,499 Executive Inn Tupelo MS 08/13/93 08/13/2008 1.0000 1.0000 278,614 1,007,909 Holiday Inn Clayton MO 08/13/93 08/13/2008 1.0000 1.0000 557,228 2,505,320 Holiday Inn Columbia SC 08/13/93 08/13/2008 1.0000 1.0000 368,754 1,475,513 Ramada Inn Lexington KY 08/13/93 03/05/96 0.1776 1.0000 53,847 231,869 Comfort Inn Conyers GA 09/23/93 09/23/2008 1.0000 1.0000 234,500 1,000,000 Holiday Inn Lafayette LA 10/26/93 10/26/2008 1.0000 1.0000 700,000 2,750,000 Comfort Inn Marietta GA 12/17/93 12/17/2008 1.0000 1.0000 472,500 1,400,000 Residence Inn Kansas City MO 02/02/94 02/02/2009 1.0000 1.0000 406,000 1,400,000 Comfort Inn Clemson SC 04/19/94 04/19/2009 1.0000 1.0587 360,500 1,058,704 Comfort Inn Ft. Mill SC 04/29/94 04/29/2009 1.0000 1.0587 518,000 1,323,381 Hampton Inn Ft. Lauderdale FL 04/19/94 04/19/2009 1.0000 1.0587 364,500 1,535,121 Holiday Inn Express Arlington Heights IL 06/07/94 06/07/2009 1.0000 1.0087 289,961 1,164,575 Holiday Inn Express Bloomington MN 06/07/94 06/07/2009 1.0000 1.0587 515,793 1,588,057 Hampton Inn Bloomington MN 06/07/94 06/07/2009 1.0000 1.0587 613,288 1,852,733 Hampton Inn Denver CO 06/07/94 06/07/2009 1.0000 1.0587 568,981 1,508,654 Holiday Inn Express Downers Grove IL 06/07/94 06/07/2009 1.0000 1.0587 409,850 1,164,575 Comfort Inn Farmington Hills MI 06/07/94 06/07/2009 1.0000 1.0587 303,594 1,111,640 Comfort Inn Grand Rapids MI 06/07/94 06/07/2009 1.0000 1.0587 227,080 1,005,769 Hampton Inn Indianapolis IN 06/07/94 06/07/2009 1.0000 1.0587 556,693 1,482,186 Hampton Inn Lansing MI 06/07/94 06/07/2009 1.0000 1.0587 263,325 620,496 Hampton Inn Lincoln NE 06/07/94 06/07/2009 1.0000 1.0587 342,202 1,005,769 Hampton Inn Minnetonka MN 06/07/94 06/07/2009 1.0000 1.0587 348,052 1,164,575 Hampton Inn Oklahoma City OK 06/07/94 06/07/2009 1.0000 1.0587 489,631 1,482,186 Hampton Inn Omaha NE 06/07/94 06/07/2009 1.0000 1.0587 463,545 1,323,381 Hampton Inn Tulsa OK 06/07/94 06/07/2009 1.0000 1.0587 423,390 1,429,251 Hampton Inn Warren MI 06/07/94 06/07/2009 1.0000 1.0587 203,688 1,032,237 Holiday Inn Express Wauwatosa WI 06/07/94 06/07/2009 1.0000 1.0587 373,516 1,270,445 Residence Inn Tyler TX 08/12/94 08/12/2009 1.0000 1.0587 512,750 1,799,798 Residence Inn Fishkill NY 07/29/94 07/29/2009 1.0000 1.0587 888,822 2,329,150 Residence Inn Providence RI 07/29/94 07/29/2009 1.0000 1.0587 651,994 1,985,071 Hampton Inn Memphis TN 09/30/94 09/30/2009 1.0000 1.0587 516,250 1,323,381 Residence Inn Ft. Worth TX 10/01/94 10/01/2009 1.0000 1.0587 812,000 2,435,020 Residence Inn Torrance CA 10/15/94 10/15/2009 1.0000 1.0587 1,365,000 4,234,818 Residence Inn Wilmington DE 10/15/94 10/15/2009 1.0000 1.0587 703,500 2,117,409 Residence Inn Ann Arbor MI 10/15/94 10/15/2009 1.0000 1.0587 308,000 1,217,510 Holiday Inn Flint MI 10/29/94 10/29/2009 1.0000 1.0587 933,100 2,911,437 Residence Inn Charlotte NC 11/15/94 11/15/2009 1.0000 1.0587 315,000 1,217,510 Hawthorn Suites Hotel Atlanta GA 12/21/94 12/21/2009 1.0000 1.0587 1,194,200 3,387,854 Holiday Inn Express Austin TX 01/03/95 01/03/2010 1.0000 1.0295 367,500 1,338,386 Hampton Inn Lakewood CO 03/16/95 03/16/2010 1.0000 1.0295 553,000 1,647,244 Hampton Inn Hattiesburg MS 04/20/95 04/20/2010 1.0000 1.0295 385,000 1,183,957 Hampton Inn Laredo TX 07/05/95 07/05/2010 1.0000 1.0295 409,255 514,764 Residence Inn Atlanta GA 10/02/95 10/02/2010 1.0000 1.0295 815,500 1,544,291 Holiday Inn Crystal Lake IL 10/05/95 10/05/2010 1.0000 1.0295 1,016,000 3,387,854 Residence Inn Orlando FL 10/19/95 10/19/2010 1.0000 1.0295 707,000 2,419,390 Residence Inn Sacramento CA 01/12/96 01/12/2011 0.0328 1.0295 33,049 97,541 Hampton Inn Plano TX 07/15/96 07/15/2011 0.5383 1.0000 263,743 592,077 Hampton Inn Houston TX 11/12/96 11/12/2011 0.8681 1.0000 363,816 1,156,270 Homewood Suites Salt Lake City UT 11/08/96 11/08/2011 0.8552 1.0000 472,996 1,265,683 Courtyard by Marriott Flint MI 12/14/96 12/14/2011 0.9536 1.0000 407,167 1,468,470 Doubletree Hotel San Diego CA 05/30/96 05/30/2011 0.4126 1.0000 479,404 1,155,191 - - -------------------------------------------------------------------------------------------------------- 1st Tier 2nd Tier 2nd Tier 3rd Tier Food Beverage Phone Other Percent Amount Percent Percent Percent Percent Percent Percent - - -------------------------------------------------------------------------------------------------------- 27.5% 0 50.0% 0.0% 5.0% 20.0% 0.0% 0.0% 20.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 23.0% 1,787,499 45.0% 60.0% 5.0% 20.0% 0.0% 0.0% 34.0% 0 60.0% 0.0% 5.0% 20.0% 0.0% 0.0% 17.0% 2,755,320 30.0% 50.0% 5.0% 20.0% 0.0% 0.0% 17.5% 1,725,513 30.0% 50.0% 5.0% 20.0% 0.0% 0.0% 14.0% 276,268 30.0% 40.0% 5.0% 20.0% 0.0% 0.0% 32.0% 0 75.0% 0.0% 5.0% 20.0% 0.0% 0.0% 24.0% 3,000,000 35.0% 70.0% 5.0% 20.0% 0.0% 0.0% 27.5% 0 60.0% 0.0% 5.0% 20.0% 0.0% 0.0% 24.0% 1,650,000 45.0% 60.0% 5.0% 20.0% 0.0% 0.0% 27.0% 0 75.0% 0.0% 5.0% 20.0% 0.0% 0.0% 32.0% 0 65.0% 0.0% 5.0% 20.0% 0.0% 0.0% 27.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 38.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 27.5% 0 72.0% 0.0% 5.0% 20.0% 0.0% 0.0% 41.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 27.5% 0 76.5% 0.0% 5.0% 20.0% 0.0% 0.0% 34.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 36.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 29.5% 0 72.0% 0.0% 5.0% 20.0% 0.0% 0.0% 40.5% 0 72.0% 0.0% 5.0% 20.0% 0.0% 0.0% 30.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 30.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 38.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 32.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 38.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 33.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 33.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 40.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 26.0% 0 67.5% 0.0% 5.0% 20.0% 0.0% 0.0% 27.5% 0 72.0% 0.0% 5.0% 20.0% 0.0% 0.0% 31.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 33.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 41.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 35.0% 0 69.0% 0.0% 5.0% 20.0% 0.0% 0.0% 36.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 24.0% 0 69.0% 0.0% 5.0% 20.0% 0.0% 0.0% 40.0% 3,176,113 65.0% 70.0% 5.0% 20.0% 0.0% 0.0% 24.0% 0 69.0% 0.0% 5.0% 20.0% 0.0% 0.0% 36.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 36.5% 0 65.0% 0.0% 5.0% 20.0% 0.0% 0.0% 33.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 36.0% 0 65.0% 0.0% 5.0% 20.0% 0.0% 0.0% 21.0% 1,338,385 37.0% 70.0% 5.0% 20.0% 0.0% 0.0% 30.0% 2,059,055 50.0% 70.0% 5.0% 20.0% 0.0% 0.0% 30.0% 2,985,630 50.0% 70.0% 5.0% 20.0% 0.0% 0.0% 25.0% 2,934,154 50.0% 70.0% 5.0% 20.0% 0.0% 0.0% 40.0% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 33.0% 753,552 50.0% 60.0% 5.0% 20.0% 0.0% 0.0% 35.0% 0 65.0% 0.0% 0.0% 0.0% 0.0% 0.0% 33.7% 0 70.0% 0.0% 0.0% 0.0% 0.0% 0.0% 41.5% 0 70.0% 0.0% 5.0% 20.0% 0.0% 0.0% 26.0% 1,367,664 45.0% 70.0% 5.0% 20.0% 0.0% 0.0%
EX-10.3.A 4 SCHEDULE OF PURCHASE AGREEMENTS 1 EXHIBIT 10.3(a) RFS HOTEL INVESTORS, INC. SCHEDULE OF TERMS OF SALE AND PURCHASE AGREEMENTS FOR AGREEMENTS IN 1996
Purchase Sale Price Price ----- ----- RESIDENCE INN HOTEL - 14,250,000 Sacramento, CA HAMPTON INN HOTEL - 5,900,000 Houston, TX DOUBLETREE HOTELS - 16,500,000 Del Mar, CA COURTYARD BY MARIOTT HOTEL - 6,300,000 Flint, MI RAMADA INN HOTEL - 3,900,000 Lexington, KY
EX-10.4 5 EMPLOYMENT AGREEMENT 1 Exhibit 10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT effective January 1, 1997, by and between RFS Managers, Inc., a Tennessee corporation (the "Company"), and Robert M. Solmson (the "Executive"). W I T N E S S E T H: WHEREAS, the Company provides management services to RFS Hotel Investors, Inc. (the "Parent") pursuant to a Management Services Agreement dated December 30, 1994 (the "Management Agreement"); and WHEREAS, the Company desires to employ the Executive to serve as the Chief Executive Officer of the Company; and WHEREAS, the Company and the Executive have previously entered into an employment agreement dated January 1, 1996 (the "Original Agreement"); and WHEREAS, the parties desire to amend and restate the Original Agreement in its entirety effective as of January 1, 1997 as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual obligations hereinafter set forth the parties agree as follows: 1. EMPLOYMENT. The Company shall employ the Executive, and the Executive agrees to be so employed, in the capacity of Chief Executive Officer of the Company to serve for the Term hereof, subject to earlier termination as hereinafter provided. 2. TERM. The term of the Executive's employment hereunder shall be three years and shall commence on January 1, 1997 and shall be extended automatically, for so long as the Executive remains employed by the Company hereunder, each January 1 beginning January 1, 1998 for an additional twelve-month period (such period, as it may be extended from time to time, being herein referred to as the "Term"), unless terminated earlier in accordance with the terms of this Agreement, to the effect that on each January 1, the remaining term of this Agreement and the Executive's employment hereunder shall be three years. 3. SERVICES. The Executive shall devote such amount of his time and attention to the Company's affairs as are necessary to perform his duties to the Company and to allow the Company to perform its duties specified in the Management Agreement. Pursuant to the Management Agreement, the Executive shall have authority and responsibility with respect to the day to day operations and management of the Parent and RFS Partnership, L.P. (the "Partnership"), for which the Parent currently serves as sole general partner, as well as implementation of the long range growth strategy of the Parent and the Partnership, consistent with direction from the Parent's Board of Directors (the "Board"). 2 4. COMPENSATION. (a) During the Term, the Company shall pay the Executive for his services an annual base salary of $225,000 (the "Base Salary"), to be paid in semi-monthly payments of $9,375.00, such Base Salary being subject to any increases approved by the Compensation Committee of the Board (the "Compensation Committee"). (b) In addition to the Base Salary described in Section 4(a) above, the Executive shall be entitled to a cash bonus ("Base Salary Bonus") for 1996 payable on or before April 1, 1997 determined as follows: (i) If fully diluted net income per share of common stock of the Parent, for the year ending December 31, 1996, as reported in the Parent's audited financial statements for the year ending December 31, 1996, as adjusted as described in the following sentence ("1996 Net Income Per Share") is at least $1.35, the Executive shall be entitled to receive a cash bonus equal to ten percent (10%) of the Base Salary. For purposes of determining the cash bonus under this Section 4(b), fully diluted Net Income per Share of common stock of the Parent shall be exclusive of any gain or loss on the sale of property, any expenses relating to the transactions between the Company and Doubletree Corporation and its affiliates and any expenses which the Compensation Committee deems appropriate to exclude from the calculation of fully diluted net income per share for purposes of determining the cash bonus; and (ii) For each $.01 increase in Net Income Per Share for 1996 in excess of $1.35, computed by rounding to the closest cent, the Executive shall be entitled to receive an additional bonus equal to three percent (3%) of the Base Salary; and (iii) Notwithstanding the provisions of Section 4(b)(ii) above, the maximum cash bonus payable to the Executive pursuant to this Section 4(b) shall be fifty percent (50%) of the Base Salary. (c) In addition to the Base Salary Bonus, the Executive may be entitled to receive other incentive compensation, including but not limited to, additional grants of stock options or shares of stock of the Parent, which awards shall be made (if at all) in consideration of and as an incentive for services performed solely for the Company, in accordance with rules and criteria established by the Compensation Committee. Such criteria may include, but not be limited to, the growth in the Parent's Net Income Per Share and/or other performance goals. 5. BENEFITS. The Company agrees to provide the Executive with the following benefits: (a) Vacation. The Executive shall be entitled each calendar year to a vacation, during which time his compensation shall be paid in full. The time allotted for such vacation 2 3 shall be three (3) weeks. (b) Employee Benefits. This Agreement shall not be in lieu of any rights, benefits and privileges to which the Executive may be entitled as a management level employee of the Company, including but not limited to any retirement, pension, profit-sharing, insurance, hospital or other plans which may now be in effect or which may hereafter be adopted. The Executive shall have the same rights and privileges to participate in such plans and benefits as any other management level employee during the Term. 6. EXPENSES. The Company recognizes that the Executive will have to incur certain out-of-pocket expenses, including but not limited to travel expenses, related to his services and the Company's and the Parent's business and the Company agrees to reimburse the Executive for all reasonable expenses necessarily incurred by him in the performance of his duties upon presentation of a voucher or documentation indicating the amount and business purposes of any such expenses. 7. TERMINATION IN CASE OF DEATH OR DISABILITY. In the event of the Executive's death or a complete physical or mental inability, confirmed by a licensed physician, to perform the services described in Section 3 above that continues for a period of one hundred twenty (120) consecutive days) ("Permanent Disability"), the Company may elect to terminate this Agreement, subject to continuation of the payments described in Section 10. 8. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: (a) "Voluntary Termination" means, subject to the provisions of Section 11 hereof, the Executive's voluntary termination of his employment hereunder, which may be effected by the Executive giving the Board not less than 90 days' prior written notice of the Executive's desire to terminate his employment or the Executive's failure to provide substantially all the services described in Section 3 hereof for a period greater than four consecutive weeks by reason of the Executive's voluntary refusal to perform such services. Notwithstanding the foregoing, if the Executive gives notice of Voluntary Termination and, prior to the expiration of the 90-day notice period, the Executive voluntarily refuses or fails to provide substantially all the services described in Section 3 hereof for a period greater than two consecutive weeks, the Voluntary Termination shall be deemed to be effective as of the date on which the Executive so ceases to carry out his duties. For purposes of this Section 8, voluntary refusal to perform services shall not include taking vacation otherwise permitted in accordance with Section 5(a) hereof, the Executive's failure to perform services on account of his illness or the illness of a member of his immediate family, provided such illness is adequately substantiated at the reasonable request of the Company, or any other absence from service with the written consent of the Board. 3 4 (b) "Termination Without Cause" means the termination of the Executive's employment by the Company for any reason other than Voluntary Termination or Termination With Cause. (c) "Termination With Cause" means the termination of the Executive's employment by act of the Board for any of the following reasons: (i) the Executive's conviction for a felony; (ii) the Executive's theft, embezzlement, misappropriation of or intentional and malicious infliction of damage to the Company's or the Parent's property or business opportunity; (iii) the Executive's intentional and material breach of the noncompetition covenant in Section 11 hereof; (iv) the Executive's continuous neglect of his duties hereunder or his continuous failure or refusal to follow any reasonable, unambiguous duly adopted written direction of the Board or any duly constituted committee thereof that is not inconsistent with the description of the Executive's duties set forth in Section 3 above; and (v) the Executive's abuse of alcohol, drugs or other substances, or his engaging in other deviant personal activities in a manner that, in the reasonable judgment of the Board, adversely affects the reputation, goodwill or business position of the Company. (d) "Involuntary Termination" means conduct on the part of the Company that constitutes continuous and material interference by the Company with the Executive's performance of his duties as set forth in Section 3 hereof or the intentional or material breach by the Company of this Agreement. 9. VOLUNTARY TERMINATION; TERMINATION WITH CAUSE. If (i) the Executive shall cease being an employee of the Company on account of a Voluntary Termination or (ii) there shall be a Termination With Cause, the Executive shall not be entitled to any compensation after the effective date of such Voluntary Termination or Termination With Cause (except Base Salary and vacation accrued but unpaid on the effective date of such event). In the event of a Voluntary Termination or Termination With Cause, the Executive shall continue to be subject to the noncompetition covenant contained in Section 11 hereof for the remainder of the Term. 10. DEATH OR DISABILITY; TERMINATION WITHOUT CAUSE; OR INVOLUNTARY TERMINATION. Following (i) the death of the Executive, (ii) Permanent Disability of the Executive, (iii) an Involuntary Termination, or (iv) a Termination Without Cause, the Company shall continue to pay the Executive or his heirs, devisees, executors, legatees or personal representatives, as 4 5 appropriate, the semi-monthly payments of the Base Salary then in effect for three years from the date of the termination of the Executive's employment. 11. CHANGE OF CONTROL COMPENSATION. (a) Compensation. In the event of the Company's termination of the Executive's employment or the Executive's resignation for Good Reason (as defined below) after a Change of Control (as defined below), the Company shall, on the date of such termination or resignation, pay the Executive, in addition to any Base Salary earned but not paid through the date of termination or resignation for Good Reason, a cash amount equal to three (3) times the Base Salary for the fiscal year in which Change of Control occurs (the "Termination Payment"). In addition, the Company shall cause the Executive's insurance benefits, as in effect immediately prior to the Change of Control, to remain in effect for at least one year following the date of the termination of Executive's employment by the Company or the Executive's resignation for Good Reason. (b) A "Change of Control", for purposes of this Agreement, shall be deemed to have occurred if, at any time during the Term, any of the following events occurs: (i) any "person", as that term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes, is discovered to be, or files a report on Schedule 13D or 14D-1 (or any successor schedule, form or report) disclosing that such person is, a beneficial owner (as defined in Rule 13d-3 under the Exchange Act or any successor rule or regulation), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; (ii) individuals who, as of the Effective Date, constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company, unless any such change is approved by the vote of at least 80% of the members of the Board of Directors of the Company in office immediately prior to such cessation; (iii) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, or securities of the Company are exchanged for securities of another corporation or other legal person, and immediately after such merger, consolidation, reorganization or exchange less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; 5 6 (iv) the Company in any transaction or series of related transactions, sells all or substantially all of its assets to any other corporation or other legal person and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or sales are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such sale; (v) the Company and its affiliates shall sell or transfer of (in a single transaction or series of related transactions) to a non-affiliate business operations or assets that generated at least two-thirds of the consolidated revenues (determined on the basis of the Company's four most recently completed fiscal quarters for which reports have been filed under the Exchange Act) of the Company and its subsidiaries immediately prior thereto; (vi) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K (or any successor, form or report or item therein) that a change in control of the Company has occurred; or (vii) any other transaction or series of related transactions occur that have substantially the effect of the transactions specified in any of the preceding clauses in this sentence. (c) Certain Transactions. Notwithstanding the provisions of Section 11(b)(i) or 11(b)(vi) hereof, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company, a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities or (iii) any Company-sponsored employee stock ownership plan, or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item thereon) under the Exchange Act, disclosing beneficial ownership by it of shares of stock of the Company, or because the Company reports that a Change in Control of the Company has or any have occurred or will or may occur in the future by reason of such beneficial ownership. (d) Good Reason. "Good Reason," for purposes of this Agreement, shall be deemed to mean any of the following: (i) a change in the Executive's status, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from the Executive's status, position or responsibilities as in effect immediately prior to a Change in Control; the 6 7 assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect the Executive to any of such positions, except in connection with a Termination with Cause as defined in Section 8(c), as a result of the Executive's death or Permanent Disability, or by Voluntary Termination; (ii) a reduction in the Executive's Base Salary and Bonus as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of the Company's or the Parent's principal executive offices to a location outside a thirty-mile radius of Memphis, Tennessee or the Company's or the Parent's requiring the Executive to be based at any place other than a location within a thirty-mile radius of Memphis, Tennessee, except for reasonably required travel on the Company's or the Parent's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company or the Parent to continue to provide the Executive with compensation and benefits provided for under this agreement or benefits substantially similar to those provided to the Executive under any of the employee benefit plans in which the Executive is or becomes a participant, or the taking of any action by the Company or the Parent which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control; (v) any material breach by the Company of any provision of this Agreement; and (vi) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement. (e) Tax Matters. In the event the Executive's receipt of the Termination Payment, together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in Control, would, in the reasonable opinion of the Executive's tax advisor, cause the Executive to incur tax liability under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, the Executive may elect to receive either: (i) the Termination Payment or (ii) the maximum portion of the Termination Payment which the Executive may receive, which taken together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in 7 8 Control, would not cause the Executive to incur tax liability under Section 4999 of the Code. 12. NONCOMPETITION. During the Term and for a period of two (2) years thereafter, the Executive shall not, other than through the Parent or affiliates of the Parent, own more than a 10% interest in any hotel property (other than hotels owned by the Parent and the Partnership), as partner, shareholder or otherwise, or directly or indirectly, for his own account or for the account of others, either as an officer, director, shareholder, owner, partner, promoter, employee, consultant, advisor, agent, manager, or in any other capacity engage in the acquisition, development, operation or management of any hotel property located within 20 miles of any hotel property owned by the Parent or the Partnership at the time of termination of employment. The foregoing sentence shall not restrict the Executive from owning up to 10% of the outstanding securities of any entity, including any entity whose securities are traded in public securities markets. The Executive agrees that damages at law for violation of the restrictive covenant contained herein would not be an adequate or proper remedy to the Company, and that should the Executive violate or threaten to violate any of the provisions of such covenant, the Company, its successors or assigns, shall be entitled to obtain a temporary or permanent injunction against the Executive in any court having jurisdiction over the person and the subject matter, prohibiting any further violation of any such covenants. The injunctive relief provided herein shall be in addition to any award of damages, compensatory, exemplary or otherwise, payable by reason of such violation. Furthermore, the Executive acknowledges that this Agreement has been negotiated at arms' length by the parties, neither being under any compulsion to enter into this Agreement, and that the foregoing restrictive covenant does not in any respect inhibit his ability to earn a livelihood in his chosen profession without violating the restrictive covenant contained herein. The Company by these presents has attempted to limit the Executive's right to compete only to the extent necessary to protect the Company from unfair competition. The Company recognizes, however, that reasonable people may differ in making such a determination. Consequently, the Company agrees that if the scope or enforceability of the restricted covenant contained herein is in any way disputed at any time, a court or other trier of fact may modify and enforce the covenant to the extent that it believes to be reasonable under the circumstances existing at the time. 13. NOTICES. All notices or deliveries authorized or required pursuant to this Agreement shall be deemed to have been given when in writing and personally delivered or when deposited in the U.S. mail, certified, return receipt requested, postage prepaid, addressed to the parties at the following addresses or to such other addresses as either may designate in writing to the other party: 8 9 To the Company: RFS Managers, Inc. 850 Ridge Lake Boulevard Suite 220 Memphis, TN 38120 To the Executive: Robert M. Solmson 850 Ridge Lake Boulevard, Suite 220 Memphis, TN 38120 14. ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and shall not be modified in any manner except by instrument in writing signed, by or on behalf of, the parties hereto; provided, however, that any amendment or termination of the covenant of noncompetition in Section 11 must be approved by a majority of the Directors of the Parent other than the Executive, if the Executive is then a director of the Parent. This Agreement shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties hereto. 15. ARBITRATION. Any claim or controversy arising out of, or relating to, this Agreement or its breach, shall be settled by arbitration in accordance with the governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered in any court of competent jurisdiction. 16. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Tennessee. 17. ASSIGNMENT. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement, except with respect to certain rights to receive payments as described in Section 10. The Company's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Company's successors and assigns. 18. HEADINGS. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 19. ORIGINAL AGREEMENT. This Agreement amends and restates the Original Agreement in its entirety as of the effective date of this Agreement. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. RFS MANAGERS, INC. By: /s/ Minor W. Perkins -------------------- Name: ____________________ Title: President EXECUTIVE: /s/ Robert M. Solmson --------------------- Robert M. Solmson 10 EX-10.5 6 EMPLOYMENT AGREEMENT 1 Exhibit 10.5 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT effective January 1, 1997, by and between RFS Managers, Inc., a Tennessee corporation (the "Company"), and Minor W. Perkins (the "Executive"). W I T N E S S E T H: WHEREAS, the Company provides management services to RFS Hotel Investors, Inc. (the "Parent") pursuant to a Management Services Agreement dated December 30, 1994 (the "Management Agreement"); and WHEREAS, the Company desires to employ the Executive to serve as the President of the Company; and WHEREAS, the Company and the Executive have previously entered into an employment agreement dated April 8, 1996 (the "Original Agreement"); and WHEREAS, the parties desire to amend and restate the Original Agreement in its entirety effective as of January 1, 1997 as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual obligations hereinafter set forth the parties agree as follows: 1. EMPLOYMENT. The Company shall employ the Executive, and the Executive agrees to be so employed, in the capacity of President of the Company to serve for the Term hereof, subject to earlier termination as hereinafter provided. 2. TERM. The term of the Executive's employment hereunder shall be three years and shall commence on January 1, 1997 and shall be extended automatically, for so long as the Executive remains employed by the Company hereunder, each January 1 beginning January 1, 1998 for an additional twelve-month period (such period, as it may be extended from time to time, being herein referred to as the "Term"), unless terminated earlier in accordance with the terms of this Agreement, to the effect that on each January 1, the remaining term of this Agreement and the Executive's employment hereunder shall be three years. 3. SERVICES. The Executive shall devote such amount of his time and attention to the Company's affairs as are necessary to perform his duties to the Company and to allow the Company to perform its duties specified in the Management Agreement. Pursuant to the Management Agreement, the Executive shall have authority and responsibility with respect to the day to day operations and management of the Parent and RFS Partnership, L.P. (the "Partnership"), for which the Parent currently serves as sole general partner, as well as implementation of the long range growth strategy of the Parent and the Partnership, consistent with direction from the Parent's Board of Directors (the "Board"). 2 4. COMPENSATION. (a) During the Term, the Company shall pay the Executive for his services an annual base salary of $225,000 (the "Base Salary"), to be paid in semi-monthly payments of $9,375.00, such Base Salary being subject to any increases approved by the Compensation Committee of the Board (the "Compensation Committee"). (b) In addition to the Base Salary described in Section 4(a) above, the Executive shall be entitled to a cash bonus ("Base Salary Bonus") for 1996 payable on or before April 1, 1997 determined as follows: (i) If fully diluted net income per share of common stock of the Parent, for the year ending December 31, 1996, as reported in the Parent's audited financial statements for the year ending December 31, 1996, as adjusted as described in the following sentence ("1996 Net Income Per Share") is at least $1.35, the Executive shall be entitled to receive a cash bonus equal to ten percent (10%) of the Base Salary. For purposes of determining the cash bonus under this Section 4(b), fully diluted Net Income per Share of common stock of the Parent shall be exclusive of any gain or loss on the sale of property, any expenses relating to the transactions between the Company and Doubletree Corporation and its affiliates and any expenses which the Compensation Committee deems appropriate to exclude from the calculation of fully diluted net income per share for purposes of determining the cash bonus; and (ii) For each $.01 increase in Net Income Per Share for 1996 in excess of $1.35, computed by rounding to the closest cent, the Executive shall be entitled to receive an additional bonus equal to three percent (3%) of the Base Salary; and (iii) Notwithstanding the provisions of Section 4(b)(ii) above, the maximum cash bonus payable to the Executive pursuant to this Section 4(b) shall be fifty percent (50%) of the Base Salary. (c) In addition to the Base Salary Bonus, the Executive may be entitled to receive other incentive compensation, including but not limited to, additional grants of stock options or shares of stock of the Parent, which awards shall be made (if at all) in consideration of and as an incentive for services performed solely for the Company, in accordance with rules and criteria established by the Compensation Committee. Such criteria may include, but not be limited to, the growth in the Parent's Net Income Per Share and/or other performance goals. 5. BENEFITS. The Company agrees to provide the Executive with the following benefits: (a) Vacation. The Executive shall be entitled each calendar year to a vacation, during which time his compensation shall be paid in full. The time allotted for such vacation 2 3 shall be three (3) weeks. (b) Employee Benefits. This Agreement shall not be in lieu of any rights, benefits and privileges to which the Executive may be entitled as a management level employee of the Company, including but not limited to any retirement, pension, profit-sharing, insurance, hospital or other plans which may now be in effect or which may hereafter be adopted. The Executive shall have the same rights and privileges to participate in such plans and benefits as any other management level employee during the Term. 6. EXPENSES. The Company recognizes that the Executive will have to incur certain out-of-pocket expenses, including but not limited to travel expenses, related to his services and the Company's and the Parent's business and the Company agrees to reimburse the Executive for all reasonable expenses necessarily incurred by him in the performance of his duties upon presentation of a voucher or documentation indicating the amount and business purposes of any such expenses. 7. TERMINATION IN CASE OF DEATH OR DISABILITY. In the event of the Executive's death or a complete physical or mental inability, confirmed by a licensed physician, to perform the services described in Section 3 above that continues for a period of one hundred twenty (120) consecutive days) ("Permanent Disability"), the Company may elect to terminate this Agreement, subject to continuation of the payments described in Section 10. 8. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: (a) "Voluntary Termination" means, subject to the provisions of Section 11 hereof, the Executive's voluntary termination of his employment hereunder, which may be effected by the Executive giving the Board not less than 90 days' prior written notice of the Executive's desire to terminate his employment or the Executive's failure to provide substantially all the services described in Section 3 hereof for a period greater than four consecutive weeks by reason of the Executive's voluntary refusal to perform such services. Notwithstanding the foregoing, if the Executive gives notice of Voluntary Termination and, prior to the expiration of the 90-day notice period, the Executive voluntarily refuses or fails to provide substantially all the services described in Section 3 hereof for a period greater than two consecutive weeks, the Voluntary Termination shall be deemed to be effective as of the date on which the Executive so ceases to carry out his duties. For purposes of this Section 8, voluntary refusal to perform services shall not include taking vacation otherwise permitted in accordance with Section 5(a) hereof, the Executive's failure to perform services on account of his illness or the illness of a member of his immediate family, provided such illness is adequately substantiated at the reasonable request of the Company, or any other absence from service with the written consent of the Board. 3 4 (b) "Termination Without Cause" means the termination of the Executive's employment by the Company for any reason other than Voluntary Termination or Termination With Cause. (c) "Termination With Cause" means the termination of the Executive's employment by act of the Board for any of the following reasons: (i) the Executive's conviction for a felony; (ii) the Executive's theft, embezzlement, misappropriation of or intentional and malicious infliction of damage to the Company's or the Parent's property or business opportunity; (iii) the Executive's intentional and material breach of the noncompetition covenant in Section 11 hereof; (iv) the Executive's continuous neglect of his duties hereunder or his continuous failure or refusal to follow any reasonable, unambiguous duly adopted written direction of the Board or any duly constituted committee thereof that is not inconsistent with the description of the Executive's duties set forth in Section 3 above; and (v) the Executive's abuse of alcohol, drugs or other substances, or his engaging in other deviant personal activities in a manner that, in the reasonable judgment of the Board, adversely affects the reputation, goodwill or business position of the Company. (d) "Involuntary Termination" means conduct on the part of the Company that constitutes continuous and material interference by the Company with the Executive's performance of his duties as set forth in Section 3 hereof or the intentional or material breach by the Company of this Agreement. 9. VOLUNTARY TERMINATION; TERMINATION WITH CAUSE. If (i) the Executive shall cease being an employee of the Company on account of a Voluntary Termination or (ii) there shall be a Termination With Cause, the Executive shall not be entitled to any compensation after the effective date of such Voluntary Termination or Termination With Cause (except Base Salary and vacation accrued but unpaid on the effective date of such event). In the event of a Voluntary Termination or Termination With Cause, the Executive shall continue to be subject to the noncompetition covenant contained in Section 11 hereof for the remainder of the Term. 10. DEATH OR DISABILITY; TERMINATION WITHOUT CAUSE; OR INVOLUNTARY TERMINATION. Following (i) the death of the Executive, (ii) Permanent Disability of the Executive, (iii) an Involuntary Termination, or (iv) a Termination Without Cause, the Company shall continue to pay the Executive or his heirs, devisees, executors, legatees or personal representatives, as 4 5 appropriate, the semi-monthly payments of the Base Salary then in effect for three years from the date of the termination of the Executive's employment. 11. CHANGE OF CONTROL COMPENSATION. (a) Compensation. In the event of the Company's termination of the Executive's employment or the Executive's resignation for Good Reason (as defined below) after a Change of Control (as defined below), the Company shall, on the date of such termination or resignation, pay the Executive, in addition to any Base Salary earned but not paid through the date of termination or resignation for Good Reason, a cash amount equal to three (3) times the Base Salary for the fiscal year in which Change of Control occurs (the "Termination Payment"). In addition, the Company shall cause the Executive's insurance benefits, as in effect immediately prior to the Change of Control, to remain in effect for at least one year following the date of the termination of Executive's employment by the Company or the Executive's resignation for Good Reason. (b) A "Change of Control", for purposes of this Agreement, shall be deemed to have occurred if, at any time during the Term, any of the following events occurs: (i) any "person", as that term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes, is discovered to be, or files a report on Schedule 13D or 14D-1 (or any successor schedule, form or report) disclosing that such person is, a beneficial owner (as defined in Rule 13d-3 under the Exchange Act or any successor rule or regulation), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; (ii) individuals who, as of the Effective Date, constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company, unless any such change is approved by the vote of at least 80% of the members of the Board of Directors of the Company in office immediately prior to such cessation; (iii) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, or securities of the Company are exchanged for securities of another corporation or other legal person, and immediately after such merger, consolidation, reorganization or exchange less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; 5 6 (iv) the Company in any transaction or series of related transactions, sells all or substantially all of its assets to any other corporation or other legal person and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or sales are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such sale; (v) the Company and its affiliates shall sell or transfer of (in a single transaction or series of related transactions) to a non-affiliate business operations or assets that generated at least two-thirds of the consolidated revenues (determined on the basis of the Company's four most recently completed fiscal quarters for which reports have been filed under the Exchange Act) of the Company and its subsidiaries immediately prior thereto; (vi) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K (or any successor, form or report or item therein) that a change in control of the Company has occurred; or (vii) any other transaction or series of related transactions occur that have substantially the effect of the transactions specified in any of the preceding clauses in this sentence. (c) Certain Transactions. Notwithstanding the provisions of Section 11(b)(i) or 11(b)(vi) hereof, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company, a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities or (iii) any Company-sponsored employee stock ownership plan, or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item thereon) under the Exchange Act, disclosing beneficial ownership by it of shares of stock of the Company, or because the Company reports that a Change in Control of the Company has or any have occurred or will or may occur in the future by reason of such beneficial ownership. (d) Good Reason. "Good Reason," for purposes of this Agreement, shall be deemed to mean any of the following: (i) a change in the Executive's status, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from the Executive's status, position or responsibilities as in effect immediately prior to a Change in Control; the 6 7 assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect the Executive to any of such positions, except in connection with a Termination with Cause as defined in Section 8(c), as a result of the Executive's death or Permanent Disability, or by Voluntary Termination; (ii) a reduction in the Executive's Base Salary and Bonus as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of the Company's or the Parent's principal executive offices to a location outside a thirty-mile radius of Memphis, Tennessee or the Company's or the Parent's requiring the Executive to be based at any place other than a location within a thirty-mile radius of Memphis, Tennessee, except for reasonably required travel on the Company's or the Parent's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company or the Parent to continue to provide the Executive with compensation and benefits provided for under this agreement or benefits substantially similar to those provided to the Executive under any of the employee benefit plans in which the Executive is or becomes a participant, or the taking of any action by the Company or the Parent which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control; (v) any material breach by the Company of any provision of this Agreement; and (vi) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement. (e) Tax Matters. In the event the Executive's receipt of the Termination Payment, together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in Control, would, in the reasonable opinion of the Executive's tax advisor, cause the Executive to incur tax liability under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, the Executive may elect to receive either: (i) the Termination Payment or (ii) the maximum portion of the Termination Payment which the Executive may receive, which taken together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in 7 8 Control, would not cause the Executive to incur tax liability under Section 4999 of the Code. 12. NONCOMPETITION. During the Term and for a period of two (2) years thereafter, the Executive shall not, other than through the Parent or affiliates of the Parent, own more than a 10% interest in any hotel property (other than hotels owned by the Parent and the Partnership), as partner, shareholder or otherwise, or directly or indirectly, for his own account or for the account of others, either as an officer, director, shareholder, owner, partner, promoter, employee, consultant, advisor, agent, manager, or in any other capacity engage in the acquisition, development, operation or management of any hotel property located within 20 miles of any hotel property owned by the Parent or the Partnership at the time of termination of employment. The foregoing sentence shall not restrict the Executive from owning up to ___% of the outstanding securities of any entity, including any entity whose securities are traded in public securities markets. The Executive agrees that damages at law for violation of the restrictive covenant contained herein would not be an adequate or proper remedy to the Company, and that should the Executive violate or threaten to violate any of the provisions of such covenant, the Company, its successors or assigns, shall be entitled to obtain a temporary or permanent injunction against the Executive in any court having jurisdiction over the person and the subject matter, prohibiting any further violation of any such covenants. The injunctive relief provided herein shall be in addition to any award of damages, compensatory, exemplary or otherwise, payable by reason of such violation. Furthermore, the Executive acknowledges that this Agreement has been negotiated at arms' length by the parties, neither being under any compulsion to enter into this Agreement, and that the foregoing restrictive covenant does not in any respect inhibit his ability to earn a livelihood in his chosen profession without violating the restrictive covenant contained herein. The Company by these presents has attempted to limit the Executive's right to compete only to the extent necessary to protect the Company from unfair competition. The Company recognizes, however, that reasonable people may differ in making such a determination. Consequently, the Company agrees that if the scope or enforceability of the restricted covenant contained herein is in any way disputed at any time, a court or other trier of fact may modify and enforce the covenant to the extent that it believes to be reasonable under the circumstances existing at the time. 13. NOTICES. All notices or deliveries authorized or required pursuant to this Agreement shall be deemed to have been given when in writing and personally delivered or when deposited in the U.S. mail, certified, return receipt requested, postage prepaid, addressed to the parties at the following addresses or to such other addresses as either may designate in writing to the other party: 8 9 To the Company: RFS Managers, Inc. 850 Ridge Lake Boulevard Suite 220 Memphis, TN 38120 To the Executive: Minor W. Perkins 6551 May Hollow Memphis, TN 38119 14. ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and shall not be modified in any manner except by instrument in writing signed, by or on behalf of, the parties hereto; provided, however, that any amendment or termination of the covenant of noncompetition in Section 11 must be approved by a majority of the Directors of the Parent other than the Executive, if the Executive is then a director of the Parent. This Agreement shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties hereto. 15. ARBITRATION. Any claim or controversy arising out of, or relating to, this Agreement or its breach, shall be settled by arbitration in accordance with the governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered in any court of competent jurisdiction. 16. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Tennessee. 17. ASSIGNMENT. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement, except with respect to certain rights to receive payments as described in Section 10. The Company's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Company's successors and assigns. 18. HEADINGS. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 19. ORIGINAL AGREEMENT. This Agreement amends and restates the Original Agreement in its entirety as of the effective date of this Agreement. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. RFS MANAGERS, INC. By: /s/ Robert M. Solmson --------------------- Name: _________________________ Title: Chairman EXECUTIVE: /s/ Minor W. Perkins -------------------- Minor W. Perkins 10 EX-10.6 7 EMPLOYMENT AGREEMENT 1 Exhibit 10.6 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT effective January 1, 1997, by and between RFS Managers, Inc., a Tennessee corporation (the "Company"), and J. William Lovelace (the "Executive"). W I T N E S S E T H: WHEREAS, the Company provides management services to RFS Hotel Investors, Inc. (the "Parent") pursuant to a Management Services Agreement dated December 30, 1994 (the "Management Agreement"); and WHEREAS, the Company desires to employ the Executive to serve as the Executive Vice President of the Company; and WHEREAS, the Company and the Executive have previously entered into an employment agreement dated January 1, 1996 (the "Original Agreement"); and WHEREAS, the parties desire to amend and restate the Original Agreement in its entirety effective as of January 1, 1997 as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual obligations hereinafter set forth the parties agree as follows: 1. EMPLOYMENT. The Company shall employ the Executive, and the Executive agrees to be so employed, in the capacity of Executive Vice-President of the Company to serve for the Term hereof, subject to earlier termination as hereinafter provided. 2. TERM. The term of the Executive's employment hereunder shall be three years and shall commence on January 1, 1997 and shall be extended automatically, for so long as the Executive remains employed by the Company hereunder, each January 1 beginning January 1, 1998 for an additional twelve-month period (such period, as it may be extended from time to time, being herein referred to as the "Term"), unless terminated earlier in accordance with the terms of this Agreement, to the effect that on each January 1, the remaining term of this Agreement and the Executive's employment hereunder shall be three years. 3. SERVICES. The Executive shall devote such amount of his time and attention to the Company's affairs as are necessary to perform his duties to the Company and to allow the Company to perform its duties specified in the Management Agreement. Pursuant to the Management Agreement, the Executive shall have authority and responsibility with respect to the day to day operations and management of the Parent and RFS Partnership, L.P. (the "Partnership"), for which the Parent currently serves as sole general partner, as well as implementation of the long range growth strategy of the Parent and the Partnership, consistent with direction from the Parent's Board of Directors (the "Board"). 2 4. COMPENSATION. (a) During the Term, the Company shall pay the Executive for his services an annual base salary of $190,000 (the "Base Salary"), to be paid in semi-monthly payments of $7,916.67, such Base Salary being subject to any increases approved by the Compensation Committee of the Board (the "Compensation Committee"). (b) In addition to the Base Salary described in Section 4(a) above, the Executive shall be entitled to a cash bonus ("Base Salary Bonus") for 1996 payable on or before April 1, 1997 determined as follows: (i) If fully diluted net income per share of common stock of the Parent, for the year ending December 31, 1996, as reported in the Parent's audited financial statements for the year ending December 31, 1996, as adjusted as described in the following sentence ("1996 Net Income Per Share") is at least $1.35, the Executive shall be entitled to receive a cash bonus equal to ten percent (10%) of the Base Salary. For purposes of determining the cash bonus under this Section 4(b), fully diluted Net Income per Share of common stock of the Parent shall be exclusive of any gain or loss on the sale of property, any expenses relating to the transactions between the Company and Doubletree Corporation and its affiliates and any expenses which the Compensation Committee deems appropriate to exclude from the calculation of fully diluted net income per share for purposes of determining the cash bonus; and (ii) For each $.01 increase in Net Income Per Share for 1996 in excess of $1.35, computed by rounding to the closest cent, the Executive shall be entitled to receive an additional bonus equal to three percent (3%) of the Base Salary; and (iii) Notwithstanding the provisions of Section 4(b)(ii) above, the maximum cash bonus payable to the Executive pursuant to this Section 4(b) shall be fifty percent (50%) of the Base Salary. (c) In addition to the Base Salary Bonus, the Executive may be entitled to receive other incentive compensation, including but not limited to, additional grants of stock options or shares of stock of the Parent, which awards shall be made (if at all) in consideration of and as an incentive for services performed solely for the Company, in accordance with rules and criteria established by the Compensation Committee. Such criteria may include, but not be limited to, the growth in the Parent's Net Income Per Share and/or other performance goals. 5. BENEFITS. The Company agrees to provide the Executive with the following benefits: (a) Vacation. The Executive shall be entitled each calendar year to a vacation, during which time his compensation shall be paid in full. The time allotted for such vacation 2 3 shall be three (3) weeks. (b) Employee Benefits. This Agreement shall not be in lieu of any rights, benefits and privileges to which the Executive may be entitled as a management level employee of the Company, including but not limited to any retirement, pension, profit-sharing, insurance, hospital or other plans which may now be in effect or which may hereafter be adopted. The Executive shall have the same rights and privileges to participate in such plans and benefits as any other management level employee during the Term. 6. EXPENSES. The Company recognizes that the Executive will have to incur certain out-of-pocket expenses, including but not limited to travel expenses, related to his services and the Company's and the Parent's business and the Company agrees to reimburse the Executive for all reasonable expenses necessarily incurred by him in the performance of his duties upon presentation of a voucher or documentation indicating the amount and business purposes of any such expenses. 7. TERMINATION IN CASE OF DEATH OR DISABILITY. In the event of the Executive's death or a complete physical or mental inability, confirmed by a licensed physician, to perform the services described in Section 3 above that continues for a period of one hundred twenty (120) consecutive days) ("Permanent Disability"), the Company may elect to terminate this Agreement, subject to continuation of the payments described in Section 10. 8. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: (a) "Voluntary Termination" means, subject to the provisions of Section 11 hereof, the Executive's voluntary termination of his employment hereunder, which may be effected by the Executive giving the Board not less than 90 days' prior written notice of the Executive's desire to terminate his employment or the Executive's failure to provide substantially all the services described in Section 3 hereof for a period greater than four consecutive weeks by reason of the Executive's voluntary refusal to perform such services. Notwithstanding the foregoing, if the Executive gives notice of Voluntary Termination and, prior to the expiration of the 90-day notice period, the Executive voluntarily refuses or fails to provide substantially all the services described in Section 3 hereof for a period greater than two consecutive weeks, the Voluntary Termination shall be deemed to be effective as of the date on which the Executive so ceases to carry out his duties. For purposes of this Section 8, voluntary refusal to perform services shall not include taking vacation otherwise permitted in accordance with Section 5(a) hereof, the Executive's failure to perform services on account of his illness or the illness of a member of his immediate family, provided such illness is adequately substantiated at the reasonable request of the Company, or any other absence from service with the written consent of the Board. 3 4 (b) "Termination Without Cause" means the termination of the Executive's employment by the Company for any reason other than Voluntary Termination or Termination With Cause. (c) "Termination With Cause" means the termination of the Executive's employment by act of the Board for any of the following reasons: (i) the Executive's conviction for a felony; (ii) the Executive's theft, embezzlement, misappropriation of or intentional and malicious infliction of damage to the Company's or the Parent's property or business opportunity; (iii) the Executive's intentional and material breach of the noncompetition covenant in Section 11 hereof; (iv) the Executive's continuous neglect of his duties hereunder or his continuous failure or refusal to follow any reasonable, unambiguous duly adopted written direction of the Board or any duly constituted committee thereof that is not inconsistent with the description of the Executive's duties set forth in Section 3 above; and (v) the Executive's abuse of alcohol, drugs or other substances, or his engaging in other deviant personal activities in a manner that, in the reasonable judgment of the Board, adversely affects the reputation, goodwill or business position of the Company. (d) "Involuntary Termination" means conduct on the part of the Company that constitutes continuous and material interference by the Company with the Executive's performance of his duties as set forth in Section 3 hereof or the intentional or material breach by the Company of this Agreement. 9. VOLUNTARY TERMINATION; TERMINATION WITH CAUSE. If (i) the Executive shall cease being an employee of the Company on account of a Voluntary Termination or (ii) there shall be a Termination With Cause, the Executive shall not be entitled to any compensation after the effective date of such Voluntary Termination or Termination With Cause (except Base Salary and vacation accrued but unpaid on the effective date of such event). In the event of a Voluntary Termination or Termination With Cause, the Executive shall continue to be subject to the noncompetition covenant contained in Section 11 hereof for the remainder of the Term. 10. DEATH OR DISABILITY; TERMINATION WITHOUT CAUSE; OR INVOLUNTARY TERMINATION. Following (i) the death of the Executive, (ii) Permanent Disability of the Executive, (iii) an Involuntary Termination, or (iv) a Termination Without Cause, the Company shall continue to pay the Executive or his heirs, devisees, executors, legatees or personal representatives, as 4 5 appropriate, the semi-monthly payments of the Base Salary then in effect for three years from the date of the termination of the Executive's employment. 11. CHANGE OF CONTROL COMPENSATION. (a) Compensation. In the event of the Company's termination of the Executive's employment or the Executive's resignation for Good Reason (as defined below) after a Change of Control (as defined below), the Company shall, on the date of such termination or resignation, pay the Executive, in addition to any Base Salary earned but not paid through the date of termination or resignation for Good Reason, a cash amount equal to three (3) times the Base Salary for the fiscal year in which Change of Control occurs (the "Termination Payment"). In addition, the Company shall cause the Executive's insurance benefits, as in effect immediately prior to the Change of Control, to remain in effect for at least one year following the date of the termination of Executive's employment by the Company or the Executive's resignation for Good Reason. (b) A "Change of Control", for purposes of this Agreement, shall be deemed to have occurred if, at any time during the Term, any of the following events occurs: (i) any "person", as that term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes, is discovered to be, or files a report on Schedule 13D or 14D-1 (or any successor schedule, form or report) disclosing that such person is, a beneficial owner (as defined in Rule 13d-3 under the Exchange Act or any successor rule or regulation), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; (ii) individuals who, as of the Effective Date, constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company, unless any such change is approved by the vote of at least 80% of the members of the Board of Directors of the Company in office immediately prior to such cessation; (iii) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, or securities of the Company are exchanged for securities of another corporation or other legal person, and immediately after such merger, consolidation, reorganization or exchange less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; 5 6 (iv) the Company in any transaction or series of related transactions, sells all or substantially all of its assets to any other corporation or other legal person and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or sales are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such sale; (v) the Company and its affiliates shall sell or transfer of (in a single transaction or series of related transactions) to a non-affiliate business operations or assets that generated at least two-thirds of the consolidated revenues (determined on the basis of the Company's four most recently completed fiscal quarters for which reports have been filed under the Exchange Act) of the Company and its subsidiaries immediately prior thereto; (vi) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K (or any successor, form or report or item therein) that a change in control of the Company has occurred; or (vii) any other transaction or series of related transactions occur that have substantially the effect of the transactions specified in any of the preceding clauses in this sentence. (c) Certain Transactions. Notwithstanding the provisions of Section 11(b)(i) or 11(b)(vi) hereof, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company, a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities or (iii) any Company-sponsored employee stock ownership plan, or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item thereon) under the Exchange Act, disclosing beneficial ownership by it of shares of stock of the Company, or because the Company reports that a Change in Control of the Company has or any have occurred or will or may occur in the future by reason of such beneficial ownership. (d) Good Reason. "Good Reason," for purposes of this Agreement, shall be deemed to mean any of the following: (i) a change in the Executive's status, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from the Executive's status, position or responsibilities as in effect immediately prior to a Change in Control; the 6 7 assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect the Executive to any of such positions, except in connection with a Termination with Cause as defined in Section 8(c), as a result of the Executive's death or Permanent Disability, or by Voluntary Termination; (ii) a reduction in the Executive's Base Salary and Bonus as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of the Company's or the Parent's principal executive offices to a location outside a thirty-mile radius of Memphis, Tennessee or the Company's or the Parent's requiring the Executive to be based at any place other than a location within a thirty-mile radius of Memphis, Tennessee, except for reasonably required travel on the Company's or the Parent's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company or the Parent to continue to provide the Executive with compensation and benefits provided for under this agreement or benefits substantially similar to those provided to the Executive under any of the employee benefit plans in which the Executive is or becomes a participant, or the taking of any action by the Company or the Parent which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control; (v) any material breach by the Company of any provision of this Agreement; and (vi) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement. (e) Tax Matters. In the event the Executive's receipt of the Termination Payment, together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in Control, would, in the reasonable opinion of the Executive's tax advisor, cause the Executive to incur tax liability under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, the Executive may elect to receive either: (i) the Termination Payment or (ii) the maximum portion of the Termination Payment which the Executive may receive, which taken together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in 7 8 Control, would not cause the Executive to incur tax liability under Section 4999 of the Code. 12. NONCOMPETITION. During the Term and for a period of two (2) years thereafter, the Executive shall not, other than through the Parent or affiliates of the Parent, own more than a 10% interest in any hotel property (other than hotels owned by the Parent and the Partnership), as partner, shareholder or otherwise, or directly or indirectly, for his own account or for the account of others, either as an officer, director, shareholder, owner, partner, promoter, employee, consultant, advisor, agent, manager, or in any other capacity engage in the acquisition, development, operation or management of any hotel property located within 20 miles of any hotel property owned by the Parent or the Partnership at the time of termination of employment. The foregoing sentence shall not restrict the Executive from owning up to 10% of the outstanding securities of any entity, including any entity whose securities are traded in public securities markets. The Executive agrees that damages at law for violation of the restrictive covenant contained herein would not be an adequate or proper remedy to the Company, and that should the Executive violate or threaten to violate any of the provisions of such covenant, the Company, its successors or assigns, shall be entitled to obtain a temporary or permanent injunction against the Executive in any court having jurisdiction over the person and the subject matter, prohibiting any further violation of any such covenants. The injunctive relief provided herein shall be in addition to any award of damages, compensatory, exemplary or otherwise, payable by reason of such violation. Furthermore, the Executive acknowledges that this Agreement has been negotiated at arms' length by the parties, neither being under any compulsion to enter into this Agreement, and that the foregoing restrictive covenant does not in any respect inhibit his ability to earn a livelihood in his chosen profession without violating the restrictive covenant contained herein. The Company by these presents has attempted to limit the Executive's right to compete only to the extent necessary to protect the Company from unfair competition. The Company recognizes, however, that reasonable people may differ in making such a determination. Consequently, the Company agrees that if the scope or enforceability of the restricted covenant contained herein is in any way disputed at any time, a court or other trier of fact may modify and enforce the covenant to the extent that it believes to be reasonable under the circumstances existing at the time. 13. NOTICES. All notices or deliveries authorized or required pursuant to this Agreement shall be deemed to have been given when in writing and personally delivered or when deposited in the U.S. mail, certified, return receipt requested, postage prepaid, addressed to the parties at the following addresses or to such other addresses as either may designate in writing to the other party: 8 9 To the Company: RFS Managers, Inc. 850 Ridge Lake Boulevard Suite 220 Memphis, TN 38120 To the Executive: J. William Lovelace 4617 Woodmont Place Memphis, TN 38119-3253 14. ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and shall not be modified in any manner except by instrument in writing signed, by or on behalf of, the parties hereto; provided, however, that any amendment or termination of the covenant of noncompetition in Section 11 must be approved by a majority of the Directors of the Parent other than the Executive, if the Executive is then a director of the Parent. This Agreement shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties hereto. 15. ARBITRATION. Any claim or controversy arising out of, or relating to, this Agreement or its breach, shall be settled by arbitration in accordance with the governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered in any court of competent jurisdiction. 16. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Tennessee. 17. ASSIGNMENT. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement, except with respect to certain rights to receive payments as described in Section 10. The Company's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Company's successors and assigns. 18. HEADINGS. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 19. ORIGINAL AGREEMENT. This Agreement amends and restates the Original Agreement in its entirety as of the effective date of this Agreement. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. RFS MANAGERS, INC. By: /s/ Minor W. Perkins -------------------- Name: _________________________ Title: President EXECUTIVE: /s/ J. William Lovelace ----------------------- J. William Lovelace 10 EX-10.7 8 EMPLOYMENT AGREEMENT 1 Exhibit 10.7 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT effective January 1, 1997, by and between RFS Managers, Inc., a Tennessee corporation (the "Company"), and Michael J. Pascal (the "Executive"). W I T N E S S E T H: WHEREAS, the Company provides management services to RFS Hotel Investors, Inc. (the "Parent") pursuant to a Management Services Agreement dated December 30, 1994 (the "Management Agreement"); and WHEREAS, the Company desires to employ the Executive to serve as the Secretary and Treasurer of the Company; and WHEREAS, the Company and the Executive have previously entered into an employment agreement dated January 1, 1996 (the "Original Agreement"); and WHEREAS, the parties desire to amend and restate the Original Agreement in its entirety effective as of January 1, 1997 as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual obligations hereinafter set forth the parties agree as follows: 1. EMPLOYMENT. The Company shall employ the Executive, and the Executive agrees to be so employed, in the capacity of Secretary and Treasurer of the Company to serve for the Term hereof, subject to earlier termination as hereinafter provided. 2. TERM. The term of the Executive's employment hereunder shall be three years and shall commence on January 1, 1997 and shall be extended automatically, for so long as the Executive remains employed by the Company hereunder, each January 1 beginning January 1, 1998 for an additional twelve-month period (such period, as it may be extended from time to time, being herein referred to as the "Term"), unless terminated earlier in accordance with the terms of this Agreement, to the effect that on each January 1, the remaining term of this Agreement and the Executive's employment hereunder shall be three years. 3. SERVICES. The Executive shall devote such amount of his time and attention to the Company's affairs as are necessary to perform his duties to the Company and to allow the Company to perform its duties specified in the Management Agreement. Pursuant to the Management Agreement, the Executive shall have authority and responsibility with respect to the day to day operations and management of the Parent and RFS Partnership, L.P. (the "Partnership"), for which the Parent currently serves as sole general partner, as well as implementation of the long range growth strategy of the Parent and the Partnership, consistent with direction from the Parent's Board of Directors (the "Board"). 2 4. COMPENSATION. (a) During the Term, the Company shall pay the Executive for his services an annual base salary of $165,000 (the "Base Salary"), to be paid in semi-monthly payments of $6,875.00, such Base Salary being subject to any increases approved by the Compensation Committee of the Board (the "Compensation Committee"). (b) In addition to the Base Salary described in Section 4(a) above, the Executive shall be entitled to a cash bonus ("Base Salary Bonus") for 1996 payable on or before April 1, 1997 determined as follows: (i) If fully diluted net income per share of common stock of the Parent, for the year ending December 31, 1996, as reported in the Parent's audited financial statements for the year ending December 31, 1996, as adjusted as described in the following sentence ("1996 Net Income Per Share") is at least $1.35, the Executive shall be entitled to receive a cash bonus equal to ten percent (10%) of the Base Salary. For purposes of determining the cash bonus under this Section 4(b), fully diluted Net Income per Share of common stock of the Parent shall be exclusive of any gain or loss on the sale of property, any expenses relating to the transactions between the Company and Doubletree Corporation and its affiliates and any expenses which the Compensation Committee deems appropriate to exclude from the calculation of fully diluted net income per share for purposes of determining the cash bonus; and (ii) For each $.01 increase in Net Income Per Share for 1996 in excess of $1.35, computed by rounding to the closest cent, the Executive shall be entitled to receive an additional bonus equal to three percent (3%) of the Base Salary; and (iii) Notwithstanding the provisions of Section 4(b)(ii) above, the maximum cash bonus payable to the Executive pursuant to this Section 4(b) shall be fifty percent (50%) of the Base Salary. (c) In addition to the Base Salary Bonus, the Executive may be entitled to receive other incentive compensation, including but not limited to, additional grants of stock options or shares of stock of the Parent, which awards shall be made (if at all) in consideration of and as an incentive for services performed solely for the Company, in accordance with rules and criteria established by the Compensation Committee. Such criteria may include, but not be limited to, the growth in the Parent's Net Income Per Share and/or other performance goals. 5. BENEFITS. The Company agrees to provide the Executive with the following benefits: (a) Vacation. The Executive shall be entitled each calendar year to a vacation, during which time his compensation shall be paid in full. The time allotted for such vacation 2 3 shall be three (3) weeks. (b) Employee Benefits. This Agreement shall not be in lieu of any rights, benefits and privileges to which the Executive may be entitled as a management level employee of the Company, including but not limited to any retirement, pension, profit-sharing, insurance, hospital or other plans which may now be in effect or which may hereafter be adopted. The Executive shall have the same rights and privileges to participate in such plans and benefits as any other management level employee during the Term. 6. EXPENSES. The Company recognizes that the Executive will have to incur certain out-of-pocket expenses, including but not limited to travel expenses, related to his services and the Company's and the Parent's business and the Company agrees to reimburse the Executive for all reasonable expenses necessarily incurred by him in the performance of his duties upon presentation of a voucher or documentation indicating the amount and business purposes of any such expenses. 7. TERMINATION IN CASE OF DEATH OR DISABILITY. In the event of the Executive's death or a complete physical or mental inability, confirmed by a licensed physician, to perform the services described in Section 3 above that continues for a period of one hundred twenty (120) consecutive days) ("Permanent Disability"), the Company may elect to terminate this Agreement, subject to continuation of the payments described in Section 10. 8. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: (a) "Voluntary Termination" means, subject to the provisions of Section 11 hereof, the Executive's voluntary termination of his employment hereunder, which may be effected by the Executive giving the Board not less than 90 days' prior written notice of the Executive's desire to terminate his employment or the Executive's failure to provide substantially all the services described in Section 3 hereof for a period greater than four consecutive weeks by reason of the Executive's voluntary refusal to perform such services. Notwithstanding the foregoing, if the Executive gives notice of Voluntary Termination and, prior to the expiration of the 90-day notice period, the Executive voluntarily refuses or fails to provide substantially all the services described in Section 3 hereof for a period greater than two consecutive weeks, the Voluntary Termination shall be deemed to be effective as of the date on which the Executive so ceases to carry out his duties. For purposes of this Section 8, voluntary refusal to perform services shall not include taking vacation otherwise permitted in accordance with Section 5(a) hereof, the Executive's failure to perform services on account of his illness or the illness of a member of his immediate family, provided such illness is adequately substantiated at the reasonable request of the Company, or any other absence from service with the written consent of the Board. 3 4 (b) "Termination Without Cause" means the termination of the Executive's employment by the Company for any reason other than Voluntary Termination or Termination With Cause. (c) "Termination With Cause" means the termination of the Executive's employment by act of the Board for any of the following reasons: (i) the Executive's conviction for a felony; (ii) the Executive's theft, embezzlement, misappropriation of or intentional and malicious infliction of damage to the Company's or the Parent's property or business opportunity; (iii) the Executive's intentional and material breach of the noncompetition covenant in Section 11 hereof; (iv) the Executive's continuous neglect of his duties hereunder or his continuous failure or refusal to follow any reasonable, unambiguous duly adopted written direction of the Board or any duly constituted committee thereof that is not inconsistent with the description of the Executive's duties set forth in Section 3 above; and (v) the Executive's abuse of alcohol, drugs or other substances, or his engaging in other deviant personal activities in a manner that, in the reasonable judgment of the Board, adversely affects the reputation, goodwill or business position of the Company. (d) "Involuntary Termination" means conduct on the part of the Company that constitutes continuous and material interference by the Company with the Executive's performance of his duties as set forth in Section 3 hereof or the intentional or material breach by the Company of this Agreement. 9. VOLUNTARY TERMINATION; TERMINATION WITH CAUSE. If (i) the Executive shall cease being an employee of the Company on account of a Voluntary Termination or (ii) there shall be a Termination With Cause, the Executive shall not be entitled to any compensation after the effective date of such Voluntary Termination or Termination With Cause (except Base Salary and vacation accrued but unpaid on the effective date of such event). In the event of a Voluntary Termination or Termination With Cause, the Executive shall continue to be subject to the noncompetition covenant contained in Section 11 hereof for the remainder of the Term. 10. DEATH OR DISABILITY; TERMINATION WITHOUT CAUSE; OR INVOLUNTARY TERMINATION. Following (i) the death of the Executive, (ii) Permanent Disability of the Executive, (iii) an Involuntary Termination, or (iv) a Termination Without Cause, the Company shall continue to pay the Executive or his heirs, devisees, executors, legatees or personal representatives, as 4 5 appropriate, the semi-monthly payments of the Base Salary then in effect for three years from the date of the termination of the Executive's employment. 11. CHANGE OF CONTROL COMPENSATION. (a) Compensation. In the event of the Company's termination of the Executive's employment or the Executive's resignation for Good Reason (as defined below) after a Change of Control (as defined below), the Company shall, on the date of such termination or resignation, pay the Executive, in addition to any Base Salary earned but not paid through the date of termination or resignation for Good Reason, a cash amount equal to three (3) times the Base Salary for the fiscal year in which Change of Control occurs (the "Termination Payment"). In addition, the Company shall cause the Executive's insurance benefits, as in effect immediately prior to the Change of Control, to remain in effect for at least one year following the date of the termination of Executive's employment by the Company or the Executive's resignation for Good Reason. (b) A "Change of Control", for purposes of this Agreement, shall be deemed to have occurred if, at any time during the Term, any of the following events occurs: (i) any "person", as that term is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes, is discovered to be, or files a report on Schedule 13D or 14D-1 (or any successor schedule, form or report) disclosing that such person is, a beneficial owner (as defined in Rule 13d-3 under the Exchange Act or any successor rule or regulation), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; (ii) individuals who, as of the Effective Date, constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company, unless any such change is approved by the vote of at least 80% of the members of the Board of Directors of the Company in office immediately prior to such cessation; (iii) the Company is merged, consolidated or reorganized into or with another corporation or other legal person, or securities of the Company are exchanged for securities of another corporation or other legal person, and immediately after such merger, consolidation, reorganization or exchange less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; 5 6 (iv) the Company in any transaction or series of related transactions, sells all or substantially all of its assets to any other corporation or other legal person and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or sales are held, directly or indirectly, in the aggregate by the holders of securities entitled to vote generally in the election of directors of the Company immediately prior to such sale; (v) the Company and its affiliates shall sell or transfer of (in a single transaction or series of related transactions) to a non-affiliate business operations or assets that generated at least two-thirds of the consolidated revenues (determined on the basis of the Company's four most recently completed fiscal quarters for which reports have been filed under the Exchange Act) of the Company and its subsidiaries immediately prior thereto; (vi) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K (or any successor, form or report or item therein) that a change in control of the Company has occurred; or (vii) any other transaction or series of related transactions occur that have substantially the effect of the transactions specified in any of the preceding clauses in this sentence. (c) Certain Transactions. Notwithstanding the provisions of Section 11(b)(i) or 11(b)(vi) hereof, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company, a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities or (iii) any Company-sponsored employee stock ownership plan, or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item thereon) under the Exchange Act, disclosing beneficial ownership by it of shares of stock of the Company, or because the Company reports that a Change in Control of the Company has or any have occurred or will or may occur in the future by reason of such beneficial ownership. (d) Good Reason. "Good Reason," for purposes of this Agreement, shall be deemed to mean any of the following: (i) a change in the Executive's status, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from the Executive's status, position or responsibilities as in effect immediately prior to a Change in Control; the 6 7 assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect the Executive to any of such positions, except in connection with a Termination with Cause as defined in Section 8(c), as a result of the Executive's death or Permanent Disability, or by Voluntary Termination; (ii) a reduction in the Executive's Base Salary and Bonus as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of the Company's or the Parent's principal executive offices to a location outside a thirty-mile radius of Memphis, Tennessee or the Company's or the Parent's requiring the Executive to be based at any place other than a location within a thirty-mile radius of Memphis, Tennessee, except for reasonably required travel on the Company's or the Parent's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company or the Parent to continue to provide the Executive with compensation and benefits provided for under this agreement or benefits substantially similar to those provided to the Executive under any of the employee benefit plans in which the Executive is or becomes a participant, or the taking of any action by the Company or the Parent which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control; (v) any material breach by the Company of any provision of this Agreement; and (vi) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement. (e) Tax Matters. In the event the Executive's receipt of the Termination Payment, together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in Control, would, in the reasonable opinion of the Executive's tax advisor, cause the Executive to incur tax liability under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, the Executive may elect to receive either: (i) the Termination Payment or (ii) the maximum portion of the Termination Payment which the Executive may receive, which taken together with any other payment or compensation which the Executive may be entitled to receive from the Company or the Parent or any of their affiliates as a result of the Change in 7 8 Control, would not cause the Executive to incur tax liability under Section 4999 of the Code. 12. NONCOMPETITION. During the Term and for a period of two (2) years thereafter, the Executive shall not, other than through the Parent or affiliates of the Parent, own more than a 10% interest in any hotel property (other than hotels owned by the Parent and the Partnership), as partner, shareholder or otherwise, or directly or indirectly, for his own account or for the account of others, either as an officer, director, shareholder, owner, partner, promoter, employee, consultant, advisor, agent, manager, or in any other capacity engage in the acquisition, development, operation or management of any hotel property located within 20 miles of any hotel property owned by the Parent or the Partnership at the time of termination of employment. The foregoing sentence shall not restrict the Executive from owning up to 10% of the outstanding securities of any entity, including any entity whose securities are traded in public securities markets. The Executive agrees that damages at law for violation of the restrictive covenant contained herein would not be an adequate or proper remedy to the Company, and that should the Executive violate or threaten to violate any of the provisions of such covenant, the Company, its successors or assigns, shall be entitled to obtain a temporary or permanent injunction against the Executive in any court having jurisdiction over the person and the subject matter, prohibiting any further violation of any such covenants. The injunctive relief provided herein shall be in addition to any award of damages, compensatory, exemplary or otherwise, payable by reason of such violation. Furthermore, the Executive acknowledges that this Agreement has been negotiated at arms' length by the parties, neither being under any compulsion to enter into this Agreement, and that the foregoing restrictive covenant does not in any respect inhibit his ability to earn a livelihood in his chosen profession without violating the restrictive covenant contained herein. The Company by these presents has attempted to limit the Executive's right to compete only to the extent necessary to protect the Company from unfair competition. The Company recognizes, however, that reasonable people may differ in making such a determination. Consequently, the Company agrees that if the scope or enforceability of the restricted covenant contained herein is in any way disputed at any time, a court or other trier of fact may modify and enforce the covenant to the extent that it believes to be reasonable under the circumstances existing at the time. 13. NOTICES. All notices or deliveries authorized or required pursuant to this Agreement shall be deemed to have been given when in writing and personally delivered or when deposited in the U.S. mail, certified, return receipt requested, postage prepaid, addressed to the parties at the following addresses or to such other addresses as either may designate in writing to the other party: 8 9 To the Company: RFS Managers, Inc. 850 Ridge Lake Boulevard Suite 220 Memphis, TN 38120 To the Executive: Michael J. Pascal 850 Ridge Lake Boulevard, Suite 220 Memphis, TN 38120 14. ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and shall not be modified in any manner except by instrument in writing signed, by or on behalf of, the parties hereto; provided, however, that any amendment or termination of the covenant of noncompetition in Section 11 must be approved by a majority of the Directors of the Parent other than the Executive, if the Executive is then a director of the Parent. This Agreement shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties hereto. 15. ARBITRATION. Any claim or controversy arising out of, or relating to, this Agreement or its breach, shall be settled by arbitration in accordance with the governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered in any court of competent jurisdiction. 16. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Tennessee. 17. ASSIGNMENT. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement, except with respect to certain rights to receive payments as described in Section 10. The Company's rights and obligations under this Agreement shall inure to the benefit of and shall be binding upon the Company's successors and assigns. 18. HEADINGS. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 19. ORIGINAL AGREEMENT. This Agreement amends and restates the Original Agreement in its entirety as of the effective date of this Agreement. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. RFS MANAGERS, INC. By: /s/ Minor W. Perkins -------------------- Name: _________________________ Title: President EXECUTIVE: /s/ Michael J. Pascal --------------------- Michael J. Pascal 10 EX-10.8 9 REVOLVING CREDIT AND TERM LOAN AGREEMENT 1 Exhibit 10.8(a) FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT DATED AS OF FEBRUARY 20, 1996 BY AND AMONG RFS HOTEL INVESTORS, INC., RFS PARTNERSHIP, L.P., AND BOATMEN'S BANK OF TENNESSEE 2 TABLE OF CONTENTS OF FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT
ARTICLE I - DEFINITIONS AND ACCOUNTING TERMS......................................................................2 1.01. Defined Terms............................................................................................2 1.02. Accounting Terms.........................................................................................8 ARTICLE II - AMOUNT AND TERMS OF THE LOANS........................................................................8 2.01. Revolving Credit Loan....................................................................................8 2.02. Term Loan Option.........................................................................................8 2.03. Notice and Manner of Borrowing...........................................................................9 2.04. Interest.................................................................................................9 2.05. Note.....................................................................................................9 2.06. Prepayments and Funding Losses; Increased Costs; Unavailability of Dollar Deposits; Illegality and Risk Based Capital.......................................................................10 (a) Prepayment.....................................................................................10 (b) Increased Costs................................................................................10 (c) Unavailability of Dollar Deposits..............................................................10 (d) Illegality.....................................................................................11 (e) Risk-based Capital.............................................................................12 2.07. Method of Payment.......................................................................................12 2.08. Use of Loan Proceeds....................................................................................13 (a) Working Capital................................................................................13 (b) Acquisition....................................................................................13 (c) Development....................................................................................13 2.09. Collateral Pool.........................................................................................14 (a) Mortgages......................................................................................14 (b) Security Agreements............................................................................14 (c) Evidence of Due Authorization of Security Documents and Corporate or Partnership Good Standing......................................................................14 (d) Assignments of Rents and Leases................................................................15 (e) Franchise Agreements...........................................................................15 (f) Leases.........................................................................................15 (g) Subordinations.................................................................................15 (h) Management Agreements..........................................................................15 (i) Surveys........................................................................................15 (j) Title Insurance Policies.......................................................................15 (k) Environmental Audits...........................................................................16 (l) Physical Inspections...........................................................................16 (m) Hazard Insurance...............................................................................16 (n) Appraisals.....................................................................................16 (o) Environmental Indemnity........................................................................16 (p) Opinion of Counsel for Borrower and Rfsp.......................................................16
3 (q) Independent Market Study.......................................................................16 (r) Other Documents................................................................................16 2.10. Adjustments to Collateral Pool Valuation................................................................17 (a) Appraisals.....................................................................................17 (b) Mandatory Adjustments..........................................................................17 (c) Adjustments for Franchise Cancellations........................................................17 (d) Pre-approvals..................................................................................18 2.11. Sale of Hotel Properties................................................................................18 2.12. Fees....................................................................................................18 (a) Commitment Fee.................................................................................18 (b) Agent's Fee....................................................................................18 ARTICLE III CONDITIONS PRECEDENT ................................................................................18 3.01. Intentionally Omitted...................................................................................18 3.02. Conditions Precedent to Advances under the Revolving Credit Loan.......................................18 3.03. Conditions Precedent to the Term Loan...................................................................19 (a) Note...........................................................................................19 (b) Opinion of Counsel for Borrower and RFSP.......................................................19 (c) Officer's Certificate, Etc.....................................................................19 (d) Modifications of Mortgages/Title Endorsements..................................................19 (e) Additional Documentation ......................................................................19 ARTICLE IV - REPRESENTATIONS AND WARRANTIES .....................................................................20 4.01. Incorporation, Good Standing, and Due Qualification of Borrower.........................................20 4.02. Corporate Power and Authority of Borrower...............................................................20 4.03. Existence and Due Qualification of Rfsp.................................................................20 4.04. Power and Authority of Rfsp.............................................................................20 4.05. Legally Enforceable Agreement...........................................................................21 4.06. Labor Disputes and Acts of God..........................................................................21 4.07. Other Agreements........................................................................................21 4.08. Litigation..............................................................................................21 4.09. No Defaults on Outstanding Judgments or Orders..........................................................21 4.10. Ownership and Liens.....................................................................................22 4.11. Operation of Business...................................................................................22 4.12. Taxes...................................................................................................22 4.13. Debt....................................................................................................22 4.14. Environmental Compliance................................................................................22 4.15. Ada Compliance..........................................................................................22 4.16. Operations; Room Rents..................................................................................23 ARTICLE V - AFFIRMATIVE COVENANTS...............................................................................23 5.01. Maintenance of Existence................................................................................23 5.02. Maintenance of Records..................................................................................23
4 5.03. Maintenance of Properties...............................................................................23 5.04. Conduct of Business.....................................................................................23 5.05. Maintenance of Insurance................................................................................23 5.06. Compliance with Laws....................................................................................24 5.07. Right of Inspection.....................................................................................24 5.08. Reporting Requirements..................................................................................24 (a) Quarterly Financial Statements.................................................................24 (b) Annual Financial Statements....................................................................24 (c) Management Letters.............................................................................25 (d) Certificate of No Default......................................................................25 (e) Notice of Litigation...........................................................................25 (f) Notice of Defaults and Events of Default.......................................................25 (g) Reports to Other Creditors.....................................................................25 (h) Proxy Statements, Etc..........................................................................25 (i) Tax Receipts...................................................................................26 (j) General Information............................................................................26 5.09. Debt Coverage Ratios....................................................................................26 (a) Debt Coverage Ratio (NOI)......................................................................26 (b) Debt Coverage Ratio (CF).......................................................................26 (c) Debt Coverage Ratio (CFO)......................................................................26 (d) Quarterly Calculations.........................................................................26 (e) Revolving Credit Loan Calculation..............................................................26 5 10. Reserve for Room Renovations............................................................................27 5.11. Maintenance of Franchises...............................................................................27 5.12. Minimum Net Worth.......................................................................................27 5.13. Operations; Room Rents..................................................................................27 5.14. Minimum Cash Flow.......................................................................................27 ARTICLE VI NEGATIVE COVENANTS....................................................................................27 6.01. Liens...................................................................................................28 6.02. Debt....................................................................................................28 6.03. Mergers, Etc............................................................................................29 6.04. Leases..................................................................................................29 6.05. Sale and Leaseback......................................................................................29 6.06. Guaranties, Etc.........................................................................................29 6.07. Condition of Hotels.....................................................................................29 ARTICLE VII - EVENTS OF DEFAULT..................................................................................30 7.01. Events of Default.......................................................................................30 ARTICLE VIII - MISCELLANEOUS.....................................................................................32 8.01. Amendments, Etc.........................................................................................32 8.02. Notices, Etc............................................................................................32 8.03. No Waiver; Remedies.....................................................................................32 8.04. Successor and Assigns...................................................................................33
5 8.05. Costs, Expenses, and Taxes..............................................................................33 8.06. Right of Set-off........................................................................................33 8.07. Waiver of Right to Jury Trial...........................................................................33 8.08. Governing Law...........................................................................................34 8.09. Severability of Provision...............................................................................34 8.10. Headings................................................................................................34 8.11. Joinder by RFSP.........................................................................................34 8.12. Jurisdiction and Venue..................................................................................34 8.13. No Third Party Beneficiaries............................................................................35 8.14. No Agency...............................................................................................35 8.15. Bank Approvals..........................................................................................35 8.16. Lending Limitation; Participation.......................................................................35
6 FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT ("AGREEMENT") dated as of February 20, 1996, between RFS HOTEL INVESTORS, INC., a Tennessee corporation ("Borrower"); RFS PARTNERSHIP, L.P., a Tennessee limited partnership ("RFSP"); and BOATMEN'S BANK OF TENNESSEE, a Tennessee banking corporation ("Bank"), on behalf of itself as well as all Participants. RECITALS: A. Borrower is an equity real estate investment trust ("REIT") and is the majority owner and general partner of RFSP which owns certain Hotel Properties, as herein defined, in various states. B. Bank and the Participants, as herein defined, have heretofore committed to make advances to Borrower on a revolving credit basis in an amount not to exceed at any one time outstanding the maximum aggregate principal sum of Fifty Million and No/100 dollars ($50,000,000.00). Accordingly, Bank, Borrower, RFSP and RFS Management Co., Inc. ("RFSM") entered into that certain Revolving Credit and Term Loan Agreement dated as of the 8th day of September, 1994 (the "First Loan Agreement"), and Bank and the Participants entered into the Participation Agreement, as herein defined, setting forth the terms and conditions of Bank's and the Participant's agreement to fund their respective Percentage Interests of the Revolving Credit Loan, as herein defined. C. RFSM has been merged into RFS, Inc. ("RFS") which has merged with Doubletree, Corporation, and has asked to be removed from this Agreement, as well as for certain changes to the form of lease subordination agreement executed formerly by RFSM, and to be executed henceforth by RFS, in connection with each of the Hotel Properties. D. Bank, Borrower, RFSP and RFS have heretofore entered into that certain First Modification Agreement dated as of the 31st day of August, 1995, and that certain Second Modification Agreement dated as of the 31st day of October, 1995 (collectively the "Modification Agreements"). E. Bank, Borrower and RFSP have all agreed to enter into this Agreement amending and restating the First Loan Agreement to remove RFS therefrom, include the changes set forth in the Modification Agreements, and to include certain other amendments as hereinafter set forth. NOW, THEREFORE, in consideration of their mutual covenants, the financial accommodations extended to Borrower herein which will benefit not only Borrower but RFSP as well, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree to and affirm the foregoing recitals, and further agree as follows: 7 ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. DEFINED TERMS. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): (a) "Additional Hotel Properties" means all Hotel Properties acquired by Borrower or RFSP subsequent to the date of this Agreement, regardless of whether the same are included in the Collateral Pool. (b) "Agreement means this First Amended Revolving Credit and Term Loan Agreement, as hereinafter amended, supplemented, or modified from time to time. (c) "Annual Debt Service" means the annual payments of principal and/or interest, as the case may be, required to be paid on a particular Debt of Borrower which, when referring to all of Borrower's Debt shall include, without limitation, projected annual payments of principal and interest on the Revolving Credit Loan using the projected debt service calculation set forth in Section 5.09e herein, as well as payments paid on the principal indebtedness outstanding under obligations assumed by Borrower on any Additional Hotel Properties acquired by Borrower. (d) "Asbestos" shall have the meanings provided under the Environmental Laws (as hereinafter defined), and shall include, but not be limited to, asbestos fibers and friable asbestos, as such terms are defined under the Environmental Laws. (e) "Assignments of Rents and Leases" means the assignments of rents, leases, issues and profits covering the Hotel Properties described in the Mortgages. (f) "Base Rate" means a variable rate and is a benchmark or reference rate of interest established by Bank as its corporate base rate to be in effect from time to time whether or not such rate is otherwise published, which rate may not be the Bank's lowest or best rate; provided, that in the event this Agreement is assigned to another holder of the Revolving Credit Note which is a commercial bank, Base Rate shall mean the reference rate of interest established by such subsequent holder from and after the date of such assignment, as its base rate from time to time. (g) "Borrowing Base" shall mean a sum equal to thirty three percent (33%) of the Value of the Collateral Pool, to be determined by Bank, from time to time, including, without limitation, whenever an advance is requested by Borrower under the Revolving Credit Loan. (h) "Business Day" means any Domestic Business Day on which Bank is open for business. 2 8 (i) "Capital Lease" means all leases which have been or should be capitalized on the books of the lessee in accordance with GAAP. (j) "Cash Flow" or "CF" means the gross income received by Borrower and/or by RFSP, as the case may be, from lease payments received from Collateral Pool Properties, less real property taxes and insurance premiums paid in connection therewith, and less a proportionate share of any and all other expenses of every type and character incurred by Borrower and/or RFSP (except for depreciation and amortization and interest expense), such proportion being equal to the ratio of the total number of hotel rooms contained in the Collateral Pool Properties divided by the total number of hotel rooms contained in all of the Hotel Properties. (k) "Cash Flow Operations" or "CFO" means the gross income received by Borrower and/or by RFSP, as the case may be, from lease payments received from all Hotel Properties, less real property taxes and insurance premiums paid in connection therewith, and less any and all other expenses of every type and character incurred by Borrower and/or RFSP (except for depreciation and amortization, and interest expense). (l) "Collateral" means all property which is subject or is to be subject to the Liens granted by the Security Agreements. (m) "Collateral Pool" means such of the Initial Hotels and the Additional Hotel Properties which Bank has accepted as part of the Collateral Pool pursuant to the terms of Section 2.09 hereof. (n) "Collateral Pool Property" means any of the Initial Hotels or the Additional Hotel Properties which may, at the relevant time, be part of the Collateral Pool. (o) "Commitment" means Bank's obligation to make the Loans to Borrower pursuant to Sections 2.01 and 2.02 in the amount referred to therein. (p) "Cost Basis" means the original acquisition cost of a Hotel Property or Properties, as the case may be, plus the actual cost of any permanent improvements increasing the net useable square footage of the Hotel Property or Properties in question, determined according to GAAP. (q) "Debt" means: (a) indebtedness or liability for borrowed money, or for the deferred purchase price of property or services (excluding trade obligations incurred in the ordinary course of business); (b) obligations as lessee under Capital Leases; (c) obligations under letters of credit issued for the account of any Person; (d) all guarantees, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; and (e) obligations secured by 3 9 any Lien on property owned by the Person, whether or not the obligations have been assumed. (r) "Debt Coverage Ratio (CF)," applies to Borrower's Debt relating to the Revolving Credit Loan only, and shall mean the ratio of Cash Flow from the Collateral Pool Properties to Annual Debt Service on the Revolving Credit Loan using the projected debt service calculation set forth in Section 5.09e hereof. (s) "Debt Coverage Ratio (CFO)," applies to all Debt and Hotel Properties of Borrower, and shall mean the ratio of CFO from all Hotel Properties to Annual Debt Service on the Revolving Credit Loan. (t) "Debt Coverage Ratio (NOI)," applies to all Debt and Hotel Properties of Borrower, and shall mean the ratio of Net Operating Income from all Hotel Properties to Annual Debt Service on all of Borrower's Debt. (u) "Default" means any of the events specified in Section 7.01, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. (v) "Development" means the construction of "Additional Hotel Properties" as defined in the Loan Agreement, and all reasonable, normal and necessary costs incident thereto including, without limitation, costs incurred for acquisition, engineering, architectural, planning, rezoning, environmental testing and appraisal. (w) "Domestic Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in Memphis, Tennessee, are authorized or required to close under the laws of the state of Tennessee. (x) "Easements" means any agreements entered into by Borrower, RFSP or RFS with any other Persons, which agreements grant to such Person the right to use any portion of any of the Hotel Properties, including, without limitation, any reciprocal easement agreement entered into with adjoining landowners owning property adjacent to any of the Hotel Properties. (y) "Environmental Laws" means the Toxic Substances Control Act of 1976, the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Response, Compensation and Liability Act of 1980, the Federal Insecticide, Fungicide and Rodenticide Act of 1972, the Clean Air Act of 1971, as amended, the Clean Water Act of 1977, the Safe Drinking Water Act of 1977 and the National Environmental Policy Act of 1969, including all amendments to and regulations under such acts, and all other applicable federal, state and local laws, rules, regulations, orders, judicial determinations and decisions or determinations by any judicial, legislative or executive body of any governmental or quasi- 4 10 governmental entity, whether in the past, the present or the future, with respect to: (1) the installation, existence, or removal of, or exposure to, Asbestos at any Hotel Property owned by Borrower or RFSP; (2) the existence on, discharge from, or removal from any such Hotel Property of Hazardous Wastes; and (3) the effects on the environment of any such Hotel Property or of any activity now, previously, or hereafter conducted on any such Hotel Property. (z) "Event of Default" means any of the events specified in Section 7.01, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. (aa) "GAAP" means generally accepted accounting principles in the United States. (bb) "Hazardous Wastes" means any chemical, material or substance to which exposure is prohibited, limited or regulated by any Environmental Law or which even if not so regulated, is known to pose a hazard to health and safety, including, but not limited to, Asbestos and any of the following as defined by the Environmental Laws: solid wastes; toxic or hazardous substances, wastes or contaminants (including, without limitation, polychlorinated biphenyls ["PCB's"], paint containing lead and urea formaldehyde foam insulation); and discharges of sewage and effluent. (cc) "Head Office" means the principal office of Bank at 6060 Poplar Avenue, Memphis, Tennessee 38119; or the principal office of any subsequent holder of the Revolving Credit Note. (dd) "Hotel Properties" means all hotel properties now owned, or hereafter acquired, by RFSP or Borrower including, without limitation, the Initial Hotels and the Additional Hotel Properties, regardless of whether any of the same are included in the Collateral Pool or not. (ee) "Initial Hotels" means the Hotel Properties presently owned by RFSP. (ff) "Interest Period" means a period of ninety (90) days commencing on each date the interest rate payable on the Revolving Credit Loan is adjusted as provided in Section 2.04 hereof. (gg) "Leases" means any and all leases of any or all of the Hotel Properties by RFSP or Borrower, as lessor therein. (hh) "LIBOR Rate," as used herein, shall mean the average of interbank three (3) month offered rates for U.S. dollar deposits in the London market based on quotations at five major banks, as published in The Wall Street Journal and set forth under its "Money Rates" and described as "LONDON INTERBANK OFFERED RATES (LIBOR)"; provided that if two or more three-month LIBOR Rates are published, the LIBOR Rate shall be the arithmetic mean of such offered rates rounded upwards, if necessary, to the 5 11 nearest 1/16th of one percent; provided further, however, that if the rate adjustment date falls on a Saturday, Sunday or legal holiday, or if a LIBOR Rate does not appear in The Wall Street Journal on the rate adjustment date, then the LIBOR Rate shall be the LIBOR Rate as published in The Wall Street Journal on the next Domestic Business Day on which a three (3) month LIBOR Rate appears; and provided further, however, that if at any time hereafter The Wall Street Journal ceases to publish the LIBOR Rate, then "LIBOR Rate" shall mean the arithmetic mean rounded upwards, if necessary, to the nearest 1/16th of one percent of the interest rates per annum at which deposits in an amount comparable to the aggregate principal amount outstanding under the Revolving Credit Note in U.S. Dollars are offered by the Reference Banks, as hereinafter defined, to leading banks in the London Interbank market for a period of three (3) months as of 11:00 a.m., London time, on the day which is two Business Days prior to the first day of the applicable Interest Period. The term "Reference Banks" means Barclays Bank PLC, Bankers Trust Company, National Westminster PLC and Bank of Tokyo, and, in the event data from any such bank is unavailable, in the order of priority, Credit Suisse, Deutsche Bank, Swiss Bank and/or Citibank, N.A. (ii) "Lien" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement, or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever (including without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing). (jj) "Loans" means the Revolving Credit Loan or the Term Loan or both as the context may require. (kk) "Loan Documents" means this Agreement, the Note, the Mortgages, the Assignment of Rents and Leases, the Security Agreements, the Environmental Indemnity Agreement and any additional documents required to be delivered by Borrower, RFSP or RFS under this Agreement, or otherwise evidencing, securing and/or relating to the Loans. (ll) "Loan to Value Ratio" shall mean that percentage that the current outstanding principal balance of the Loans bears to the aggregate Value of the Collateral Pool, as such ratio is computed by Bank from time to time. (mm) "Mortgages" means the deeds of trust or mortgages covering the Initial Hotels and any Additional Hotel Properties. (nn) "Net Operating Income" means the sum of (a) net income after tax (excluding any net capital gain) for the preceding twelve (12) months, plus (b) interest expense and/or 6 12 percentage rent payments, as the case may be, for that period, plus (c) depreciation and amortization expense for that period, all performed on a consolidated basis. (oo) "Note" means the Revolving Credit Note and may also mean, if the context requires and if Borrower does not execute a replacement note when the Revolving Credit Loan is converted to the Term Loan, the promissory note evidencing the Term Loan. (pp) "Operating Income" means the gross revenue derived from the operation of the Collateral Pool Properties, less all expenses pertaining thereto, including, without limitation, real and personal property taxes and insurance premiums, and projected expenses associated with the replacement of fixed assets of four percent (4%) of gross revenues, and projected expenses associated with the management of the Collateral Pool Properties of four percent (4%) of gross revenues. (qq) "Participants" means those certain lenders who have agreed, or will agree, from time to time, to fund a portion of the Commitment, and/or purchase a portion of the Loans. (rr) "Participation Agreement" means any participation agreement, as subsequently modified or amended, entered into by and among Bank and the Participants, pursuant to which each Participant has agreed, or will agree, to purchase and/or fund its respective Percentage Interest in the Loans, including all loan advances and other extensions of credit made or to be made pursuant to the provisions hereof, as said Participation Agreement may be amended from time to time. (ss) "Percentage Interest" means, as applicable and as the context would require, either (i) the proportionate share of Bank or each Participant of the Revolving Credit Loan, or (ii) the proportionate share of Bank or each Participant of the principal balance outstanding at any given time under the Revolving Credit Loan. (tt) "Person" means any individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority, or other entity of whatever nature. (uu) "Revolving Credit Loan" shall have the meaning assigned to such term in Section 2.01. (vv) "Revolving Credit Note" shall have the meaning assigned to such term in Section 2.05. (ww) "Security Agreements" means the Security Agreements to be delivered by Borrower and RFSP under the terms of this Agreement and may be included in the Mortgages. (xx) "Termination Date" means September 8, 1998, and is the date on which Bank's commitment to make advances under the Revolving Credit Loan shall terminate, and on which date the outstanding principal balance under the Revolving Credit Loan, plus all accrued and unpaid interest shall be due and payable in full. 7 13 (yy) "Term Loan" shall have the meaning assigned to such term in Section 2.02. (zz) "Value" means the lesser of (i) the actual Cost Basis of the Collateral Pool, determined according to GAAP, or (ii) the most recent appraised value of the Collateral Pool. SECTION 1.02. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with that applied in the preparation of the financial statements referred to in Section 5.08, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. ARTICLE II AMOUNT AND TERMS OF THE LOANS SECTION 2.01. REVOLVING CREDIT LOAN. Bank agrees, subject to the terms and conditions hereinafter set forth (including, without limitation, the restriction on Bank's obligation to disburse any portion the Participants have failed to fund as provided in Section 8.16 hereof), to make advances to Borrower from time to time during the period from September 8, 1994, up to but not including the Termination Date (the "Revolving Credit Loan") in an aggregate principal amount outstanding not to exceed at any time the lesser of: (a) Fifty Million and No/100 Dollars ($50,000,000.00), less any sums which the Participants have failed to fund, as more fully provided in Section 8.16 hereof, or (b) the Borrowing Base which shall be equal to thirty three percent (33%) of the Value of the Collateral Pool Properties, subject to adjustment in accordance with Section 2.10. Within the limits of the Commitment, Borrower may borrow, prepay pursuant to Section 2.06, and reborrow under this Section 2.01. SECTION 2.02. TERM LOAN OPTION. Provided that no Default or Event of Default has occurred and is then existing under the terms of this Agreement, and Borrower is in material compliance with the provisions of any other agreement with Bank, at the Termination Date, Borrower shall have the option (the "Term Loan Option") to convert the principal balance outstanding under the Revolving Credit Loan (in a principal amount not exceeding the Commitment) to a term loan (the "Term Loan"), as shall be provided in the Revolving Credit Note, in form and content prepared by and acceptable to Bank. All accrued and outstanding interest on the portion of the Revolving Credit Loan converted to the Term Loan shall be paid on or prior to the date such conversion becomes effective. The outstanding principal balance of the Term Loan shall accrue and bear interest throughout its term at the option of Borrower at either (a) a fixed rate of interest equal to two and one-half percent (2 1/2%)in excess of the five (5) year U.S. Treasury Bond yield as reported in The Wall Street Journal under its money rates on the date of conversion or (b) a variable rate equal to Bank's corporate Base Rate plus one percent (1%) floating, as the same may change from time to time. Borrower's interest rate option shall be a one-time option only and must be exercised within ten (10) days prior to the Termination Date. Interest shall be calculated on the basis of a year of 360 days from the actual number of days elapsed. The Term Loan shall be payable over five (5) years in consecutive monthly installments of principal and interest commencing the first day of the month following conversion and due on 8 14 the first day of each month thereafter for the remainder of the five-year term. The first fifty-nine (59) monthly payments shall be computed based on a ten (10) year amortization, with the sixtieth and final such monthly payment to be in the amount of the entire remaining principal and all accrued and unpaid interest. SECTION 2.03. NOTICE AND MANNER OF BORROWING. Borrower shall submit to Bank a request for an advance under the Revolving Credit Loan at least five (5) Domestic Business Days prior to the requested date for funding. Each such request for advance shall specify the effective date for funding and the amount of the advance requested, specify the use to be made of the proceeds of such advance in such detail as Bank shall require, and be accompanied by (a) a debt service coverage worksheet depicting the debt service coverage calculation for the twelve-month period ending with the last day of the most recent fiscal quarter (the "Debt Coverage Worksheet"), and (b), a borrowing base certificate ("Borrowing Base Certificate"), all of which request for advance, Debt Coverage Worksheet and Borrowing Base Certificate shall be submitted in form and content acceptable to Bank , as the same may be modified by Bank from time to time. Not later than 2:00 p.m. Memphis, Tennessee, applicable central time on the date such advance under the Revolving Credit Loan is to be effective, provided all of the applicable conditions set forth in Article III hereof have been fulfilled to Bank's satisfaction, Bank and/or the Participants, as the case may be, will make such advance under the Revolving Credit Loan available to Borrower in immediately available funds by crediting the amount thereof to Borrower's account with Bank. SECTION 2.04. INTEREST. Borrower shall pay interest to Bank on the outstanding and unpaid principal amount of the Revolving Credit Loan at a floating rate equal to one and three-fourths percent (1 3/4%) in excess of the LIBOR Rate on the date of the initial advance under the Revolving Credit Loan hereunder, and on the ninetieth (90th) day of each Interest Period thereafter to correspond to the LIBOR Rate published or determined on the date of such adjustment; such rate as adjusted shall be effective for the next succeeding ninety-day period. The interest rate as so determined shall be applicable to all advances under the Revolving Credit Loan and shall be subject to adjustment on the same date for each new Interest Period, regardless of the date of any particular advance under the Revolving Credit Loan. Interest shall be calculated on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed. Interest on the Revolving Credit Loan shall be paid in immediately available funds on the first day of each month at the Head Office. Any principal installment or final payment amount under any Note not paid when due at maturity, by acceleration, or otherwise, shall bear interest thereafter until paid at a rate which shall be equal to the maximum effective rate of interest which Bank or the then current holder of the Note is permitted to contract for and charge from time to time. SECTION 2.05. NOTE. The Revolving Credit Loan and advances thereunder shall be evidenced by, and repaid with interest in accordance with, a single promissory note of Borrower in form and content acceptable to Bank, in the original principal amount of Fifty Million and No/100 Dollars ($50,000,000.00) dated September 8, 1994, which Note shall be payable to Bank, and maturing as to principal on the Termination Date (the "Revolving Credit Note"). In the absence of manifest error, the amounts reflected on Bank's and the Participants' internal records 9 15 shall be deemed conclusive as to the outstanding balance of principal and interest under the Revolving Credit Loan from time to time. The Term Loan, if Borrower exercises the Term Loan Option, shall also be evidenced by the Revolving Credit Note, with applicable provisions therein pertaining to the Term Loan Option as required by Bank. In the event Borrower exercises the Term Loan Option, if requested by Bank, Borrower shall execute a replacement note, in form and content acceptable to Bank, evidencing the Term Loan. SECTION 2.06. PREPAYMENTS AND FUNDING LOSSES; INCREASED COSTS; UNAVAILABILITY OF DOLLAR DEPOSITS; ILLEGALITY AND RISK BASED CAPITAL. (a) PREPAYMENT. Borrower may, upon at least five (5) Domestic Business Days' notice to Bank, prepay the Revolving Credit Loan or the Term Loan, in whole or in part, without penalty, with accrued interest to the date of such prepayment on the amount prepaid. (b) INCREASED COSTS. In the event that any applicable law or regulation or the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) (i) shall change the basis of taxation of payments to Bank of any amounts payable by Borrower hereunder (other than taxes imposed on the overall net income of Bank), or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Bank, or (iii) shall impose any other condition with respect to the Loans, and the result of any of the foregoing is to increase the cost to Bank of making or maintaining the Loans or to reduce any amount receivable by Bank, and Bank determines that such increased costs or reduction in amount receivable was attributable to the LIBOR Rate basis used to establish the interest rate applicable to the Revolving Credit Loan, then Borrower shall from time to time, upon demand by Bank, pay to Bank additional amounts sufficient to compensate Bank for such increased cost. A detailed statement as to the amount of such increased cost, prepared in good faith and submitted to Borrower by Bank, shall be conclusive and binding in the absence of manifest error. (c) UNAVAILABILITY OF DOLLAR DEPOSITS. If Borrower selects the LIBOR Rate, if on or prior to the first day of any Interest Period: (i) Borrower is advised by Bank that deposits in Dollars (in the applicable amounts) are not being offered to Bank in the Euro-dollar interbank market for such Interest Period, or (ii) Borrower is advised by Bank that the Reserve Adjusted LIBOR Rate will not adequately and fairly reflect the cost to Bank of funding the Loans for such Interest Period, until the circumstances giving rise to such suspension no longer exist, the Reserve Adjusted LIBOR Rate shall be suspended as the basis for establishing the interest rate at which interest will accrue under the Revolving Credit Loan. Commencing on the day Borrower receives advice of such suspension, and continuing for a maximum of ten (10) Domestic Business Days thereafter, Bank and Borrower shall conduct good faith negotiations to establish a mutually agreeable substitute method of determining the rate at which interest will accrue under the Revolving Credit 10 16 Loans during such period of suspension. Bank shall be under no obligation to make further advances under the Revolving Credit Loan during such period of suspension. If Bank and Borrower have not reached an agreement with respect to such substitute method of determining interest by the end of such negotiation period, Borrower shall, at its option, (i) prepay the entire unpaid principal balance and all accrued but unpaid interest then outstanding under the Revolving Credit Loan within fifteen (15) days after the termination of such negotiations as evidenced by Bank's written statement delivered to Borrower indicating the failure of such negotiations, or (ii) elect to convert the entire outstanding principal balance under the Revolving Credit Loan to the Term Loan in strict accordance with Section 2.02 and provided the conditions specified in said Section 2.02 are satisfied and Borrower gives Bank five (5) days' prior written notice thereof, which conversion shall be effective the fifteenth (15th) day following the termination of negotiations. For purposes of such prepayment, interest shall accrue under the Revolving Credit Loan for any period during which the LIBOR Rate basis was suspended at the interest rate per annum required to be paid hereunder on the day immediately prior to the day such suspension began continuing until agreement is reached as to a substitute method of determining the interest rate or the principal is paid in full. The suspension shall not affect the rate applicable to the Term Loan during the suspension period, which shall remain the rate set forth in the Note. (d) ILLEGALITY. Notwithstanding any other provision herein, if Bank determines that any applicable law, rule, or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Bank with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency, shall make it unlawful or impossible for Bank to maintain or fund the Revolving Credit Loan based upon the Reserve Adjusted LIBOR Rate and Bank so advises Borrower of such fact, until other circumstances giving rise to such suspension no longer exist, the LIBOR Rate shall be suspended as the basis for establishing the interest rate at which interest shall accrue under the Revolving Credit Loan. Commencing on the day Borrower receives advice of such suspension, and continuing for a maximum of ten (10) Domestic Business Days thereafter, Bank and Borrower shall conduct good faith negotiations to establish a mutually agreeable substitute method of determining the rate at which interest shall accrue under the Revolving Credit Loan during such period of suspension. Bank shall be under no obligation to make further advances of Revolving Credit Loan during such period of suspension. If Bank and Borrower have not reached an agreement with respect to such substitute method of determining interest by the end of such negotiation period, Borrower shall, at its option, (i) prepay the entire unpaid principal balance and all accrued but unpaid interest then outstanding under the Revolving Credit Loan within fifteen (15) days after the termination of such negotiations as evidenced by Bank's written statement delivered to Borrower indicating the failure of such negotiations, or (ii) elect to convert the entire outstanding principal balance under the Revolving Credit Loan to the Term Loan in strict accordance with Section 2.02 and provided the conditions specified in said 2.02 are 11 17 satisfied and Borrower gives Bank five (5) days' prior written notice thereof, which conversion shall be effective the fifteenth (15th) day following the termination of negotiations. For purposes of such prepayment, interest shall accrue under the Revolving Credit Loan for any period during which the LIBOR Rate basis was suspended at the interest rate per annum required to be paid hereunder on the day immediately prior to the day such suspension began and continuing until agreement is reached as to a substitute method of determining the interest rate or the principal is paid in full. (e) RISK-BASED CAPITAL. In the event that the (i) introduction of or any change in the judicial, administrative, or other governmental interpretation of any law or regulation or (ii) compliance by Bank or any corporation controlling Bank with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), has the effect of requiring an increase in the amount of capital required or expected to be maintained by Bank or any corporation controlling Bank, and Bank determines that such increase is based upon its obligations hereunder, and other similar obligations, Borrower shall pay to Bank such additional amount as shall be certified by Bank to be the amount allocable to Bank's obligations to the Borrower hereunder. Provided, however, with respect to the occurrence of any increase in premiums payable by Bank to the Federal Deposit Insurance Corporation which is the direct result of an unsound practice or procedure of Bank in the opinion of said agency, said increase alone shall not serve as the basis of the requirement of Bank hereunder that Borrower pay any additional amounts and Bank must have an independent basis for assessing such additional amount. Bank will notify Borrower of any event occurring after the date hereof that will entitle Bank to compensation pursuant to this subsection as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Determination by Bank for purposes of this subsection of the effect of any increase in the amount of capital required to be maintained by Bank and of the amount allocable to Bank's obligations to Borrower hereunder shall be conclusive, provided that such determinations are made on a reasonable basis. Notwithstanding anything to the contrary contained in this Agreement or any other Loan Document, Borrower's obligations to pay increased interest rates and other fees and charges under this Section 2.06 are limited to the extent that such obligations do not arise or are effected due to acts or omissions of Bank resulting from gross negligence, willful or unlawful conduct. SECTION 2.07. METHOD OF PAYMENT. Borrower shall make each payment under this Agreement and under the Note not later than 2:00 p.m., Memphis, Tennessee, time, on the date when due in lawful money of the United States to Bank at the Head Office in immediately available funds. Borrower hereby authorizes Bank, if and to the extent payment is not made when due under this Agreement or under the Note, to charge from time to time against any account of Borrower with Bank containing unrestricted funds any amount so due. Whenever any payment to be made under this Agreement or under the Note shall be stated to be due on a Saturday, Sunday, or a public holiday, or Banking holiday under the laws of the state in which the Head Office is located, such payment shall be made on the next succeeding Domestic Business Day, and such extension of time shall in such case be included in the computation of the payment of interest. 12 18 SECTION 2.08. USE OF LOAN PROCEEDS. Advances under the Revolving Credit Loan shall be used by Borrower for the following purposes only: (a) Working Capital. Working capital needs including, without limitation, the payment of dividends in the ordinary course of operations (and advances to RFSP for its working capital needs), such advances for working capital needs not to exceed the aggregate sum of Five Million and No/100 Dollars ($5,000,000.00) outstanding at any one time; (b) Acquisition. Acquisition of Additional Hotel Properties by RFSP or Borrower (provided however, no portion of the Loans shall be used for international hotel acquisitions); (c) Development. Development of Additional Hotel Properties, such advances for ----------- Development not to exceed the aggregate sum of Thirty-Five Million and No/100 Dollars ($35,000,000.00) outstanding at any one time, provided however, that Bank shall be under no obligation to allow Advances for Development unless and until Bank deems itself fully secured by enough Hotel Properties which have been accepted into the Collateral Pool in order to maintain, including the Advance requested for any such Development purpose, the proper Loan to Value Ratio required in Section 2.10 of this Agreement. In the event that the acquisition of any Additional Hotel Property shall be funded with proceeds from the Revolving Credit Loan, Bank shall have received at least thirty (30) days prior notice if such Additional Hotel Property is to be added to the Collateral Pool upon the acquisition thereof pursuant to the terms of this Agreement. Borrower shall have full responsibility to deliver or have delivered to Bank those items specified in subsections 2.09 (a) - (r) below in the form required, and to otherwise comply with all other requirements set forth therein on or before the date of closing of any acquisition, or the date Borrower shall otherwise require such proceeds for the acquisition of any Additional Hotel Properties. Notwithstanding the foregoing, in the event Borrower shall request an advance under the Revolving Credit Loan in accordance with Section 2.03 above and such request is within the limits of the Commitment pursuant to Section 2.01 above and Borrower otherwise complies with the provisions of Article III, said advance under the Revolving Credit Loan may be used by Borrower to acquire an Additional Hotel Property with respect to which all items specified in Section 2.09 have not been satisfied at the time of the advance thereunder in the event that Borrower shall not at the time of such advance seek to have such Additional Hotel Property made a part of the Collateral Pool. If Borrower shall thereafter seek to have such Additional Hotel Property approved for the Collateral Pool, it shall satisfy in full the requirements of Section 2.09 with respect thereto, provided, however, that all Additional Hotel Properties to be added to the Collateral Pool must be added within sixty (60) days of acquisition or Bank shall be under no obligation to 13 19 thereafter consider accepting any such Additional Hotel Properties into the Collateral Pool. SECTION 2.09. COLLATERAL POOL. Borrower and RFSP shall provide Bank with enough Hotel Properties acceptable to Bank for inclusion in the Collateral Pool which are sufficient to maintain, at all times relevant hereto, a Value of the Collateral Pool Properties equal to or greater than One Hundred Fifty-One Million, Five Hundred Thousand and No/100 Dollars ($151,500,000.00). All such Hotel Properties shall be deemed a part of the Collateral Pool for purposes of Section 2.01 only after Bank has received, with respect to each such Hotel Property, each of the following documents within the time limits set forth in Section 2.08 above, which documents shall be in all respects acceptable in form and content to Bank and its counsel: (a) Mortgages. A Mortgage in recordable form duly executed by Borrower and RFSP in form and content acceptable to Bank and its counsel and giving Bank a first lien on said Hotel Property subject only to those easements or encumbrances consented to in writing by Bank ("Permitted Exceptions"). (b) Security Agreements. Security Agreements duly executed by Borrower and RFSP, as applicable, granting to Bank a first security interest in all furniture, furnishings, equipment, fixtures, supplies, inventory, accounts, licenses, franchise agreements, general intangibles and other personal property of every kind and description used in connection with the ownership, operation and or management of each such Hotel Property, together with (i) acknowledgment copies of Financing Statements (UCC-1) duly filed under the Uniform Commercial Code of all jurisdictions necessary or, in the opinion of Bank, desirable to perfect the security interest created by the Security Agreement; and (ii) certified copies of requests for information (Form UCC-11) identifying all of the financing statements on file with respect to Borrower, RFSP and RFS, as applicable, indicating that no party claims an interest in any of the Collateral. At Bank's option, the Security Agreements may be contained in the Mortgages. (c) Evidence of Due Authorization of Security Documents and Corporate or Partnership Good Standing. Certified copies of all partnership or corporate action, as applicable, taken by each party executing a Mortgage, Security Agreement, Assignments of Rents and Leases, Subordinations and/or Assignments of Leases and Management Agreements, UCC-1 financing statement, and all other instruments, certificates or agreements required by Bank (the "Security Documents"), including resolutions of its Board of Directors or appropriate partnership action, as applicable, authorizing the execution, delivery and performance of the Security Documents and evidence of the good standing of each party to each of the Security Documents under their respective states organization and any other state Bank deems necessary or appropriate. 14 20 (d) Assignments of Rents and Leases. An Assignment of Rents and Leases with respect to each such Hotel Property duly executed by Borrower and RFSP, in form and content acceptable to Bank and its counsel. (e) Franchise Agreements. Copies of the franchise agreement under which each such Hotel Property will be operated, a copy of the franchisor's most recent inspection report, and, unless waived by Bank, a letter from franchisor agreeing to give notices to Bank of any defaults by the franchisee. (f) Leases. Copies of each lease of each such Hotel Property (collectively, the "Leases"), which Leases shall be acceptable to Bank, it being understood that the form of lease used for the Initial Hotels is acceptable to Bank. (g) Subordinations. Subordination agreement(s) duly executed by the lessees under the Leases subordinating the Leases to the Mortgages. (h) Management Agreements. Copy of any management agreement for any Hotel Property subject to a management agreement providing for management by a company satisfactory to Bank, and an assignment to Bank of any such management agreement, as well as the subordination thereof and management fees thereunder to the Mortgage for the subject Hotel Property, and the consent of the manager thereto, all in form and content acceptable to Bank and its counsel. (i) Surveys. An ALTA as-built survey of each such Hotel Property from a licensed surveyor acceptable to Bank, Bank's counsel and the title insurance company. The survey must be sufficient in form and content so that the title insurance company will issue an ALTA mortgagee's title insurance policy in which the standard boundary, encroachment and survey exceptions have been deleted. The survey must be dated within ninety (90) days prior to the issuance of the title policy and be certified to Bank and the title insurance company in form acceptable to Bank. The survey must show all easements or restrictions reflected as exceptions in the title insurance policies and must not show any matters affecting a particular property which is objectionable to Bank. The survey shall indicate whether any part of the particular Hotel Property is located within a flood plan area. (j) Title Insurance Policies. A mortgagee title insurance policy with respect to each such Hotel Property in an amount satisfactory to Bank, naming Bank as the insured party, showing no indebtedness against such Hotel Property except for the Mortgage and reflecting fee simple title to the Hotel Property in RFSP, subject to no exceptions except for Permitted Exceptions. Such policy shall contain affirmative coverage as to survey matters, and such other affirmative coverage or endorsements as may be reasonably required by Bank. 15 21 (k) Environmental Audits. A Phase I environmental audit for each such Hotel Property, or higher, if reasonably required by Bank, performed and issued by a nationally recognized environmental audit firms, or as otherwise mutually agreed upon by Borrower and Bank, addressed to Bank as a party entitled to rely thereon, dated not more than six (6) months prior to the date the applicable Hotel Property is accepted into the Collateral Pool, reflecting no indication of adverse environmental conditions at the subject Hotel Property. (l) Physical Inspections. Unless waived by Bank, report of an independent inspecting engineering firm satisfactory to Bank as to the physical condition of each such Hotel Property reflecting the condition of such Hotel Property acceptable to Bank and the independent satisfaction of Bank with the physical condition of the Hotel Property pursuant to the on-site inspection of officers to Bank, for which inspections such officers shall be permitted access to the Hotel Property during reasonable hours. All out of pocket expenses incurred by Bank in connection with such inspections shall be payable on demand by Borrower. (m) Hazard Insurance. Certificate of insurance coverage for each such Hotel Property of the type required to be carried as provided in Section 5.05. (n) Appraisals. An appraisal of each such Hotel Property in form and content satisfactory to Bank prepared by an MAI appraiser familiar with values of Hotel Properties in the area in which the subject Hotel Property is located, or other appraiser satisfactory to Bank in its discretion. (o) Environmental Indemnity. An Environmental Indemnity Agreement in form and content satisfactory to Bank and its counsel, executed by Borrower and RFSP, as applicable, with respect to each such Hotel Property. (p) Opinion of Counsel for Borrower and RFSP. Favorable opinions of counsel for Borrower and RFSP as to the existence and authority of each such entity and the enforceability against such entity of the Security Documents, as applicable, and all other documents to be delivered by such entities and, with respect to RFSP, specifically opining as to the existence and sufficiency of consideration for the Security Documents to be signed by it, each such opinion letter to be in form and content acceptable to Bank, and opining as to such other matters as Bank may request. (q) Independent Market Study. An independent market study acceptable to Bank on each such Hotel Property. (r) Other Documents. Such other approvals, opinions, or documents as Bank may request. 16 22 If at any time Bank reasonably determines, in its sole discretion, that a Hotel Property should be removed from the Collateral Pool, whether due to environmental concerns which have changed or become known since the date of inclusion in the Collateral Pool, casualty or otherwise, Bank shall so notify Borrower in writing and such Hotel Property shall thereafter no longer be considered part of the Collateral Pool, nor included in the calculation of the Borrowing Base. As promptly as possible thereafter, Borrower or RFSP, as the case may be, shall pledge to Bank another unencumbered Hotel Property proposed by Borrower and acceptable to Bank in substitution thereof and in accordance with this Section 2.09. It is understood and agreed that at any time it becomes necessary pursuant to the terms hereof to pledge a Hotel Property to Bank for inclusion in the Collateral Pool, Bank shall initially consider any Hotel Property proposed by Borrower, but if Borrower does not propose a Hotel Property acceptable to Bank, Bank shall be allowed to choose from all unencumbered Hotel Properties not then included in the Collateral Pool, and Borrower and RFSP shall provide to Bank all such information and documents on such Hotel Properties as Bank may reasonably request to enable Bank to choose the Hotel Properties necessary to be pledged to Bank pursuant to the terms hereof. SECTION 2.10. ADJUSTMENTS TO COLLATERAL POOL VALUATION. (a) Appraisals. Bank may require Borrower to furnish Bank updated appraisals of each Collateral Pool Property bi-annually, or more often as Bank may from time to time require in order to assist Bank in determining the present Loan to Value Ratio (hereinafter referred to as "LTV Ratio"). All such appraisals shall comply in all respects with the requirements of subsection 2.09(n) above. (b) Mandatory Adjustments. In the event that at any time during the term hereof the LTV Ratio exceeds The Borrowing Base of thirty three percent (33%), Borrower shall within thirty (30) days following notification from Bank: (i) prepay such amount of the Loans as may be necessary to reduce said ratio on the date of payment to thirty three percent (33%) or less, or (ii) pledge additional collateral acceptable to Bank with an appraised value sufficient to reduce the LTV Ratio to thirty three percent (33%) or less. (c) Adjustments for Franchise Cancellations. In no event shall Borrower be entitled hereunder to borrow amounts which will increase the LTV Ratio to greater than thirty three percent (33%), nor shall the aggregate sum outstanding at any time under the Loans exceed Fifty Million and no/100 Dollars ($50,000,000.00). Furthermore, the Value of any Collateral Pool Property whose operating franchise license is cancelled shall be immediately deducted from the value of the Collateral Pool until such time as a national franchise reasonably acceptable to Bank is obtained with respect to such property and a new appraisal is obtained reflecting the same. In the interim, Bank shall have the right to deliver the notice set forth in subsection (b) above, in which event said subsection (b) shall be applicable in full. For purposes of the computation of the LTV Ratio, the Value of the Collateral Pool Property with respect to which such franchise is canceled shall be deemed $0. 17 23 (d) Pre-Approvals. Borrower may from time to time submit information to Bank concerning hotels to be purchased by Borrower or RFSP which are not to be purchased with proceeds of the Revolving Credit Loan, such submission to be for the purpose of pre-approving such Hotel Properties for satisfaction of all requirements set forth in Section 2.09 and inclusion in the Collateral Pool at the option of Borrower, subject to all requirements and provisions herein relating to the purchase of Additional Hotel Properties for inclusion in the Collateral Pool. SECTION 2.11. SALE OF HOTEL PROPERTIES. Upon the written request of Borrower, Bank shall release from the liens of any Mortgages such Hotel Properties as Borrower may sell from time to time, provided that the LTV Ratio will not exceed thirty three percent (33%) after any requested releases of any Collateral Pool Properties. SECTION 2.12. FEES. In consideration of Bank's Commitment to advance funds under the Revolving Credit Loan, Borrower agrees to pay to Bank the following annual fees: (a) Commitment Fee. A commitment fee equal to one-quarter percent (.25%) of the maximum amount of the Commitment, determined without regard to the Collateral Pool valuation limitation (the "Maximum Committed Amount"), such fee to be paid annually upon the anniversary date of the execution of the First Loan Agreement; and (b) Agent's Fee. An agent's fee equal to one-quarter percent (.25%) of the maximum amount of the Commitment, determined without regard to the Maximum Committed Amount, such fee to be paid annually upon the anniversary date of the execution of the First Loan Agreement. ARTICLE III CONDITIONS PRECEDENT SECTION 3.01. INTENTIONALLY OMITTED. SECTION 3.02. CONDITIONS PRECEDENT TO ADVANCES UNDER THE REVOLVING CREDIT LOAN. The obligation of Bank or the Participants to make advances under the Revolving Credit Loan is subject to the conditions precedent that on the date of each advance under the Revolving Credit Loan: (a) The following statements shall be true and Bank shall have received a certificate signed by a duly authorized officer of Borrower dated the date of each advance under the Revolving Credit Loan, stating that: 18 24 (i) The representations and warranties contained in Article IV of this Agreement are correct on and as of the date of such advance as though made on and as of such date; (ii) No Default or Event of Default has occurred and is continuing, or would result from such advance; (iii) There has been no material adverse change in the financial condition of Borrower or RFSP since the date of the financial statements, if any, delivered to Bank pursuant to Section 5.08; and (iv) The principal amount outstanding under the Revolving Credit Loan, when aggregated with the principal amount of the advance requested, shall not exceed the limits of the Commitment pursuant to Section 2.01 above. (b) Bank shall have received such other approvals, opinions, or documents as Bank may reasonably request. SECTION 3.03. CONDITIONS PRECEDENT TO THE TERM LOAN. The obligation of Bank to make the Term Loan shall be subject to the condition precedent that Bank shall have received on or before the day of the Term Loan all of the documents required by Section 3.02 and each of the following, in form and substance satisfactory to Bank and its counsel: (a) Note. The Note duly executed by Borrower, or any replacement note requested by bank; (b) Opinion of counsel for Borrower and RFSP. A favorable opinion of counsel for Borrower and RFSP dated the date of the Term Loan, in form and content acceptable to Bank; (c) Officer's certificate, etc. The following statements shall be true and Bank shall have received a certificate signed by a duly authorized officer of Borrower dated the date of the Term Loan stating that: (i) The representations and warranties contained in Article IV of this Agreement are correct on and as of the date of the Term Loan as though made on and as of such date; and (ii) No Default or Event of Default has occurred and is continuing, or would result from the Term Loan. (d) Modifications of Mortgages/Title Endorsements. If reasonably required by Bank, modification agreements with respect to the Mortgages on the Hotel Properties pledged as collateral for the Loans and endorsements to the policies of mortgagee title 19 25 insurance reflecting the conversion of the Revolving Credit Loan to the Term Loan and showing no adverse title matters as to any such Hotel Property; and (e) Additional Documentation. Bank shall have received such other approvals, opinions, or documents as Bank may request. ARTICLE IV REPRESENTATIONS AND WARRANTIES Borrower and/or RFSP, as the case may be or the context would require, represent and warrant to Bank that: SECTION 4.01. INCORPORATION, GOOD STANDING, AND DUE QUALIFICATION OF BORROWER. Borrower is a corporation duly incorporated, validly existing, and in good standing under the laws of the jurisdiction of its incorporation; has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged; and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required. SECTION 4.02. CORPORATE POWER AND AUTHORITY OF BORROWER. The execution, delivery, and performance by Borrower of the Loan Documents have been duly authorized by all necessary corporate action and do not and will not (1) require any consent or approval of the stockholders of Borrower; (2) contravene any provision of Borrower's charter or bylaws; (3) violate any provision of any law, rule, regulation (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to Borrower; (4) result in a breach of or constitute a default under (whether with the giving of notice, passage of time, or both) any indenture or loan or credit agreement or any other agreement, lease, or instrument to which Borrower is a party or by which it is or its properties may be bound or affected; (5) result in, or require, the creation or imposition of any lien, upon or with respect to any of the properties now owned or hereafter acquired by Borrower; or (6) cause Borrower to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award or any such indenture, agreement, lease, or instrument. SECTION 4.03. EXISTENCE AND DUE QUALIFICATION OF RFSP. RFSP is validly existing and in good standing under the laws of the State of Tennessee; has the power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged in; and is duly qualified and in good standing under the laws of each other jurisdiction in which such qualification is required. SECTION 4.04. POWER AND AUTHORITY OF RFSP. The execution, delivery and performance by RFSP of any of the Loan Documents to which it is a party, have been duly authorized by all necessary partnership action, and do not and will not (1) require any consent or approval of any 20 26 limited partners; (2) contravene any partnership agreement; (3) violate any provision of any law, rule, regulation (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to RFSP ; (4) result in a breach of or constitute a default under (whether with the giving of notice, passage of time, or both) any indenture or loan or credit agreement or any other agreement, lease, or instrument to which is a party or by which its properties may be bound or affected; (5) result in or require the creation of imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by it; or (6) cause either RFSP to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award for any such indenture, agreement, lease, or instrument. SECTION 4.05. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, legal, valid, and binding obligations of Borrower, or of RFSP, as applicable, enforceable in accordance with their respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws affecting creditors' rights generally. SECTION 4.06. LABOR DISPUTES AND ACTS OF GOD. Neither the respective businesses, nor the respective properties, of Borrower or RFSP are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), materially and adversely affecting such businesses or properties or the operations of Borrower or RFSP. SECTION 4.07. OTHER AGREEMENTS. Neither Borrower nor RFSP is a party to any indenture, loan, or credit agreement, or to any lease, or other agreement or instrument, or subject to any charter or corporate restriction, or partnership restriction, which could have a material adverse effect on the business properties, assets, operations, or conditions, financial or otherwise, of Borrower or of RFSP, or the ability of Borrower or of RFSP to carry out their respective obligations under the Loan Documents to which they are a party. Neither Borrower nor RFSP is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which any of them is a party, including, without limitation, any of the Easements, or the Leases. SECTION 4.08. LITIGATION. There is no pending or threatened action or proceeding against or affecting Borrower or RFSP before any court, governmental agency, or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the respective financial conditions, operations, properties, or businesses of Borrower or RFSP or the ability of Borrower or RFSP to perform their respective obligations under the Loan Documents to which they are a party. SECTION 4.09. NO DEFAULTS ON OUTSTANDING JUDGMENTS OR ORDERS. Borrower and RFSP have satisfied all judgments, and neither Borrower nor RFSP is in default with respect to any judgment, writ, injunction, decree, rule, or regulation of any court, arbitrator, or federal, 21 27 state, municipal, or other government authority, commission, board, bureau, agency, or instrumentality, domestic or foreign. SECTION 4.10. OWNERSHIP AND LIENS. Borrower and RFSP have title to all of their respective properties and assets, real and personal, and none of the properties and assets owned by Borrower or RFSP is subject to any Lien except as provided in Section 6.01. RFSP has unencumbered fee simple title to all of the Initial Hotels. SECTION 4.11. OPERATION OF BUSINESS. Except as may have been disclosed in writing to, and approved by, Bank, Borrower and RFSP have made application for or otherwise possess all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, and neither Borrower nor RFSP are in violation of any of the foregoing or any valid rights of others with respect to any of the foregoing. SECTION 4.12. TAXES. Borrower and RFSP have filed all tax returns (federal, state, and local) required to be filed and have paid all taxes, assessments, and governmental charges and levies shown or required to be shown thereon to be due, including interest and penalties, and have paid all real estate and personal property taxes due to date with respect to each Hotel Property and their other assets. SECTION 4.13. DEBT. Borrower has provided to Bank a complete and correct list of all credit agreements, indentures, purchase agreements, guaranties, Capital Leases, and other investments, agreements, and arrangements presently in effect providing for or relating to extensions of credit (including agreements and arrangement for the issuance of letters of credit or for acceptance financing) in respect of which Borrower or RFSP is in any manner directly or contingently obligated; and the maximum principal or face amounts of the credits in question, which are outstanding and which can be outstanding, have been correctly stated, and all liens of any nature given or agreed to be given as security therefor have been correctly described or identified to Bank. SECTION 4.14. ENVIRONMENTAL COMPLIANCE. The Hotel Properties are not currently used in any manner, and, to the best of the knowledge of Borrower and RFSP, no prior use by Borrower or RFSP, or any prior owner or tenant has occurred, which violates applicable Environmental Laws; neither Borrower nor RFSP, nor any tenant has received any notice from a governmental agency of a violation of such laws. If any such notice is received, Borrower shall immediately notify Bank. Borrower will not use or permit to be used any Hotel Property in a manner which would violate Environmental Laws. SECTION 4.15. ADA COMPLIANCE. To the best of Borrower's and RFSP's respective knowledges, the Hotel Properties comply with all applicable provisions of the Americans With Disabilities Act which would result in material liability if said Hotel Properties were found to be in non-compliance. 22 28 SECTION 4.16. OPERATIONS; ROOM RENTS. The Hotel Properties have been operated in a prudent manner consistent with other hotels of similar character and location, and neither Borrower nor RFSP have diverted or transferred any motel receipts or room rents for any use inconsistent with such operations performed in the ordinary course of operating the Hotel Properties. ARTICLE V AFFIRMATIVE COVENANTS So long as any Note shall remain unpaid or Bank shall have any Commitment under this Agreement, Borrower and RFSP covenant as follows: SECTION 5.01. MAINTENANCE OF EXISTENCE. Borrower will preserve and maintain its corporate existence and good standing in the jurisdiction of its incorporation, qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required, and retain its qualification as a REIT under federal income tax regulations; ; and RFSP will maintain its existence as a limited partnership and will remain qualified in each jurisdiction in which qualification is required. SECTION 5.02. MAINTENANCE OF RECORDS. Borrower and RFSP will keep adequate records and books of account in which complete entries will be made in accordance with GAAP consistently applied, reflecting all financial transactions. SECTION 5.03. MAINTENANCE OF PROPERTIES. Borrower and RFSP will maintain, keep, and preserve all of their respective properties (tangible and intangible) necessary or useful in the proper conduct of their respective businesses in good working order and condition, ordinary wear and tear and insured casualty damage or taking through the power of eminent domain excepted. SECTION 5.04. CONDUCT OF BUSINESS. Borrower and RFSP will continue to engage in an efficient and economical manner in a business of the same general type as conducted by them on the date of this Agreement. SECTION 5.05. MAINTENANCE OF INSURANCE. Borrower and RFSP will maintain insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated. RFSP will maintain with respect to each Hotel Property fire and extended coverage insurance in form and content acceptable to Bank, including vandalism and malicious mischief coverage, in an amount not less than the full replacement cost of the improvements. The policies must contain coverage for damage from wind and earthquake and be issued by a company which is approved by the applicable governmental entity overseeing the insurance industry in the state where the Hotel Property is located, and which is acceptable to Bank. If at any time during the term hereof it is determined that any Hotel Property is located in a "special flood hazard area" 23 29 requiring flood insurance under the Flood Disaster Protection Act of 1973, RFSP shall provide satisfactory flood insurance with respect to such property. All policies of insurance required to be maintained hereunder shall name Bank as loss payee under the standard New York mortgagee clause or the equivalent thereof acceptable to Bank. SECTION 5.06. COMPLIANCE WITH LAWS. Borrower and RFSP will comply in all material respects with all applicable laws, rules, regulations, and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments, and governmental charges imposed upon them or upon their respective properties. SECTION 5.07. RIGHT OF INSPECTION. At any reasonable time and from time to time, Borrower and RFSP will permit Bank or any agent or representative thereof to examine and make copies of and abstracts from their records and books of account of, and visit their properties and to discuss their affairs, finances, and accounts with any of their respective officers and directors and their independent accountants. SECTION 5.08. REPORTING REQUIREMENTS. Borrower and RFSP shall furnish to Bank: (a) Quarterly financial statements. No later than twenty-five (25) days after the end of each quarter, or more frequently if Bank shall reasonably request, but in any event, no later than one (1) day prior to the filing of such information with the Securities and Exchange Commission, after the end of each of the first three quarters of each fiscal year, balance sheets as of the end of such quarter, statements of income and retained earnings for the portion of the fiscal year ending with the end of such quarter, a statement of change in cash flow for the portion of the fiscal year ending with the last day of such quarter, a properly completed Debt Coverage Worksheet, plus all supporting documentation, covering the twelve-month period ending with the last day of such quarter, statements of operation for all of the Hotel Properties and a combined statement of operations for all Hotel Properties for such quarter, and detailed information regarding occupancy figures and average daily room rates for all of the Hotel Properties for such quarter in form and content acceptable to Bank, as same may be modified by Bank from time to time, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the previous fiscal year and all prepared in accordance with GAAP consistently applied and certified by their chief financial officers (subject to year-end adjustments); (b) Annual financial statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year, balance sheets as of the end of their respective fiscal years, statements of income and retained earnings as of the end of such fiscal years, statements of changes in cash flows for such fiscal years, and, with respect to each of the foregoing, accompanied by an opinion thereon acceptable to Bank by Coopers & Lybrand or other independent certified public accountants acceptable to Bank, a properly completed Debt Coverage Worksheet, covering such fiscal year, statements of operation for all of the Hotel Properties and a combined statement of operations for such 24 30 fiscal year (both including an itemized account of gross income and expenses), and detailed information regarding occupancy figures and average daily room rates for all of the Hotel Properties for such fiscal year, and detailed information regarding occupancy figures and average daily room rates for all of the Hotel Properties for such fiscal year, all of the foregoing to be in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year and all prepared in accordance with GAAP consistently applied and certified as correct by their chief financial officers; (c) Management letters. Promptly upon receipt thereof, copies of any reports submitted by independent certified public accountants in connection with any audits of their financial statements made by such accountants; (d) Certificate of no Default. Within ninety (90) days after the end of each of the quarters of each of their respective fiscal years, certificates of their chief financial officers certifying that to the best of their knowledge no Default or Event of Default has occurred and is continuing, or if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto; (e) Notice of litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting Borrower or RFSP, which, if determined adversely, could have a material adverse effect on their respective financial conditions, properties, or operations; (f) Notice of Defaults and Events of Default. As soon as possible and in any event within ten (10) days after the occurrence of each Default or Event of Default, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken with respect thereto; (g) Reports to other creditors. Promptly after the furnishing thereof, copies of any financial statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to Bank pursuant to any other clause of this Section 5.08; (h) Proxy statements, etc. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements, and reports which Borrower or RFSP sends to their respective stockholders or partners, as applicable, and copies of all regular, periodic, and special reports, and all registration statements which Borrower or RFSP files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; 25 31 (i) Tax receipts. Copies of paid real estate ad valorem tax receipts for all Hotel Properties prior to delinquency; and (j) General information. Such other information respecting the condition or operations, financial or otherwise, as Bank may from time to time request. SECTION 5.09. DEBT COVERAGE RATIOS. (a) Debt Coverage Ratio (NOI). Borrower shall maintain a Debt Coverage Ratio (NOI) on all of Borrower's Debt and Hotel Properties, whether such Debt was incurred with Bank or any other creditor, of at least 3.0:1 at all times during the term hereof. (b) Debt Coverage Ratio (CF). Borrower shall maintain a Debt Coverage Ratio (CF) on just the Revolving Credit Loan and Collateral Pool Properties of at least 2.25:1 at all times during the term hereof, and must maintain a minimum level of Operating Income from Collateral Pool Properties at all times of at least $17,500,000.00. (c) Debt Coverage Ratio (CFO). Borrower shall maintain a Debt Coverage Ratio (CFO) on all of Borrower's Debt and Hotel Properties, whether such Debt was incurred with Bank or any other creditor, of at least 1.75:1 at all times during the term hereof. (d) Quarterly Calculations. The Debt Coverage Ratios shall be calculated each quarter using a trailing twelve (12) month rolling average using the NOI, CF, or CFO, as applicable, for the immediately preceding twelve (12) month period. Borrower shall prepay a portion of the Loans sufficient to achieve such of the required Debt Coverage Ratios as are not in compliance within thirty days following notification from Bank if any such quarterly calculation shall result in a Debt Coverage Ratio less than the minimums set forth above. Bank may refuse any draw request made by Borrower if the result of the making of the advance requested would be that the calculation of any of the required Debt Coverage Ratios, using an Annual Debt Service amount computed on the total principal which would be outstanding after the advance of the draw requested, would result in Borrower's failure to maintain any of the required Debt Coverage Ratios. Borrower shall be allowed to borrow additional funds at such time as Borrower can demonstrate that it has sufficient net taxable income for the preceding four calendar quarters to provide the required coverage for all Debt Coverage Ratios not in compliance. (e) Revolving Credit Loan Calculation. With respect to the calculation of the Debt Coverage Ratio relating to the Revolving Credit Loan, the Annual Debt Service on Borrower's outstanding Debt thereunder shall be determined as though 26 32 such Debt was being amortized to arrive at a monthly installment amount using a ten (10) year term and an assumed interest rate equal to the greater of (i) 1.75%, in excess of the Libor Rate, or (ii) the five (5) year U.S. Treasury Note yield, plus 2.5%. SECTION 5.10. RESERVE FOR ROOM RENOVATIONS. Borrower shall maintain a reserve account at Bank, into which Borrower shall deposit, or shall have deposited, as the case may be, commencing with the calendar quarter beginning July 1, 1994, the sum of $75.00 per room for all Hotel Properties pledged as collateral for the Loans followed by deposits on or before the first day of each calendar quarter thereafter during the term hereof (January 1, April 1, July 1, and October 1). Borrower or RFSP may withdraw funds from said account at any time prior to an Event of Default without restriction. Borrower or RFSP shall furnish Bank an accounting of all sums withdrawn from such account at the end of each calendar quarter (March 31, June 30, September 30 and December 31). SECTION 5.11. MAINTENANCE OF FRANCHISES. Borrower and RFSP, as applicable, shall comply with the requirements imposed on any of them as franchisee under all franchise agreements held for operation of the Initial Hotels, and any Additional Hotel Properties acquired with proceeds of the Revolving Credit Loan. Copies of any notices of default under said franchise agreements and copies of any other material correspondence received from a franchisor under such franchise agreements shall be given immediately to Bank. SECTION 5.12. MINIMUM NET WORTH. Borrower shall maintain at all applicable times, a minimum net worth in an amount equal to the net worth of Borrower as reported to, and accepted by, Bank in Borrower's most recent fiscal year-end audited financing statement, as such net worth may change from year to year. SECTION 5.13. OPERATIONS; ROOM RENTS. BORROWER AND RFSP shall ensure that the operations of the Hotel Properties are conducted in a prudent manner consistent with other hotels of similar character and location, and shall not divert or transfer any receipts or room rents for any use inconsistent with such operations performed in the ordinary course of operating the Hotel Properties. SECTION 5.14. MINIMUM CASH FLOW. Borrower and RFSP shall maintain at all times a Cash Flow amount which is equal to or greater than thirty-five percent (35%) of the committed amount of the Revolving Credit Loan. 27 33 ARTICLE VI NEGATIVE COVENANTS So long as any Note shall remain unpaid or Bank shall have any Commitment under this Agreement, Borrower and RFSP will comply with the following negative covenants: SECTION 6.01. LIENS. Borrower and RFSP will not create, incur, assume, or suffer to exist, any lien upon with respect to any of their respective properties, now owned or hereafter acquired, except: (a) Liens in favor of Bank; (b) Liens for taxes or assessments or other government charges or levies if not yet due and payable or, if due and payable, if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (c) Liens imposed by law, such as mechanics' materialmen's, landlords', warehousemen's, and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; (d) Liens under workmen's compensation, unemployment insurance, social security, or similar legislation; (e) Liens, deposits, or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (f) Judgment and other similar liens arising in connection with court proceedings, provided the execution or other enforcement of such liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (g) Easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use, and enjoyment of their property or assets encumbered thereby in the normal course of their respective businesses or materially impair the value of their property subject thereto; (h) Existing mortgage liens on any Hotel Properties securing obligations assumed by Borrower or RFSP, provided, however, such Hotel Properties shall not be 28 34 purchased with proceeds from the Revolving Credit Loan, nor pledged to Bank as collateral for the Loans, nor be submitted for inclusion in the Collateral Pool, unless Bank shall consent in its sole discretion after request from Borrower. 28 SECTION 6.02. DEBT. Neither Borrower nor RFSP will create, incur, assume, or suffer to exist any Debt, except: (a) Debt of Borrower under this Agreement or the Note; (b) Accounts payable to trade creditors, including without limitation, amounts payable under service contracts, for goods or services incurred in the ordinary course of business and paid within the specified time, unless contested in good faith and by appropriate proceedings; (c) Debt assumed by Borrower or RFSP secured by any of the Additional Hotel Properties, provided, however, that (i) such debt assumed by Borrower or RFSP shall never exceed in the aggregate Twenty Million and no/100 Dollars ($20,000,000.00), (ii) the total LTV Ratio may not exceed thirty three percent (33%) after including the debt assumed, if such Additional Hotel Properties were purchased with proceeds from the Revolving Credit Loan (iii) such Additional Hotel Properties shall not be included in the Collateral Pool, unless Bank shall consent in its sole discretion, and (iv) Borrower will maintain the required Debt Coverage Ratio after including the debt assumed. SECTION 6.03. MERGERS, ETC. Neither Borrower nor RFSP will merge or consolidate with, or sell, assign, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of their assets (whether now owned or hereafter acquired) to any person, or acquire all or substantially all of the assets or the business of any person, other than acquisition of Hotel Properties by RFSP in the ordinary course of business. SECTION 6.04. LEASES. Neither Borrower nor RFSP will create, incur, assume, or suffer to exist any obligation as lessee for the rental or hire of any real or personal property, except for non-Capital Leases incurred in the ordinary course of business and for any Capital Leases of equipment necessary for the operation of the Hotel Properties. SECTION 6.05. SALE AND LEASEBACK. Neither Borrower nor RFSP will sell, transfer, or otherwise dispose of any real or personal property to any Person and thereafter directly or indirectly lease back the same or similar property. SECTION 6.06. GUARANTIES, ETC. Neither Borrower nor RFSP will assume, guarantee, endorse, or otherwise be or become directly or contingently responsible or liable (including, but not limited to, an agreement to purchase any obligation, stock, assets, goods, or services, or to supply or advance any funds, assets, goods, or services, or to maintain or cause such person to maintain a minimum working capital or net worth, or otherwise to assure the creditors of any 29 35 person against loss) for obligations of any person, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. SECTION 6.07. CONDITION OF HOTELS. Neither Borrower nor RFSP will suffer to occur any material adverse change in the physical condition of any of the Hotel Properties as determined in the sole but reasonable discretion of Bank based on an appraisal or engineering report meeting the requirements of Section 2.09(l) and (n), respectively, delivered to Bank as required hereunder, other than losses from insured casualty or takings under the power of eminent domain. ARTICLE VII EVENTS OF DEFAULT SECTION 7.01. EVENTS OF DEFAULT. If any of the following events ("Events of Default") shall occur: (a) Borrower should fail to pay the principal of, or interest on, the Note, or any amount of a commitment fee, within fifteen (15) days following the date on which the same becomes due and payable; (b) Any representation or warranty made or deemed made by Borrower, RFSP or RFS in this Agreement, the Loan Documents or in any certificate, document, opinion, or financial or other statement furnished at any time under or in connection with any Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; (c) Borrower, RFSP or RFS shall fail to perform or observe any term, covenant, or agreement contained in any Loan Document (other than the Note) to which any of them is a party on their part to be performed or observed, and such failure shall continue for a period of thirty (30) days after notice to Borrower from Bank describing the nature of the failure; provided that, if such failure is not susceptible of cure within thirty (30) days, such party shall be allowed an additional thirty (30) days to effect such cure provided it promptly begins efforts to cure and thereafter diligently pursues such cure to conclusion; (d) Borrower or RFSP shall (i) fail to pay any indebtedness for borrowed money (other than the Note), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise); (ii) fail to perform or observe any term, covenant, or condition on their parts to be performed or observed under any agreement or instrument relating to any such indebtedness, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration after the giving of notice or passage of time, or both, of the maturity of such indebtedness, whether or not such failure to perform or observe shall be waived by the holder of such indebtedness; or any such indebtedness shall 30 36 be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (iii) suffer a material adverse change in condition (financial or otherwise); (e) Each of Borrower or RFSP (i) shall generally not, or shall be unable to, or shall admit in writing its inability to pay its debts as such debts become due; or (ii) shall make an assignment for the benefits of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (iii) shall commence any proceeding under any Bankruptcy, reorganization, arrangements, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction whether now or hereafter in effect, or (iv) shall have any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or adjudication or appointment is made and which remains undismissed for a period of sixty (60) days or more; or (v) by any act or omission shall indicate its consent to, approval of, or acquiescence in any such petition, application, or proceeding, or order for relief, or the appointment of a custodian, receiver, or trustee for all or any substantial part of its properties; or (vi) shall suffer any such custodianship, receivership, or trusteeship to continue undischarged for a period of sixty (60) days or more; (f) One or more judgments, decrees, or orders for the payment of money in excess of One Million and No/100 Dollars ( 1,000,000.00) in the aggregate shall be rendered against Borrower or RFSP, and such judgments, decrees, or orders shall continue unsatisfied and in effect for a period of twenty (20) consecutive days without being vacated, discharged, satisfied, or stayed or bonded pending appeal; (g) Any single Mortgage or Security Agreement shall at any time after its execution and delivery and for any reason, other than payment in full of the obligations so secured, cease: (i) to create a valid and perfected first priority mortgage or security interest in and to the property purported to be subject thereto; or (ii) to be in full force and effect or shall be declared null and void, or the validity or unenforceability thereof shall be contested by RFSP, or RFSP shall deny it has any further liability or obligation under any such Mortgage or Security Agreement, or RFSP shall fail to perform any of its obligations under any such Mortgage or Security Agreement, if the effect of removing the affected Collateral Pool Property from the Collateral Pool would result in a violation of the required LTV Ratio; (h) RFSP shall sell, transfer or convey any interest whatsoever in any of the Hotel Properties or the personal property held in connection therewith or the rental income therefrom (except for the leases to RFS ), or enter into any termination of, or material amendment to, any of the leases on any of the Collateral Pool Properties, without the prior written consent of Bank, which consent shall not be unreasonably withheld; (i) Borrower ceases to qualify as a REIT under applicable law entitled to all the benefits thereof, or RFSP ceases to be actively involved in the ownership of 31 37 Borrower and the Hotel Properties, or if any further encumbrances, whether by way of mortgage, deed of trust, financing lease, declaration of trust, or other instrument is placed on any of the Hotel Properties without the prior written consent of Bank; (j) Borrower's charter is amended to allow a LTV Ratio higher than thirty three percent (33%); (k) Borrower or RFSP defaults under any other agreement to which any is a party, which affects or relates to any of the Hotel Properties, such agreements including, without limitation, any of the Easements or the Leases; then, and in any such event, Bank may, by notice to Borrower, (1) declare its obligation to make advances under the Revolving Credit Loan terminated, whereupon the same shall forthwith terminate, (2) declare the outstanding principal balance owing under the Loans, all interest thereon, and all other amounts payable under this Agreement, or otherwise to be forthwith due and payable, whereupon the Loans, all such interest, and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by Borrower and RFSP , provided, however, that occurrence of any event specified in subsection (e) above shall constitute an immediate and automatic termination of Bank's obligation to make advances under the Revolving Credit Loan hereunder, and all sums then outstanding shall become automatically and simultaneously due and payable in full without any action on the part of Bank, (3) avail itself of any and all remedies available to it in any of the Loan Documents, including, without limitation, appointment of receivers for the Hotel Properties, (4) avail itself of any and all other or additional remedies available by law. ARTICLE VIII MISCELLANEOUS SECTION 8.01. AMENDMENTS, ETC. No amendment, modification, termination, or waiver of any provision of any Loan Document, nor consent to any departure by Borrower, RFSP or RFS from any Loan Document to which any of them is a party, shall in any event be effective unless the same shall be in writing and signed by Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8.02. NOTICES, ETC. All notices and other communications provided for under this Agreement and under the other Loan Documents shall be in writing (including telegraphic communication) and mailed or telegraphed or delivered, if to Borrower or RFSP, at Memphis, Tennessee 38119, and if to Bank, at its address at 6060 Poplar Avenue, Memphis, Tennessee 38119, Attention: Metropolitan Department; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 8.02. All such notices and communications shall, when mailed or telegraphed, be effective when deposited in the mails or delivered to the telegraph company, 32 38 respectively, addressed as aforesaid, except that notices to Bank pursuant to the provisions of Article II shall not be effective until received by Bank. SECTION 8.03. NO WAIVER; REMEDIES. No failure on the part of Bank to exercise, and no delay in exercising, any right, power, or remedy under any Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Loan Documents preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. SUCCESSOR AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that neither Borrower, RFSP nor RFS may assign or transfer, any of their rights under any Loan Document to which they are a party without the prior written consent of Bank. SECTION 8.05. COSTS, EXPENSES, AND TAXES. Borrower and RFSP agree to pay on demand all costs and expenses in connection with the preparation, execution, delivery, filing, recording, and administration of any of the Loan Documents, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for Bank, and local counsel who may be retained by said counsel, with respect thereto and with respect to advising Bank as to its rights and responsibilities under any of the Loan Documents, and all costs and expenses, if any, in connection and the enforcement of any of the Loan Documents. In addition, Borrower and RFSP shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing, and recording of any of the Loan Documents and the other documents to be delivered under any such Loan Documents, and agrees to save Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. Borrower and RFSP shall also pay all costs associated with the appraisals, engineering inspections, inspections of Hotel Properties by officers or employees of Bank, surveys and title insurance to be furnished Bank as provided herein; and all costs, including attorney fees, associated with modification of the Loan Documents and endorsements to title policies resulting from exercise by Borrower of the Term Loan Option or substitution of collateral. SECTION 8.06. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default, Bank is hereby authorized at any time and from time to time, without notice to Borrower or RFSP (any such notice being expressly waived), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit or the account of Borrower against any and all of the obligations of Borrower now or hereafter existing under this Agreement or the Note or any other Loan Document, irrespective of whether or not Bank shall have made any demand under this Agreement or the Note or such other Loan Document and although such obligations may be unmatured. Bank agrees promptly to notify Borrower after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such 33 39 setoff and application. The rights of Bank under this Section 8.06 are in addition to other rights and remedies (including, without limitation, other rights or setoff) which Bank may have. SECTION 8.07. WAIVER OF RIGHT TO JURY TRIAL. BORROWER AND RFSP JOINTLY AND SEVERALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED (OR WHICH MAY IN THE FUTURE BE DELIVERED) IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT. THE UNDERSIGNED AGREE(S) THAT SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 8.08. GOVERNING LAW. This Agreement and the Note shall be governed by, and construed in accordance with, the laws of the State of Tennessee, except with respect to interest which may be governed by applicable federal law in effect from time to time. SECTION 8.09. SEVERABILITY OF PROVISION. Any provision of any Loan Document 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 of such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 8.10. HEADINGS. Article and Section headings in the Loan Documents are included in such Loan Documents for the convenience of reference only and shall not constitute a part of the applicable Loan Documents for any other purpose. SECTION 8.11. JOINDER BY RFSP. RFSP joins in the execution hereof for the purpose of consenting to the provisions contained herein applicable to it and its properties and of agreeing to comply with all such applicable provisions. SECTION 8.12. JURISDICTION AND VENUE. The parties agree that the sole proper venue for the determination of any litigation commenced by Borrower or RFSP against Bank on any basis shall be in a court of competent jurisdiction which is located in Shelby County, Tennessee and the parties hereby expressly declare that any other venue shall be improper and Borrower and RFSP expressly waive any right to a determination of any such litigation against Bank by a court in any other venue. Borrower and RFSP further agree that service of process by any judicial officer or by registered or certified U.S. Mail, as specified in Section 8.02 on Notices, shall establish personal jurisdiction over Borrower and RFSP and Borrower and RFSP waive any rights under the laws of any state to object to jurisdiction within the State of Tennessee. Borrower and RFSP acknowledge that this Agreement was negotiated, executed and delivered in the State of Tennessee and shall be governed and construed in accordance with the laws thereof. Provided, however, nothing contained in this Section 8.12 shall prevent Bank from bringing any action or 34 40 exercising any rights against any security or against Borrower or RFSP personally, and any of their property, within any other state. Initiating such proceedings or taking such action in any other state shall in no event constitute a waiver of the agreement contained herein that the laws of the State of Tennessee shall govern the rights and obligations of the parties hereunder or of the submission herein made by Borrower and RFSP to personal jurisdiction within the State of Tennessee. The aforesaid means of obtaining personal jurisdiction and perfecting service of process are not intended to be exclusive, but are cumulative and in addition to all other means of obtaining personal jurisdiction and perfecting service of process now or hereafter provided by the laws of the State of Tennessee. SECTION 8.13. NO THIRD PARTY BENEFICIARIES. All conditions of the obligations of any party hereunder, including the obligation of Bank to make advances, are imposed solely and exclusively for the benefit of the other parties and Bank's successors and assigns and any permitted assigns of Borrower or RFSP. No other person or entity shall have standing to require satisfaction of such conditions in accordance with the terms or, with respect to Borrower or RFSP, be entitled to assume that Bank will refuse to make advances in the absence of strict compliance with any or all thereof, and no other person or entity shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by the respective party to whom the performance of any such condition shall run at any time if in the sole discretion of such party it deems it desirable to do so. SECTION 8.14. NO AGENCY. Bank is not the agent or representative of Borrower or RFSP, and neither Borrower nor RFSP is the agent or representative of Bank, and nothing in this Agreement shall be construed to make Bank liable to anyone for goods delivered to or services performed with respect to the Hotel Properties or Collateral or for debts or claims accruing against Borrower or RFSP. Nothing herein nor the acts of the parties hereto shall be construed to create a partnership or joint venture between Bank, Borrower and RFSP, or any other relationship except as debtor and creditor. SECTION 8.15. BANK APPROVALS. Each and every provision of this Agreement providing for the approval or consent of Bank, permitting inspection or review by Bank, providing the submission of any items in form or content acceptable to Bank or otherwise relating to the review and approval by Bank shall, at the discretion of Bank, include such approval, consent, acceptance or review, as applicable, of the Participants, all of which shall be conclusively determined by Bank. SECTION 8.16. LENDING LIMITATION; PARTICIPATION. Notwithstanding any other provision to the contrary contained herein, in the Commitment, or in any other document, Borrower expressly understands and agrees that Bank's obligation to lend under the Commitment and this Agreement is limited to the maximum amount under any circumstances of Twenty-five Million and no/100 Dollars ($25,000,000.00), and that pursuant to the Participation Agreement, such Participants have agreed to fund their respective Percentage Interests of the Commitment and all Loans made thereunder, which, in the aggregate participation, may total up to fifty percent (50%) of the Commitment, or Twenty-five Million and no/100 Dollars ($25,000,000.00), subject to the 35 41 terms of the Participation Agreement concerning the rights of Bank and the Participants to fund more than their original Percentage Interests. It is expressly understood and agreed that if, for any reason, any of said Participants should fail or refuse to fund its Percentage Interest of the Loan, neither Bank nor any other Participant shall have any liability or obligation to Borrower to fund such unfunded portion of the Loan. In such event, Bank and each of the other Participants shall have the right, but not the obligation, to fund the Percentage Interest of the defaulting Participant or may cause such Percentage Interest to be purchased and funded by a substituted participant. It is also understood and agreed that the Participants may require certain additional documents and/or amendments to this Agreement and/or any of the other Loan Documents, including, without limitation, the possible request for Borrower to execute multiple notes evidencing each Participant's respective Percentage Interest in the Loans. In such event, Borrower and RFSP agree to execute such additional documents and/or amendments as Bank and/or the Participants may reasonably request in order to fully evidence and secure, to Bank's and/or the Participants' reasonable satisfaction, Bank's and the Participants' Percentage Interests in the Loans. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. "BORROWER" RFS HOTEL INVESTORS, INC. BY: /s/ ------------------------------------ TITLE: --------------------------------- "RFSP" RFS PARTNERSHIP, L.P. BY: RFS HOTEL INVESTORS, INC. ITS GENERAL PARTNER BY: /s/ ------------------------------ TITLE: --------------------------- "BANK" BOATMEN'S BANK OF TENNESSEE BY: /s/ ------------------------------------ TITLE: --------------------------------- 36 EX-10.8.A 10 MODIFICATION TO CREDIT AND LOAN AGREEMENT 1 FIRST MODIFICATION OF FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT AND OF RELATED LOAN DOCUMENTS (Increase from $50 to $75 Million) THIS FIRST MODIFICATION OF FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT AND OF RELATED LOAN DOCUMENTS ("Agreement") dated as of the 29th day of May, 1996, entered into by and between RFS HOTEL INVESTORS, INC., a Tennessee corporation ("Borrower"); RFS PARTNERSHIP, L.P., a Tennessee limited partnership ("RFSP"); and BOATMEN'S BANK OF TENNESSEE, a Tennessee banking corporation ("Bank") on behalf of itself as well as all Participants. RECITALS A. Borrower, RFSP and Bank have previously entered into that certain FIRST AMENDED REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of February 20, 1996 (the "Loan Agreement") setting forth the terms and conditions of that certain Revolving Credit Loan, as therein defined, in an amount not to exceed the maximum principal sum of Fifty Million and No/100 Dollars ($50,000,000.00). B. The indebtedness of Borrower to Bank is secured by various Hotel Properties, as defined in the Loan Agreement, by the Collateral, as defined in the Loan Agreement, by the Assignments of Rents and Leases, as defined in the Loan Agreement, and by certain other property heretofore, or hereafter, pledged as collateral security for the indebtedness of Borrower to Bank, all of which may hereinafter sometimes be collectively referred to as the "Collateral." C. Borrower has asked Bank to increase the Revolving Credit Loan to Seventy-Five Million and No/100 Dollars ($75,000,000.00), and Bank has agreed to do so, contingent on the agreement of the Participants to fund their respective Percentage Interests (as defined in the Loan Agreement) thereof, it being understood and agreed that Bank's obligation to lend is limited to the maximum amount of Twenty Five Million and No/100 Dollars ($25,000,000.00) in the event any Participants fail to fund to Bank their portions of advances requested by Borrower under the Revolving Credit Loan. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. All recitals set forth above are true and correct statements of fact. 2. All capitalized terms not defined herein shall have the meaning assigned to such terms in the Loan Agreement. 2 3. Contingent upon the Participants agreeing to fund their respective Percentage Interests of the increase in the amount of the Revolving Credit Loan, the maximum principal amount of the Revolving Credit Loan is hereby increased from Fifty Million and No/100 Dollars ($50,000,000.00) to Seventy-Five Million and No/100 Dollars ($75,000,000.00). Wherever in the Loan Agreement reference is made to the aggregate principal amount or maximum amount of the Revolving Credit Loan, it is hereby understood and agreed that such terms shall refer to the increased sum of Seventy-Five Million and No/100 Dollars ($75,000,000.00). All other Loan Documents are also hereby modified to the extent necessary so that wherever therein reference is made to the amount of the Revolving Credit Loan, such amount shall hereafter be Seventy-Five Million and No/100 Dollars ($75,000,000.00). 4. The Revolving Credit Note shall be replaced with a replacement note in the principal amount of Seventy-Five Million and No/100 Dollars ($75,000,000.00). Thereafter, the Revolving Credit Loan and advances thereunder shall be evidenced by, and repaid with interest in accordance with, such replacement note. 5. Borrower shall pay to Bank a prorated commitment fee and agent's fee on the date hereof, both of which shall be equal to the prorated percentage of the number of days remaining in the year commencing with such date divided by Three Hundred Sixty (360), times one-quarter percent (.25%) of the increase in the maximum amount of the Revolving Credit Loan of Twenty- Five Million and No/100 Dollars ($25,000,000.00). 6. Section 2.09 of the Loan Agreement is hereby amended to substitute the sum of Two Hundred Twenty-Seven Million Two Hundred Seventy-Three Thousand and No/100 Dollars ($227,273,000.00) in the place and stead of One Hundred Fifty-One Million Five Hundred Thousand and No/100 Dollars ($151,500,000.00). 7. Section 5.09(b) of the Loan Agreement presently requires Borrower to maintain a minimum level of Operating Income from Collateral Pool Properties at all times of at least Seventeen Million Five Hundred Thousand and No/100 Dollars ($17,500,000.00). Commencing with the effective date hereof, Borrower must maintain a minimum level of Operating Income from Collateral Pool Properties at all times of at least Twenty-Six Million Two Hundred Fifty Thousand and No/100 Dollars ($26,250,000.00). 8. Borrower understands that the Participants must agree to increase their respective Percentage Interests in the Revolving Credit Loan, and that Bank must locate another lending institution which will agree to purchase an undivided interest in the Revolving Credit Loan for such sum as when added to Bank's and the remaining Participants' Percentage Interests, as amended, will total one hundred percent (100%) of the Revolving Credit Loan, in order for Bank to be able to fund Borrower's requested increase therein. Borrower also hereby acknowledges that Bank shall be entering into certain modifications or agreements with the Participants to fund to Bank their respective Percentage Interests of the increase in the Revolving Credit Loan. It is expressly understood and agreed that if, for any reason, any of said Participants should fail 3 or refuse to fund its Percentage Interest of the Revolving Credit Loan, neither Bank nor any of the other Participants shall have any liability or obligation to Borrower to fund such unfunded portion of the Loan, all as more fully provided in Section 8.16 of the Loan Agreement. 9. Borrower and RFSP hereby ratify and affirm all terms and provisions of the Loan Agreement and other Documents, and their obligations thereunder, as modified hereby, without any objection or defense to the enforcement thereof by Bank in accordance with the terms and provisions thereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. "BORROWER": RFS HOTEL INVESTORS, INC. BY: /s/ ------------------------------------ TITLE: --------------------------------- "RFSP" RFS PARTNERSHIP, L.P. BY: RFS HOTEL INVESTORS, INC. ITS GENERAL PARTNER BY: /s/ ------------------------------ TITLE: --------------------------- "BANK" BOATMEN'S BANK OF TENNESSEE BY: /s/ ------------------------------------ TITLE: --------------------------------- EX-10.9.A 11 FIRST AMENDMENT TO MASTER AGREEMENT 1 FIRST AMENDMENT TO MASTER AGREEMENT THIS FIRST AMENDMENT TO MASTER AGREEMENT ("Agreement") is made as of the 21st day of November 1996, among Doubletree Corporation, a Delaware corporation ("Tree"), RFS, Inc., a Tennessee corporation (the "Lessee"), RFS Hotel Investors, Inc., a Tennessee corporation ("RFSI"), RFS Partnership, L.P., a Tennessee limited partnership (the "Lessor"), RFS Leasing, Inc., a Tennessee corporation and a wholly-owned subsidiary of the Lessee (the "Additional Lessee"), RFS Financing Partnership, L.P., a Tennessee limited partnership (the "Additional Lessor") and DTR RFS Lessee, Inc., a California corporation ("DTR Lessee"). RECITALS A. The Lessor and the Lessee are parties to that certain Consolidated Lease Amendment dated as of February 27, 1996 (the "Existing Lease"), which Existing Lease represents (as of the date hereof) forty-eight (48) separate leases (the "Existing Leases"). B. The Lessor and DTR Lessee are parties to that certain Lease Agreement dated as of May 30, 1996 (the "Existing DTR Lease"). C. The Lessor currently owns forty-eight (48) hotel properties described in Exhibit A that are leased under the Existing Lease to the Lessee and owns the hotel property described in Exhibit B (the "Del Mar Hotel") that is leased under the Existing DTR Lease to DTR Lessee. D. The Lessor is transferring to the Additional Lessor as of the date hereof its fee interest in 15 of the hotel properties (the "Transfer Hotels"), identified on Exhibit A and Exhibit B as Transfer Hotels, and in connection with such transfer the Lessor desires to assign to the Additional Lessor all of its rights under (1) the 14 leases represented by the Existing Lease 2 relating to all of the Transfer Hotels other than the Del Mar Hotel (the "14 Existing Leases") and (2) the Existing DTR Lease relating to the Del Mar Hotel. E. In connection with the transfer of the Transfer Hotels to the Additional Lessor, at the request of the Lessor and the Additional Lessor, (1) the Lessee has agreed to assign to the Additional Lessee all of its rights under the 14 Existing Leases and (2) DTR Lessee has agreed to assign to the Additional Lessee the Existing DTR Lease relating to the Del Mar Hotel. F. The Additional Lessor and the Additional Lessee desire to amend certain provisions of the 14 Existing Leases and the Existing DTR Lease. G. The Lessor and the Lessee desire to amend certain provisions of the Existing Lease relating to the 34 hotel properties (the "Remaining Hotels") identified on Exhibit A as Remaining Hotels. H. The parties hereto desire to amend the Master Agreement dated as of February 1, 1996 (the "Original Master Agreement") among Tree, Seedling Merger Subsidiary, Inc. (which was subsequently merged into the Lessee), the Lessee, RFSI and the Lessor, to make certain amendments and other agreements with respect to the foregoing and the Original Master Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Original Master Agreement. Unless the context otherwise 2 3 requires, (a) references to the singular shall include the plural and vice versa, (b) references to gender shall include all genders, (c) references to designated "Sections" or other subdivisions are references to the designated Sections or other subdivisions of this Amendment or the Original Master Agreement, as applicable, (d) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with GAAP and, if applicable, the Uniform System of Accounts (as defined in the Existing Lease) and (e) the words "herein," "hereof," and "hereunder" and other words of similar import refer to this Amendment or the Original Master Agreement, as applicable, as a whole and not to any particular Section or other subdivision. 2. ASIGNMENT AND ASSUMPTION THE 14 EXISTING LEASES AND THE EXISTING a. By the Lessor and the Additional Lessor: (i) The Lessor hereby (A) assigns to the Additional Lessor all of its right, title and interest in and to the 14 Existing Leases and the Existing DTR Lease and (B) conveys, transfers and assigns to the Additional Lessor all of its interest in and to any fixtures, equipment and other personal property used in connection with the Transfer Hotels. (ii) The Additional Lessor hereby (A) accepts the assignments, conveyances and transfers in paragraph (i) above and (B) assumes all of the obligations of the Lessor under the 14 Existing Leases and the Existing DTR Lease accruing from and after the date hereof. (iii) The Lessor hereby agrees to hold the Additional Lessor harmless from the obligations and liabilities of the "Lessor" under the 14 Existing Leases 3 4 and the Existing DTR Lease arising from or relating to events or circumstances occurring prior to the date hereof. The Additional Lessor hereby agrees to hold the Lessor harmless from the obligations and liabilities of the "Lessor" under the 14 Existing Leases and the Existing DTR Lease arising from or relating to events or circumstances occurring on or after the date hereof. b. By the Lessee, DTR Lessee and the Additional Lessee: (i) The Lessee hereby (A) assigns to the Additional Lessee all of its right, title and interest in and to the 14 Existing Leases and (B) conveys, transfers and assigns to the Additional Lessee all of its interest in and to any fixtures, equipment and other personal property used in connection with the Transfer Hotels other than the Del Mar Hotel. (ii) DTR Lessee hereby (A) assigns to the Additional Lessee all of its right, title and interest in and to the Existing DTR Lease and (B) conveys, transfers and assigns to the Additional Lessee all of its interest in and to any fixtures, equipment and other personal property used in connection with the Del Mar Hotel. (iii) The Additional Lessee hereby (A) accepts the assignments, conveyances and transfers in paragraphs (i) and (ii) above and (B) assumes all of the obligations of the Lessee under the 14 Existing Leases and of DTR Lessee under the Existing DTR Lease, in each case accruing from and after the date hereof. 4 5 (iv) Each of the Lessee and DTR Lessee hereby agrees to hold the Additional Lessee harmless from the obligations and liabilities of the "Lessee" under the 14 Existing Leases and the Existing DTR Lease, respectively, arising from or relating to events or circumstances occurring prior to the date hereof. The Additional Lessee hereby agrees to hold harmless the Lessee and the DTR Lessee from the obligations and liabilities of the "Lessee" under the 14 Existing Leases and the Existing DTR Lease, respectively, arising from or relating to events or circumstances occurring on or after the date hereof. c. The Lessor agrees to look solely to the Lessee with respect to the obligations of the "Lessee" under the 14 Existing Leases accruing, or arising from or relating to events or circumstance occurring, prior to the date hereof and solely to the DTR Lessee with respect to the obligations of the "Lessee" under the Existing DTR Leas accruing, or arising from or relating to events or circumstances occurring, prior to the date hereof; and the Additional Lessor agrees that it will have no rights or claims with respect thereto. The Additional Lessor agrees to look solely to the Additional Lessee with respect to the obligations of the "Lessee" under the 14 Existing Lease and the Existing DTR Lease accruing, or arising from or relating to events or circumstances occurring, from and after the date hereof; and the Lessor agrees that it will have no rights or claims with respect thereto. d. The Lessee and the DTR Lessee agree to look solely to the Lessor with respect to the obligations of the "Lessor" under the 14 Existing Leases and the Existing DTR Lease, respectively, accruing, or arising from or relating to events or circumstances 5 6 occurring, prior to the date hereof; and the Additional Lessee agrees that it will have no rights or claims with respect thereto. The Additional Lessee agrees to look solely to the Additional Lessor with respect to the obligations of the "Lessor" under the 14 Existing Leases and the Existing DTR Lease, respectively, accruing, or arising from or relating to events or circumstances occurring, from and after the date hereof; and the Lessee and the DTR Lessee each agrees that it will have no rights or claims with respect thereto. 3. MODIFICATION AND AMENDMENT OF THE EXISTING LEASE AND THE EXISTING DTR LEASE. a. Contemporaneously with the execution of this Agreement, the Additional Lessor and the Additional Lessee shall execute the Second Consolidated Lease Amendment pursuant to which the 14 Existing Leases and the Existing DTR Lease shall be restated and amended, effective as of the date hereof. b. Contemporaneously with the execution of this Agreement, Agreement, the Lessor and the Lessee shall execute the Third Consolidated Lease Amendment pursuant to which the 34 leases represented by the Existing Lease relating to the Remaining Hotels shall be restated and amended, effective as of the date hereof. 4. AMENDMENTS TO THE ORIGINAL MASTER AGREEMENT. The following amendments to the Original Master Agreement shall be effective as of the date hereof: a. Section 1 of the Original Master Agreement shall be amended hereby as follows: (i) the definition of "Current Hotels" shall be deleted in its entirety and the following substituted therefor: 6 7 CURRENT HOTELS - shall mean the hotels leased by the Lessee from the Lessor as of the Closing Date, plus the Del Mar Hotel. (ii) the definition of "Default by the Lessee" shall be deleted in its entirety and the following substituted therefor: DEFAULT BY THE LESSEE - shall have the meaning set forth in Section 15a. (iii) the definition of "Percentage Lease" shall be deleted in its entirety and the following substituted therefor: PERCENTAGE LEASE - shall mean, (A) with respect to a Current Hotel that is a Transfer Hotel, the percentage lease with respect to such hotel represented by the Second Consolidated Lease Amendment between the Additional Lessor and the Additional Lessee, (B) with respect to a Current Hotel that is not a Transfer Hotel, the percentage lease with respect to such hotel represented by the Third Consolidated Lease Amendment between the Lessor and the Lessee and (C) with respect to each Additional Hotel, the percentage lease entered into between the Lessor and the Lessee with respect to such hotel. (iv) the definition of "Percentage Rent" shall be amended hereby by inserting the clause "or Additional Lessee's" after the word "Lessee's." b. Section 4(b) of the Original Master Agreement shall be amended by inserting the following at the end of Section 4(b): 7 8 Notwithstanding any provisions of this Section 4(b) to the contrary, the Additional Lessor and the Additional Lessee shall have the same rights and obligations as the Lessor and the Lessee, respectively, under this Section 4(b), provided, however, that such rights and obligations are and shall remain subject to the terms of the Consolidated Lease Estoppel, Subordination, Attornment and Non-Disturbance Agreement dated as of November 21, 1996 (the "SND Agreement") among the Additional Lessor, the Additional Lessee and LaSalle National Bank for so long as the SND Agreement remains in effect. c. Section 5(a) of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: a. NET WORTH. At all times during the terms of the Percentage Leases relating to the Remaining Hotels and the Additional Hotels, Tree shall cause the Lessee to maintain and the Lessee shall maintain, a Net Worth in an amount at least equal to $11,000,000. At all times during the terms of the Percentage Leases relating to the Transfer Hotels, Tree and the Lessee shall cause the Additional Lessee to maintain and the Additional Lessee shall maintain, a Net Worth in an amount at least equal to $4,000,000. The Lessee shall at all times maintain an adequate amount of Working Capital to operate the Remaining Hotels and the Additional Hotels. The 8 9 Additional Lessee shall at all times maintain an adequate amount of Working Capital to operate the Transfer Hotels. d. Section 7(a) of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: a. Changes in Structure. Tree represents that as of November 21, 1996, the Additional Lessee is a wholly-owned subsidiary of the Lessee and the Lessee is a wholly-owned subsidiary of Tree and Tree will have the sole economic and voting interest in the Lessee. Until the earlier to occur of (i) the expiration of ten years following the Closing Date or (ii) the date of redemption or conversion of the Preferred Stock, without the prior written consent following not less than 60 days prior written notice to the Lessor or the Additional Lessor, as the case may be, which consent shall not be unreasonably withheld, Tree, the Lessee and the Additional Lessee shall not permit any merger, sale of its stock or sale, transfer or conveyance of all or substantially all of the assets of the Lessee or the Additional Lessee if, as a result thereof, the Lessee or the Additional Lessee, or the surviving entity, would cease to be controlled, directly or indirectly, by Tree. After the date described in the preceding sentence, any merger, sale of stock, transfer or conveyance of all or substantially all of the assets of the Lessee or the Additional Lessee which results in the Lessee 9 10 or the Additional Lessee ceasing to be controlled, directly or indirectly, by Tree shall require the prior written consent of the Lessor or the Additional Lessor, as the case may be, which consent shall not be unreasonably withheld and which shall be granted by the Lessor or the Additional Lessor, as the case may be, if the party proposed to acquire control of the Lessee or the Additional Lessee or its assets obtains the approval of the Franchisors to serve as franchise licensee for the affected Hotels and, if applicable, of liquor licensing authorities for the affected Hotels, and either (x) has substantial experience in the leasing and/or managing of hotels of the type then owned by the Lessor or the Additional Lessor, as the case may be, and in the operation of hotels licensed by one or more of the Franchisors, or (y) provides reasonable assurance to the Lessor or the Additional Lessor, as the case may be, that such party will maintain the senior management organization of the Lessee or the Additional Lessee, as the case may be, materially intact, or (z) enters into management arrangements for the operation of the affected Hotels under terms satisfactory to the Lessor or the Additional Lessor, as the case may be, during the remainder of the terms of the Percentage Leases, by an entity that satisfies either (x) or (y) above. Prior to any transaction otherwise permissible under the preceding sentence, 10 11 Tree, the Lessee or the Additional Lessee, as the case may be, and the proposed transferee shall acknowledge and agree in writing with the Lessor or the Additional Lessor, as the case may be, with respect to the restrictions on change in control set forth herein and shall agree that no further transfer of capital stock or assets may be made by such transferee except pursuant to the provisions of this Section. e. Section 7(c) of the Original Master Lease Agreement shall be amended hereby by inserting the clause "and the Additional Lessee" after the word "Lessee." f. Sections 8, 9 and 10 of the Original Master Agreement shall be deleted in their entirety and the following substituted therefor: 8. Financial Statements; Indemnification; Due Diligence; Confidentiality. a. Financial Disclosure. During the term of any Percentage Lease, Tree, the Lessee and the Additional Lessee agree: (i) to make available to RFSI, the Lessor and the Additional Lessor, (A) not more than 30 days following the end of the first three calendar quarters of each year, quarterly unaudited financial statements, including balance sheet, statement of operations, statement of 11 12 shareholders' equity, statement of cash flows and schedules for each of the Lessee and the Additional Lessee for the most recently ended calendar quarter and the comparable prior year period prepared in conformity with GAAP; (B) not more than 60 days after the end of each calendar year, audited annual financial statements and schedules for each of the Lessee and the Additional Lessee for the most recently ended calendar year prepared in accordance with GAAP, audited by a national accounting firm reasonably acceptable to RFSI, the Lessor and the Additional Lessor; (C) any historical financial information necessary to re-state historical financial information to conform to the presentation of each of the Lessee's and the Additional Lessee's audited and unaudited financial statements at any future time; and (D) on a timely basis, any other information reasonably requested by RFSI, the Lessor or the Additional Lessor to permit RFSI, the 12 13 Lessor or the Additional Lessor to meet their filing and reporting requirements under the 1934 Act and to file and have declared effective registration statements under the 1933 Act, including providing information necessary to complete the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of RFSI's 1934 Act reports and 1933 Act registration statements as it may relate to the Lessee, the Additional Lessee or the Hotels. (ii) to provide to RFSI, the Lessor and the Additional Lessor operati and financial reports described on Exhibit E hereto. (iii) that the Lessee and the Additional Lessee shall bear the cost of obtaining, preparing and providing all information required to be furnished to the Lessor, the Additional Lessor and RFSI under this Section 8(a), including the cost and related expenses of the annual audit of the financial statements of the Lessee and the Additional Lessee, except as provided in Section 5 of the First Amendment to Master Agreement. 13 14 b. Indemnification. RFSI and the Lessor agree, jointly and severally, to indemnify, defend (with counsel acceptable to the Lessee), and hold harmless the Lessee, the Additional Lessee and their respective officers, directors and controlling persons from and against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) to which the Lessee, the Additional Lessee and their respective officers, directors or controlling persons may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities or actions in respect thereof arise out of or are based upon the 1934 Act reports or 1933 Act registration statements of RFSI or the Lessor, except to the extent any such claims, liabilities, losses, damages, expenses, or liabilities (or actions in respect thereof) result from any untrue statement of a material fact or omission of any material fact in the information provided by the Lessee or the Additional Lessee to RFSI, the Lessor or the Additional Lessor pursuant to subsections (i) and (ii) of this Section 8(a). The Lessee and Tree agree, jointly and severally, to indemnify, defend (with counsel acceptable to RFSI and the Lessor) and hold harmless RFSI, the Lessor and the Additional Lessor, and their respective officers, directors and controlling persons from and against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) to which RFSI, the Lessor or the Additional Lessor or their respective officers, directors or controlling 14 15 persons may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement of a material fact or omissions of any material fact in any information furnished by the Lessee or the Additional Lessee to RFSI, the Lessor or the Additional Lessor pursuant to subsections (i)(A), (B) and (C) of this Section 8(a). c. DUE DILIGENCE. During the term of any Percentage Lease, Tree, the Lessee and the Additional Lessee agree: (i) to permit the Lessor, the Additional Lessor and RFSI, together with their independent public accountants, counsel, financial advisors, underwriters, underwriters' counsel, rating agencies, lenders and others having a legitimate interest in the Lessee's, the Additional Lessee's or the Hotels' financial condition and results of operations, during regular business hours, upon reasonable notice and at the sole cost of the Lessor, the Additional Lessor and RFSI (provided there shall be no charge by the Lessee or the Additional Lessee to the Lessor, the Additional Lessor or RFSI for the time of the Lessee's or the Additional Lessee's officers or employees), to interview 15 16 officers and employees of the Lessee or the Additional Lessee and to have access to and review: (A) the general accounting records of the Lessee or the Additional Lessee or any Hotel for purposes of performing an audit of the Lessee or the Additional Lessee or any Hotel in accordance with generally accepted auditing standards and to conduct reasonable due diligence with respect to the Lessee or the Additional Lessee and their respective business activities and the Hotels; and (B) the Lessee's or the Additional Lessee's corporate records, minutebooks, contracts and other documents, agreements or items relating to the operation of the Hotels and the Lessee's or the Additional Lessee's financial condition. (ii) to cooperate promptly and fully with the Lessor, the Additional Lessor and RFSI, upon request and at the cost of Lessor and the Additional Lessor (except with respect to the cost of obtaining, preparing and providing the information required to be furnished to RFSI, the Lessor and the Additional Lessor under Section 8(a) above and any costs relating to the time of employees or officers 16 17 of the Lessee, the Additional Lessee or Tree, other than as provided in Section 5 of the First Amendment to Master Agreement), in making available such information with respect to the Lessee, the Additional Lessee or the Hotels as may be required by any regulatory agency, including the Commission and the National Association of Securities Dealers, Inc., the Nasdaq Stock Market or any stock exchange on which RFSI's, the Lessor's or the Additional Lessor's securities may be registered, listed or traded. (iii) to use their best efforts to cause the independent public accountants preparing audits of the Lessee or the Additional Lessee to provide RFSI, the Lessor or the Additional Lessor, at the sole cost of the Lessor, the Additional Lessor and RFSI, with all consents of such accountants required for RFSI's, the Lessor's or the Additional Lessor's filings under the 1933 Act or the 1934 Act or to have RFSI's, the Lessor's or the Additional Lessor's registration statements be declared effective under the 1933 Act. d. CONFIDENTIALITY. To the extent Lessor, the Additional Lessor or RFSI on the one hand, or the Lessee, the Additional Lessee or Tree on the other, obtains information or 17 18 becomes aware of material information concerning the other that is not disclosed in a public announcement or filing under the 1933 Act or the 1934 Act by Tree or RFSI, each party agrees that it shall not improperly disclose or unlawfully utilize such information or otherwise act unlawfully with respect thereto. 9. REIT REQUIREMENTS. a. Tree, the Lessee and the Additional Lessee understand that, in order for RFSI to qualify as a REIT, the following requirements (the "REIT Requirements") must be satisfied: (i) The average of the adjusted tax bases of the Lessor's or the Additional Lessor's personal property that is leased to the Lessee or the Additional Lessee under a lease at the beginning and end of a calendar year cannot exceed 15% of the average of the aggregate adjusted tax bases of all of the Lessor's or the Additional Lessor's property that is leased to the Lessee or the Additional Lessee under such lease at the beginning and end of such calendar year. (ii) Neither the Lessee nor the Additional Lessee can sublet the property that is leased to it by the Lessor or the Additional Lessor, or enter into any similar arrangement, on any basis such that the rental or other 18 19 amounts paid by the sublessee thereunder would be based, in whole or in part, on either (i) the net income or profits derived by the business activities of the sublessee or (ii) any other formula such that any portion of the rent paid by the Lessee or the Additional Lessee to the Lessor or the Additional Lessor would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code. (iii) Neither the Lessee nor the Additional Lessee can sublease the property leased to it by the Lessor or the Additional Lessor to, or enter into any similar arrangement with, any person in which RFSI owns, directly or indirectly, a 10% or more interest, within the meaning of Section 856(d)(2)(B) of the Code. (iv) RFSI cannot own, directly or indirectly, a 10% or more interest in the Lessee or the Additional Lessee, within the meaning of Section 856(d)(2)(B) of the Code. (v) No person can own, directly or directly, capital stock of RFSI that exceeds the "Limit" (as defined in RFSI's Charter, as amended and restated). 19 20 b. Tree, the Lessee and the Additional Lessee agree, and agree to use reasonable efforts to cause their Affiliates, to use their best efforts to permit the REIT Requirements to be satisfied. Tree, the Lessee and the Additional Lessee agree, and agree to use reasonable efforts to cause their Affiliates, to cooperate in good faith with RFSI, the Lessor and the Additional Lessor to ensure that the REIT Requirements are satisfied, including but not limited to, providing RFSI with information about the ownership of Tree, the Lessee, the Additional Lessee and their Affiliates to the extent that such information is reasonably available. Tree, the Lessee and the Additional Lessee agree, and agree to use reasonable efforts to cause their Affiliates, upon request by RFSI, and, where appropriate, at RFSI's expense, to take reasonable action necessary to ensure compliance with the REIT Requirements. Immediately after becoming aware that the REIT Requirements are not, or will not be, satisfied, Tree, the Lessee or the Additional Lessee shall notify, or use reasonable efforts to cause their Affiliates to notify, RFSI of such noncompliance. 10. TERMINATION OF REIT STATUS. Notwithstanding anything herein or in any Percentage Lease to the contrary, in the event RFSI terminates its status as a real estate investment trust for federal income tax purposes, the Lessor and the Additional Lessor may elect to terminate all then-existing Percentage Leases and terminate the Right of First Refusal by providing the Lessee or the Additional 20 21 Lessee, as the case may be, at least 30 days prior written notice, or such longer notice as may be required by statute or regulation to comply with the WARN Act or other similar or successor federal or state laws, and by satisfying the following requirements: (i) if such terminations occur prior to sale, redemption or conversion of all of the Preferred Stock, RFSI shall purchase from the Lessee within twenty (20) business days after the date of such terminations, all of the then-outstanding Preferred Stock then owned by the Lessee at a price per share equal to the greater of (A) the Stated Value plus all accrued and unpaid dividends at the date of such redemption or (B) the product of (1) the weighted average of the sales prices of RFSI's common stock for all transactions reported on the Nasdaq Stock Market or principal exchange on which RFSI's common stock is then traded during the ten (10) business days preceding the second business day preceding the date of purchase of the Preferred Stock or, if RFSI's common stock is no longer traded on the Nasdaq Stock Market or a recognized exchange, the fair market value thereof as mutually agreed by RFSI and the Lessee, or if RFSI and the Lessee cannot so agree, by appraisal by an independent third party designated by RFSI and the Lessee or by their respective designees multiplied by (2) the number of shares of Common Stock into which a share of Preferred Stock then held by the 21 22 Lessee would be convertible, if converted on the business day preceding the date of the redemption; and (ii) if such terminations occur prior to the tenth (10th) anniversary of the Closing Date, the Lessor shall pay to the Lessee an amount equal to $5,000,000, which amount shall be reduced by $41,667 for each calendar month which has expired during the ten (10) year period following the Closing Date; and (iii) the Lessor or the Additional Lessor shall pay the Lessee or the Additional Lessee, as the case may be, the fair market value of the Percentage Leases based on the then-remaining terms of the Percentage Leases determined in the manner set forth in Article XXXVIII of the Form Percentage Lease. The Lessor and the Additional Lessor must elect to terminate both the Right of First Refusal and all then-existing Percentage Leases in exercising their rights under this Section 10. g. The first sentence of Section 14 of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: From and after the date of the First Amendment to Master Agreement, (i) an Event of Default (as defined in the Percentage Leases) by the Additional Lessee under a Percentage Lease with respect to a Transfer Hotel will continue to create an Event of Default under the Percentage Leases with respect to all other Transfer Hotels and (ii) an Event of Default by the Lessee under a Percentage Lease with respect to 22 23 a Remaining Hotel will continue to create an Event of Default under the Percentage Leases with respect to all other Remaining Hotels. From and after the date of the First Amendment to Master Agreement, (i) a default or an Event of Default under a Percentage Lease with respect to a Transfer Hotel shall not constitute a default or an Event of Default under a Percentage Lease with respect to any Remaining Hotel and (ii) a default or an Event of Default with respect to a Remaining Hotel shall not constitute a default or an Event of Default under a Percentage Lease with respect to a Transfer Hotel. h. Section 15a of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: DEFAULT. a. A "Default by the Lessee" shall exist under this Agreement if any of the following occur: (I) MINIMUM NET WORTH. During the term of any Percentage Lease, (a) the Additional Lessee fails to maintain a minimum Net Worth as set forth in Section 5 and does not cure any deficiency within 30 days following written notice thereof from the Additional Lessor or (b) the Lessee fails to maintain a minimum Net Worth as set forth in Section 5 and does not cure any deficiency within 30 days following written notice thereof from the Lessor. 23 24 (II) DEFAULT UNDER PERCENTAGE LEASES. An Event of Default occurs under any of the Percentage Leases. (III) OTHER BREACHES. The Lessee or the Additional Lessee fails to comply with any other provision of this Agreement for a period of 30 days after being notified by the Lessor or the Additional Lessor in writing of the provisions of this Agreement with which the Lessee or the Additional Lessee, as the case may be, has failed to comply; provided that if such default (other than a failure to pay any rent under any Percentage Lease when due (after any applicable cure period), which shall be subject to the provisions set forth in the Percentage Leases, and any failure to maintain the minimum Net Worth, which shall be subject to the provisions of subsection 15a(i) above) cannot with due diligence be cured within a 30 day period, such period shall be extended for such reasonable time as the Lessee or the Additional Lessee, as the case may be, promptly and with due diligence commences and continues the cure thereof but in no event for a period of more than 90 days following the date of notice from the Lessor or the Additional Lessor, as the case may be. i. Section 16 of the Original Master Agreement shall be amended such that notices made to the Additional Lessee shall be made in the same manner in which notices are required to be made to the Lessee and notices made to the 24 25 Additional Lessor shall be made in the same manner in which notices are required to be made to the Lessor. 5. Certain Expenses Associated with the Additional Lessee. a. The Additional Lessor and the Lessor jointly and severally agree that they shall be responsible for the following costs and expenses related to the organization and on-going maintenance of the Additional Lessee. (i) the costs and expenses of incorporating and organizing the Additional Lessee in Tennessee and qualifying the Additional Lessee to do business in each of the states in which a Transfer Property is located, including all filing fees, reasonable counsel fees and other fees with respect thereto; (ii) all costs and expenses incurred in connection with transferring the 14 Existing Leases and the Existing DTR Lease to the Additional Lessee, including (A) costs and expenses incurred in connection with transferring the related franchise licenses and any other licenses and permits from the Lessee or DTR Lessee to the Additional Lessee, (B) the preparation, negotiation and execution of the Second Consolidated Lease Amendment and Third Consolidated Lease Amendment, the First Amendment to Master Agreement, the management agreements between the Additional Lessee and affiliated managers, the Consolidated Lease Estoppel, Subordination, Attornment and Non-Disturbance Agreement relating to the Transfer Hotels and any other 25 26 documents entered into by the Additional Lessee in connection with the transfer of the Transfer Properties and (C) reasonable fees and costs of counsel relating to the foregoing; (iii) the ongoing fees, annual business taxes and similar amounts required to be paid to governmental authorities by the Additional Lessee in order to maintain its corporate existence and be qualified to do business and remain in good standing in each of the states in which the Transfer Properties are located (net of such amounts, if any, by which Lessee's or DTR Lessee's obligations have been reduced as a result of the assignment of the 14 Existing Leases and the DTR Lease to the Additional Lessee, taking into account the fact that the Lessee will be required to maintain its qualification to do business in all of the states in which the Transfer Hotels covered by the 14 Existing Leases are located because, incident to the assignment of the 14 Existing Leases by the Lessor to the Additional Lessor and by the Lessee to the Additional Lessee, at the request of the Additional Lessor, the Lessee has been engaged to manage such Hotels); and (iv) The incremental cost with respect to the ongoing administration and accounting of the Additional Lessee to the extent such cost, together with the related costs of the Lessee, exceed the costs that the Lessee and DTR Lessee would otherwise have incurred (A) if the 14 Existing Leases and the Existing DTR Lease had not been transferred to 26 27 the Additional Lessee and the Additional Lessee had not been formed, and (B) if the Lessee had not been engaged to manage the Transfer Hotels covered by the 14 Existing Leases. (b) In the event the Lessee or the Additional Lessee pays any of the costs or fees for which the Additional Lessor and the Lessor are responsible pursuant to paragraph (a) above, the Lessor and/or the Additional Lessor shall reimburse the Lessee or the Additional Lessee, as applicable, for such costs or fees no later than 30 days following receipt of satisfactory evidence that such amounts were paid. (c) The Lessee and the Additional Lessee agree to cooperate with the Additional Lessor in determining what amounts are payable by the Lessor and the Additional Lessor to the Lessee or the Additional Lessee pursuant to paragraph (a) above and agree that neither the Lessor nor the Additional Lessor shall be responsible for any costs or expenses with respect to the items listed in paragraph (a) above to the extent the Lessee or DTR Lessee would otherwise have been responsible for such costs and expenses (A) if the 14 Existing Leases and the Existing DTR Lease had not been transferred to the Additional Lessee and the Additional Lessee had not been formed, and (B) if the Lessee had not been engaged to manage the Transfer Hotels covered by the 14 Existing Leases. 6. TRANSFER OF LICENSES AND PERMITS. The parties acknowledge that in order to meet the timing requirements of the Lessor and the Additional Lessor in connection with the transfer of the Transfer Hotels by the Lessor to the Additional Lessor and, incident thereto, the transfer 27 28 to the Additional Lessee of the interest of the Lessee and the DTR Lessee in the 14 Existing Leases and the Existing DTR Lease, respectively, there has not been sufficient time in which to also effect the transfer of certain licenses and other governmental authorizations (including, in the case of certain of the Transfer Hotels, liquor licenses) with respect to the operation of the Transfer Hotels from the Lessee and the DTR Lessee to the Additional Lessee and to obtain all requisite governmental approvals with respect thereto (collectively, the "Governmental Transfer Approvals"). Accordingly, the parties agree that (a) notwithstanding anything to the contrary contained in the Second Consolidated Lease Amendment (including, without limitation, Sections 8.1 and 8.2 thereof), the absence of the Governmental Transfer Approvals until such time that such Governmental Transfer Approvals initially are obtained shall not constitute a default or an Event of Default under the Second Consolidated Lease Amendment or a "Default by the Lessee" under the Original Master Agreement, as amended hereby, except to the extent the Additional Lessee is in breach of its obligations under paragraph (c) below which breach continues uncured beyond the expiration of the notice and grace periods provided for in Section 16.1(d) of the Second Consolidated Lease Amendment and in Section 15a of the Original Master Agreement, as amended hereby; (b) the Lessor and the Additional Lessor agree, jointly and severally, to indemnify, defend (with counsel reasonably acceptable to the Additional Lessee), and hold harmless the Additional Lessee and its officers, directors and controlling persons from and against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) to which the Additional Lessee or its officers, directors or controlling persons may become subject by reason of the absence of the Governmental Transfer Approvals; and (c) at the expense of the Lessor and the Additional Lessor as set forth in Section 5 above, the Additional Lessee shall 28 29 promptly apply for and diligently seek the Governmental Transfer Approvals and the Lessor, the Additional Lessor, the Lessee, the DTR Lessee and the Additional Lessee shall cooperate with each other in order to expeditiously obtain the Governmental Transfer Approvals. 7. RECORDING THE SND AGREEMENT. The parties acknowledge that the form in which the SND Agreement has been executed was not appropriate to permit the recording of the SND Agreement in all jurisdictions in which the Transfer Hotels are located. Accordingly, contemporaneously with the execution of this Amendment, counterparts of the SND Agreement are being recorded in some but not all of the jurisdictions in which the Transfer Hotels are located. The Lessor and the Additional Lessor agree that, promptly following the execution of this Amendment, they will have counterparts of the SND Agreement re-executed by all parties thereto in form sufficient to permit, and shall promptly thereafter effect, the recording of the SND Agreement in each jurisdiction in which a Transfer Hotel is located in which the SND Agreement has not previously been recorded. * * * As amended hereby, the Original Master Agreement is ratified, confirmed and approved. 29 30 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RFS HOTEL INVESTORS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ RFS PARTNERSHIP, L.P. By: RFS Hotel Investors, Inc., general partner By: --------------------------------- Name: ------------------------------- Title: ------------------------------ RFS FINANCING PARTNERSHIP By: RFS Financing Corporation, general partner By: --------------------------------- Name: ------------------------------- Title: ------------------------------ DOUBLETREE CORPORATION By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 31 RFS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ DTR RFS LESSEE, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ RFS LEASING, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 32 EXHIBIT A EXISTING LEASE CURRENT HOTELS
Number Franchise and City/ of Transfer Remaining State Location Rooms Hotel? Hotel? - - ------------------ ------- -------- -------- HAMPTON INN HOTELS Denver, CO (Airport) 138 No Yes Denver, CO (Lakewood) 148 Yes No Ft. Lauderdale, FL 123 No Yes Indianapolis, IN (Airport) 131 No Yes Lansing, MI 108 No Yes Warren, MI 124 No Yes Bloomington, MN (Airport) 135 No Yes Minnetonka, MN 127 No Yes Hattiesburg, MS 116 Yes No Lincoln, NE 111 No Yes Omaha, NE (Westroads Mall) 129 Yes No Oklahoma City, OK (Airport) 133 Yes No Tulsa, OK 148 No Yes Memphis, TN (Walnut Grove) 120 No Yes Laredo, TX 120 No Yes RESIDENCE INN HOTELS Sacramento, CA (Cal Expo) 176 Yes No Torrance, CA 247 No Yes Wilmington, DE 120 No Yes Orlando, FL 176 Yes No Atlanta, GA (Perimeter-West) 128 No Yes Ann Arbor, MI 72 Yes No Kansas City, MO 96 No Yes Fishkill, NY 136 No Yes Charlotte, NC 80 Yes No Providence, RI 96 Yes No Ft. Worth, TX (River Plaza) 120 Yes No Tyler, TX 128 No Yes
33
Number Franchise and City/ of Transfer Remaining State Location Rooms Hotel? Hotel? - - ------------------ ------- -------- --------- HOLIDAY INN EXPRESS HOTELS Arlington Heights, IL 125 No Yes Downers Grove, IL 123 No Yes Bloomington, MN 142 No Yes Tupelo, MS 115 No Yes Franklin, TN 120 No Yes Austin, TX (I-35 Airport) 125 Yes No Milwaukee, WI (Mayfair Mall) 122 No Yes HOLIDAY INN HOTELS Crystal Lake, IL 197 Yes No Louisville, KY (So. West) 169 No Yes Lafayette, LA (Central) 242 No Yes Flint, MI (Gateway Center) 173 No Yes Clayton, MO (Clayton Plaza) 253 No Yes Columbia, SC (Coliseum) 175 No Yes COMFORT INN HOTELS Atlanta, GA (Conyers) 83 No Yes Atlanta, GA (Marietta) 186 Yes No Farmington Hills, MI 135 No Yes Grand Rapids, MI 109 No Yes Clemson, SC 122 No Yes Ft. Mill, SC (Carowinds) 155 Yes No HAWTHORNE SUITES HOTEL Atlanta, GA (NW) 200 No Yes EXECUTIVE INN HOTEL Tupelo, MS 115 No Yes
34 EXHIBIT B EXISTING DTR LEASE CURRENT HOTEL
Number Franchise and City/ of Transfer Remaining State Location Rooms Hotel? Hotel? - - ------------------ ------- -------- --------- DOUBLETREE HOTEL Del Mar, CA 220 Yes No
EX-10.10 12 INDENTURE 1 EXHIBIT 10.10 - - -------------------------------------------------------------------------------- INDENTURE among RFS FINANCING PARTNERSHIP, L.P., Issuer, LASALLE NATIONAL BANK, Indenture Trustee and ABN AMRO BANK N.V., Fiscal Agent Dated as of November 21, 1996 - - -------------------------------------------------------------------------------- Relating to RFS FINANCING PARTNERSHIP, L.P. COMMERCIAL MORTGAGE BONDS, SERIES 1996-1 2 TABLE OF CONTENTS
Page ---- PARTIES ............................................................................. 1 PRELIMINARY STATEMENT................................................................. 1 GRANTING CLAUSE....................................................................... 1
ARTICLE I. DEFINITIONS SECTION 1.01. General Definitions................................................. 2
ARTICLE II. THE BONDS SECTION 2.01. Payments of Principal and Interest on the Bonds...................... 2 SECTION 2.02. Denominations........................................................ 5 SECTION 2.03. Execution, Authentication, Delivery and Dating....................... 5 SECTION 2.04. Registration, Registration of Transfer and Exchange.................. 6 SECTION 2.05. Mutilated, Destroyed, Lost or Stolen Bonds........................... 7 SECTION 2.06. Payments on the Bonds................................................ 8 SECTION 2.07. Persons Deemed Owners................................................ 11 SECTION 2.08. Cancellation......................................................... 11 SECTION 2.09. Authentication and Delivery of Bonds................................. 12 SECTION 2.10. Forms of Bonds....................................................... 13 SECTION 2.11. Termination of Book-Entry System..................................... 14 SECTION 2.12. General Restrictions on Transfers.................................... 15 SECTION 2.13. Transfers of Bonds from One Form to Another.......................... 17
ARTICLE III. COVENANTS SECTION 3.01. Payment of Bonds...................................................... 19 SECTION 3.02. Maintenance of Office or Agency....................................... 19 SECTION 3.03. Money for Bond Payments to Be Held in Trust........................... 20 SECTION 3.04. Protection of Trust Estate............................................ 22
(i) 3
Page ---- ARTICLE IV. SATISFACTION AND DISCHARGE SECTION 4.01. Satisfaction and Discharge of Indenture............................... 23 SECTION 4.02. Application of Trust Money............................................ 24
ARTICLE V. DEFAULTS AND REMEDIES SECTION 5.01. Events of Default..................................................... 24 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.................... 24 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Indenture Trustee.................................................. 25 SECTION 5.04. Remedies.............................................................. 26 SECTION 5.05. Optional Preservation of Trust Estate................................. 27 SECTION 5.06. Indenture Trustee May File Proofs of Claim............................ 27 SECTION 5.07. Indenture Trustee May Enforce Claims without Possession of Bonds................................................... 28 SECTION 5.08. Application of Money Collected........................................ 28 SECTION 5.09. Limitation on Suits................................................... 29 SECTION 5.10. Unconditional Rights of Bondholders to Receive Principal and Interest................................................ 30 SECTION 5.11. Restoration of Rights and Remedies.................................... 30 SECTION 5.12. Rights and Remedies Cumulative........................................ 31 SECTION 5.13. Delay or Omission Not Waiver.......................................... 31 SECTION 5.14. Control by Bondholders................................................ 31 SECTION 5.15. Waiver of Past Defaults............................................... 31 SECTION 5.16. Undertaking for Costs................................................. 32 SECTION 5.17. Waiver of Stay or Extension Laws...................................... 32 SECTION 5.18. Rights Upon a Nonrecoverable Advance Determination.................... 33 SECTION 5.19. Action on Bonds....................................................... 33 SECTION 5.20. No Recourse to Other Assets of the Issuer............................. 33
(ii) 4
Page ---- ARTICLE VI. THE INDENTURE TRUSTEE SECTION 6.01. Duties of Indenture Trustee........................................... 33 SECTION 6.02. Notice of Default..................................................... 35 SECTION 6.03. Rights of Indenture Trustee........................................... 35 SECTION 6.04. Not Responsible for Recitals or Issuance of Bonds..................... 35 SECTION 6.05. May Hold Bonds........................................................ 36 SECTION 6.06. Money Held in Trust................................................... 36 SECTION 6.07. Compensation and Reimbursement........................................ 36 SECTION 6.08. Eligibility: Disqualification......................................... 38 SECTION 6.09. Indenture Trustee's Capital and Surplus............................... 38 SECTION 6.10. Resignation and Removal; Appointment of Successor..................... 38 SECTION 6.11. Acceptance of Appointment by Successor................................ 39 SECTION 6.12. Merger or Consolidation of the Indenture Trustee and the Fiscal Agent.......................................................... 40 SECTION 6.13. Co-trustees and Separate Indenture Trustees........................... 40 SECTION 6.14. Servicing Agreement and Certain Documents............................. 42 SECTION 6.15 Review of Mortgage Files.............................................. 43
ARTICLE VII. BONDHOLDERS' LISTS AND REPORTS SECTION 7.01. Issuer to Furnish Indenture Trustee Names and Addresses of Bondholders..................................... 43 SECTION 7.02. Preservation of Information: Communications to Bondholders.................................................. 44 SECTION 7.03. Reports by Indenture Trustee.......................................... 44 SECTION 7.04. Reports by Issuer..................................................... 44
ARTICLE VIII. ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES SECTION 8.01. Collection of Moneys.................................................. 45 SECTION 8.02. Collateral Proceeds Account........................................... 45 SECTION 8.03. General Provisions Regarding the Collateral
(iii) 5 Page ---- Proceeds Account............................................. ........ 47 SECTION 8.04. Central Account....................................................... 48 SECTION 8.05. Reports by Indenture Trustee to Bondholders; Access to Certain Information......................................... 48 SECTION 8.06. Release of Trust Estate............................................... 49 SECTION 8.07. Amendment to Servicing Agreement...................................... 49 SECTION 8.08. Appointment of Servicer............................................... 49 SECTION 8.09. Termination of Servicer............................................... 50 SECTION 8.10. Appointment of Custodians............................................. 50 SECTION 8.11. The Fiscal Agent...................................................... 50
ARTICLE IX. SUPPLEMENTAL INDENTURES AND MODIFICATIONS OF OTHER LOAN DOCUMENTS SECTION 9.01. Supplemental Indentures without Consent of Bondholders........................................................... 51 SECTION 9.02. Supplemental Indentures with Consent of Bondholders................... 52 SECTION 9.03. Execution of Supplemental Indentures.................................. 53 SECTION 9.04. Effect of Supplemental Indentures..................................... 53 SECTION 9.05. Reference in Bonds to Supplemental Indentures......................... 54 SECTION 9.06. Amendments to Loan Documents.......................................... 54 SECTION 9.07. Amendments to Governing Documents..................................... 55
ARTICLE X. MISCELLANEOUS SECTION 10.01. Compliance Certificates............................................... 55 SECTION 10.02. Form of Documents Delivered to Indenture Trustee...................... 56 SECTION 10.03. Acts of Bondholders................................................... 57 SECTION 10.04. Notices to Indenture Trustee and Issuer............................... 57 SECTION 10.05. Notices and Reports to Bondholders; Waiver of Notices................. 58 SECTION 10.06. Rules by Indenture Trustee............................................ 58 SECTION 10.07. Effect of Headings and Table of Contents.............................. 58 SECTION 10.08. Successors and Assigns................................................ 58 SECTION 10.09. Separability.......................................................... 59 SECTION 10.10. Benefits of Indenture................................................. 59 SECTION 10.11. Legal Holidays........................................................ 59 SECTION 10.12. Governing Law......................................................... 59
(iv) 6 Page ---- SECTION 10.13. Counterparts.......................................................... 59 SECTION 10.14. Issuer Obligation..................................................... 60 SECTION 10.15. Usury................................................................. 60 SECTION 10.16 Streit Act............................................................ 60
SCHEDULE A Schedule of Mortgaged Properties and Initial Allocated Loan Amounts SCHEDULE B Amortization Schedule EXHIBIT A Form of Class A Bond and Form of Class B Bond EXHIBIT B Regulation S Exchange Certificate (Bond Owner) EXHIBIT C Regulation S Exchange Certificate (Euroclear or Cedel) EXHIBIT D Letter Agreement (to the Depository Trust Company) EXHIBIT E Transferee Agreement EXHIBIT F Transfer Certificate EXHIBIT G Rule 144A Certificate EXHIBIT H Property Operating Information ANNEX I Glossary
(v) 7 PARTIES THIS INDENTURE, dated as of November 21, 1996 (as amended or supplemented from time to time as permitted hereby, this "Indenture"), among RFS FINANCING PARTNERSHIP, L.P., a Tennessee limited partnership (together with its permitted successors and assigns, the "Issuer"), LASALLE NATIONAL BANK, a nationally chartered bank, as trustee (together with its permitted successors in the trusts hereunder, the "Indenture Trustee"), and ABN AMRO BANK N.V., a Netherlands banking corporation, as fiscal agent of the Indenture Trustee (together with its permitted successors and assigns, the "Fiscal Agent"). PRELIMINARY STATEMENT The Issuer has duly authorized the execution and delivery of this Indenture to provide for its Commercial Mortgage Bonds, Series 1996-1, Class A and Class B (the "Bonds"), issuable as provided in this Indenture. All covenants and agreements made by the Issuer herein are for the benefit and security of the Holders of the Bonds. The Issuer is entering into this Indenture, and the Indenture Trustee is accepting the trusts created hereby, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. The Issuer is the owner of the parcels of real property listed on Schedule A to this Indenture (the "Premises") and the Improvements and Equipment and various rights related thereto (as more fully described in the granting clauses of the Mortgages (as defined below), the "Mortgaged Properties"). As of the date hereof, the Issuer has granted the Indenture Trustee a mortgage, deed of trust, deed to secure debt or other security instrument (each, a "Mortgage") on each of the Mortgaged Properties to secure payment of the Bonds. This Indenture is intended to confirm the granting of those Mortgages and, inter alia, to provide for the administration of the Bonds. All things necessary to make this Indenture a valid agreement of the Issuer in accordance with its terms have been done. GRANTING CLAUSE The Issuer hereby confirms the Grants it gave in the Mortgages to the Indenture Trustee, for the exclusive benefit of the Bondholders, of all of the Issuer's right, title and interest in and to the Mortgaged Properties relating to the Premises listed in Schedule A to this Indenture, including the related Mortgage Files. The Issuer also hereby Grants to the Indenture Trustee, for the exclusive benefit of the Bondholders, all of the Issuer's right, title and interest in and to (a) all cash, instruments or other property held or required to be deposited in the Loss Proceeds Account, the Central Account (including the related Sub-Accounts) or the Collateral Proceeds Account, including any income on funds deposited in, or investments made with funds deposited in, the Loss Proceeds Account, the Central Account and the Collateral Proceeds Account, (b) all Required Insurance Policies and (c) all proceeds of the conversion, voluntary or involuntary, 8 of any of the foregoing into cash or other liquid assets, including, without limitation, all Insurance Proceeds, Condemnation Proceeds and Liquidation Proceeds. Such Grants are made, however, in trust to secure (i) the payment of all amounts due on the Bonds in accordance with their terms, (ii) the payment of all other sums payable under this Indenture and (iii) compliance with the provisions of this Indenture, all as provided in this Indenture. The Indenture Trustee acknowledges such Grant and the Grants given in the Mortgages and confirmed herein, accepts the trusts hereunder in accordance with the provisions of this Indenture and agrees to perform the duties herein required to the end that the interests of the Bondholders may be adequately and effectively protected. ARTICLE I. DEFINITIONS SECTION 1.01. GENERAL DEFINITIONS Except as otherwise specified or as the context may otherwise require, capitalized terms used herein have the respective meanings set forth in the Glossary attached hereto as Annex I for all purposes of this Indenture. ARTICLE II. THE BONDS SECTION 2.01. PAYMENTS OF PRINCIPAL AND INTEREST ON THE BONDS. (a) General Provisions with Respect to Principal and Interest Provisions (i) The Bonds shall be designated generally as the "Commercial Mortgage Bonds, Series 1996-1" of the Issuer. (ii) The aggregate principal amount of Bonds that may be authenticated and delivered under the Indenture is limited to $75,000,000, except for the Bonds authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Bonds pursuant to Sections 2.04, 2.05 or 9.05 of this Indenture. The Bonds shall consist of two Classes, having designations, initial principal amounts, Bond Interest Rates and Stated Maturities as follows: 2 9 - - -------------------------------------------------------------------------------------------------- Initial Principal Bond Interest Designation Amount Rate Stated Maturity - - -------------------------------------------------------------------------------------------------- Series 1996-1, Class A $50,000,000 6.83% August 20, 2008 - - -------------------------------------------------------------------------------------------------- Series 1996-1, Class B $25,000,000 7.30% November 21, 2011 - - --------------------------------------------------------------------------------------------------
(iii) The Bonds shall be issued in the form specified in Section 2.10. (iv) Subject to this Section 2.01, Section 3.01 and Section 5.10, the principal of each Class of Bonds shall be payable in installments as described herein ending no later than the Stated Maturity for such Class, unless the principal balance of the Bonds becomes due and payable at an earlier date by declaration of acceleration or otherwise. (b) Scheduled Payments. Except as otherwise provided herein, the aggregate amount of principal and interest on the Bonds due and payable on each Payment Date shall be equal to the Scheduled Payment for such Payment Date. All Scheduled Payments made with respect to the Bonds shall be applied on each Payment Date in accordance with this Section 2.01 first, to the payment of accrued and unpaid interest on the Class A Bonds on such Payment Date and then to principal due on the Class A Bonds, and second, to the payment of accrued and unpaid interest on the Class B Bonds and then to principal due on the Class B Bonds. The Scheduled Payments reflected on the original Amortization Schedule shall be adjusted following a partial Prepayment of a Class of Bonds to reflect the reamortization of such Class of Bonds based on the remaining term and reduced principal balance of such Class of Bonds, calculated by the Servicer pursuant to the Servicing Agreement in the same manner as the original Amortization Schedule. (c) Interest Payments. (i) With respect to each Payment Date or Special Payment Date, interest on each Class of Bonds shall accrue at its respective Bond Interest Rate from the previous Payment Date (or the Closing Date in the case of the first Payment Date) to the Accounting Date for the Payment Date or Special Payment Date on which such interest shall be payable, such interest to accrue on the principal balance of such Class of Bonds as of such Accounting Date (or on the prepaid principal to be paid on such Class of Bonds on the Special Payment Date). Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months. (ii) If any Scheduled Payment is not paid in full by the Issuer in immediately available funds within five days after the related Payment Date, then, regardless of whether a P&I Advance is made with respect to such Scheduled Payment, interest shall accrue at the applicable Default Rate on such unpaid portion of the Scheduled Payment 3 10 due on the Class A or Class B Bonds, respectively, during the period from such Payment Date to the date on which such amount is paid in full by the Issuer. Holders of the Class A or Class B Bonds are entitled to interest paid at the Default Rate only if the Scheduled Payment due and payable on such Class was not paid or advanced within five days after the related Payment Date. Interest paid at the Default Rate may be deposited either in the Central Account or the Collateral Proceeds Account and will be applied with other amounts in such accounts in accordance with the priorities set forth in the Servicing Agreement or this Indenture, respectively, (d) Principal Payments. The principal portion of each Scheduled Payment shall be payable on the Class A and Class B Bonds on the related Payment Date in the manner set forth on the Amortization Schedule. Principal payments (including Prepayments) on the Bonds of each Class shall be made to the Holders of the Bonds of such Class pro rata in the proportion that the principal balance of each Outstanding Bond of such Class bears to the aggregate principal balance of all Bonds of such Class. (e) Prepayments and Yield Maintenance Premiums. (i) Subject to Sections 5.08 and 8.02, prepayments (other than Directed Voluntary Prepayments) on the Bonds, including payment of the Release Price pursuant to a Mortgage, shall be applied (after payment of accrued and unpaid interest with respect to such prepaid principal) first to the Class A Bonds until the Class A Bonds have been paid in full and then to the Class B Bonds until the Class B Bonds have been paid in full. Prepayments (other than Directed Voluntary Prepayments and payments of the Release Price, both of which shall be payable on the related Payment Date) shall be payable on the related Special Payment Date. (ii) On any Payment Date following the Lock-Out Period, the Issuer may make Directed Voluntary Prepayments to be applied on the Class A or Class B Bonds, in whole or in part, provided that: (A) no Event of Default shall have occurred and be continuing (other than an Event of Default that will be cured by such Prepayment); (B) the Issuer shall have given no less than 10 days' prior written notice to the Indenture Trustee and the Servicer, such notice to specify the Class or Classes of Bonds to be prepaid and the amount of such Prepayment; (C) the Issuer pays with respect to the Bonds being prepaid the applicable Yield Maintenance Premium, except that no Yield Maintenance Premium will be required to be paid with respect to any Directed Voluntary Prepayment to be applied on a Class of Bonds during the Prepayment Window; 4 11 (D) such Prepayment is not being made in connection with a Release of a Mortgaged Property; and (E) all amounts required to be paid by the Issuer in connection with a Directed Voluntary Prepayment are received by the Indenture Trustee no later than the Remittance Date for the Payment Date on which the Prepayment is to be applied, together with all other amounts required to be paid by the Issuer on such Payment Date. (iii) In connection with a Prepayment resulting from an Event of Loss, the portion of such Prepayment allocable to interest shall equal the amount necessary to pay accrued and unpaid interest on the portion of such Prepayment to be allocable as principal at the applicable Bond Interest Rate for the Class of Bonds on which the prepaid principal will be applied. (iv) The Yield Maintenance Premium, to the extent required to be paid pursuant hereto or the related Mortgage in connection with a Directed Voluntary Prepayment or the payment of the Release Price, will be applied as excess interest for each Class of Bonds to which the prepaid principal will be applied. (f) Notwithstanding any of the foregoing provisions with respect to payments of principal of and interest on the Bonds, if the Bonds have become or been declared due and payable following an Event of Default and such acceleration of maturity and its consequences have not been rescinded and annulled, then payments of principal of and interest on the Bonds shall be made in accordance with Section 5.08. SECTION 2.02. DENOMINATIONS. The Bonds shall be issuable only as registered Bonds in the minimum denomination of $100,000 and integral multiples of $1,000 in excess thereof. SECTION 2.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. (a) The Bonds shall be executed on behalf of the Issuer by the President or one of the Vice Presidents of the Issuer's General Partner. The signature of such officer on the Bonds may be manual or facsimile. (b) Bonds bearing the manual or facsimile signature of an individual who was at any time a proper officer of the General Partner shall bind the Issuer, notwithstanding that such individual has ceased to hold such office prior to the authentication and delivery of such Bonds or did not hold such office at the date of such Bonds. (c) At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Bonds executed on behalf of the Issuer to the Indenture Trustee 5 12 for authentication; and the Indenture Trustee shall authenticate and deliver such Bonds as in this Indenture provided and not otherwise. (d) The form of the Indenture Trustee's certificate of authentication is as follows: This is one of the Class ___ Bonds referred to in the within-mentioned Indenture. LaSalle National Bank, as Indenture Trustee By: -------------------------- Authorized Signatory (e) Each Bond authenticated on the Closing Date shall be dated the Closing Date. All other Bonds which are authenticated after the Closing Date for any other purpose hereunder shall be dated the date of their authentication. (f) No Bond shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Bond a certificate of authentication substantially in the form provided for herein executed by the Indenture Trustee by the manual signature of one of its authorized officers or employees, and such certificate upon any Bond shall be conclusive evidence, and the only evidence, that such Bond has been duly authenticated and delivered hereunder. SECTION 2.04. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Issuer shall cause to be kept a register (the "Bond Register") in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Bonds and the registration of transfers of Bonds. The Indenture Trustee is hereby initially appointed "Bond Registrar" for the purpose of registering Bonds and transfers of Bonds as herein provided. Upon any resignation of any Bond Registrar appointed by the Issuer, the Issuer shall promptly appoint a successor or, in the absence of such appointment, shall assume the duties of Bond Registrar. (b) At any time the Indenture Trustee is not also the Bond Registrar, the Indenture Trustee shall be a co-Bond Registrar. The Issuer shall cause each co-Bond Registrar to furnish the Bond Registrar promptly after each authentication of a Bond by it appropriate information with respect thereto for entry by the Bond Registrar into the Bond Register. If the Indenture Trustee shall at any time not be authorized to keep and maintain the Bond Register, the Indenture Trustee shall have the right to inspect such Bond Register at all reasonable times and to rely conclusively upon a certificate of the Person in charge of the Bond Register as to the 6 13 names and addresses of the Holders of the Bonds and the principal amounts and numbers of such Bonds as held. (c) Upon surrender for registration of transfer of any Bond at the office or agency of the Issuer to be maintained as provided in Section 3.02, the Issuer shall execute, and the Indenture Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Bonds of any authorized denominations and of a like aggregate principal amount. (d) At the option of the Holder, Bonds may be exchanged for other Bonds of any authorized denominations, and of a like aggregate initial principal amount, upon surrender of the Bonds to be exchanged at such office or agency. Whenever any Bonds are so surrendered for exchange, the Issuer shall execute, and the Indenture Trustee shall authenticate and deliver, the Bonds that the Bondholder making the exchange is entitled to receive. (e) All Bonds issued upon any registration of transfer or exchange of Bonds shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Bonds surrendered upon such registration of transfer or exchange. (f) Every Bond presented or surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Indenture Trustee duly executed by the Holder thereof or his attorney duly authorized in writing. (g) No service charge shall be made for any registration of transfer or exchange of Bonds, but the Issuer or the Indenture Trustee may require payment of a sum sufficient to cover any tax or other governmental charge as may be imposed in connection with any registration of transfer or exchange of Bonds, other than exchanges pursuant to Section 2.05 not involving any transfer. SECTION 2.05. MUTILATED, DESTROYED, LOST OR STOLEN BONDS. (a) If (1) any mutilated Bond is surrendered to the Indenture Trustee or the Indenture Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Bond, and (2) there is delivered to the Indenture Trustee such security or indemnity as may be required by the Indenture Trustee to save each of the Issuer and the Indenture Trustee harmless, then, in the absence of notice to the Issuer or the Indenture Trustee that such Bond has been acquired by a bona fide purchaser, the Issuer shall execute and upon its request the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Bond, a new Bond or Bonds of the same tenor and aggregate initial principal amount bearing a number not contemporaneously outstanding. If, after the delivery of such new Bond, a bona fide purchaser of the original Bond in lieu of which such new Bond was issued presents for payment such original Bond, the Issuer and the Indenture Trustee shall be entitled to recover such new Bond from the person to whom it was delivered or any person taking therefrom, 7 14 except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity, provided therefor to the extent of any loss, damage, cost or expenses incurred by the Issuer or the Indenture Trustee in connection therewith. If any such mutilated, destroyed, lost or stolen Bond shall have become or shall be about to become due and payable, instead of issuing a new Bond, the Issuer may pay such Bond without surrender thereof, except that any mutilated Bond shall be surrendered. (b) Upon the issuance of any new Bond under this Section, the Issuer, the Indenture Trustee or the Bond Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other reasonable expenses (including the fees and expenses of the Indenture Trustee or the Bond Registrar) connected therewith. (c) Every new Bond issued pursuant to this Section in lieu of any destroyed, lost or stolen Bond shall constitute an original additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Bond shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Bonds duly issued hereunder. (d) The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Bonds. SECTION 2.06. PAYMENTS ON THE BONDS. (a) Payments on Bonds issued as Global Bonds will be made by or on behalf of the Indenture Trustee to DTC or its nominee. Payments on any IAI Bonds or Definitive Bonds that are punctually paid or duly provided for by the Issuer on the applicable Payment Date (or Special Payment Date) shall be paid to the Person in whose name such Bond (or one or more Predecessor Bonds) is registered at the close of business on the Record Date for such Payment Date (or Special Payment Date) by wire transfer of immediately available funds to the account of a Bondholder, unless such Bondholder has not either provided the Indenture Trustee with wiring instructions in writing by five days prior to the related Record Date or provided the Indenture Trustee with such instructions for any previous Payment Date, in which case, payments on the Bonds will be made by check mailed to such Person's address as it appears in the Bond Register on such Record Date. Notwithstanding the above, the final installment of principal payable with respect to such Bond shall be payable as provided in subsection (c) below of this Section 2.06. A fee may be charged by the Indenture Trustee to a Bondholder of Definitive Bonds (or IAI Bonds) for any payment made by wire transfer. Any required payments on the Bonds not punctually paid or duly provided for shall be payable as soon as funds are available to the Indenture Trustee for payment thereof, or if Section 5.08 applies, pursuant to Section 5.08. 8 15 (b) All reductions in the principal amount of a Bond (or one or more Predecessor Bonds) effected by payments of installments of principal made on any Payment Date (or Special Payment Date) shall be binding upon all Holders of such Bond and of any Bond issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, whether or not such payment is noted on such Bond. (c) The final installment of principal of each Bond shall be payable only upon presentation and surrender thereof on or after the Payment Date (or Special Payment Date) therefor at the Indenture Trustee's Corporate Trust Office or New York Presenting Office pursuant to Section 3.02. Whenever the Indenture Trustee expects that the entire remaining unpaid principal balance of any Bond will become due and payable on the next Payment Date (or Special Payment Date), it shall, no later than one Business Day prior to such Payment Date (or Special Payment Date), telecopy or hand deliver to each Person in whose name a Bond to be so retired is registered at the close of business on such otherwise applicable Record Date a notice to the effect that: (i) the Indenture Trustee expects that funds sufficient to pay such final installment will be available in the Collateral Proceeds Account on such Payment Date (or Special Payment Date); and (ii) if such funds are available, (A) such final installment will be payable on such Payment Date (or Special Payment Date), but only upon presentation and surrender of such Bond at the office or agency of the Indenture Trustee maintained for such purpose pursuant to Section 3.02 (the address of which shall be set forth in such notice) and (B) no interest shall accrue on such Bond after such Payment Date (or Special Payment Date). (d) Subject to the foregoing provisions of this Section, each Bond delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Bond shall carry the rights to unpaid principal and interest and other amounts that were carried by such other Bond. Any checks mailed pursuant to subsection (a) of this Section 2.06 and returned undelivered shall be held in accordance with Section 3.03. (e) Not later than each Payment Date, the Indenture Trustee shall prepare a statement (a "Payment Date Statement") with respect to such Payment Date setting forth: (i) the amount of Scheduled Payments allocable as interest and principal to the Class A Bonds and Class B Bonds on such Payment Date; (ii) the amount of interest actually paid to Class A Bondholders and Class B Bondholders on such Payment Date; 9 16 (iii) the amount of principal actually paid to Class A Bondholders and Class B Bondholders on such Payment Date and the principal balance of the Outstanding Class A Bonds and Class B Bonds after giving effect to such payments; (iv) the aggregate amount of P&I Advances included in such payments described in clauses (ii) and (iii) and the aggregate amount of unreimbursed P&I Advances and Property Protection Advances at the close of business on the related Determination Date (as reported by the Servicer to the Indenture Trustee); (v) the amount of Indenture Trustee Fees (including co-trustee fees payable hereunder) and Servicing Fees (as reported by the Servicer) payable with respect to such Payment Date and any such fees accrued but unpaid as of the related Determination Date; (vi) the amount, if any, withdrawn from the Central Account (as reported by the Servicer) or the Collateral Proceeds Account and paid to the Indenture Trustee, the Fiscal Agent or the Servicer as reimbursement for Advances, plus Advance Interest paid thereon on or prior to the related Determination Date, to the extent not previously reported; (vii) the aggregate amount of Directed Voluntary Prepayments and Release Price payments made on such Payment Date and any other Prepayments made on a Special Payment Date (and any interest thereon) to the extent not previously reported; (viii) the amount of any Yield Maintenance Premiums paid to the Class A Bonds and Class B Bonds with respect to such Payment Date; (ix) as reported by the Servicer to the Indenture Trustee, the amount of (A) any withdrawals from the FF&E Reserve Sub-Account on or prior to the related Determination Date, to the extent not previously reported, (B) any costs for FF&E Replacements submitted to the Servicer for reimbursement by the Issuer but unreimbursed as of the related Determination Date, and (C) funds remaining in the FF&E Reserve Sub-Account as of the related Determination Date; (x) as reported by the Servicer to the Indenture Trustee, the amount of (A) any funds released from the Loss Proceeds Account to the Issuer on or prior to the related Determination Date for the purpose of Restorations or otherwise (as indicated therein), to the extent not previously reported, (B) funds remitted to the Collateral Proceeds Account from the Loss Proceeds Account on or prior to the related Determination Date, to the extent not previously reported, and (C) funds, if any, in the Loss Proceeds Account as of the related Determination Date; and (xi) the amount, if any, released to the Issuer from the Central Account on such Payment Date on or prior to the related Determination Date, as reported by the Servicer to the Indenture Trustee, to the extent not previously reported. 10 17 In the case of information furnished pursuant to clauses (i), (ii) and (iii) above, the amounts may be expressed as a dollar amount per $1,000 denomination of Bonds. (f) On each Payment Date, the related Payment Date Statement will be delivered by the Indenture Trustee only in the event it receives the related Servicer report in the form and by the time required under Section 3.06 of the Servicing Agreement. On each Payment Date, the related Payment Date Statement shall be delivered by the Indenture Trustee to the Issuer, DTC, and the Rating Agency and shall also be delivered to each Bondholder as the statement required pursuant to Section 8.05. The Indenture Trustee shall have no responsibility to recalculate, verify or recompute information contained in any such Servicer's report. (g) No later than the second Business Day preceding each Payment Date occurring in the second month of each calendar quarter, the Issuer shall deliver to the Servicer and the Indenture Trustee an unaudited report substantially in the form of Exhibit H completed to reflect the information required thereon for the twelve months ended at the end of the immediately preceding calendar quarter. On each such Payment Date, such report will be delivered by the Indenture Trustee to each Bondholder and the Rating Agency; provided, however, that such report shall only be delivered by the Indenture Trustee in the event it receives such report in the form and by the time required under this Section 2.06(g). The Indenture Trustee shall have no responsibility to recalculate, verify or recompute information contained in any such report. (h) Within a reasonable period of time after the end of each calendar year, the Indenture Trustee will be required to furnish to each person who at any time during the calendar year was a Bondholder a statement containing the information set forth in paragraph (e) above, aggregated for such calendar year or the applicable portion thereof during which such person was a Bondholder. Such obligation will be deemed to have been satisfied to the extent that substantially comparable information is provided pursuant to any requirements of the Code as are from time to time in force. SECTION 2.07. PERSONS DEEMED OWNERS. Prior to due presentment for registration of transfer of any Bond, the Issuer, the Indenture Trustee, any Agent and any other agent of the Issuer or the Indenture Trustee may treat the Person in whose name any Bond is registered as the owner of such Bond (a) on the applicable Record Date for the purpose of receiving required payments on such Bond and (b) on any other date for all other purposes whatsoever, and neither the Issuer, the Indenture Trustee, any Agent nor any other agent of the Issuer or the Indenture Trustee shall be affected by notice to the contrary. SECTION 2.08. CANCELLATION. All Bonds surrendered for payment, registration of transfer or exchange shall, if surrendered to any Person other than the Indenture Trustee, be delivered to the Indenture Trustee and shall be promptly canceled by it. The Issuer may at any time deliver to the Indenture 11 18 Trustee for cancellation any Bond previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Bonds so delivered shall be promptly canceled by the Indenture Trustee. No Bonds shall be authenticated in lieu of or in exchange for any Bonds canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Bonds held by the Indenture Trustee shall be held by the Indenture Trustee in accordance with its standard retention policy, unless the Issuer shall direct by an Issuer Order that they be destroyed or returned to it. SECTION 2.09. AUTHENTICATION AND DELIVERY OF BONDS. The Bonds may be executed by the Issuer and delivered to the Indenture Trustee for authentication, and thereupon the same shall be authenticated and delivered by the Indenture Trustee, upon Issuer Request and upon receipt by the Indenture Trustee of the following: (a) an Officer's Certificate evidencing the authorization of the execution and delivery of this Indenture and the execution, authentication and delivery of the Bonds, and specifying the Stated Maturity, the principal amount and the Bond Interest Rate of each Class of Bonds to be authenticated and delivered; and (b) one or more Opinions of Counsel (upon which the Indenture Trustee may rely) regarding conditions precedent relating to the authentication and delivery of the Bonds, which Opinions of Counsel shall be reasonably satisfactory in form and substance to the Indenture Trustee. In rendering the opinions set forth above, such counsel may rely upon officer's certificates of the General Partner, the Issuer, the Servicer, and the Indenture Trustee, without independent confirmation or verification with respect to factual matters relevant to such opinions. (c) an Officers' Certificate complying with the requirements of Section 10.01 and stating that: (i) the Issuer is not in Default under this Indenture and the issuance of the Bonds will not result in any breach of any of the terms, conditions or provisions of, or constitute a default under, the Issuer's Certificate of Limited Partnership or Partnership Agreement or any indenture, mortgage, deed of trust or other agreement or instrument to which the Issuer is a party or by which it is bound, or any order of any court or administrative agency entered in any proceeding to which the Issuer is a party or by which it may be bound or to which it may be subject, and that all conditions precedent provided in this Indenture relating to the authentication and delivery of the Bonds have been complied with; 12 19 (ii) the information set forth in the schedule attached as Schedule A to this Indenture is correct; and (iii) attached thereto is a true and correct copy of a letter signed by the Rating Agency confirming that the Class A Bonds have been rated "AA" and the Class B Bonds have been rated "A" by such Rating Agency. SECTION 2.10. FORMS OF BONDS. (a) The Bonds shall be in substantially the form set forth on Exhibit A attached hereto with such insertions, omissions, substitutions and other variations as are required or permitted hereunder, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be necessary or desirable as determined by the officers executing such Bonds, as evidenced by their execution thereof. Only the Global Bonds will contain the first paragraph of Exhibit A. (b) Bonds sold within the United States to investors that are Institutional Accredited Investors, but that are not QIBs, will be issued and registered in certificated form as IAI Bonds. Upon the written request of a QIB that is purchasing a Bond on the Closing Date, such purchaser may obtain a Bond in definitive, certificated form (a "Definitive Bond") rather than through the facilities of DTC. The Definitive Bonds and the IAI Bonds may be produced in any manner determined by the officers executing such Bonds, as evidenced by their execution thereof. (c) Except as set forth in paragraph (b) above, Bonds of each Class sold within the United States to QIBs will be represented initially by a single Global Bond in definitive, fully registered form without interest coupons (a "Rule 144A Global Bond") and will be registered in the name of DTC or its nominee, and deposited with the Indenture Trustee as custodian for DTC. The aggregate principal amount of the Rule 144A Global Bond may be increased or decreased from time to time by adjustments made on the books and records of the Indenture Trustee and DTC or its nominee, as hereinafter provided. (d) Bonds of each Class sold in offshore transactions in reliance on Regulation S initially will be represented by a single Global Bond in definitive, fully registered form without interest coupons (each, a "Regulation S Temporary Global Bond") and will be deposited on behalf of the subscribers therefor with the Indenture Trustee as custodian for DTC. The Regulation S Temporary Global Bond will be registered in the name of DTC or its nominee, for credit to the subscribers' respective accounts at Euroclear or CEDEL. Beneficial interests in the Regulation S Temporary Global Bond may be held only through Euroclear or CEDEL. The aggregate principal amount of the Regulation S Temporary Global Bond may be increased or decreased from time to time by adjustments made on the books and records of the Indenture Trustee and DTC or its nominee, as hereinafter provided. Within a reasonable period of time after the expiration of the 40-day restricted period referred to in Rule 903(c)(3) of Regulation S (the "40-day restricted period"), the Regulation S 13 20 Temporary Global Bond will be exchanged for another Global Bond registered in the name of DTC or its nominee, and deposited with the Indenture Trustee as custodian for DTC (the "Regulation S Permanent Global Bond"), but only upon delivery of certifications of compliance in the form of Exhibit B and Exhibit C (the "Regulation S Exchange Certificates"). Investors that hold beneficial interests in the Regulation S Permanent Global Bond may hold such interests through CEDEL, Euroclear or other organizations that are participants in the DTC system. The aggregate principal amount of the Regulation S Permanent Global Bond may be increased or decreased from time to time by adjustments made on the books and records of the Indenture Trustee and DTC or its nominee, as hereinafter provided. (e) The Indenture Trustee shall deal with DTC and Participants as representatives of the Bond Owners of such Bonds for purposes of exercising the rights of Bondholders hereunder. Each required payment on a Global Bond shall be paid to DTC, which shall credit the amount of such payments to the account of its Participants in accordance with its normal procedures. Each Participant shall be responsible for disbursing such payments to the Bond Owners of the Global Bonds that it represents and to each indirect participating brokerage firm (a "brokerage firm" or "indirect participating firm") for which it acts as agent. Each brokerage firm shall be responsible for disbursing funds to the Bond Owners of the Global Bonds that it represents. All such credits and disbursements are to be made by DTC and the Participants in accordance with the provisions of the Bonds. None of the Indenture Trustee, the Bond Registrar, if any, the Issuer, or any Agents shall have any responsibility therefore except as otherwise provided by applicable law. Requests and directions from, and votes of, such representatives shall not be deemed to be inconsistent if they are made with respect to different Bond Owners. SECTION 2.11. TERMINATION OF BOOK-ENTRY SYSTEM. (a) The book-entry system through DTC with respect to the Global Bonds may be terminated upon the happening of any of the following: (i) DTC or the Issuer advises the Indenture Trustee that DTC is no longer willing or able properly to discharge its responsibilities under the Letter Agreement (attached as Exhibit D) and the Issuer is unable to locate a qualified successor clearing agency satisfactory to the Indenture Trustee and the Issuer; (ii) The Issuer, in its sole discretion but with the consent of the Indenture Trustee, elects to terminate the book-entry system by notice to DTC and the Indenture Trustee; or (iii) After the occurrence of an Event of Default (at which time the Indenture Trustee shall use all reasonable efforts to promptly notify each Bond Owner through DTC of such Event of Default) when such notice shall be given pursuant to Section 6.02, the Bond Owners of a majority in principal balance of the Outstanding Global Bonds advise the Indenture Trustee in writing, through the related Participants and DTC, that the continuation of a book-entry system through DTC to the exclusion of any Definitive 14 21 Bonds being issued to any person other than DTC or its nominee is no longer in the best interests of the Bond Owners. (b) Upon the occurrence of any event described in subsection (a) above, the Indenture Trustee shall use all reasonable efforts to notify all Bond Owners, through DTC, of the occurrence of such event and of the availability of Definitive Bonds to Bond Owners requesting the same, in an aggregate current principal balance of the Outstanding Bonds representing the interest of each, making such adjustments and allowances as it may find necessary or appropriate as to accrued interest. Definitive Bonds shall be issued only upon surrender to the Indenture Trustee of the Global Bond(s) by DTC, accompanied by registration instructions for the Definitive Bonds. Neither the Issuer nor the Indenture Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon issuance of the Definitive Bonds, all references herein to obligations imposed upon or to be performed by DTC shall cease to be applicable and the provisions relating to Definitive Bonds shall be applicable. SECTION 2.12. GENERAL RESTRICTIONS ON TRANSFERS. (a) The Bonds will not be registered under the 1933 Act, or any state securities or "blue sky" laws, and none of the Indenture Trustee, the Issuer, the Placement Agent nor the Servicer are under any obligation to register or qualify the Bonds under the 1933 Act or any state securities laws or to provide registration rights to any purchaser. No sale, pledge or other transfer of any Bond or any beneficial interest therein may be made by any person unless such sale, pledge or other transfer is made (i) pursuant to an effective registration statement under the 1933 Act and effective registration or qualification under applicable state securities laws, or (ii) (A) to QIBs in transactions complying with the requirements of Rule 144A, (B) to Institutional Accredited Investors who sign an agreement substantially in the form of Exhibit E hereto (a "Transferee Agreement"), or (C) in transactions outside the United States complying with the provisions of Regulation S. (b) Each Person who becomes a Bondholder or a Bond Owner will be deemed to have agreed to indemnify the Issuer, the Placement Agent, the Indenture Trustee, the Fiscal Agent and the Servicer against any liability that may result if such holder transfers such Bond or interest in a manner that is not exempt or in accordance with applicable federal, state and foreign securities laws. In addition, each Bondholder and Bond Owner that does not execute a Transferee Agreement shall be deemed to have represented and warranted as follows: (i) It is purchasing the Bonds for its own account or an account with respect to which it exercises sole investment discretion, and (A) it or such account is (1) a QIB, and, except with respect to the initial purchaser, is aware that the sale to it is being made in reliance on Rule 144A; (2) an Institutional Accredited Investor, or (3) not a U.S. Person for purposes of the 1933 Act and is acquiring the Bond pursuant to Regulation S, and (B) in the case of each of (1) through (3), it is acquiring such Bonds for investment and not with a view to, or for offer and sale in connection with, any 15 22 distribution (within the meaning of the 1933 Act) or fractionalization thereof or with any intention of reselling the Bonds or any part thereof, subject to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control and subject to its or their ability to resell such Bonds pursuant to Rule 144A, Regulation S, or any other exemption from registration available under the 1933 Act. (ii) It acknowledges that the Bonds have not been and will not be registered under the 1933 Act or any state securities law and may not be sold except as permitted below. (iii) It agrees that (i) if it should transfer the Bonds within three years after the later of the original issuance of the Bonds or the sale thereof by an affiliate of the Issuer (computed in accordance with paragraph (d) of Rule 144 under the 1933 Act) or if it was at the date of such transfer or during the three months preceding such date of transfer an affiliate of the Issuer, it will do so in compliance with any applicable state securities or "Blue Sky" laws and only (a) to the Issuer, (b) in accordance with Rule 144A, (c) outside the United States in compliance with Rule 904 of Regulation S under the 1933 Act, or (d) to an Institutional Accredited Investor, but only if, in connection with any transfer pursuant to clause (d), a certificate in the form attached as an exhibit to the Indenture is delivered by the transferee to the Indenture Trustee, and (ii) it will give the transferee notice of these restrictions on resale of the Bonds. (iv) It understands that each Bond, unless otherwise agreed to by the Issuer and the holder thereof, will bear a legend to the following effect: THIS BOND HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF, BY PURCHASING THIS BOND, AGREES FOR THE BENEFIT OF THE ISSUER AND THE INDENTURE TRUSTEE THAT THIS BOND MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD ANNIVERSARY OF THE LATER OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR BOND HERETO) OR THE SALE HEREOF (OR ANY PREDECESSOR BOND) BY THE ISSUER OR ANY AFFILIATE OF THE ISSUER (COMPUTED IN ACCORDANCE WITH PARAGRAPH (D) OF RULE 144 UNDER THE 1933 ACT) OR (Y) BY AN AFFILIATE OF THE ISSUER OR BY ANY HOLDER THAT WAS AN AFFILIATE OF THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE, OTHER THAN (1) TO THE ISSUER, (2) TO A PERSON WHO THE ISSUER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE 1933 ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED 16 23 INSTITUTIONAL BUYER OVER WHICH IT EXERCISES SOLE INVESTMENT DISCRETION THAT IS AWARE THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN ACCORDANCE WITH REGULATION S UNDER THE 1933 ACT AND (4) TO AN INSTITUTIONAL INVESTOR THAT IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE 1933 ACT, AND IN CONNECTION WITH ANY TRANSFER PURSUANT TO CLAUSE (3) OR (4), A TRANSFEREE AGREEMENT IN THE FORM ATTACHED TO THE INDENTURE IS DELIVERED TO THE INDENTURE TRUSTEE. (v) It has received the information, if any, requested by it, has had full opportunity to review such information, and has received all additional information necessary to verify such information. (vi) It (i) is able to fend for itself in the transactions contemplated by the Memorandum; (ii) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment in the Bonds; and (iii) has the ability to bear the economic risks of its prospective investment and can afford the complete loss of such investment. (vii) It understands that the Issuer, the Indenture Trustee, the Fiscal Agent, the Servicer, the Placement Agent and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that if any of the acknowledgments, representations, or warranties deemed to have been made by it by its purchase of the Bonds are no longer accurate, it shall promptly notify the Issuer. If it is acquiring any Bonds as fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of such account. SECTION 2.13. TRANSFERS OF BONDS FROM ONE FORM TO ANOTHER. (a) Global to Definitive or IAI Bonds. If a Bond Owner who holds a beneficial interest in a Rule 144A Global Bond or Regulation S Permanent Global Bond proposes to transfer a Bond (i) within the United States otherwise than pursuant to Rule 144A and the date of such proposed transfer is prior to three years after the later of the date of original issuance of the Bonds (or any predecessor of such Bond) or the sale of such Bond (or any predecessor of such Bond) by the Issuer or an Affiliate of the Issuer, or (ii) the proposed transferee wishes to hold such Bond in definitive, certificated form, then such Bond Owner must obtain the consent of the Indenture Trustee to the transfer. The Indenture Trustee shall consent to such transfer if the proposed transferor provides a transfer certificate substantially in the form of Exhibit F hereto and the transferee delivers an executed Transferee Agreement to the Indenture 17 24 Trustee no later than 30 days prior to the date on which the transfer is to be effectuated and reflected in the Bond Register. After approval of the transfer, the Issuer will cause the requested IAI Bonds (in the case of clause (i) above) or Definitive Bonds (in the case of clause (ii) above), to be prepared for execution and delivery, and the Indenture Trustee shall authenticate such Bond in accordance with this Indenture. Subject to DTC's customary procedures, the Indenture Trustee shall cause the Bond Owner's interest in the Bonds held by DTC to be reduced in an amount equal to the aggregate principal amount of the Bond being transferred (and shall cause the Rule 144A Global Bond or the Regulation S Permanent Global Bond, as applicable, held by DTC to be modified or substituted for accordingly) and a Definitive Bond or IAI Bond in an equal aggregate principal amount registered in the name of the transferee shall be delivered to such transferee. Thereafter, such transferee shall be recognized as a Bondholder under the Indenture. In all cases, Definitive Bonds or IAI Bonds delivered in exchange for any beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by DTC. Regulation S Temporary Global Bonds may not be exchanged for, or transferred to a Person who takes delivery in the form of, IAI Bonds or Definitive Bonds. (b) Definitive or IAI to Global Bonds. If a Bondholder that holds a Definitive Bond or an IAI Bond wishes to transfer such Bond pursuant to Rule 144A and the proposed transferee is a QIB that wishes to hold such Bond through DTC, then, upon written request of such Bondholder 30 days in advance, accompanied by a certificate in the form of Exhibit G hereto (the "Rule 144A Certificate"), and subject to the rules and procedures of DTC and, if applicable, Euroclear or CEDEL, the Indenture Trustee shall arrange for such Bond to be represented by a Rule 144A Global Bond registered to DTC. If a Bondholder that holds a Definitive Bond or IAI Bond wishes to transfer such Bond pursuant to Regulation S and the proposed transferee is a Person other than a U.S. Person that wishes to hold such Bond through DTC, then, upon written request (by presentation of a transfer certificate in the form of Exhibit F) of such Bondholder 30 days in advance, subject to the rules and procedures of DTC and, if applicable, Euroclear or CEDEL, the Indenture Trustee shall arrange for such Bond to be represented by a Regulation S Permanent Global Bond (or, if the Regulation S Temporary Global Bond has not been exchanged for the Regulation S Permanent Global Bond, a Regulation S Temporary Global Bond) registered to DTC. (c) Global to Another Global. A beneficial interest in a Regulation S Permanent Global Bond may be transferred to a person who takes delivery in the form of an interest in a Rule 144A Global Bond, subject to the rules and procedures of DTC and Euroclear or CEDEL and upon receipt by the Indenture Trustee of a transfer certificate in the form of Exhibit F from the transferor. A beneficial interest in a Rule 144A Global Bond may be transferred to a person who takes delivery in the form of an interest in a Regulation S Temporary Global Bond or, after the 40-day restricted period described in 903(c)(3) of Regulation S, Regulation S Permanent Global Bond, subject to the rules and procedures of DTC and upon receipt by the Indenture Trustee of a transfer certificate in the form of Exhibit F. 18 25 A beneficial interest in a Regulation S Temporary Global Bond may not be transferred to a person who takes delivery in the form of an interest in a Rule 144A Global Bond. A Regulation S Temporary Global Bond may be exchanged for a Regulation S Permanent Bond in accordance with Section 2.10(d). Any beneficial interest in one of the Global Bonds that is transferred to a person who takes delivery in the form of an interest in another Global Bond will, upon transfer, cease to be an interest in such Global Bond and become an interest in the other Global Bond and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other Global Bond for as long as it remains such an interest. ARTICLE III. COVENANTS SECTION 3.01. PAYMENT OF BONDS. The Issuer will pay or cause to be duly and punctually paid the principal of, and interest and other amounts on, the Bonds in accordance with the terms of the Bonds and this Indenture. The Bonds shall be non-recourse obligations of the Issuer and shall be limited in right of payment to amounts available from the Trust Estate as provided in this Indenture and neither the Issuer nor any other Person shall otherwise be liable for payments on the Bonds except as expressly provided under the Loan Documents. If any other provision of this Indenture conflicts or is deemed to conflict with the provisions of this Section 3.01, the provisions of this Section 3.01 shall control. SECTION 3.02. MAINTENANCE OF OFFICE OR AGENCY. The Issuer will cause the Indenture Trustee to maintain an office or agency as a location where Bonds may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Issuer in respect of the Bonds and this Indenture may be served. The Indenture Trustee has appointed its Corporate Trust Office, or in the alternative, its New York Presenting Office as the presenting agent for such purpose and for the purpose of presentment or surrender for payment of the Bonds and such agency shall be maintained at the Indenture Trustee's expense. The Issuer may also from time to time at its own expense designate one or more other offices or agencies (in or outside the City of New York) where the Bonds may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that (i) no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, the State of New York, for the purposes set forth in the preceding paragraph, (ii) presentations or surrenders of Bonds for payment may be made only in the City of New 19 26 York, the State of New York and (iii) any designation of an office or agency for payment of Bonds shall be subject to Section 3.03. The Issuer will give prompt written notice to the Indenture Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 3.03. MONEY FOR BOND PAYMENTS TO BE HELD IN TRUST. (a) All payments of amounts due and payable with respect to any Bonds which are to be made from amounts withdrawn from the Collateral Proceeds Account pursuant to Section 8.02(c) or 8.02(d) or Section 5.08 shall be made on behalf of the Issuer by the Indenture Trustee or by a Paying Agent, and no amounts so withdrawn from the Collateral Proceeds Account for payments of Bonds shall be paid over to the Issuer under any circumstances except as provided in this Section 3.03 or in Section 5.08 or 8.02(e). (b) If the Issuer shall have a Paying Agent that is not also the Bond Registrar, it shall furnish, or cause the Bond Registrar to furnish, no later than one Business Day after each Record Date, a list, in such form as such Paying Agent may reasonably require, of the names and addresses of the Holders of Bonds and of the Class and principal balance of the Bonds held by each such Holder. (c) Whenever the Issuer shall have a Paying Agent other than the Indenture Trustee, it will, on or before the Business Day next preceding each Payment Date (or Special Payment Date) direct the Indenture Trustee to deposit with such Paying Agent an aggregate sum sufficient to pay the amounts then becoming due (to the extent funds are then available for such purpose in the Collateral Proceeds Account), such sum to be held in trust for the benefit of the Persons entitled thereto. Any moneys deposited with a Paying Agent in excess of an amount sufficient to pay the amounts then becoming due on the Bonds with respect to which such deposit was made shall, upon Issuer Order, be paid over by such Paying Agent to the Indenture Trustee for application in accordance with Article VIII. (d) Any Paying Agent other than the Indenture Trustee shall be appointed by Issuer Order and at the expense of the Issuer. The Issuer shall not appoint any Paying Agent (other than the Indenture Trustee) which is not, at the time of such appointment, a depository institution or trust company whose obligations would be Permitted Investments pursuant to clause (b) of the definition of the term "Permitted Investments." The Issuer will cause each Paying Agent other than the Indenture Trustee to execute and deliver to the Indenture Trustee an instrument in which such Paying Agent shall agree with the Indenture Trustee (and if the Indenture Trustee acts as Paying Agent, it hereby so agrees), subject to the provisions of this Section, that such Paying Agent will: (i) allocate all sums received for payment to the Holders of Bonds on each Payment Date (and Special Payment Date) among such Holders in the proportion specified in the applicable Payment Date Statement, in each case to the extent permitted by applicable law; 20 27 (ii) hold all sums held by it for the payment of amounts due with respect to the Bonds in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided; (iii) if such Paying Agent is not the Indenture Trustee, immediately resign as a Paying Agent and forthwith pay to the Indenture Trustee all sums held by it in trust for the payment of the Bonds if at any time it ceases to meet the standards set forth above required to be met by a Paying Agent at the time of its appointment; (iv) if such Paying Agent is not the Indenture Trustee, give the Indenture Trustee notice of any Default by the Issuer (or any other obligor upon the Bonds) in the making of any payment required to be made with respect to any Bonds for which it is acting as Paying Agent; (v) if such Paying Agent is not the Indenture Trustee, at any time during the continuance of any such Default, upon the written request of the Indenture Trustee, forthwith pay to the Indenture Trustee all sums so held in trust by such Paying Agent; and (vi) comply with all requirements of the Code, and all regulations thereunder, with respect to the withholding taxes from any payments made by it on any Bonds of any applicable withholding taxes imposed thereon and with respect to any applicable reporting requirements in connection therewith; provided, however, that with respect to withholding and reporting requirements applicable to original issue discount (if any) on any of the Bonds, the Issuer has provided the calculations pertaining thereto to the Indenture Trustee. (e) The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or any other purpose, by Issuer Order direct any Paying Agent, if other than the Indenture Trustee, to pay to the Indenture Trustee all sums held in trust by such Paying Agent, such sums to be held by the Indenture Trustee upon the same trusts as those upon which such sums were held by such Paying Agent; and upon such payment by any Paying Agent to the Indenture Trustee, such Paying Agent shall be released from all further liability with respect to such money. (f) Any money held by the Indenture Trustee or any Paying Agent in trust for the payment of any amount due with respect to any Bond and remaining unclaimed for two and one-half years after such amount has become due and payable to the Holder of such Bond (or if earlier, three months before the date on which such amount would escheat to a governmental entity under applicable law) shall be discharged from such trust and paid to the Issuer; and the Holder of such Bond shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof (but only to the extent of the amounts so paid to the Issuer), and all liability of the Indenture Trustee or such Paying Agent with respect to such trust money shall thereupon 21 28 cease. The Indenture Trustee may adopt and employ, at the expense of the Issuer, any reasonable means of notification of such repayment (including, but not limited to, mailing notice of such repayment to Holders whose right to interest in moneys due and payable but not claimed is determinable from the records of the Indenture Trustee or any Agent, at the last address of record for each such Holder). SECTION 3.04. PROTECTION OF TRUST ESTATE. (a) The Issuer will from time to time execute and deliver all such supplements and amendments hereto and all such financing statements, continuation statements, instruments of further assurance and other instruments, and will take such other action as may be necessary or advisable to: (i) Grant more effectively all or any portion of the Trust Estate; (ii) maintain or preserve the lien of this Indenture or carry out more effectively the purposes hereof; (iii) perfect, publish notice of or protect the validity of any Grant made or to be made by this Indenture; or (iv) preserve and defend title to the Trust Estate and the rights of the Indenture Trustee, and of the Bondholders, in the Mortgages and the other property held as part of the Trust Estate against the claims of all Persons and parties. The Issuer hereby designates the Indenture Trustee its agent and attorney-in-fact to execute any financing statement, continuation statement or other instrument required pursuant to this Section 3.04; provided, however, that such designation shall not be deemed to create a duty in the Indenture Trustee to monitor the compliance of the Issuer with the foregoing covenants; and provided further, however, that the duty of the Indenture Trustee to execute any instrument required pursuant to this Section 3.04 shall arise only if the Indenture Trustee has knowledge pursuant to Section 6.01(d) of the occurrence of a failure of the Issuer to comply with the provisions of this Section 3.04. (b) The Indenture Trustee shall not remove any portion of the Trust Estate that consists of money or is evidenced by an instrument, certificate or other writing from the jurisdiction in which it was held, or to which it is intended to be removed, as described in the Opinion of Counsel delivered at the Closing Date pursuant to Section 2.09(b), or cause or permit ownership or the pledge of any portion of the Trust Estate that consists of book-entry securities to be recorded on the books of a Person located in a different jurisdiction from the jurisdiction in which such ownership or pledge was recorded at such time unless the Indenture Trustee shall have first received an Opinion of Counsel (at the Issuer's expense) to the effect that the lien and security interest created by this Indenture with respect to such property will continue to be maintained after giving effect to such action or actions. 22 29 ARTICLE IV. SATISFACTION AND DISCHARGE SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE. (a) This Indenture shall cease to be of further effect except as to (i) rights of registration of transfer and exchange, (ii) substitution of mutilated, destroyed, lost or stolen Bonds, (iii) the rights of Bondholders to receive payments of principal thereof and interest thereon, (iv) the rights, obligations and immunities of the Indenture Trustee hereunder and (v) the rights of Bondholders as beneficiaries hereof with respect to the property so deposited with the Indenture Trustee and payable to all or any of them, and the Indenture Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture whenever the following conditions shall have been satisfied: (i) either (1) all Bonds theretofore authenticated and delivered (other than (i) Bonds which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.05, and (ii) Bonds for whose payment money has theretofore been deposited in trust and thereafter repaid to the Issuer, as provided in Section 3.03) have been delivered to the Indenture Trustee for cancellation; or (2) all Bonds not theretofore delivered to the Indenture Trustee for cancellation (A) have become due and payable, or (B) will become due and payable at the Stated Maturity within one year, and the Issuer, in the case of clauses (2)(A) or (2)(B) above, has deposited or caused to be deposited with the Indenture Trustee, in trust for such purpose, cash or government securities (as such term is defined under Section 2(16) of the Investment Company Act of 1940, as amended) sufficient to pay and discharge the entire indebtedness on such Bonds not theretofore delivered to the Indenture Trustee for cancellation, for principal and interest to the Maturity of the Bonds and in the case of Bonds that were not paid at their Stated Maturity, for all overdue principal and all interest payable on such Bonds to the next succeeding Payment Date therefor; and (ii) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and 23 30 (iii) the Issuer has delivered to the Indenture Trustee an Officers' Certificate and an Opinion of Counsel satisfactory in form and substance to the Indenture Trustee each stating that all conditions precedent herein providing for the satisfaction and discharge of this Indenture have been complied with; then this Indenture and the lien, rights and interests created hereby and thereby shall cease to be of further effect, and the Indenture Trustee and each co-trustee and Class B Trustee, if any, then acting as such hereunder shall, at the expense of the Issuer, execute and deliver all such instruments as may be necessary to acknowledge the satisfaction and discharge of this Indenture and shall pay, or assign or transfer and deliver, to the Issuer or upon Issuer Order all cash, securities and other property held by it as part of the Trust Estate remaining after satisfaction of the conditions set forth in clauses (i) and (ii) above. (b) Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Issuer under Section 6.07 and the obligations of the Indenture Trustee to the Holders of Bonds under Section 4.02 shall survive. SECTION 4.02. APPLICATION OF TRUST MONEY. All cash or government securities and proceeds therefrom deposited with the Indenture Trustee pursuant to Sections 3.03 and 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Bonds and this Indenture, to the payment, either directly or through any Paying Agent, as the Indenture Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such cash or government securities and proceeds therefrom has been deposited with the Indenture Trustee. ARTICLE V. DEFAULTS AND REMEDIES SECTION 5.01. EVENTS OF DEFAULT. "Event of Default", wherever used herein with respect to Bonds issued hereunder, shall have the meaning ascribed to the term in the Glossary attached hereto as Annex I. SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. (a) If an Event of Default occurs and is continuing, then and in every such case the Indenture Trustee or the Holders of Bonds representing not less than 25% of the principal balance of the Outstanding Bonds may declare the Bonds to be immediately due and payable by a notice in writing to the Issuer (and to the Indenture Trustee if given by Bondholders), and upon any such declaration, the Bonds, in an amount equal to the principal balance of the 24 31 Outstanding Bonds, together with accrued and unpaid interest and any other amounts due thereon to the date of such acceleration, shall become immediately due and payable. (b) At any time after such a declaration of acceleration of Maturity of the Bonds pursuant to paragraph (a) of this Section 5.02 has been made and before a judgment or decree for payment of the money due has been obtained by the Indenture Trustee as hereinafter in this Article provided, the Holders of Bonds representing more than 50% of the principal balance of the Outstanding Bonds, by written notice to the Issuer and the Indenture Trustee, may rescind and annul such declaration and its consequences if: (i) (A) the Issuer has paid or deposited with the Indenture Trustee a sum sufficient to pay: (1) all payments of principal of, and interest on, all Bonds and all other amounts that would then be due hereunder or upon all Bonds if the Event of Default giving rise to such acceleration had not occurred; and (2) all unreimbursed Advances by the Fiscal Agent, the Indenture Trustee and the Servicer under the Servicing Agreement (together with Advance Interest thereon) and all amounts due the Indenture Trustee pursuant to Section 6.07(a) and all amounts due the Servicer under the Servicing Agreement; and (B) all Events of Default, other than the nonpayment of the principal of Bonds that have become due solely by such acceleration, have been cured or waived as provided in Section 5.15; or (ii) an election is made to act in accordance with the provisions of Section 5.05 with respect to the Event of Default that gave rise to such declaration. No such rescission shall affect any subsequent Default or impair any right consequent thereon. SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY INDENTURE TRUSTEE. Subject to the provisions of Section 3.01 and the following sentence, if an Event of Default occurs and is continuing, the Indenture Trustee (or the Servicer on its behalf) may in its discretion, subject to Section 5.05, proceed to protect and enforce its rights and the rights of the Bondholders by any Proceedings the Indenture Trustee (or the Servicer on its behalf) deems appropriate to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or enforce any other proper remedy. Any Proceedings brought by the Indenture Trustee (or the Servicer on its behalf) on behalf of the Bondholders or any Bondholder against the Issuer shall 25 32 be limited to the preservation, enforcement and foreclosure of the liens, assignments, rights and security interests under the Indenture and the Mortgages and the other Loan Documents and no attachment, execution or other unit or process shall be sought, issued or levied upon any assets, properties or funds of the Issuer, other than the Trust Estate, except as otherwise expressly provided in the Loan Documents. If there is a foreclosure of any such liens, assignments, rights and security interests, by private power of sale or otherwise, no judgment for any deficiency upon the indebtedness represented by the Bonds may be sought or obtained by the Indenture Trustee or any Bondholder against the Issuer, except as otherwise expressly provided in the Loan Documents. The Indenture Trustee shall be entitled to recover the costs and expenses expended by it pursuant to this Section 5.03, including reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and the Servicer and their respective agents and counsel. In any Proceedings brought by the Indenture Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Indenture Trustee shall be a party), the Indenture Trustee shall be held to represent all the Holders of the Bonds, and it shall not be necessary to make any Holders of the Bonds parties to any such Proceedings. SECTION 5.04. REMEDIES. If an Event of Default shall have occurred and be continuing and the Bonds have been declared due and payable and such declaration and its consequences have not been rescinded and annulled, the Indenture Trustee (or the Servicer on its behalf) may do one or more of the following: (a) institute Proceedings for the collection of all amounts then payable on the Bonds, or under this Indenture, whether by declaration or otherwise, enforce any judgment obtained, and collect from the Issuer moneys adjudged due, subject in all cases to the provisions of Sections 3.01 and 5.03; (b) subject to the rights of the Bondholders under this Indenture, exercise such remedies under Section 6 of the Mortgages as the Indenture Trustee deems advisable to protect and enforce its rights against the Borrower and in and to the Mortgaged Property; (c) take any actions pursuant to the Mortgages to cause the foreclosure of one or more of the Mortgaged Properties, and effect the sales of the related Foreclosed Properties called and conducted in any manner permitted by law; and (d) exercise any remedies of a secured party under the Uniform Commercial Code and take any other appropriate action to protect and enforce the rights and remedies of the Indenture Trustee or the Holders of the Bonds hereunder. 26 33 SECTION 5.05. OPTIONAL PRESERVATION OF TRUST ESTATE. If (i) an Event of Default shall have occurred and be continuing and (ii) no Bonds have been declared due and payable or such declaration and its consequences are annulled and rescinded, the Indenture Trustee may in conclusive reliance on the Servicer's determination that it is in the best interests of such Holders, and upon request from the Holders of more than 50% of the principal balance of the Outstanding Bonds shall, elect (by giving written notice of such election to the Issuer) to refrain from commencing foreclosure or other Proceedings to sell or liquidate the Mortgaged Properties and retain the Trust Estate securing the Bonds intact, collect or cause the collection of the proceeds thereof and make and apply all payments and deposits and maintain all accounts in respect of such Bonds in accordance with the provisions of Articles Two, Three and Eight. If the Indenture Trustee is unable to give or is stayed from giving such notice to the Issuer for any reason whatsoever, such election shall be effective as of the time of such determination or request, as the case may be, notwithstanding any failure to give such notice, and the Indenture Trustee shall give such notice upon the removal or cure of such inability or stay (but shall have no obligation to effect such removal or cure). Any such election may be rescinded with respect to any portion of the Trust Estate securing the Bonds remaining at the time of such rescission by written notice to the Indenture Trustee and the Issuer from the Holders of more than 50% of the principal balance of the Outstanding Bonds. SECTION 5.06. INDENTURE TRUSTEE MAY FILE PROOFS OF CLAIM. (a) In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, composition or other judicial Proceeding relative to the Issuer or any other obligor upon any of the Bonds or the property of the Issuer or of such other obligor or their creditors, the Indenture Trustee (irrespective of whether the Bonds shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Indenture Trustee shall have made any demand on the Issuer for the payment of any overdue principal or interest) shall be entitled and empowered, by intervention in such Proceeding or otherwise to: (i) file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Bonds and file such other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, the Fiscal Agent and the Servicer, and their respective agents and counsel, in each case to the extent such amounts are otherwise payable under this Indenture or the Servicing Agreement) and of the Bondholders allowed in such Proceeding, and (ii) collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator, or sequestrator (or other similar official) in any such Proceeding is hereby authorized by each Bondholder to make such payments to the Indenture Trustee and, in 27 34 the event that the Indenture Trustee shall consent to the making of such payments directly to the Bondholders, to pay to the Indenture Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, the Fiscal Agent and the Servicer, and their respective agents and counsel, in each case to the extent such amounts are otherwise payable under this Indenture or the Servicing Agreement, and any other amounts due the Indenture Trustee under Section 6.07 and due the Servicer under Section 2.02 of the Servicing Agreement. (b) Nothing herein contained shall be deemed to authorize the Indenture Trustee to authorize or consent to or accept or adopt on behalf of any Bondholder any plan of reorganization, arrangement, adjustment or composition affecting any of the Bonds or the rights of any Holder thereof, or to authorize the Indenture Trustee to vote in respect of the claim of any Bondholder in any such Proceeding. SECTION 5.07. INDENTURE TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF BONDS. All rights of action and claims under this Indenture or any of the Bonds may be prosecuted and enforced by the Indenture Trustee without the possession of any of the Bonds or the production thereof in any Proceeding relating thereto, and any such Proceeding instituted by the Indenture Trustee or its designee shall be brought in the name of the Indenture Trustee as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of reasonable compensation, expenses, disbursements or advances of the Indenture Trustee, the Fiscal Agent and the Servicer and their respective agents and counsel, in each case to the extent such amounts are otherwise payable under this Indenture or the Servicing Agreement, be for the benefit of the Holders of the Bonds in accordance with their rights under this Indenture. SECTION 5.08. APPLICATION OF MONEY COLLECTED. If the Bonds have been declared due and payable following an Event of Default and such declaration and its consequences have not been rescinded and annulled, any Liquidation Proceeds (net of Liquidation Expenses) or other money collected by the Indenture Trustee with respect to such Bonds pursuant to this Article or otherwise and any other monies that may then be held or thereafter received by the Indenture Trustee as security for such Bonds shall be applied in the following order, at the date or dates fixed by the Indenture Trustee and, in case of the distribution of the entire amount due on account of principal of, and interest on, such Bonds, plus any Yield Maintenance Premium due thereon, upon presentation and surrender thereof: First: To pay the Indenture Trustee, all accrued but unpaid Indenture Trustee Fees (and fees payable to the Class B Trustee or other co-trustee, if any), and to the Servicer, all accrued but unpaid Servicing Fees (in that order of priority), and to the extent of any remaining Liquidation Proceeds (which proceeds shall be applied to pay the foregoing fees only after any other amounts collected by the Indenture Trustee have been applied), any accrued and unpaid Default Servicing Fees with interest thereon at the 27 35 the event that the Indenture Trustee shall consent to the Making of such payments to the Bondholders, to pay to the Indenture Trustee any amount due to it for the, reasonable compensation, expenses, disbursements and advances of the Indenture Trustee,, the Fiscal Agent and the Servicer, and their respective agents arid counsel, in each cm to the extent such amounts am otherwise payable under this Indenture or the Servicing Agreement, and any other amounts due the Indenture Trustee under Section 6.07 and due the Servicer under Section 2.02 of the Servicing Agreement. (b) Nothing herein contained shall be deemed to authorize the Indenture Trustee to authorize or consent to or accept or adopt on behalf of any Bondholder any plan of reorganization, arrangement, adjustment or composition affecting any of the Bonds or the rights of any Holder thereof, or to authorize the Indenture Trustee to vote in respect of the claim of any Bondholder in any such Proceeding. SECTION 5.07. Indenture Trustee May Enforce Claims without Posession of Bonds. All rights of action and claims under this Indenture or any of the Bonds may be prosecuted and enforced by the Indcnture Trustee without the possession of any of the Bonds or the production thereof in any Proceeding relating thereto, and any such Proceeding instituted by the Indenture Trustee or its designee shall be brought in the name of the Indenture Trustee as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of reasonable compensation, expenses,, disbursements or advances of the Indenture Trustee, the Fiscal Agent and the Servicer and their respective agents and counsel,, in each cast to the extent such amounts are otherwise payable under this Indenture or the Servicing Agreement, be for the benefit of the Holders of the Bonds in accordance with their rights under this Indenture. SECTION 5.08. Application of Money collected If the Bonds have been declared due and payable following an Event of Default and such declaration and its consequences have not been rescinded and annulled, any Liquidation Proceeds (net of Liquidation Expenses) or other money collected by the Indenture Trustee with respect to such Bonds pursuant to this Article or otherwise and any other monies that may then be held or thereafter received by the Indenture Trustee as security for such Bonds shall be applied in the following order, at the date or dates fixed by the Indenture Trustee and, in case,of the distribution of the entire amount due on account of principal of, and interest on, such Bonds, plus any Yield Maintenance Premium due thereon, upon presentation and surrender thereof: First: To pay the Indenture Trustee, all accrued but unpaid Indenture Trustee Fees (and fees payable to the Class B Trustee or other co-trustee, if any), and to the Servicer, all accrued but unpaid Servicing Fees (in that order of priority), and to the extent of any remaining Liquidation Proceeds (which proceeds shall be applied to Pay the foregoing fees only after any other amounts collected by the Indenture Trustee have ban applied), any accrued and unpaid Default Servicing Fees with interest thereon at the 28 36 Advance Rate and Disposition Fees payable therefrom to the Servicer pursuant to the Servicing Agreement; Second: To pay (or reimburse the Indenture Trustee or the Servicer, in that order of priority) any Trust Estate Expenses; Third: To pay the amount necessary to reimburse the Fiscal Agent, the Indenture Trustee and the Servicer (in that order of priority) first, for any Property Protection Advances (and Advance Interest thereon) and second, any P&I Advances (and Advance Interest thereon), to the extent not previously reimbursed; Fourth: To the payment of amounts then due and unpaid upon the Class A Bonds for interest on the principal balance of the Outstanding Class A Bonds to the date on which payment is made at the Class A Interest Rate; Fifth: To the payment of the Class A Bonds, the principal balance of the Outstanding Class A Bonds; Sixth: To the payment of amounts then due and unpaid upon the Class B Bonds for interest on the principal balance of the Outstanding Class B Bonds to the date on which payment is made at the Class B Interest Rate; Seventh: To the payment of the Class B Bonds, the principal balance of the Outstanding Class B Bonds; Eighth: To pay an amount equal to the Yield Maintenance Premium (unless such Event of Default shall have been declared during the Prepayment Window) first with respect to the Class A Bonds and then with respect to the Class B Bonds based on the amount of principal being applied on such Class of Bonds to the extent such principal is received prior to the date such principal otherwise was scheduled to be received; Ninth: To the payment of any unpaid Default Servicing Fees (with interest thereon at the Advance Rate) due the Servicer; and Tenth: To the payment of the remainder, if any, to the Issuer. SECTION 5.09. LIMITATION ON SUITS. (a) No Holder of a Bond shall have any right to institute any Proceedings, judicial or otherwise, with respect to this Indenture or the Servicing Agreement, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given written notice to the Indenture Trustee of a continuing Event of Default; 29 37 (ii) the Holders of Bonds representing not less than 25% of the principal balance of the Outstanding Bonds shall have made written request to the Indenture Trustee to institute Proceedings in respect of such Event of Default in its own name as Indenture Trustee hereunder; (iii) such Holder or Holders have offered to the Indenture Trustee indemnity acceptable to the Indenture Trustee in full against the costs, expenses and liabilities to be incurred in compliance with such request; (iv) the Indenture Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such Proceeding; and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by the Holders of Bonds representing more than 50% of the principal balance of the Outstanding Bonds; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Bonds or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders of Bonds. (b) In the event the Indenture Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of Holders of Bonds, each representing less than 50% of the principal balance of the Outstanding Bonds, the Indenture Trustee in its sole discretion may take such action, if any, as otherwise permitted under this Indenture. In taking or refraining from taking such action, the Indenture Trustee shall not be required to take into account any such requests. SECTION 5.10. UNCONDITIONAL RIGHTS OF BONDHOLDERS TO RECEIVE PRINCIPAL AND INTEREST. Subject to the provisions in this Indenture (including Sections 3.01 and 5.03) limiting the right to recover amounts due on a Bond to recovery from amounts in the Trust Estate, and subject to Section 5.09, the Holder of any Bond shall have the right, to the extent permitted by applicable law, which right is absolute and unconditional, to receive payment of principal of and interest on such Bond as such principal and interest becomes due and payable and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. SECTION 5.11. RESTORATION OF RIGHTS AND REMEDIES. If the Indenture Trustee or any Bondholder has instituted any Proceeding to enforce any right or remedy under this Indenture and such Proceeding has been discontinued or abandoned 30 38 for any reason, or has been determined adversely to the Indenture Trustee or to such Bondholder, then and in every such case the Issuer, the Indenture Trustee and the Bondholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Indenture Trustee and the Bondholders shall continue as though no such Proceeding had been instituted. SECTION 5.12. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to the Indenture Trustee or to the Bondholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.13. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Indenture Trustee or of any Holder of any Bond to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Indenture Trustee or to the Bondholders may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee or by the Bondholders, as the case may be. SECTION 5.14. CONTROL BY BONDHOLDERS. The Holders of Bonds representing more than 50% of the principal balance of the Outstanding Bonds on the applicable Record Date shall have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee or exercising any trust or power conferred on the Indenture Trustee under this Indenture or any of the Loan Documents; provided that: (a) such direction shall not be in conflict with any rule of law or with this Indenture; and (b) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee which is not inconsistent with such direction; provided, however, that, subject to Section 6.01, the Indenture Trustee need not take any action which it determines might involve it in liability or be unjustly prejudicial to the Bondholders not consenting. SECTION 5.15. WAIVER OF PAST DEFAULTS. 31 39 (a) Subject to Section 5.02(b), the Holders of Bonds representing more than 50% of the principal balance of the Outstanding Bonds on the applicable Record Date may on behalf of the Holders of all the Bonds waive any past Default hereunder and its consequences, except a Default: (i) in the payment of any installment of principal of, or interest on, any Bonds; or (ii) in respect of a covenant or provision hereof which under Section 9.02 cannot be modified or amended without the consent of the Holder of each Outstanding Bond affected. (b) Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 5.16. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Bond by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted by it as Indenture Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Indenture Trustee (or the Servicer on its behalf), to any suit instituted by any Bondholder, or group of Bondholders, holding in the aggregate Bonds representing more than 10% of the principal balance of the Outstanding Bonds, or to any suit instituted by any Bondholder for the enforcement of the payment of the principal of or the interest due on any Bond on or after the Stated Maturity thereof. SECTION 5.17. WAIVER OF STAY OR EXTENSION LAWS. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension of law wherever enacted, now or at any time hereafter in force, which may affect the covenants in, or the performance of, this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Indenture Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 32 40 SECTION 5.18. RIGHTS UPON A NONRECOVERABLE ADVANCE DETERMINATION. Notwithstanding anything herein to the contrary, if in connection with any Event of Default the Servicer has recommended the commencement of foreclosure or any Proceedings or actions which relate to the realization against the Mortgaged Properties, or the Servicer has recommended the sale or liquidation of any Foreclosed Property, and, in either case, the requisite Bondholders have not approved such action pursuant to this Indenture, the Servicer shall be entitled to commence such foreclosure, Proceedings or actions and sell or liquidate such Foreclosed Property, as the case may be, in accordance with Accepted Servicing Practices, upon any determination by the Servicer or the Indenture Trustee that any previously made and unreimbursed Advances with Advance Interest thereon constitute Nonrecoverable Advances. SECTION 5.19. ACTION ON BONDS. The Indenture Trustee's right to seek and recover judgment under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture. Neither the lien of this Indenture nor any rights or remedies of the Indenture Trustee or the Holders of Bonds shall be impaired by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any execution under such judgment upon any portion of the Trust Estate. SECTION 5.20. NO RECOURSE TO OTHER ASSETS OF THE ISSUER. The Trust Estate Granted to the Indenture Trustee as security for the Bonds serves as security only for the Bonds. Except as expressly provided in the Loan Documents, Holders of the Bonds shall have no recourse against any other assets of the Issuer and no judgment against the Issuer for any amount due with respect to the Bonds may be enforced against any other assets of the Issuer, nor may any prejudgment lien or other attachment be sought against any other assets of the Issuer. ARTICLE VI. THE INDENTURE TRUSTEE SECTION 6.01. DUTIES OF INDENTURE TRUSTEE. (a) Upon any Default, the Indenture Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Subject to Section 6.01(a): 33 41 (i) The Indenture Trustee need perform only those duties that are specifically set forth in this Indenture and no others and no implied covenants or obligations shall be read into this Indenture against the Indenture Trustee; and (ii) In the absence of bad faith on its part, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture. The Indenture Trustee shall, however, examine such certificates and opinions to determine whether they conform to the requirements of this Indenture. (c) The Indenture Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) This paragraph does not limit the effect of subsection (b) of this Section 6.01; (ii) The Indenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; and (iii) The Indenture Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.14 or exercising any trust or power conferred upon the Indenture Trustee under this Indenture. (d) For all purposes under this Indenture, the Indenture Trustee shall not be deemed to have notice or knowledge of any Default (other than an Issuer Payment Default) unless a Responsible Officer assigned to and working in the Indenture Trustee's corporate trust department has actual knowledge thereof or unless written notice of any event which is in fact such an Event of Default or Default is received by the Indenture Trustee at the Corporate Trust Office, and such notice references the Bonds generally, the Issuer, the Trust Estate or this Indenture. (e) No provision of this Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. In determining that such repayment or indemnity is not reasonably assured to it, the Indenture Trustee must consider not only the likelihood of repayment or indemnity by or on behalf of the Issuer but also the likelihood of repayment or indemnity from amounts payable to it from the Trust Estate pursuant to Sections 6.07 and 8.02(e). 34 42 (f) Every provision of this Indenture that in any way relates to the Indenture Trustee is subject to the provisions of this Section. (g) Notwithstanding any extinguishment of all right, title and interest of the Issuer in and to the Trust Estate following an Event of Default and a consequent declaration of acceleration of the Maturity of the Bonds, whether such extinguishment occurs through foreclosures of the Mortgages, the acquisition of the Mortgaged Properties by the Indenture Trustee or otherwise, the rights, powers and duties of the Indenture Trustee with respect to the Trust Estate (or the proceeds thereof) and the Bondholders and the rights of Bondholders shall continue to be governed by the terms of this Indenture. SECTION 6.02. NOTICE OF DEFAULT. Within 90 days after the occurrence of any Default known to the Indenture Trustee, the Indenture Trustee shall transmit by mail to all Holders of Bonds notice of each such Default, unless such Default shall have been cured or waived; provided, however, that, except in the case of an Issuer Payment Default, the Indenture Trustee shall be protected in withholding such notice if and so long as the Responsible Officers of the Indenture Trustee in good faith determine that the withholding of such notice is in the interests of the Holders of the Bonds. Concurrently with the mailing of any such notice to the Holders of the Bonds, the Indenture Trustee shall transmit by mail a copy of such notice to the Rating Agency. SECTION 6.03. RIGHTS OF INDENTURE TRUSTEE. (a) The Indenture Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Indenture Trustee need not investigate any fact or matter stated in any such document. (b) Before the Indenture Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel (at the Issuer's expense) reasonably satisfactory in form and substance to the Indenture Trustee. The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on any such Certificate or Opinion. (c) The Indenture Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF BONDS. The recitals contained herein and in the Bonds, except the certificates of authentication on the Bonds, shall be taken as the statements of the Issuer, and the Indenture Trustee assumes no responsibility for their correctness. The Indenture Trustee makes no representations with 35 43 respect to the Trust Estate or as to the validity or sufficiency of this Indenture or of the Bonds. The Indenture Trustee shall not be accountable for the use or application by the Issuer of the Bonds or the proceeds thereof or any money paid to the Issuer or upon Issuer Order pursuant to the provisions hereof. SECTION 6.05. MAY HOLD BONDS. The Indenture Trustee, the Fiscal Agent, any Agent, or any other agent of the Issuer, in its individual or any other capacity, may become the owner or pledgee of Bonds and, subject to Sections 6.08 and 6.13, may otherwise deal with the Issuer or any Affiliate of the Issuer with the same rights it would have if it were not Indenture Trustee, the Fiscal Agent, any Agent or such other agent. SECTION 6.06. MONEY HELD IN TRUST. Money held by the Indenture Trustee in trust hereunder need not be segregated from other funds except to the extent required by this Indenture or by law. The Indenture Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Issuer or provided herein and except to the extent of income or other gain on investments that are obligations of the Indenture Trustee, in its commercial capacity, and income or other gain actually received by the Indenture Trustee on investments that are obligations of others. SECTION 6.07. COMPENSATION AND REIMBURSEMENT. (a) The Issuer agrees: (i) to pay to the Indenture Trustee the Indenture Trustee Fee on a monthly basis, which Indenture Trustee Fee shall be payable from amounts deposited in the Central Account pursuant to the Servicing Agreement, for all services rendered by the Indenture Trustee hereunder; (ii) to pay to the Class B Trustee or co-trustee, if any, its reasonable and customary fee not to exceed the Indenture Trustee Fee, which fee shall be payable from amounts deposited in the Central Account pursuant to the Servicing Agreement; (iii) except as otherwise expressly provided herein, to reimburse the Indenture Trustee upon its request for all reasonable expenses and disbursements incurred or made by the Indenture Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and 36 44 (iv) to indemnify the Indenture Trustee and its agents for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on their part, arising out of, or in connection with, the acceptance or administration of this trust (including action taken by the Indenture Trustee at the direction of any Bondholders pursuant to this Indenture or at the direction of the Servicer pursuant to Section 2.05(a) of the serving Agreement) including the costs and expenses of defending themselves against any claim in connection with the exercise or performance of any of their powers or duties hereunder, provided that: (1) with respect to any such claim, the Indenture Trustee shall have given the Issuer written notice thereof promptly after the Indenture Trustee shall have knowledge thereof; (2) while maintaining absolute control over its own defense, the Indenture Trustee shall cooperate and consult fully with the Issuer in preparing such defense; and (3) notwithstanding anything to the contrary in this Section 6.07(a)(iv), the Issuer shall not be liable for settlement of any such claim by the Indenture Trustee entered into without the prior consent of the Issuer. (b) To the extent the fees and expenses itemized in Section 6.07(a) hereof are not otherwise paid, the Indenture Trustee may pay such fees and expenses pursuant to Section 8.02(c) hereof from moneys on deposit in the Collateral Proceeds Account. (c) As security for the payment obligations of the Issuer pursuant to the foregoing provisions of this Section 6.07, the Issuer hereby Grants to the Indenture Trustee a lien ranking at all times senior to the lien of the Bonds with respect to which any claim of the Indenture Trustee under this Section arose and senior to all other liens, if any, upon all property and funds held or collected as part of the Trust Estate for such Bonds by the Indenture Trustee in its capacity as such. The Indenture Trustee shall not (i) exercise or enforce such senior lien in any manner, or (ii) institute any Proceeding against the Issuer for any payments, reimbursements, or indemnifications to the Indenture Trustee or to enforce such lien, in either case unless (i) the Bonds have been declared due and payable following an Event of Default pursuant to Section 5.02, (ii) such acceleration of Maturity and its consequences have not been rescinded and annulled, and (iii) moneys collected by the Indenture Trustee are being applied in accordance with Section 5.08. (d) Subject to the last sentence of Section 6.07(c), nothing in this Section 6.07 shall be construed to limit (except as otherwise expressly provided in subsection (c) of this Section 6.07) the exercise by the Indenture Trustee of any right or remedy permitted under the Indenture or otherwise in the event of the Issuer's failure to pay the amounts due the Indenture Trustee pursuant to this Section 6.07. 37 45 SECTION 6.08. ELIGIBILITY: DISQUALIFICATION. This Indenture shall always have an Indenture Trustee who (i) shall be a corporation, national bank or national banking association organized and doing business under the laws of the United States or of any state or territory or the District of Columbia which (A) is authorized under such law to exercise corporate trust powers and (B) is subject to supervision or examination by federal, state, territorial or District of Columbia authority and (ii) shall not be an affiliate of the Issuer. The Indenture Trustee shall always have a combined capital and surplus as stated in Section 6.09. SECTION 6.09. INDENTURE TRUSTEE'S CAPITAL AND SURPLUS. The Indenture Trustee shall at all times have a combined capital and surplus of at least $50,000,000 or shall be a member of a bank holding company system, the aggregate combined capital and surplus of which is at least $50,000,000; provided, however, that the Indenture Trustee's separate capital and surplus shall at all times be at least $150,000. If at any time the Indenture Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Indenture Trustee and no appointment of a successor Indenture Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Indenture Trustee under Section 6.11. (b) The Indenture Trustee may resign at any time by giving written notice thereof to the Issuer and the Servicer. If an instrument of acceptance by a successor Indenture Trustee shall not have been delivered to the Indenture Trustee within 30 days after the giving of such notice of resignation, the resigning Indenture Trustee may petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee. (c) The Indenture Trustee may be removed at any time by Act of the Holders representing more than 50% of the principal balance of the Outstanding Bonds delivered to the Indenture Trustee and to the Issuer. (d) If at any time the Indenture Trustee shall cease to be eligible under Section 6.09 or shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Indenture Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Indenture Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Issuer by an Issuer Order may remove the Indenture Trustee, and the Issuer shall join with the Indenture Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint a successor Indenture Trustee and to vest in such successor Indenture Trustee any 38 46 property, title, right or power deemed necessary or desirable, subject to the other provisions of this Indenture; provided, however, if the Issuer does not join in such appointment within fifteen (15) days after the receipt by it of a request to do so, or in case an event of default has occurred and is continuing, the Indenture Trustee may petition a court of competent jurisdiction to make such appointment. (e) If the Indenture Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Indenture Trustee for any cause, the Issuer, by an Issuer Order shall promptly appoint a successor Indenture Trustee. If within one year after such resignation, removal or incapability or the occurrence of such vacancy a successor Indenture Trustee shall be appointed by Act of the Holders of Bonds representing more than 50% of the principal balance of the Outstanding Bonds delivered to the Issuer and the retiring Indenture Trustee, the successor Indenture Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Indenture Trustee and supersede the successor Indenture Trustee appointed by the Issuer. If no successor Indenture Trustee shall have been so appointed by the Issuer or Bondholders and shall have accepted appointment in the matter hereinafter provided, any Bondholder who has been a bona fide Holder of a Bond for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee. (f) The Issuer shall give notice of each resignation and each removal of the Indenture Trustee and each appointment of a successor Indenture Trustee to the Holders of Bonds and the Servicer. Each notice shall include the name of the successor Indenture Trustee and the address of its Corporate Trust Office. SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) Every successor Indenture Trustee and successor Fiscal Agent appointed hereunder shall execute, acknowledge and deliver to the Issuer and the retiring Indenture Trustee and retiring Fiscal Agent, respectively, an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Indenture Trustee and retiring Fiscal Agent, respectively, shall become effective and such successor Indenture Trustee and successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Indenture Trustee and retiring Fiscal Agent, respectively. Notwithstanding the foregoing, on request of the Issuer or the successor Indenture Trustee, such retiring Indenture Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Indenture Trustee all the rights, powers and trusts of the retiring Indenture Trustee, and shall duly assign, transfer and deliver to such successor Indenture Trustee all property and money held by such retiring Indenture Trustee hereunder subject nevertheless to its lien, if any, provided for in Section 6.07. Upon request of any such successor Indenture Trustee, the Issuer shall execute and deliver any and all instruments for more fully and certainly vesting in and confirming to such successor Indenture Trustee all such rights, powers and trusts. 39 47 (b) No successor Indenture Trustee shall accept its appointment unless at the time of such acceptance such successor Indenture Trustee shall be qualified and eligible under this Article. SECTION 6.12. MERGER OR CONSOLIDATION OF THE INDENTURE TRUSTEE AND THE FISCAL AGENT. Any Person into which the Indenture Trustee or the Fiscal Agent, as the case may be, may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Indenture Trustee or the Fiscal Agent shall be a party, or any Person succeeding to the business of the Indenture Trustee or the Fiscal Agent, shall be the successor of the Indenture Trustee or the Fiscal Agent, respectively, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided that with respect to the Indenture Trustee such Person shall be eligible under the provisions of Section 6.08 and Section 6.09. SECTION 6.13. CO-TRUSTEES AND SEPARATE INDENTURE TRUSTEES. (a) At any time or times, (i) for the purpose of meeting the legal requirements of any jurisdiction in which any of the Trust Estate may at the time be located, the Issuer and the Indenture Trustee shall have power to appoint, and (ii) if the Holders of Bonds representing more than 50% of the principal balance of the Outstanding Class B Bonds determine that there is a conflict between the Holders of Class A Bonds and the Holders of the Class B Bonds, then such Holders of more than 50% of the principal balance of the Outstanding Class B Bonds may notify the Issuer and Indenture Trustee of the conflict, the Indenture Trustee shall appoint one or more Persons either to act as co-trustee (such co-trustee, if appointed pursuant to clause (ii), the "Class B Trustee"), jointly with the Indenture Trustee, of all or any part of the Trust Estate, or to act as Class B Trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section; provided, however, that in cases of appointment of a Class B Trustee, the Indenture Trustee (in the event a Class B Trustee is appointed, the "Class A Trustee") shall have sole possession of the Trust Estate in accordance with this Indenture and shall continue to be solely responsible for maintaining the Collateral Proceeds Account and receiving remittances from the Servicer for deposit therein. In the event a Class B Trustee is appointed, the Servicer shall only be required to act in accordance with the instructions of the trustee acting on behalf of the Class of Bonds representing a majority of the aggregate principal balance of all of the Bonds. (b) The Issuer shall for such purpose join with the Indenture Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to appoint such co-trustee. If the Issuer does not join in such appointment within 15 days after the receipt by it of a request to do so, or in case an Event of Default has occurred and is continuing, the 40 48 Indenture Trustee alone shall have power to make such appointment. All fees and expenses of any Class B Trustee, co-trustee or separate trustee shall be payable by the Issuer. (c) Should any written instrument from the Issuer be required by any Class B Trustee, co-trustee or separate trustee so appointed for more fully confirming to such Class B Trustee, co-trustee or separate trustee such property, title, right or power, any and all such instruments shall, on request, be executed, acknowledged and delivered by the Issuer. (d) Every co-trustee or Class B Trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms: (i) The Bonds shall be authenticated and delivered and all rights, powers, duties and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Indenture Trustee hereunder, shall be exercised, solely by the Indenture Trustee or Class A Trustee, as the case may be. (ii) The rights, powers, duties and obligations hereby conferred or imposed upon the Indenture Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Indenture Trustee or by the Class A Trustee and such co-trustee or Class B Trustee jointly, as shall be provided in the instrument appointing such co-trustee or Class B Trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Indenture Trustee or Class A Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-trustee or Class B Trustee. (iii) The Indenture Trustee at any time, by an instrument in writing executed by it, with the concurrence of the Issuer evidenced by an Issuer Order, may accept the resignation of or remove any co-trustee (except a Class B Trustee) appointed under this Section, and, in case an Event of Default has occurred and is continuing, the Indenture Trustee shall have power to accept the resignation of, or remove, any such co-trustee (except a Class B Trustee) without the concurrence of the Issuer. In the case of a Class B Trustee, Holders of more than 50% of the principal balance of the Outstanding Class B Bonds shall have the power to accept the resignation of or remove such Class B Trustee. Upon the written request of the Indenture Trustee or, in the case of a resignation or removal of a Class B Trustee, upon the written request of the Holders of more than 50% of the principal balance of the Outstanding Class B Bonds, the Issuer shall join with the Indenture Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or Class B Trustee so resigned or removed may be appointed in the manner provided in this Section. 41 49 (iv) No co-trustee or Class B Trustee hereunder shall be personally liable by reason of any act or omission of the Indenture Trustee, or any other such trustee hereunder. The Indenture Trustee shall not be liable by reason of any act or omission of a co-trustee or Class B Trustee to the extent such co-trustee or Class B Trustee is appointed in good faith and with due care. (v) Except in the case of any conflicts between Classes, any Act of Bondholders delivered to the Indenture Trustee shall be deemed to have been delivered to each such co-trustee and Class B Trustee; in the case of conflicts between Classes, the Class A Trustee promptly shall send a copy thereof to the Class B Trustee. (vi) Any co-trustee or Class B Trustee must meet the eligibility requirements of Section 6.08 hereof. SECTION 6.14. SERVICING AGREEMENT AND CERTAIN DOCUMENTS. (a) Each of the Indenture Trustee and the Fiscal Agent is hereby authorized to execute and shall execute (i) the Servicing Agreement to provide for the servicing of the Secured Obligations and such other matters provided for therein and (ii) such other documents or agreements contemplated hereby and by the Servicing Agreement; and the Indenture Trustee is hereby authorized to execute and shall execute (i) the Subordination Agreement to provide for certain matters relating to the Leases and the Lessee and such other matters provided for therein and (ii) such other documents or agreements contemplated by the Subordination Agreement. Each of the Indenture Trustee and Fiscal Agent shall perform its duties and satisfy its obligations under the Servicing Agreement, the Subordination Agreement (if applicable) and such other documents, including its obligations to make Advances in certain circumstances pursuant to Section 4.03 of the Servicing Agreement. The Indenture Trustee shall take or cause to be taken such action as may be appropriate to enforce its rights under the Servicing Agreement, the Subordination Agreement and such other documents or agreements referred to above. (b) Upon any termination of the Servicer's rights and powers pursuant to the Servicing Agreement, the rights and powers of the Servicer with respect thereto shall vest in the Indenture Trustee, and the Indenture Trustee shall be the successor in all respects to the Servicer in its capacity as Servicer under the Servicing Agreement until the Indenture Trustee shall have appointed, with the consent of the Rating Agency, a new servicer to serve as successor to the Servicer under the Servicing Agreement. Upon appointment of a successor Servicer, the Indenture Trustee, the Fiscal Agent and such Servicer shall enter into a new servicing agreement in a form substantially similar to the Servicing Agreement. In connection with any such appointment, the Indenture Trustee may make such arrangements for the compensation of such successor as it and such successor shall agree, but in no event shall such compensation of the successor Servicer (including the Indenture Trustee) be in excess of that payable to the original Servicer under the Servicing Agreement without confirmation from the Rating Agency that such compensation will not adversely affect the then current ratings of the Rating Agency on the Bonds. 42 50 (c) Upon any termination of the Servicer's rights and powers pursuant to the Servicing Agreement, the Indenture Trustee shall promptly notify the Rating Agency. As soon as any successor Servicer is appointed, the Indenture Trustee shall notify the Rating Agency, specifying in such notice the name and address of such successor Servicer. SECTION 6.15 REVIEW OF MORTGAGE FILES. By execution and delivery of this Indenture, the Indenture Trustee acknowledges receipt of the Mortgage Files in good faith and without actual notice or knowledge of any adverse claim pertaining to the Mortgaged Properties. The Indenture Trustee agrees, for the benefit of the Holders of the Bonds, to review the Mortgage Files within 90 days after the Closing Date. The Indenture Trustee's review shall be limited to a determination that all documents referred to in the definition of the term Mortgage Files have been delivered with respect to each such Mortgaged Property, that all such documents have been executed, and that all such documents relate to the Mortgaged Properties. In performing such review the Indenture Trustee may rely upon the purported genuineness and due execution of any such document and on the purported genuineness of any signature thereon. If the Indenture Trustee discovers any defect or omission in the Mortgage Files or that any document required to be delivered to it has not been delivered or that any document so delivered does not relate to any of the Mortgaged Properties, it shall promptly notify in writing the Issuer and the Servicer of such defect, omission or error, and the Issuer shall cure or correct such defect, omission or error within 90 days of receipt of such written notice. ARTICLE VII. BONDHOLDERS' LISTS AND REPORTS SECTION 7.01. ISSUER TO FURNISH INDENTURE TRUSTEE NAMES AND ADDRESSES OF BONDHOLDERS. (a) Upon the reasonable request of the Indenture Trustee, the Issuer shall furnish or cause to be furnished to the Indenture Trustee a list, in such form as the Indenture Trustee may reasonably require, of the names and addresses of the Holders of Bonds as of a date not more than 10 days prior to the time such list is furnished; provided, however, that so long as the Indenture Trustee is the Bond Registrar, no such list shall be required to be furnished. (b) In addition to furnishing to the Indenture Trustee the Bondholder lists, if any, required under subsection (a), the Issuer shall also furnish all Bondholder lists, if any, required under Section 3.03 at the times required by said Section 3.03. 43 51 SECTION 7.02. PRESERVATION OF INFORMATION: COMMUNICATIONS TO BONDHOLDERS. (a) The Indenture Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Holders of Bonds contained in the most recent list, if any, furnished to the Indenture Trustee as provided in Section 7.01 and the names and addresses of the Holders of Bonds received by the Indenture Trustee in its capacity as Bond Registrar. The Indenture Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) Three or more Bondholders (each of whom has owned a Bond for at least six months) may, by written request to the Indenture Trustee, obtain access to the list of all Bondholders maintained by the Indenture Trustee for the purpose of communicating with other Bondholders with respect to their rights under the Indenture. The Indenture Trustee may elect not to afford the requesting Bondholders access to the list of Bondholders if it agrees to mail the desired communication or proxy, on behalf of the requesting Bondholders, to all Bondholders. SECTION 7.03. REPORTS BY INDENTURE TRUSTEE. Within a reasonable time after the first of each year after the issuance of the Bonds the Indenture Trustee shall mail to all Holders a brief report dated as of such date that, to the extent not set forth in the Payment Date Statement pursuant to Section 2.06(e), sets forth any information necessary to enable the Bondholders to report any information required to be reported by such Bondholders to the Internal Revenue Service by statute, regulation or administrative ruling. In addition, the Indenture Trustee shall report in writing to any Bondholder any other information reasonably requested by Bondholder to enable it to prepare its federal tax returns. SECTION 7.04. REPORTS BY ISSUER. The Issuer, upon the request of any Bondholder, shall provide, or cause to be provided to, such Bondholder such information as is necessary or appropriate in the Issuer's sole discretion, to satisfy the reporting requirements under Rule 144A. 44 52 ARTICLE VIII. ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES SECTION 8.01. COLLECTION OF MONEYS. (a) Except as otherwise expressly provided herein, the Indenture Trustee may demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any intermediary, all money and other property payable to or receivable by the Indenture Trustee pursuant to this Indenture. The Indenture Trustee shall hold all such money and property received by it as part of the Trust Estate and shall apply it as provided in this Indenture. Except as otherwise expressly provided in this Indenture, if a default occurs in the making of any payment or performance required under the Servicing Agreement, any Required Insurance Policy or any Loan Document, the Indenture Trustee may, and upon the request of the Holders of Bonds representing more than 50% of the principal balance of the Outstanding Bonds shall, take such action as may be appropriate to enforce such payment or performance including the institution and prosecution of appropriate Proceedings. Any such action shall be without prejudice to any right to claim a Default or Event of Default under this Indenture and to proceed thereafter as provided in Article V. SECTION 8.02. COLLATERAL PROCEEDS ACCOUNT. (a) On or before the Closing Date, the Indenture Trustee shall open at the Corporate Trust Office one or more segregated accounts, each of which must be an Eligible Account, and must be maintained in the name of "LaSalle National Bank, as Indenture Trustee for Holders of RFS Financing Partnership, L.P., Commercial Mortgage Bonds, Series 1996-1 - Collateral Proceeds Account." The Indenture Trustee shall promptly deposit in the Collateral Proceeds Account (i) all Remittances received by it from the Servicer pursuant to the Servicing Agreement, (ii) any P&I Advances paid pursuant to the Servicing Agreement, (iii) all Prepayments and any related Yield Maintenance Premiums thereon received from or on behalf of the Issuer, and (iv) all other amounts received for deposit in the Collateral Proceeds Account. All amounts that are deposited from time to time in the Collateral Proceeds Account, and all Permitted Investments, if any, made with such moneys shall be held by the Indenture Trustee in the Collateral Proceeds Account as part of the Trust Estate as herein provided, subject to withdrawal by the Indenture Trustee for the purposes set forth in subsections (c) and (d) of this Section 8.02. All funds withdrawn from the Collateral Proceeds Account pursuant to subsection (c) of this Section 8.02 for the purpose of making payments to the Holders of Bonds shall be applied in accordance with Section 3.03. (b) Amounts in the Collateral Proceeds Account may be invested and reinvested by the Indenture Trustee in one or more Permitted Investments as the Indenture Trustee may determine. Any and all income or other gain from such investments shall be retained by the Indenture Trustee as additional compensation. The Indenture Trustee shall not in any way be 45 53 held liable by reason of any insufficiency in the Collateral Proceeds Account resulting from any loss on any Permitted Investments other than any loss resulting from the negligence or intentional misconduct by the Indenture Trustee. (c) Unless the Bonds have been declared due and payable pursuant to Section 5.02 and moneys collected by the Indenture Trustee are being applied in accordance with Section 5.08, on each Payment Date the Indenture Trustee shall withdraw from the Collateral Proceeds Account, in the amounts required, for application as follows: (i) first, the amount necessary to pay, all accrued but unpaid Indenture Trustee Fees (and any fees payable to the Class B Trustee or other co-trustee, if any) and any accrued but unpaid Servicing Fees (in that order of priority); (ii) second, the amount necessary to pay (or reimburse the Indenture Trustee or the Servicer, in that order of priority) any Trust Estate Expenses; (iii) third, the amount necessary to reimburse the Fiscal Agent, the Indenture Trustee and the Servicer (in that order of priority) for first, any Property Protection Advances (and Advance Interest thereon) and second, any P&I Advances (and Advance Interest thereon), previously made, to the extent not previously reimbursed, and either shall retain or remit to the Fiscal Agent or the Servicer such amounts as appropriate; (iv) fourth, the amount necessary to pay Required Debt Service Payments on the Bonds, to be paid as provided in Section 2.01; (v) fifth, the amount necessary to pay Yield Maintenance Premiums payable with respect to such Payment Date, to be paid on the Bonds as provided in Section 2.01(e); (vi) sixth, the amount necessary to pay any Prepayments made with respect to such Payment Date, to be paid as provided in Section 2.01; and (vii) seventh, the amount necessary to pay accrued but unpaid Default Servicing Fees (with interest thereon at the Advance Rate). Each of the foregoing amounts shall be the amount set forth in the applicable Payment Date Statement. (d) On each Special Payment Date, the Indenture Trustee shall withdraw from the Collateral Proceeds Account all amounts deposited in the Collateral Proceeds Account in connection with any Prepayments to be made on such Special Payment Date and shall apply such amounts (i) first, to pay all items set forth in clauses (i) through (iii) of Section 8.02(c); (ii) second, to pay all accrued and unpaid interest with respect to the Prepayment, to be paid as 46 54 provided in Section 2.01; and (iii) third, to pay the Prepayment made with respect to such Special Payment Date, to be paid as provided in Section 2.01(e). (e) On or after each Payment Date, so long as the Indenture Trustee shall have prepared a Payment Date Statement in respect of such Payment Date and shall have made the payments required pursuant to Section 8.02(c) and (d) and required to be made as indicated in such Payment Date Statement, any amounts remaining in the Collateral Proceeds Account (other than Prepayments (and related accrued interest) deposited therein and payable on a subsequent Payment Date and any income or other gain from amounts in the Collateral Proceeds Account invested in Permitted Investments) shall be withdrawn from the Collateral Proceeds Account by the Indenture Trustee and remitted to the Servicer for deposit in the Central Account for application in accordance with the Servicing Agreement. SECTION 8.03. GENERAL PROVISIONS REGARDING THE COLLATERAL PROCEEDS ACCOUNT. (a) The Collateral Proceeds Account shall relate solely to the Bonds and to the Mortgaged Properties, Permitted Investments and other property securing the Bonds. Funds and other property in the Collateral Proceeds Account shall not be commingled with any other moneys or property of the Issuer or any Affiliate thereof. Notwithstanding the foregoing, the Indenture Trustee may hold any funds or other property received or held by it as part of the Collateral Proceeds Account in collective accounts maintained by it in the normal course of its business and containing funds or property held by it for other Persons (which may include the Issuer or an Affiliate), provided that such accounts are under the sole control of the Indenture Trustee and the Indenture Trustee maintains adequate records indicating the ownership of all such funds or property and the portions thereof held for credit to the Collateral Proceeds Account. (b) If any amounts are needed for disbursement from the Collateral Proceeds Account and sufficient uninvested funds are not available therein to make such disbursement, the Indenture Trustee shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in the Collateral Proceeds Account. (c) The Indenture Trustee shall, at all times while any Bonds are Outstanding, maintain in its possession, or in the possession of an agent whose actions with respect to such items are under the sole control of the Indenture Trustee, all certificates or other instruments, if any, evidencing any investment of funds in the Collateral Proceeds Account. The Indenture Trustee shall relinquish possession of such items, or direct its agent to do so, only for purposes of collecting the final payment receivable on such investment or certificate or, in connection with the sale of any investment held in the Collateral Proceeds Account, against delivery of the amount receivable in connection with any sale. 47 55 SECTION 8.04. CENTRAL ACCOUNT (a) On or before each Payment Date occurring in a month in which Percentage Rent is due under the Leases, the Issuer shall deposit, or cause to be deposited, an amount equal to the FF&E Quarterly Installment into the Central Account for allocation by the Servicer pursuant to the Servicing Agreement to the FF&E Reserve Sub-Account. (b) The Issuer shall cause the Lessee to deposit all Rents due and owing after the Closing Date into the Central Account, for allocation by the Servicer of an amount with respect to each Payment Date equal to the Required Debt Service Payment (less amounts required to reimburse the Servicer, Indenture Trustee or Fiscal Agent for any previous P&I Advances) to the Debt Service Payment Sub-Account in accordance with the Servicing Agreement (and allocation of any excess to another Sub-Account or release to the Issuer, as provided in the Servicing Agreement). If, on any Payment Date, the amounts on deposit in the Debt Service Payment Sub-Account (plus amounts allocated to reimburse the Servicer, Indenture Trustee, any co-trustee and Fiscal Agent for any accrued and unpaid Servicing Fees, Indenture Trustee Fees (and fees of any co-trustees) and Trust Estate Expenses and unreimbursed Advances with Advance Interest thereon) are less than an amount equal to Required Debt Service Payments for such Payment Date and such other amounts, then the Issuer shall deposit, or cause to be deposited, into the Collateral Proceeds Account the amount of any such shortfall, so that payments can be made in accordance with Sections 2.01 and 8.02 hereof. (c) The Issuer may direct the Servicer to invest and reinvest the funds in the Central Account in one or more Permitted Investments in such manner as the Issuer shall direct in writing from time to time, or if the Issuer fails to give any such directions or upon an Event of Default that is continuing, as the Servicer may determine pursuant to the Servicing Agreement. SECTION 8.05. REPORTS BY INDENTURE TRUSTEE TO BONDHOLDERS; ACCESS TO CERTAIN INFORMATION. (a) On each Payment Date the Indenture Trustee shall deliver the written report required by Section 2.06(e). Any Bondholder that does not receive information through DTC or a Participant may request that Indenture Trustee reports required to be delivered under this Indenture be mailed directly to it by written request to the Indenture Trustee (accompanied by verification of such Bondholder's ownership interest) at the Indenture Trustee's Corporate Trust Office. (b) The Indenture Trustee shall make available at its Corporate Trust Office, during normal business hours, for review by any Bondholder or any person identified by the Issuer or a Bondholder to the Indenture Trustee as a prospective Bondholder, originals or copies of the following items: (a) the Indenture and any amendments thereto, (b) all Payment Date Statements delivered to the Issuer since the Closing Date, (c) any Officers' Certificates and any Officers' Certificate of the Servicer delivered to the Indenture Trustee since the Closing Date as described in the Indenture, (d) any Accountants' reports delivered to the Indenture Trustee since the 48 56 Closing Date as required under the Servicing Agreement, (e) the most recent property inspection report prepared by or on behalf of the Servicer in respect of each Mortgaged Property and delivered to the Indenture Trustee, (f) the most recent annual operating statement and rent roll, if any, collected by or on behalf of the Servicer and delivered to the Indenture Trustee with respect to each Mortgaged Property, (g) any and all modifications, waivers and amendments of the terms of a Mortgage Loan entered into by the Servicer and delivered to the Indenture Trustee, and (h) any and all Officers' Certificates of the Servicer and other evidence delivered to the Indenture Trustee to support the Servicer's determination that any Advance was not or, if made, would not be recoverable. Copies of any and all of the foregoing items will be available from the Indenture Trustee upon request; however, the Indenture Trustee will be permitted to require payment of a sum sufficient to cover the reasonable costs and expenses of providing such copies. SECTION 8.06. RELEASE OF TRUST ESTATE. (a) The Indenture Trustee may, and when required by the provisions of this Indenture shall, execute such instruments or powers of attorney as are prepared and delivered to it by the Servicer to release property from the lien of this Indenture and the other Loan Documents, or convey the Indenture Trustee's interest in the same, in a manner and under circumstances which are not inconsistent with the provisions of this Indenture. No party relying upon an instrument executed by the Indenture Trustee as provided in this Article VIII shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (b) The Indenture Trustee shall, at such time as there are no Bonds Outstanding, release all of the Trust Estate to the Issuer (other than any cash held for the payment of the Bonds pursuant to Section 3.03 or 4.02), subject, however, to the payment and reimbursement of any unpaid or unreimbursed Servicing Fees, Indenture Trustee Fees, Disposition Fees, Default Servicing Fees (with interest thereon at the Advance Rate) and Advances with Advance Interest thereon owed to the Servicer, the Indenture Trustee or the Fiscal Agent. SECTION 8.07. AMENDMENT TO SERVICING AGREEMENT. The Indenture Trustee may, without the consent of any Holder, enter into or consent to any amendment or supplement to the Servicing Agreement, subject to the requirements therein. SECTION 8.08. APPOINTMENT OF SERVICER. In order to facilitate the servicing of the Bonds and the Collateral therefor, the Servicer has been appointed by the Indenture Trustee to, among other things, retain, in accordance with the provisions of the Servicing Agreement and this Indenture, all Remittances prior to the time they are deposited into the Collateral Proceeds Account. 49 57 SECTION 8.09. TERMINATION OF SERVICER. If the Servicer materially breaches or fails to perform or observe any obligations or conditions in the Servicing Agreement, the Indenture Trustee may terminate the Servicer in accordance with the Servicing Agreement. If the Indenture Trustee terminates the Servicer, the Indenture Trustee shall pursuant to Section 5.03 of the Servicing Agreement assume the duties of the Servicer or appoint a successor servicer acceptable to the Issuer and the Rating Agency and meeting the requirements set forth in the Servicing Agreement. SECTION 8.10. APPOINTMENT OF CUSTODIANS. The Indenture Trustee may, at no additional cost to the Issuer, with the consent of the Issuer, appoint one or more Custodians to hold all or a portion of the Mortgage Files as agent for the Indenture Trustee. Each Custodian shall (i) be a financial institution supervised and regulated by the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation; (ii) have combined capital and surplus of at least $10,000,000; (iii) be equipped with secure, fireproof storage facilities, and, have adequate controls on access to assure the safety and security of the Mortgage Files; (iv) utilize in its custodial function employees who are knowledgeable in the handling of mortgage documents and of the functions of a mortgage document custodian; and (v) satisfy any other reasonable requirements that the Indenture Trustee may from time to time deem necessary to protect the interests of Bondholders in the Mortgage Files. Each Custodian shall be subject to the same obligations and standard of care as would be imposed on the Indenture Trustee hereunder assuming the Indenture Trustee retained the Mortgage Files directly. The appointment of one or more Custodians shall not relieve the Indenture Trustee from any of its obligations hereunder, and the Indenture Trustee shall remain responsible for all acts and omissions of any Custodian. If the Servicer is appointed as a Custodian in accordance with this Section 8.11, it shall fulfill its servicing and custodial duties and obligations through separate departments and, if it maintains a trust department, shall fulfill its custodial duties and obligations through such trust department. SECTION 8.11. THE FISCAL AGENT. (a) All fees and expenses of the Fiscal Agent (other than interest owed to the Fiscal Agent in respect of unreimbursed Advances or deposits) incurred by the Fiscal Agent in connection with the transactions contemplated by this Indenture or the Servicing Agreement shall be borne by the Indenture Trustee and neither the Indenture Trustee nor the Fiscal Agent shall be entitled to reimbursement therefor from any of the Trust Estate or the Issuer. (b) The obligations of the Fiscal Agent set forth herein and in the Servicing Agreement shall exist for so long as the initial Indenture Trustee shall act as Indenture Trustee hereunder. The obligations of the Fiscal Agent set forth herein and in the Servicing Agreement shall cease to exist to the extent that the initial Indenture Trustee is no longer acting as Indenture Trustee hereunder. 50 58 (c) Any notice to the Indenture Trustee shall be deemed a notice to the Fiscal Agent. (d) The Fiscal Agent shall be entitled to be indemnified to the same extent provided herein with respect to the Indenture Trustee. ARTICLE IX. SUPPLEMENTAL INDENTURES AND MODIFICATIONS OF OTHER LOAN DOCUMENTS SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF BONDHOLDERS. Without the consent of the Holders of any Bonds, the Issuer and the Indenture Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, or modification or amendment to any other Loan Document, in form satisfactory to the Indenture Trustee, for any of the following purposes: (a) to correct or amplify the description of any property at any time subject to the lien of this Indenture and the related Mortgage, or better to assure, convey and confirm unto the Indenture Trustee any property subject or required to be subjected to the lien of this Indenture and the related Mortgage, or to subject to the lien of this Indenture additional property; (b) to add to the conditions, limitations and restrictions on the authorized amount, terms and purposes of the issuance, authentication and delivery of any Bonds, as herein set forth, additional conditions, limitations and restrictions thereafter to be observed; (c) to evidence the succession of another Person to the Issuer to the extent expressly permitted under the Loan Documents and the Partnership Agreement or Certificate of Limited Partnership of the Issuer, and the assumption by any such successor of the covenants of the Issuer herein and in the Bonds contained; (d) to add to the covenants of the Issuer, for the benefit of the Holders of all Bonds or to surrender any right or power herein conferred upon the Issuer; and (e) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to amend any other provisions with respect to matters or questions arising under this Indenture, which shall not be inconsistent with the provisions of this Indenture provided that such action shall not adversely affect in any material respect the interests of the Holders of the Bonds, as evidenced by a letter from the Rating Agency that the amendment would not 51 59 result in the qualification, downgrading or withdrawal of the ratings then assigned to the Bonds. SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS. (a) With the consent of the Holders of Bonds representing not less than 67% of the principal balance of the Outstanding Bonds by Act of said Holders delivered to the Issuer and the Indenture Trustee, the Issuer and the Indenture Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in any manner the rights of the Holders of the Bonds under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Bond affected thereby: (i) change the Stated Maturity of the Bonds or the installment of interest on the Bonds, reduce the principal amount of the Bonds, the Bond Interest Rate on the Bonds or the Yield Maintenance Premium payable with respect to principal Prepayments on the Bonds or the terms under which such Yield Maintenance Premiums are required to be paid, or change any place of payment where, or the coin or currency in which, any Bond or any interest thereon is payable, or impair the right to institute suit for the enforcement of the payment of the principal of or interest on any Bond on or after the Stated Maturity thereof; (ii) reduce the percentage of the principal balance of the Outstanding Bonds, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver of compliance with provisions of this Indenture or Defaults hereunder and their consequences provided for in this Indenture; (iii) modify any of the provisions of this Section or Section 5.14, except to increase any percentage specified therein or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Bond affected thereby; (iv) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (v) permit the creation of any lien other than the lien of this Indenture with respect to any part of the Trust Estate (except for Permitted Liens) or terminate the lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Bond of the security afforded by the lien of this Indenture; or 52 60 (vi) modify any of the provisions of this Indenture in such manner as to affect the calculation of the Scheduled Payment for any Payment Date (including the calculation of any of the individual components of such Scheduled Payment). (b) The Indenture Trustee may determine whether or not any Bonds would be affected by any supplemental indenture in reliance upon an Opinion of Counsel or confirmation from the Rating Agency that the then current ratings of the Bonds would not be adversely affected by such supplemental indenture and any such determination shall be conclusive upon the Holders of all Bonds, whether theretofore or thereafter authenticated and delivered hereunder. The Indenture Trustee shall not be liable for any such determination made in good faith. (c) It shall not be necessary for any Act of Bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. (d) Promptly after the execution by the Issuer and the Indenture Trustee of any supplemental indenture pursuant to this Section, the Indenture Trustee shall mail to the Holders of the Bonds to which such supplemental indenture relates a notice prepared by the Issuer setting forth in general terms the substance of such supplemental indenture. Any failure of the Indenture Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Indenture Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Indenture Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Indenture Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture far all purposes; and every Holder of Bonds to which such supplemental indenture relates which have theretofore been or thereafter are authenticated and delivered hereunder shall be bound thereby. Notwithstanding any provision of this Article IX to the contrary, any modification, amendment or supplement to this Indenture that is adverse to the interests of the Servicer in any material respect shall not be binding upon the Servicer without the Servicer's prior written consent. 53 61 SECTION 9.05. REFERENCE IN BONDS TO SUPPLEMENTAL INDENTURES . Bonds authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and if required by the Indenture Trustee shall, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer shall so determine, new Bonds so modified as to conform, in the opinion of Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for Outstanding Bonds. SECTION 9.06. AMENDMENTS TO LOAN DOCUMENTS. (a) With the consent of the Issuer and the Holders of Bonds representing at least 66 2/3% of the principal balance of the Outstanding Bonds by Act of said Holders delivered to the Issuer and the Indenture Trustee, the Issuer and the Indenture Trustee may enter into a modification of any Loan Document (other than the Indenture or the Bonds) for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, such Loan Document or of modifying in any manner the rights of the Holders of the Bonds under such Loan Document; provided, however, that no such modification shall, without the consent of the Holder of each Outstanding Bond affected thereby, have any of the results enumerated in Section 9.02(a) (i) through (vi). (b) The Indenture Trustee may determine whether or not any Bonds would be affected by any modification of a Loan Document in reliance upon an Opinion of Counsel or confirmation from the Rating Agency that the then current ratings of the Bonds would not be adversely affected by such modification, and any such determination shall be conclusive upon the Holders of all Bonds, whether theretofore or thereafter authenticated and delivered hereunder. The Indenture Trustee shall not be liable for any such determination made in good faith. The Indenture Trustee may, but shall not be obligated to, enter into any such modification of a Loan Document that affects the Indenture Trustee's own rights, duties or immunities under this Indenture or otherwise. (c) It shall not be necessary for any Act of Bondholders under this Section to approve the particular form of any proposed modification, but it shall be sufficient if such Act shall approve the substance thereof. (d) The Indenture Trustee shall deposit in the related Mortgage File an original counterpart of the agreement relating to such modification, waiver or amendment promptly following the execution thereof, except to the extent such documents have been submitted to the applicable recording office, in which event the Indenture Trustee shall place a copy of such document in the related Mortgage File and shall place an original counterpart therein when the original is returned from the recording office. 54 62 SECTION 9.07. AMENDMENTS TO GOVERNING DOCUMENTS. (a) The Indenture Trustee shall, upon Issuer Request, consent to any proposed amendment to the Issuer's or the General Partner's governing documents, or an amendment to or waiver of any provision of any other document relating to the Issuer's or General Partner's governing documents, such consent to be given without the necessity of obtaining the consent of the Holders of any Bonds upon receipt by the Indenture Trustee of: (i) an Opinion of Counsel to the effect that such amendment or waiver will not adversely affect the interests of the Holders of the Bonds and that all conditions precedent to such consent specified in this Section 9.07 have been satisfied; (ii) an Officers' Certificate, to which such proposed amendment or waiver shall be attached, stating that such attached copy is a true copy of the proposed amendment or waiver and that all conditions precedent to such consent specified in this Section 9.07 have been satisfied; and (iii) written confirmation from the Rating Agency that the implementation of the proposed amendment or waiver would not result in the downgrading or withdrawal of the ratings then assigned to the Bonds. (b) Notwithstanding the foregoing, the Indenture Trustee may decline to consent to a proposed waiver or amendment that adversely affects its own rights, duties or immunities under this Indenture or otherwise. (c) Nothing in this Section 9.07 shall be construed to require that any Person obtain the consent of the Indenture Trustee to any amendment or waiver or any provision of any document where the making of such amendment or the giving of such waiver without obtaining the consent of the Indenture Trustee is not prohibited by this Indenture or by the terms of the document that is the subject of the proposed amendment or waiver. ARTICLE X. MISCELLANEOUS SECTION 10.01. COMPLIANCE CERTIFICATES. Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Indenture Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by 55 63 any provision of this Indenture relating to such particular application or request, no additional certificate need be furnished. SECTION 10.02. FORM OF DOCUMENTS DELIVERED TO INDENTURE TRUSTEE. (a) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. (b) Any certificate or opinion of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any Opinion of Counsel may be based on the written opinion of other counsel, in which event such Opinion of Counsel shall be accompanied by a copy of such other counsel's opinion and shall include a statement to the effect that such counsel believes that such counsel and the Indenture Trustee may reasonably rely upon the opinion of such other counsel. (c) Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. (d) Wherever in this Indenture, in connection with any application or certificate or report to the Indenture Trustee, it is provided that the Issuer shall deliver any document as a condition of the granting of such application, or as evidence of the Issuer's compliance with any term hereof, it is intended that the truth and accuracy, at the time of the granting of such application or at the effective date of such certificate or report (as the case may be), of the facts and opinions stated in such document shall in such case be conditions precedent to the right of the Issuer to have such application granted or to the sufficiency of such certificate or report. The foregoing shall not, however, be construed to affect the Indenture Trustee's right to rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Section 6.01(b)(2). (e) Whenever in this Indenture it is provided that the absence of the occurrence and continuation of a Default or Event of Default is a condition precedent to the taking of any action by the Indenture Trustee at the request or direction of the Issuer, then, notwithstanding that the satisfaction of such condition is a condition precedent to the Issuer's right to make such request or direction, the Indenture Trustee shall be protected in acting in accordance with such request or direction if it does not have knowledge of the occurrence and continuation of such Default or Event of Default as provided in Section 6.01(d). 56 64 SECTION 10.03. ACTS OF BONDHOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Bondholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Bondholders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Indenture Trustee, and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Bondholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Whenever such execution is by an officer of a corporation or a member of a partnership on behalf of such corporation or partnership, such certificate or affidavit shall also constitute sufficient proof of his authority. (c) The ownership of Bonds shall be proved by the Bond Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Bonds shall bind the Holder of every Bond issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not, notation of such action is made upon such Bonds. SECTION 10.04. NOTICES TO INDENTURE TRUSTEE AND ISSUER. Any request, demand, authorization, direction, notice, consent, waiver or Act of Bondholders or other documents provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Indenture Trustee by any Bondholder or by the Issuer shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with and received by the Indenture Trustee at its Corporate Trust Office; or (b) the Issuer by the Indenture Trustee or by any Bondholder shall be sufficient for every purpose hereunder (except for certain Events of Default as provided in the definition of Event of Default) if in writing and mailed, first-class postage prepaid, to the Issuer addressed to it at 889 Ridge Lake Boulevard, Suite 100, Memphis, Shelby 57 65 County, Tennessee 38120, or at any other address previously furnished in writing to the Indenture Trustee by the Issuer. SECTION 10.05. NOTICES AND REPORTS TO BONDHOLDERS; WAIVER OF NOTICES. (a) Where this Indenture provides for notice to Bondholders of any event or the mailing of any report to Bondholders, such notice or report shall be sufficiently given (unless otherwise herein expressly provided) if mailed, first-class postage prepaid, to each Bondholder affected by such event or to whom such report is required to be mailed, at the address of such Bondholder as it appears on the Bond Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice or the mailing of such report. In any case where a notice or report to Bondholders is mailed in the manner provided above, neither the failure to mail such notice or report, nor any defect in any notice or report so mailed, to any particular Bondholder shall affect the sufficiency of such notice or report with respect to other Bondholders, and any notice or report which is mailed in the manner herein provided shall be conclusively presumed to have been duly given or provided. (b) Where this Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Bondholders shall be filed with the Indenture Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. (c) In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event to Bondholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a sufficient giving of such notice. SECTION 10.06. RULES BY INDENTURE TRUSTEE. The Indenture Trustee may make reasonable rules for any meeting of Bondholders. SECTION 10.07. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 10.08. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Issuer shall bind its successors and assigns, whether so expressed or not. 58 66 SECTION 10.09. SEPARABILITY. In case any provision in this Indenture or in the Bonds shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.10. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Bonds, expressed or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Class B Trustee, separate trustee or co-trustee appointed under Section 6.14, the Servicer and the Bondholders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 10.11. LEGAL HOLIDAYS. Except as otherwise provided herein or in the Glossary, in any case where the date of any Payment Date, Special Payment Date or any other date on which principal of or interest on any Bond is proposed to be paid shall not be a Business Day, then (notwithstanding any other provision of the Bonds or this Indenture) payment need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the nominal date of any such Payment Date, Special Payment Date or other date for the payment of principal of or interest on any Bond and no interest shall accrue for the period from and after any such nominal date, provided such payment is made in full on such next succeeding Business Day. SECTION 10.12. GOVERNING LAW. IN VIEW OF THE FACT THAT BONDHOLDERS MAY RESIDE IN MANY STATES AND OUTSIDE THE UNITED STATES AND THE DESIRE TO ESTABLISH WITH CERTAINTY THAT THIS INDENTURE WILL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF A STATE HAVING A WELL-DEVELOPED BODY OF COMMERCIAL AND FINANCIAL LAW RELEVANT TO TRANSACTIONS OF THE TYPE CONTEMPLATED HEREIN, THIS INDENTURE AND EACH BOND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN. SECTION 10.13. COUNTERPARTS. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 59 67 SECTION 10.14. ISSUER OBLIGATION. Except as expressly provided in the Loan Documents, no recourse may be taken, directly or indirectly, against any organizer, General Partner or the Indenture Trustee or of any predecessor or successor of the Issuer or the Indenture Trustee with respect to the Issuer's obligations with respect to the Bonds or the obligations of the Issuer or the Indenture Trustee under this Indenture or any certificate or other writing delivered in connection herewith or therewith. SECTION 10.15. USURY. The amount of interest payable or paid on any Bond under the terms of this Indenture shall be limited to the Highest Lawful Rate. In the event any payment of interest on any Bond exceeds the Highest Lawful Rate, the Issuer stipulates that such excess amount will be deemed to have been paid as a result of an error on the part of both the Indenture Trustee, acting on behalf of the Holder of such Bond, and the Issuer, and the Holder receiving such excess payment shall promptly, upon discovery of such error or upon notice thereof from the Issuer or the Indenture Trustee, refund the amount of such excess or, at the option of the Indenture Trustee, apply the excess to the payment of principal of such Bond, if any, remaining unpaid. In addition, all sums paid or agreed to be paid to the Indenture Trustee for the benefit of Holders of Bonds for the use, forbearance or detention of money shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such Bonds. SECTION 10.16 STREIT ACT. Any provisions required to be contained in this Indenture by Section 126 and Section 130- k of Article 4-A of the New York Real Property Law are hereby incorporated, and such provisions shall be in addition to those conferred or imposed by this Indenture, provided, however, that to the extent that such Section 126 or Section 130-k shall not apply to this Indenture, said Section 126 or Section 130-k should at any time be repealed or cease to apply to this Indenture, or be construed by judicial decision to be inapplicable, said Section 126 or Section 130-k as the case may be shall cease to have any further effect upon the provisions of this Indenture. In case of a conflict between the provisions of this Indenture and any mandatory provisions of Article 4-A of the New York Real Property Law, such mandatory provisions of said Article 4-A shall prevail, provided that if said Article 4-A shall not apply to this Indenture, should at any time be repealed, or cease to apply to this Indenture, or be construed by judicial decision to be inapplicable, such mandatory provisions of such Article 4-A shall cease to have any further effect upon the provisions of this Indenture. ***** [SIGNATURES TO FOLLOW] 60 68 IN WITNESS WHEREOF, the Issuer, acting through its duly authorized general partner, the Indenture Trustee and the Fiscal Agent have caused this Indenture to be duly executed by officers thereunto duly authorized, all as of the day and year first above written. RFS FINANCING PARTNERSHIP, L.P., a Tennessee limited partnership By: RFS FINANCING CORPORATION, a Tennessee corporation, its duly authorized general partner By: LASALLE NATIONAL BANK, as Indenture Trustee By: ABN AMRO BANK N.V., as Fiscal Agent By: EX-10.11 13 FORM OF DEED OF TRUST 1 EXHIBIT 10.11 Prepared by, recording RECORDER'S STAMP requested by, and when recorded return to: Hunton & Williams One NationsBank Plaza, Suite 2650 101 South Tryon Street Charlotte, North Carolina 28280 Attention: Michael Nedzbala, Esq. DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT FROM RFS FINANCING PARTNERSHIP, L.P., the Borrower, TO __________________ Trustee FOR THE BENEFIT OF LASALLE NATIONAL BANK, as Indenture Trustee, the Beneficiary Relating to Premises in: City/Town: County: State: Dated as of: November 21, 1996 - - ------------------------------------------------------------------------------ [THE INDEBTEDNESS SECURED BY THIS DEED OF TRUST IS ALSO SECURED BY OTHER MORTGAGES AND DEEDS OF TRUST ENCUMBERING OTHER PROPERTY LYING OUTSIDE OF THE STATE OF ________________. PURSUANT TO SECTION __________ OF THE CODE OF _____________, AS AMENDED, RECORDATION TAX SHALL BE BASED UPON $_____________, BEING THE ALLOCATED LOAN AMOUNT, THAT IS, THE PROPORTION THAT THE VALUE OF THE REAL PROPERTY ENCUMBERED BY THIS DEED OF TRUST BEARS TO THE ENTIRE AMOUNT CONVEYED BY ALL SUCH MORTGAGES AND DEEDS OF TRUST.] 2 TABLE OF CONTENTS Page No. RECITALs .............................................................................................. 1 GRANTING CLAUSES....................................................................................... 2 SECTION 1. GENERAL TERMS........................................................................ 6 Section 1.01. The Borrower's Bonds........................................................ 6 Section 1.02. Prepayment.................................................................. 6 Section 1.03. Release of the Mortgaged Property........................................... 6 SECTION 2. PAYMENTS............................................................................. 8 Section 2.01. Payments.................................................................... 8 Section 2.02. Setoff...................................................................... 8 SECTION 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE BORROWER............................................................................................... 8 Section 3.01. Partnership Existence....................................................... 8 Section 3.02. No Litigation............................................................... 8 Section 3.03. No Breach................................................................... 8 Section 3.04. Partnership Action.......................................................... 9 Section 3.05. Approvals................................................................... 9 Section 3.06. ERISA....................................................................... 9 Section 3.07. Impositions................................................................. 9 Section 3.08. Investment Company Act...................................................... 10 Section 3.09. General Partner............................................................. 10 Section 3.10. Restricted Activities of Borrower and General Partner....................... 10 Section 3.11. Other Activities............................................................ 10 Section 3.12. Employees................................................................... 13 Section 3.13. Solvency.................................................................... 13 Section 3.14. No Foreign Person........................................................... 13 SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES CON- CERNING MORTGAGED PROPERTY........................................................... 13 Section 4.01. Improvements................................................................ 13 Section 4.02. Casualty; Condemnation...................................................... 13 Section 4.03. Zoning and Other Laws....................................................... 13 Section 4.04. Lease....................................................................... 14 Section 4.05. Permits..................................................................... 14 Section 4.06. Utilities................................................................... 14 Section 4.07. [Reserved].................................................................. 14
(i) 3 Page No. Section 4.08. Hazardous Materials......................................................... 14 Section 4.09. Warranty of Title........................................................... 15 Section 4.10 Flood Insurance............................................................. 15 Section 4.11 Condition of Mortgaged Property............................................. 15 SECTION 5. COVENANTS OF THE BORROWER............................................................ 15 Section 5.01. Financial Statements........................................................ 15 Section 5.02. Litigation, Etc............................................................. 16 Section 5.03. Partnership Existence, Etc.................................................. 16 Section 5.04. Prohibition of Fundamental Changes.......................................... 17 Section 5.05. Neither a Foreign Person nor an Investment Company.......................... 17 Section 5.06. ERISA....................................................................... 17 Section 5.07. Limitation on Liens......................................................... 18 Section 5.08. Indebtedness................................................................ 18 Section 5.09. Investments................................................................. 18 Section 5.10. Dividend Payments........................................................... 18 Section 5.11. Partnership Activities; Books and Records................................... 19 Section 5.12. Payment for Labor and Materials............................................. 19 Section 5.13. Modifications of Lease...................................................... 19 Section 5.14. [Reserved].................................................................. 19 Section 5.15. Performance of Other Agreements............................................. 19 Section 5.16. Operation of the Mortgaged Properties....................................... 20 Section 5.17. Environmental Matters....................................................... 20 Section 5.18. Insurance; Casualty......................................................... 21 Section 5.19. Payment of Impositions, Liens and Utilities................................. 26 Section 5.20. Condemnation................................................................ 27 Section 5.21. Leases and Rents............................................................ 28 Section 5.22. Maintenance of Mortgaged Property; Waste.................................... 30 Section 5.23. Alterations................................................................. 30 Section 5.24. Compliance with Applicable Law.............................................. 30 Section 5.25. Transfer or Encumbrance of the Mortgaged Property........................... 31 Section 5.26. Estoppel Certificates....................................................... 31 Section 5.27. Operating of Hotel.......................................................... 31 Section 5.28. Changes in the Laws Regarding Taxation...................................... 31 Section 5.29. No Credits on Account of the Secured Obligation............................. 32 Section 5.30. Documentary Stamps.......................................................... 32 Section 5.31. Right of Entry.............................................................. 32 Section 5.32. Performance of Other Agreements............................................. 32
(ii) 4 Page No. SECTION 6. RIGHTS AND REMEDIES.................................................................. 32 Section 6.01. Appraisals.................................................................... 32 Section 6.02. Events of Default............................................................. 32 Section 6.03. Remedies...................................................................... 33 Section 6.04. Right to Cure Defaults........................................................ 37 Section 6.05. Appointment of Receiver....................................................... 38 SECTION 7. WAIVER............................................................................... 38 Section 7.01. Waiver of Counterclaim........................................................ 38 Section 7.02. Sole Discretion of the Beneficiary............................................ 38 Section 7.03. Waiver of Notice.............................................................. 38 Section 7.04. Other Mortgages; No Election of Remedies...................................... 39 Section 7.05. Notices....................................................................... 40 Section 7.06. Non-Waiver.................................................................... 41 SECTION 8. SECURITY AGREEMENT RECORDATION....................................................... 41 Section 8.01. Security Agreement............................................................ 41 Section 8.02. Recording of Deed of Trust, etc............................................... 42 SECTION 9. RIGHTS OF THE BENEFICIARY............................................................ 43 Section 9.01. Further Acts, etc............................................................. 43 Section 9.02. Recovery of Sums Required To Be Paid.......................................... 43 Section 9.03. Costs of Defending and Upholding the Lien..................................... 44 Section 9.04. Additional Actions............................................................ 44 Section 9.05. Additional Security........................................................... 44 SECTION 10. APPLICABLE LAWS........................................................................... 44 Section 10.01. Usury Laws.................................................................... 44 Section 10.02. Governing Law; Jurisdiction; Waiver of Trial by Jury.......................... 45 SECTION 11. MISCELLANEOUS............................................................................. 46 Section 11.01. Exculpation................................................................... 46 Section 11.02. Duplicate Originals........................................................... 46 Section 11.03. Indemnity and the Beneficiary's Costs......................................... 46 Section 11.04. Incorporation by Reference.................................................... 47 Section 11.05. Amendments.................................................................... 48 Section 11.06. Headings, etc................................................................. 48 Section 11.07. Addresses of Mortgaged Properties............................................. 48 Section 11.08. Wire Transfer................................................................. 48 Section 11.09. Severability.................................................................. 48
(iii) 5 Page No. Section 11.10. Covenants To Run with the Land................................................ 49 Section 11.11. Trustee's Duties.............................................................. 49 Section 11.12. Business Days................................................................. 50 Section 11.13. Relationship.................................................................. 50 Section 11.14. No Merger..................................................................... 50
LIST OF SCHEDULES AND EXHIBITS Schedule A Description of Premises Schedule B Exceptions to Good Condition Schedule C Environmental Reports Schedule D Street Address of Mortgaged Property and Other Mortgaged Property Annex I Local Law Provisions
(iv) 6 DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT ("Deed of Trust") dated as of November 21, 1996, made by RFS Financing Partnership, L.P. (the "Borrower"), a Tennessee limited partnership, having an address 889 Ridge Lake Boulevard, Suite 100, Memphis, Shelby County, Tennessee 38120, as borrower, assignor and debtor, in favor of ________________________, as trustee, and his or its successors in trust hereby created (the "Trustee") as trustee for the benefit of , as indenture trustee under an indenture (the "Indenture") dated of even date herewith, between the Borrower and such trustee, (together with its successors and assigns, the "Beneficiary"), having an address at 135 South LaSalle Street, 17th Floor, Chicago, Illinois 60674-4107, as beneficiary, assignee and secured party. RECITALS: A. Except as otherwise specified or as the context may otherwise require, capitalized terms used herein shall have the meanings assigned to those terms in the "Glossary" attached as Annex I to the Indenture. B. The Borrower and the Beneficiary are executing the Indenture, pursuant to which certain bonds, dated as of the date hereof in the aggregate principal amount of SEVENTY-FIVE MILLION Dollars ($75,000,000) (the "Bonds") will be issued. C. The Borrower is the owner of the real property described on Schedule A annexed hereto, together with all buildings, structures and improvements located thereon. D. A condition to the issuance of the Bonds is that the Borrower execute and deliver this Deed of Trust and the Other Mortgages. E. The Stated Maturity of the Class A Bonds is August 20, 2008 and of the Class B Bonds is November 21, 2011. F. The Beneficiary will hold its interest in and to, inter alia, this Deed of Trust as indenture trustee for the benefit of all Bondholders who hold Bonds issued pursuant to the Indenture. G. This Deed of Trust is given by the Borrower in favor of the Beneficiary to secure the payment and performance in full when due, whether at Stated Maturity, by acceleration or otherwise (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the filing of a petition in bankruptcy (whether or not a claim is allowed against the Borrower for such interest or other amounts in any such bankruptcy proceeding) or the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of (i) all payment, performance and other obligations of the Borrower now existing or hereafter arising under or in respect of the Indenture, the Bonds and the other Loan 7 Documents (including, without limitation, the obligation to pay principal, interest and all other charges, fees, expenses, indemnities and other payments related to or in respect of the obligations contained in the Bonds and the other Loan Documents), and (ii) without duplication of the obligations described in clause (i), all payment, performance and other obligations of the Borrower now existing or hereafter arising under or in respect of this Deed of Trust, including, without limitation, with respect to all charges, fees, expenses, indemnities and other payments related to or in respect of the obligations contained in this Deed of Trust (the obligations described in clauses (i) and (ii), collectively, the "Secured Obligations"). H. The obligations of the Borrower are limited recourse obligations as more particularly described in Section 11.01 hereof. GRANTING CLAUSES: For and in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower hereby grants, transfers, bargains, sells, assigns and conveys to Trustee in trust, with power of sale and right of entry and possession, and hereby grants to the Beneficiary, a security interest in and upon, in and to the following property and rights, whether now owned or held or hereafter acquired (collectively, the "Mortgaged Property"): GRANTING CLAUSE ONE All right, title and interest in and to the real property described on Schedule A hereto (the "Premises"). GRANTING CLAUSE TWO TOGETHER WITH any and all buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter located on the Premises or any part thereof (collectively, the "Improvements"). GRANTING CLAUSE THREE TOGETHER WITH all easements, rights-of-way, strips and gores of land, streets, ways, alleys, sidewalks, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, zoning rights and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances of any nature whatsoever in any way belonging, relating or pertaining to the Premises or any part thereof, and the reversion and reversions, remainder and remainders, and all land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the Premises or any part thereof to the center line thereof and all the estates, rights, titles, interests, dower and rights of dower, courtesy and rights of courtesy, property, possession, claim and demand whatsoever, both in law 8 2 and in equity, of the Borrower of, in and to the Mortgaged Property and every part and parcel thereof, with the appurtenances thereto. GRANTING CLAUSE FOUR TOGETHER WITH all machinery, equipment, fixtures (including but not limited to all heating, ventilating, air conditioning, plumbing, lighting, communications and elevator fixtures), appliances, machinery and other property of every kind and nature whatsoever owned by the Borrower, or in which the Borrower has or shall have an interest (to the extent of such interest), now or hereafter located upon the Mortgaged Property, or appurtenant thereto, and usable in connection with the present or future operation and occupancy of the Mortgaged Property and all building equipment, materials and supplies of any nature whatsoever owned by the Borrower, or in which the Borrower has or shall have an interest (to the extent of such interest), now or hereafter located upon the Mortgaged Property, or appurtenant thereto, or usable in connection with the present or future operation and occupancy of the Mortgaged Property (hereinafter collectively called the "Equipment"), and the right, title and interest of the Borrower in and to any of the Equipment which may be subject to any security agreements (as defined in the Uniform Commercial Code) superior in lien to the lien of this Deed of Trust. In connection with Equipment which is leased to the Borrower or which is subject to a lien or security interest which is superior to the lien of this Deed of Trust, this Deed of Trust shall also cover all right, title and interest of the Borrower in and to all deposits, and the benefit of all payments now or hereafter made, with respect to such Equipment. GRANTING CLAUSE FIVE TOGETHER WITH all awards or payments, including interest thereon, which may heretofore and hereafter be made with respect to the Mortgaged Property, or any part thereof, whether from the exercise of the right of eminent domain (including but not limited to any transfer made in lieu of or in anticipation of the exercise of said right), or for a change of grade, or for any other injury to or decrease in the value of the Mortgaged Property. GRANTING CLAUSE SIX TOGETHER WITH all leases and subleases (including, without limitation, all guarantees thereof) and other agreements affecting the use, enjoyment and/or occupancy of the Mortgaged Property, or any part thereof, now or hereafter entered into, including, without limitation, the Lease (collectively, the "Leases") and all oil and gas or other mineral royalties, bonuses and rents, fees, charges, accounts, credit card slips and other payments for the use or occupancy of rooms and other public facilities in the Mortgaged Property (including, without limitation, all guaranties, letters of credit, bonds or cash security deposited thereunder to secure performance by the tenants or subtenants thereunder to the extent not prohibited by law), profits and proceeds from the Mortgaged Property (collectively, the "Rents") and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Secured Obligations. 3 9 GRANTING CLAUSE SEVEN TOGETHER WITH all proceeds of and any unearned premiums on any insurance policies covering the Mortgaged Property, or any part thereof, including, without limitation, the right to receive and apply the proceeds of any insurance, judgments, or settlements made in lieu thereof, for damage to the Mortgaged Property, or any part thereof. GRANTING CLAUSE EIGHT TOGETHER WITH the right, in the name and on behalf of the Borrower to appear in and defend any action or proceeding brought with respect to the Mortgaged Property or any part thereof and, while an Event of Default remains uncured, to commence any action or proceeding to protect the interest of the Beneficiary in the Mortgaged Property or any part thereof. GRANTING CLAUSE NINE TOGETHER WITH all accounts and accounts receivable, contract rights, interests, estate or other claims, both in law and in equity, which the Borrower now has or may hereafter acquire in the Mortgaged Property or any part thereof. GRANTING CLAUSE TEN TOGETHER WITH all rights which the Borrower now has or may hereafter acquire, to be indemnified and/or held harmless from any liability, loss, damage, cost or expense (including, without limitation, attorneys' fees and disbursements) relating specifically to the Mortgaged Property or any part thereof. GRANTING CLAUSE ELEVEN TOGETHER WITH all right, title and interest of the Borrower in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Mortgaged Property, hereafter acquired by, or released to the Borrower or constructed, assembled or placed by the Borrower on the Mortgaged Property, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, grant, conveyance, assignment or other act by the Borrower, shall become subject to the lien of this Deed of Trust as fully and completely and with the same effect, as though now owned by the Borrower and specifically described herein. GRANTING CLAUSE TWELVE TOGETHER WITH all transferable occupancy certificates, plans and specifications, franchise agreements, license agreements, consents, management agreements, service contracts and other licenses (including liquor licenses that the Borrower presently holds, if any, or may 4 10 hold at any time in the future), certificates, permits, authorizations, agreements and contracts necessary or desirable for the use, occupation, development, construction and operation of the Premises or other portions of the Mortgaged Property or any part thereof, including all renewals, extensions and replacements thereof, whether issued in the name of the Borrower or in the name of any predecessor in title. GRANTING CLAUSE THIRTEEN TOGETHER WITH all of the Borrower's right, title and interest, if any, in all surveys, title insurance policies, drawings, plans, specifications, file materials, operating and maintenance records, catalogues, tenant lists, correspondence, advertising materials, operating manuals, warranties, guaranties, appraisals, studies, trade names, good will, books and records and data relating to the Premises or the Equipment. GRANTING CLAUSE FOURTEEN TOGETHER WITH all refunds, rebates or credits in connection with a reduction in real estate taxes and assessments charged against the Mortgaged Property as a result of tax certiorari or any applications or proceedings for reduction. GRANTING CLAUSE FIFTEEN TOGETHER WITH all right, title and interest in and to all tangible personal property owned by Mortgagor (the "Personal Property"), and now or at any time hereafter located on or at the Premises or used in connection therewith, including, but not limited to: all goods, machinery, tools, insurance proceeds and refunds of insurance premiums, equipment (including fire sprinklers and alarm systems; office air conditioning; hearing; refrigerating; electronic monitoring; entertainment; recreational; window or structural cleaning rigs; maintenance equipment; equipment for the exclusion of vermin or insects; removal of dust; refuse or garbage and all other equipment of every kind), lobby and all other indoor and outdoor furniture (including tables, chairs, planters, desks, sofas, shelves, lockers and cabinets), wall beds, wall safes, furnishings, appliances (including ice boxes, freezers, refrigerators, fans, heaters, stoves, water heaters and incinerators), inventory, rugs, carpets and other floor coverings, draperies and drapery rods and brackets, awnings, window shades, venetian blinds, curtains, lamps, chandeliers and other lighting fixtures and office maintenance and other supplies; TO HAVE AND TO HOLD the above granted and described Mortgaged Property unto and to the use and benefit of Trustee, and its successors in trust, forever. PROVIDED, HOWEVER, these presents are upon the express condition, if the Borrower shall well and truly pay to the Beneficiary the Secured Obligations at the time and in the manner provided in the Bonds, the other Loan Documents and this Deed of Trust and shall well and truly abide by and comply with each and every covenant and condition set forth herein and in the Bonds and the other Loan Documents, the Beneficiary shall reconvey the Mortgaged 5 11 Property to the person or persons legally entitled thereto and shall, if requested by the Borrower, duly execute and deliver to the Borrower a satisfaction of this Deed of Trust in recordable form. AND the Borrower represents to, covenants with and warrants to the Beneficiary that: SECTION 1. GENERAL TERMS. Section 1.01. THE BORROWER'S BONDS. Two classes of Bonds shall be executed and delivered by the Borrower pursuant to the Indenture, and each class shall be payable as to principal and interest as specified in the Indenture, with a final maturity for each class on the applicable Stated Maturity. Section 1.02. PREPAYMENT. The Bonds may be prepaid in whole or in part in accordance with, and subject to the terms of, Section 2.01 of the Indenture. Section 1.03. RELEASE OF THE MORTGAGED PROPERTY. (a) The Borrower may obtain a release of the Mortgaged Property from the lien of this Deed of Trust (and the Indenture) by giving not less than 30 nor more than 90 days' prior written notice thereof to the Servicer, upon which the Beneficiary shall promptly execute, acknowledge and deliver to the Borrower a release from the lien of this Deed of Trust (a "Release") in recordable form with respect to the Mortgaged Property, provided that all of the following terms and conditions are satisfied: (i) no Event of Default has occurred and is continuing or would not be cured upon release of the Mortgaged Property in accordance with this Section 1.03; (ii) such Release, other than a Release to be made in connection with a Permitted Prepayment Event, shall occur on a Payment Date following the Lock-Out Period; (iii) the Borrower shall pay to the Beneficiary no later than the Remittance Date (A) an amount (the "Release Price") equal to 125% of the current Allocated Loan Amount for such Mortgaged Property, plus accrued interest thereon through the related Accounting Date, which Release Price will be applied to the repayment of the Bonds in accordance with the Indenture and (B) the Yield Maintenance Premium payable with respect to such Release Price, which will be paid on the Bonds in accordance with the Indenture, except that no Yield Maintenance Premium will be required for a Release made during the Prepayment Window or in connection with a Permitted Prepayment Event; and 6 12 (iv) either (x) the Lease Debt Service Coverage Ratio for the 13 full 4-week accounting periods immediately preceding such Release with respect to the Mortgaged Properties that would remain after such Release is not less than the Lease Debt Service Coverage Ratio for such periods with respect to all the Mortgaged Properties immediately prior to such Release, or (y) the Lease Debt Service Coverage Ratio with respect to the Mortgaged Properties that would remain after such release is not less than the Initial Lease Debt Service Coverage Ratio as of the Closing Date with respect to all of the Mortgaged Properties. (b) Notwithstanding Section 1.03(a), if a Release is being obtained in connection with the Lessee's purchase of the Mortgaged Property pursuant to the related Lease as a result of the Borrower's default under the Lease, then the conditions set forth in clauses (i), (ii) and (iv) of Section 1.03(a) need not be satisfied, and with respect to the condition set forth in clause (iii) of Section 1.03(a), the Release shall be made regardless of whether the Borrower satisfies its obligation (a) to pay the required Yield Maintenance Premium payable with respect to the principal portion of the Release Price or (b) to pay any accrued interest with respect to such Release Price in excess of 30 days of accrued interest. (c) Notwithstanding Section 1.03(a), in connection with the sale of the Mortgaged Property following a Permitted Prepayment Event, the Release Price shall equal the greater of (i) the sum of (A) all Insurance Proceeds and Condemnation Proceeds with respect to the Mortgaged Property (to the extent not previously applied in accordance with this Deed of Trust) and (B) the sales proceeds of any sale of the Mortgaged Property) and (ii) an amount equal to the Allocated Loan Amount for such Mortgaged Property, plus accrued and unpaid interest thereon through the related Accounting Date; provided, however, (1) such Permitted Prepayment Event was not caused by the Borrower, and (2) such event was not known to the Borrower on or prior to the Closing Date, and (3) any related sale of the Mortgaged Property is to a bona fide third party or on bona fide third party terms. Satisfactory evidence of these requirements contained in the foregoing clauses (1)-(3) shall be delivered to the Rating Agency, the Beneficiary and the Servicer or its designated nominee. Moreover, in connection with a sale of a Mortgaged Property following a Permitted Prepayment Event, the condition set forth in Section 1.03(a)(iv) need not be satisfied and no Yield Maintenance Premium shall be due. Notwithstanding any of the foregoing, in no event shall the Release Price for a Mortgaged Property exceed 125% of the current Allocated Loan Amount for such Mortgaged Property, plus accrued interest thereon through the related Accounting Date. (d) Upon repayment of the Bonds and all other amounts due hereunder and under the Loan Documents in full in accordance with the terms hereof and thereof, the Beneficiary shall, promptly after such payment, release its Liens with respect to all Mortgaged Properties. 7 13 SECTION 2. PAYMENTS. SECTION 2.01. PAYMENTS. (a) The Borrower will pay the Secured Obligations at the time and in the manner provided in the Bonds, the Indenture, this Deed of Trust and the other Loan Document. This Deed of Trust shall be subject to the covenants, conditions and agreements contained in the Bonds and the Indenture. (b) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority (other than taxes imposed on the income of the Beneficiary). SECTION 2.02. SETOFF. The Borrower agrees that, in addition to (and without limitation of) any right of set-off or counterclaim the Beneficiary may otherwise have, the Beneficiary shall be entitled, at its option, to offset balances held by it or any of its Affiliates for account of the Borrower (or amounts due from it to the Borrower) at any of its offices, in Dollars or in any other currency, against any principal of or interest on the Bonds, or any other amount payable to the Beneficiary hereunder, which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower thereof, provided that the Beneficiary's failure to give such notice shall not affect the validity thereof. SECTION 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE BORROWER. The Borrower represents and warrants to the Beneficiary that: SECTION 3.01. PARTNERSHIP EXISTENCE. The Borrower: (a) is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite 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 and in good standing in the state in which the Mortgaged Property is located. SECTION 3.02. NO LITIGATION. Except as disclosed to the Beneficiary in writing prior to the date of this Deed of Trust, 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 Borrower) threatened against the Borrower which, if adversely determined, could have a Material Adverse Effect. SECTION 3.03. NO BREACH. None of the execution and delivery of this Deed of Trust or any other Loan Document to which the Borrower is a party, the consummation of the transactions herein and therein contemplated and compliance with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent (except such 8 14 consents as have been obtained) under, the charter or by-laws, the Partnership Agreement or the organizational documents of the Borrower or the General Partner, 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 Borrower or the General Partner 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 (except for the Lien arising under the Loan Documents or any Permitted Liens) result in the creation or imposition of any Lien upon any of the revenues or assets of the Borrower or the General Partner pursuant to the terms of any such agreement or instrument. SECTION 3.04. PARTNERSHIP ACTION. The Borrower has all necessary partnership power and authority to execute, deliver and perform its obligations under this Deed of Trust and the other Loan Documents to which it is a party and to mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign and hypothecate, and grant a security interest in, the Mortgaged Property pursuant to the terms hereof and to keep and observe all of the terms of this Deed of Trust on the Borrower's part to be performed; the execution, delivery and performance by the Borrower of this Deed of Trust and the other Loan Documents to which it is a party have been duly authorized by all necessary partnership action on its part; and each of this Deed of Trust and the other Loan Documents to which the Borrower is a party has been duly and validly executed and delivered by the Borrower and constitutes, and the Bonds when executed and delivered for value will constitute, its legal, valid and binding obligation, enforceable in accordance with its terms. SECTION 3.05. APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Borrower of this Deed of Trust and the other Loan Documents to which it is a party or for the validity or enforceability thereof. SECTION 3.06. ERISA. (a) As of the date hereof and throughout the term of this Deed of Trust, (i) the Borrower is not and will not be an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, and (ii) the assets of the Borrower do not and will not constitute "plan assets" of one or more such plans for purposes of Title I of ERISA; and (b) As of the date hereof and throughout the term of this Deed of Trust, (i) the Borrower is not and will not be a "government plan" within the meaning of Section 3(3) of ERISA, and (ii) transactions by or with the Borrower are not and will not be subject to state statutes applicable to the Borrower regulating investments of and fiduciary obligations with respect to governmental plans. SECTION 3.07. IMPOSITIONS. The Borrower has filed all United States Federal income tax returns and all other material tax returns which are required to be filed by the Borrower and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the 9 15 Borrower; except such taxes which are being contested in good faith and by proper proceedings and against which adequate reserves are being maintained in accordance with Section 5.19 herein. The charges, accruals and reserves on the books of the Borrower in respect of Impositions are, in the opinion of the Borrower, adequate. SECTION 3.08. INVESTMENT COMPANY ACT. The Borrower 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 (the "Investment Company Act"). SECTION 3.09. GENERAL PARTNER. The sole general partner of the Borrower is the General Partner. RFS Hotels is the owner of all of the issued and outstanding capital stock of the General Partner, all of which capital stock has been validly issued, is fully paid and nonassessable and is owned by RFS Hotels free and clear of all mortgages, assignments, pledges and security interests and free and clear of all warrants, options and rights to purchase. The Borrower has no obligation to any Person to purchase, repurchase or issue any ownership interest in it. SECTION 3.10. RESTRICTED ACTIVITIES OF BORROWER AND GENERAL PARTNER. Each of the Certificate of Limited Partnership and the Partnership Agreement of the Borrower provides that the Borrower may not engage in any business activity unrelated to the Mortgaged Properties. The charter of the General Partner provides that the General Partner may not engage in any activity other than acting as general partner of the Borrower and activities incidental to that purpose. SECTION 3.11. OTHER ACTIVITIES. (a) The charter of the General Partner requires, until the Bonds are paid in full and the Mortgaged Properties released from the lien of the Indenture and the Mortgages, the General Partner shall not, without (a) the affirmative vote of 100% of the members of its board of directors, and (b) except with respect to subparagraph (vii), the consent of the Indenture Trustee, do any of the following: (i) take, or cause the Borrower to take, any action or suffer to exist any circumstance that would constitute an "Event of Default" under any Loan Document evidencing or securing the obligations secured by the Mortgages; (ii) amend, alter, change or repeal (A) the provision in the charter relating to the need for a unanimous vote of the board of directors, (B) the provision in the charter relating to the subordination of the Borrower's indemnification obligations to its officers and directors or (C) the Partnership Agreement or the Certificate of Limited Partnership of the Borrower; (iii) dissolve, wind up or liquidate, in whole or in part, consolidate or merge with or into any other entity, or convey, sell or transfer its properties and assets 10 16 substantially as an entirety to any entity, or cause the Borrower to dissolve or liquidate, in whole or in part, or merge with or into any other entity, or convey, sell or transfer its properties and assets substantially as an entirety to any entity except as otherwise may be permitted by the Mortgages; (iv) engage in any business or activity other than as permitted by the General Partner's charter, or cause the Borrower to engage in any business or activity other than as set forth in the Partnership Agreement (or any successor provision thereto, however designated); (v) own any assets other than those related to, or derived from, the Mortgaged Properties; (vi) incur, assume or guaranty any indebtedness other than (A) indebtedness not secured by the Mortgaged Properties consisting of trade accounts payable (other than for borrowed money) incurred in the ordinary course of business and (B) debt expressly permitted by the Loan Documents; (vii) file, or cause the Borrower to file, a voluntary or involuntary petition or otherwise initiate, or cause the Borrower to initiate, proceedings for the General Partner or the Borrower to be adjudicated insolvent or seeking an order for relief as a debtor under any chapter of the United States Bankruptcy Code, as amended (11 U.S.C. ss. ss. 101 et. seq.), or file or cause the filing of, or cause the Borrower to file or cause the filing of, any petition seeking any composition, reorganization, readjustment, liquidation, dissolution or similar relief for the General Partner or the Borrower under the present or any future federal bankruptcy laws or any other present or future applicable federal, state or other statute or law relative to bankruptcy, insolvency or other relief for debtors; or seek or cause the Borrower to seek, the appointment of any trustee, receiver, conservator, assignee, sequestrator, custodian, liquidator (or other similar official) of the General Partner or the Borrower or of all or any substantial part of the properties and assets of the General Partner or the Borrower, or make or cause the Borrower to make, any general assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or declare or effect a moratorium on its debt or take any corporate action in furtherance of any such action, or consent to or acquiesce in any of the foregoing actions; or (viii) sell, transfer, exchange, convey, encumber or otherwise dispose of any or all of the General Partner's right, title or interest as a general partner of the Borrower, except that the General Partner may withdraw as the general partner if it finds a replacement general partner that is a special purpose corporation, the charter of which contains substantially the same provisions as the General Partner's charter. (b) The charter of the General Partner also contains provisions that, until the Bonds are paid in full and the Mortgaged Properties released from the lien of the Indenture and the 11 17 Mortgages, requires the General Partner to take, and cause the Borrower to take, the following actions: (i) maintain its own books, records and accounts separate from any other Person (as defined herein); (ii) cause its financial statements to be prepared in accordance with generally accepted accounting principles in a manner that shows its assets and liabilities separate and apart from those of any other Person; (iii) pay all its liabilities and expenses only out of its own funds; (iv) pay the salaries of its own employees, if any, and maintain a sufficient number of employees in light of its contemplated business operations, but no more than necessary to perform authorized activities; (v) allocate fairly and reasonably any overhead for expenses that are shared with an affiliate, including paying for the office space and services performed by any employee of any affiliate; (vi) maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character in light of its contemplated business operations; (vii) maintain arm's length relationships with all affiliates and enter into transactions with affiliates only on commercially reasonable bases; (viii) in all dealings with the public, identify itself under its own name and as a separate and distinct entity; (ix) independently make decisions with respect to its business and daily operations; (x) not commingle its funds or other assets with those of any other Person and hold all of its assets in its own name; (xi) not assume or guarantee the liabilities of any other Person or hold out its credit as being available to satisfy the obligations of any other Person; (xii) not acquire obligations or securities of, pledge it assets for the benefit of, or make loans or advances to, any affiliates; (xiii) observe all applicable or customary organizational formalities; 12 18 (xiv) promptly correct any known misunderstanding regarding its separate identity; (xv) not identify itself as a division of any other Person; (xvi) use separate stationery, invoices and checks bearing its own name; (xvii) not own any property, real or personal, other than (a) the Mortgaged Properties (in the case of the Borrower) and General Partner's interest in the Borrower (in the case of the General Partner) and (b) the minimum amount of property necessary to perform authorized activities; and (xviii) not acquire the direct obligations of, or securities issued by, any affiliate. SECTION 3.12. EMPLOYEES. The Borrower has no employees. Section 3.13. Solvency. None of the transactions contemplated by the Loan Documents will be or have been made with an actual intent to hinder, delay or defraud any present or future creditors of the Borrower, and the Borrower is not and will not be rendered insolvent by such transactions or will have received fair and reasonably equivalent value in good faith for the grant of the Liens created by the Loan Documents. The Borrower is able to pay its debts as they become due, including contingent obligations reasonably likely to become due. SECTION 3.14. NO FOREIGN PERSON. The Borrower is not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended, and the related Treasury Department regulations, including temporary regulations. SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES CONCERNING MORTGAGED PROPERTY. Section 4.01. Improvements. Except as disclosed in the surveys or title policies delivered to the Beneficiary hereunder, all Improvements comprising a portion of the Mortgaged Property lie wholly within the boundary and building restriction lines of the Mortgaged Property, and no Improvements on adjoining properties encroach upon the Mortgaged Property in any material respect. SECTION 4.02. CASUALTY; CONDEMNATION. The Mortgaged Property is free of material damage and waste and there is no proceeding pending or, to the best of the Borrower's knowledge, threatened, for the total or partial taking by condemnation or eminent domain of the Mortgaged Property and no Event of Loss has occurred with respect to the Mortgaged Property. SECTION 4.03. ZONING AND OTHER LAWS. The Mortgaged Property and the use and operation thereof, separate and apart from any other properties, constitutes a legal use under applicable zoning regulations and complies in all material respects with all building codes, land 13 19 use and environmental laws and other applicable requirements of law and all applicable insurance requirements. SECTION 4.04. LEASE. The Borrower has made available to the Beneficiary a correct and complete copy of the Lease and all amendments thereto. As of the Closing Date the Lease is unmodified and in full force and effect and the Borrower is not, and, to the Borrower's knowledge, the Lessee is not in default under the Lease. SECTION 4.05. PERMITS. There has been issued in respect of the Mortgaged Property all certificates, licenses, permits and governmental approvals necessary or required to own, operate, use and occupy the Mortgaged Property in the manner currently operated, including any required permits relating to zoning, building code, land use and Hazardous Materials. Each such permit is in full force and effect and the Borrower has not received any notice of violation or revocation thereof. SECTION 4.06. UTILITIES. The Mortgaged Property is served by all utilities required for the current or contemplated use thereof. All public roads and streets necessary for service of and access to the Mortgaged Property for the current use thereof have been completed and are open for use. The Mortgaged Property is served by public water and sewer systems. The Borrower has not received any notice of actual or threatened reduction or curtailment of any utility service now supplied to the Mortgaged Property. SECTION 4.07. [RESERVED] SECTION 4.08. HAZARDOUS MATERIALS. The Borrower and the Lessee have obtained all permits, licenses and other authorizations which it is required to obtain with respect to the Mortgaged Properties under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a Material Adverse Effect. The Borrower and the Lessee are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables applicable to the Mortgaged Properties contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply would not have a Material Adverse Effect. In addition, except as set forth in the reports and other materials described in Schedule C hereto: (a) No notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or, to the best of the Borrower's knowledge, threatened by any governmental or other entity with respect to any alleged failure by the Borrower or the Lessee to have any permit, license or authorization required in connection with the conduct of 14 20 the business of the Borrower or the Lessee relating to the Mortgaged Properties with respect to any generation, treatment, storage, recycling, transportation, release or disposal, or any release as defined in 42 U.S.C. ss. 9601(22), of any substance regulated under Environmental Laws ("Hazardous Materials") generated by the Borrower or the Lessee. (b) No Hazardous Materials have been released at, on or under the Mortgaged Property to an extent that it has, or may reasonably be expected to have, a Material Adverse Effect. (c) There are no Liens arising under or pursuant to any Environmental Laws on any of the Mortgaged Properties or properties, and no government actions have been taken or, to the Borrower's knowledge, are in process which could subject any of such properties to such Liens and the Borrower would not be required to place any notice or restriction relating to the presence of Hazardous Materials at any Mortgaged Property in any deed to such property. SECTION 4.09. WARRANTY OF TITLE. The Borrower has good and marketable fee title to the Mortgaged Property subject only to the Permitted Liens; the Borrower has the right to grant, bargain, sell, convey and grant a security interest in, the Mortgaged Property; and the Borrower owns the Mortgaged Property free and clear of all liens, encumbrances and charges whatsoever except the lien of this Deed of Trust and Permitted Liens. The Borrower shall forever warrant, defend and preserve such title, subject to the Permitted Liens, and the validity and priority of the lien of this Deed of Trust and shall forever warrant and defend the same to the Beneficiary against the claims of all persons whomsoever. SECTION 4.10 FLOOD INSURANCE. No portion of the Improvements is located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of 1973, or the National Flood Insurance Reform Act of 1994, as each may be amended, or any successor law, or, if any portion of the Improvements is now or at any time in the future located within any such area, the Borrower has obtained and will maintain the insurance prescribed in Section 5.18 hereof. SECTION 4.11 CONDITION OF MORTGAGED PROPERTY. Except as set forth on Schedule B, the buildings, structures and improvements included on or within the Mortgaged Property are structurally sound and in good repair, and all mechanical, electrical, heating, air conditioning, drainage, sewer, water and plumbing systems are in proper working order. SECTION 5. COVENANTS OF THE BORROWER. The Borrower agrees that until payment in full of the Bonds, all interest thereon and all other amounts payable by the Borrower hereunder: SECTION 5.01. FINANCIAL STATEMENTS. The Borrower shall deliver or cause to be delivered to the Beneficiary, the Servicer and the Rating Agency: 15 21 (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower (commencing with the first full Fiscal Year following the Closing Date), consolidated statements of income and expenses of the Borrower for such year and the related consolidated balance sheets as at the end of such year, accompanied by a certificate of a senior financial officer of the General Partner, which certificate shall state (i) that such consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower as at the end of, and for, such Fiscal Year and (ii) that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Borrower has taken and proposes to take with respect thereto); (b) promptly upon receipt thereof, copies of all written reports, financial statements, budgets or plans delivered by the Lessee under the Lease; (c) copies of all written reports, budgets or plans delivered by the Borrower under the Lease; and (d) promptly after the Borrower knows or has reason to know that any Default has occurred, a written 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 Borrower has taken and proposes to take with respect thereto. SECTION 5.02. LITIGATION, Etc. The Borrower will promptly give to the Beneficiary notice of (a) all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect to such legal or other proceeding affecting the Borrower, except proceedings which if adversely determined, would not have a Material Adverse Effect and (b) of any proposal by any public authority to acquire any Mortgaged Property of the Borrower or any portion thereof. SECTION 5.03. PARTNERSHIP EXISTENCE, ETC. The Borrower will preserve and maintain its partnership existence and all of its material rights, privileges and franchises; 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 have a Material Adverse Effect; 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 all of its properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; and permit representatives of the Beneficiary (including its agents and contractors), during normal business hours and upon reasonable prior notice, to examine, copy and make extracts from its books and records, to inspect its properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Beneficiary. 16 22 SECTION 5.04. PROHIBITION OF FUNDAMENTAL CHANGES. Except as expressly provided in the Partnership Agreement, the Borrower will not (i) enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) or (ii) acquire any business or assets from, or capital stock of, or be a party to any acquisition of, any Person except for (a) the purchases of FF&E, inventory and other assets to be sold or used in the ordinary course of business, (b) purchase of the Mortgaged Property, and (c) Investments permitted under Section 5.09. Except as permitted hereunder or under the other Loan Documents in connection with a Release or otherwise, the Borrower will not convey, sell, transfer or otherwise dispose of the Mortgaged Property without the prior written consent of the Beneficiary (which consent shall be given upon written confirmation from the Rating Agency that such action would not result in a qualification, downgrading or withdrawal of the then current ratings on the Bonds). Except as expressly provided in the Partnership Agreement, the Borrower will not convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or assets, whether now owned or hereafter acquired (including receivables and leasehold interests, but excluding (i) any inventory or other assets sold or disposed of in the ordinary course of business, or (ii) obsolete or worn-out FF&E or other property no longer used or useful in its business). The Borrower will not replace or permit the replacement of the General Partner without the prior written consent of the Beneficiary; provided, that transfers aggregating more than 49% of the partnership interests in the Borrower shall require written confirmation from the Rating Agency that such transfers will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds. The Borrower shall not become a Person other than a limited partnership and shall not become a general or limited partner in any general or limited partnership. The Borrower shall not permit the General Partner to pledge or encumber its partnership interest in the Borrower without the prior written consent of the Beneficiary. SECTION 5.05. NEITHER A FOREIGN PERSON NOR AN INVESTMENT COMPANY. The Borrower will not, throughout the term of the Bonds, become a "foreign person" within the meaning of Sections 1445 and 7701 of the Code (26 USC ss.ss. 1445, 7701) and the related Treasury Department regulations, including, without limitation, temporary regulations. The Borrower will conduct its operations at all times so as not to be subject to, or shall comply with, the Investment Company Act. SECTION 5.06. ERISA. (a) The Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by the Beneficiary of any of its rights under the Bonds, this Deed of Trust and the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (b) The Borrower further covenants and agrees to deliver to the Beneficiary such certifications or other evidence from time to time throughout the term of the Deed of Trust, as 17 23 requested by the Beneficiary in its sole discretion, that (i) the Borrower is not an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a "governmental plan" within the meaning of Section 3(3) of ERISA; and (ii) the Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans. SECTION 5.07. LIMITATION ON LIENS. The Borrower will not create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except Permitted Liens. The Borrower shall discharge, by payment, by procurement of a surety bond or otherwise as approved by the Servicer, any Lien that is not a Permitted Lien within 30 days after the Borrower receives written notice of the filing of such Lien (subject to the Borrower's right to contest certain Liens as provided in Section 5.19(b) hereof). SECTION 5.08. INDEBTEDNESS. The Borrower will not create, incur or suffer to exist any Indebtedness except: (a) Indebtedness to the Beneficiary under the Loan Documents; (b) Indebtedness not secured by the Mortgaged Properties consisting of trade accounts payable (other than for borrowed money) incurred in the ordinary course of business, including purchase money Indebtedness and capitalized lease obligations for the purchase of FF&E Replacements; (c) Indebtedness secured by Permitted Liens; (d) the pledge or assignment of funds released to the Issuer from the lien of the Indenture; and (e) other Indebtedness, with the written consent of the Beneficiary, which consent shall not be withheld if (i) such Indebtedness is expressly subordinated to the Bonds, (ii) the term of such Indebtedness exceeds the latest Stated Maturity of the Bonds, (iii) such Indebtedness provides that no remedies for defaults with respect to such Indebtedness may be exercised until the Bonds are no longer outstanding, (iv) no Event of Default has occurred and is continuing and (v) written confirmation is received from the Rating Agency that such Indebtedness will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds. SECTION 5.09. INVESTMENTS. The Borrower will not make or permit to remain outstanding any Investments other than operating deposit accounts with banks and Permitted Investments. SECTION 5.10. DIVIDEND PAYMENTS. The Borrower will not declare or make any Dividend Payment at any time that an Event of Default shall have occurred and be continuing. 18 24 SECTION 5.11. PARTNERSHIP ACTIVITIES; BOOKS AND RECORDS. (a) The Borrower shall not purchase any real properties other than the Mortgaged Properties, conduct any business other than that permitted under the Partnership Agreement or charter and by-laws of the General Partner, have any assets or liabilities other than assets or liabilities derived from or related to the Mortgaged Properties or otherwise related to a business that is permitted under the Partnership Agreement, violate any of the provisions of the Partnership Agreement, nor shall the Borrower amend the Partnership Agreement without confirmation from the Rating Agency that such amendment will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds. (b) The Borrower shall comply with the "separateness provisions" of the Partnership Agreement, which provisions are described in Section 3.11(b). Section 5.12. Payment for Labor and Materials. The Borrower will pay promptly or cause to be paid when due all bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Mortgaged Property and never permit to exist beyond the due date thereof in respect of the Mortgaged Property or any part thereof any lien or security interest, even though inferior to the liens and the security interests hereof, and in any event never permit to be created or exist in respect of the Mortgaged Property or any part thereof any other or additional lien or security interest other than the liens or security interests hereof, except for the Permitted Liens. SECTION 5.13. MODIFICATIONS OF LEASE. The Borrower will not consent to any modification, supplement or waiver of the provisions of the Lease or terminate the Lease (except a termination in connection with a Lease Event of Default or a termination otherwise permitted under the Lease) without the prior written consent of the Beneficiary, which consent shall be granted if the Rating Agency confirms in writing that such action will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds. The Borrower will not consent to any modification, supplement or waiver of any provision of a service contract that would have a Material Adverse Effect on the value, utility, operation or legality of any Mortgaged Property or terminate any service contract if such termination would have a Material Adverse Effect on the value, utility, operation or legality of any Mortgaged Property, without the consent of the Beneficiary, which consent shall be granted if the Rating Agency confirms in writing that such action will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds. SECTION 5.14. [RESERVED]. SECTION 5.15. PERFORMANCE OF OTHER AGREEMENTS. The Borrower shall observe and perform each and every term to be observed or performed by the Borrower pursuant to the terms of any agreement or recorded instrument affecting or pertaining to the Mortgaged Property. 19 25 SECTION 5.16. OPERATION OF THE MORTGAGED PROPERTIES. The Borrower shall comply in all material respects with the terms of the Lease. The Lessee shall be permitted to employ a manager for each of the Mortgaged Properties pursuant to the terms of the related Lease. Notwithstanding the foregoing, in the event that a Lease Event of Default shall have occurred under a Lease, the Beneficiary or the Servicer may instruct the Borrower to (i) terminate the Lease with respect to any or all of the Mortgaged Properties and/or (ii) cause the Lessee to terminate the management agreement (to the extent permitted thereunder) with respect to any or all of the Mortgaged Properties, and may designate either a replacement lessee or a property manager, as the case may be, reasonably acceptable to the Beneficiary and willing to operate the Mortgaged Properties pursuant to terms and conditions and pursuant to a Lease or property management agreement approved by the Beneficiary, and the Borrower shall so terminate the Lease(s) and/or cause the Lessee to terminate the management agreement(s) and appoint or cause the appointment of such replacement lessee or property manager. After the Closing Date, the Borrower shall not enter into any lease or property management agreement in respect of any Mortgaged Property unless the following conditions are met: (a) except in connection with hiring an Affiliate of the Lessee to act as property Manager, the Borrower obtains the Beneficiary's prior written consent, which consent shall be granted if the Rating Agency confirms in writing that such action will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds; and (b) such replacement lessee or manager executes an agreement substantially similar to the Subordination Agreement. SECTION 5.17. ENVIRONMENTAL MATTERS. (a) The Borrower shall, at its sole cost and expense, comply in all material respects with and shall cause the Lessee of the Mortgaged Property to comply in all material respects with all Environmental Laws applicable to the Mortgaged Property and shall ensure that all operations, businesses and activities conducted thereon are in material compliance with all Environmental Laws. (b) If the Borrower shall receive any notice or other communication relating to the Mortgaged Property from any governmental authority concerning any actual, alleged, suspected or threatened violation of or liability under any Environmental Laws or any Environmental Condition, or that any representation or warranty herein relating to Hazardous Materials is not or is no longer accurate in any material respect, including any notice or other communication from any governmental authority concerning any actual or threatened Environmental Claim, then the Borrower shall deliver to the Beneficiary, within ten (10) days after receipt of such notice or communication, a written description of such violation, liability, or actual or threatened event or condition. Receipt of such notice shall not be deemed to create any obligation on the part of the Beneficiary to defend or otherwise respond to such notification. The Borrower shall 20 26 promptly take all actions necessary to defend such notification of Environmental Claim or clean up or remedy such Environmental Condition in compliance with all Environmental Laws. (c) Upon the Beneficiary's or the Servicer's reasonable request, the Borrower shall, at its sole cost and expense, take all actions or cause the Lessee to take all actions necessary to ensure that there is no Hazardous Material at, on or under the Mortgaged Property in quantities or concentrations other than those permitted by applicable Environmental Laws; provided that the Borrower shall not be required to obtain environmental site assessments or audit reports or updates thereto more often than once per year. The Borrower shall reasonably promptly provide to the Beneficiary copies of all environmental site assessments or environmental audit reports, or updates of such assessments or reports that are generated in connection with the above activities. (d) Following and during the continuance of an Event of Default, the Borrower shall permit the Beneficiary to enter upon the Mortgaged Property at any reasonable time to conduct, at the Borrower's sole cost and expense, a reasonable inspection of Mortgaged Property, to determine compliance with all applicable Environmental Laws and to take any and all other actions required by any governmental agency, including the removal or cleanup of any Hazardous Materials in quantities or concentrations which violate applicable Environmental Laws at, on or under the Mortgaged Property. During the continuance of an Event of Default, the Borrower grants the Beneficiary and its employees, contractors and agents an irrevocable and nonexclusive license to enter upon the Mortgaged Property and to perform such tests on the Mortgaged Property necessary to conduct such reviews and investigations in accordance with the preceding sentence. All reasonable costs and expenses incurred by the Beneficiary (including the costs of its agents and contractors) under this subsection shall be due and payable by the Borrower on demand. SECTION 5.18. INSURANCE; CASUALTY. (a) The Borrower, at its sole cost and expense, will keep the Mortgaged Property insured during the entire term of this Deed of Trust for the mutual benefit of the Borrower, the Beneficiary and the Servicer against loss or damage by fire and against loss or damage by other risks embraced by coverage of the type known as "fire and extended coverage," in an amount sufficient to prevent the Borrower or the Beneficiary from becoming a co-insurer, but in any case in an amount not less than the then full replacement value of the Improvements and Equipment, covering physical loss or damage to such Improvements and Equipment, without considering depreciation and exclusive of excavations and foundations. The policy of insurance carried in accordance with this Section shall contain a "Replacement Cost Endorsement." (b) The Borrower, at its sole cost and expense, for the mutual benefit of the Borrower and the Beneficiary, shall also obtain and maintain during the entire term of this Deed of Trust the following policies of insurance: 21 27 (1) Flood insurance if any part of the Mortgaged Property is located in an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of 1973, or the National Flood Insurance Reform Act of 1994, as each may be amended (and any successor act thereto), in an amount at least equal to the value of the Mortgaged Property as reasonably determined by the Beneficiary from time to time or the maximum limit of coverage available with respect to the Improvements and Equipment under said Act, whichever is less. (2) Comprehensive public liability insurance with the coverages and in the amounts required under the Lease (as in effect on the date hereof). (3) Loss of income insurance with the coverages and in the amounts required under the Lease (as in effect on the date hereof). (4) Insurance against loss or damage (and loss of occupancy or use) from explosion or breakdown of steam boilers, air conditioning equipment, high pressure piping, machinery and equipment, pressure vessels or similar apparatus and elevator and escalator equipment now or hereafter installed in the Improvements with the coverages and in the amounts required under the Lease (as in effect on the date hereof). (5) During the course of any construction or repair of Improvements on the Mortgaged Property, builder's completed value risk insurance against "all risks of physical loss," during such construction with a deductible not to exceed $10,000, in non-reporting form, covering the total value of work performed and equipment, supplies and materials furnished. (6) Worker's compensation and other statutory coverages, as applicable. (7) Such other insurance as may from time to time be reasonably required by the Beneficiary or the Servicer in order to protect the Beneficiary's interests, to the extent that such insurance is generally available on commercial reasonable terms and is generally required by institutional lenders on loans secured by similar properties. (c) All policies of insurance (the "Required Insurance Policies") required pursuant to this Section 5.18 (i) shall be issued by an insurer that is then rated "A-" or better in claims-paying ability by the Rating Agency, if rated by the Rating Agency, or, if not rated by the Rating Agency, an equivalent rating from any other nationally recognized statistical rating organization or A. M. Best, or is otherwise acceptable to the Rating Agency, (ii) shall contain the standard New York (or local equivalent) non-contribution clause naming the Beneficiary as the person to which all payments over $100,000 made by such insurance company shall be paid, (iii) shall be maintained throughout the term of this Deed of Trust without cost to the Beneficiary, (iv) shall contain such provisions as the Beneficiary or the Servicer deems 22 28 reasonably necessary or desirable to protect the Beneficiary's interest including, without limitation, endorsements providing that neither the Borrower, the Beneficiary nor any other party shall be a co-insurer under said Policies and that the Beneficiary shall receive at least thirty (30) days prior written notice of any modification or cancellation and (v) shall list the Beneficiary and the Servicer, where applicable, as loss payees or additional insureds. Notwithstanding the foregoing, workers' compensation insurance may be provided by any state approved and regulated employer's self-insurance fund and need not name the Beneficiary or the Servicer as additional insureds or loss payees. The Borrower shall deliver duplicate counterparts of each of the Required Insurance Policies to the Servicer. Not later than fifteen (15) days prior to the expiration date of each of the Required Insurance Policies, the Borrower will deliver to the Servicer satisfactory evidence of the renewal of each of the Required Insurance Policies. (d) The Required Insurance Policies with respect to the Mortgaged Property may, at the option of the Borrower, be effected by blanket or umbrella policies issued to the Borrower and its affiliates (including, without limitation, the direct and indirect partners in the Borrower) covering the Mortgaged Properties and properties owned by such affiliates, provided that the policies otherwise comply with the provisions of this Deed of Trust and specifically allocate to the Mortgaged Property the coverages required hereby, without possibility of reduction or coinsurance by reason of, or damage to, another premises named therein, and if the insurance required by this Deed of Trust shall be effected by any such blanket or umbrella policies, the Borrower shall furnish to the Servicer copies of such policies in place of the originals, and in addition, within thirty (30) days after the filing thereof with any insurance ratemaking body, copies of the schedule of all improvements affected by any such blanket or umbrella policy of insurance. (e) If the Mortgaged Property shall be damaged or destroyed, in whole or in part, by fire or other casualty, the Borrower shall give prompt written notice thereof to the Beneficiary and the Servicer prior to the making of any repairs thereto; provided, however, that if the loss or damage is $100,000 or less and no Event of Default shall have occurred and be continuing, the Borrower shall have no obligation to provide notice. Following the occurrence of fire or other casualty, the Borrower, regardless of whether insurance proceeds are payable under the Required Insurance Policies, shall proceed promptly with the repair, alteration, restoration, replacement or rebuilding of the same as near as possible to their value, utility, condition and character prior to such damage or destruction (the "Restoration"), provided that if the Borrower and the Servicer determine that (i) the Mortgaged Property cannot be restored to substantially the same condition as existed before the casualty, or (ii) restoration cannot reasonably be expected to be completed within one year from the date of casualty, the Borrower may choose, in its sole discretion, not to proceed with Restoration but to prepay the Bonds in accordance with the Indenture in an amount equal to the lesser of (x) the Insurance Proceeds or (y) the Allocated Loan Amount, plus accrued interest through the related Accounting Date for the Special Payment Date on which such Prepayment is applied on the Bonds in accordance with the Loan Documents, in each case without payment of a Yield Maintenance Premium. In that event, any excess of the Insurance Proceeds over the Allocated Loan Amount shall be deposited into the Central Account for application (or release to the Borrower) in accordance with the 23 29 Servicing Agreement. In the event that the Borrower proceeds with the Restoration, and the Insurance Proceeds exceed the costs of Restoration, such excess proceeds shall be deposited into the Central Account for application (or release to the Borrower) in accordance with the Servicing Agreement. The Restoration shall be performed in accordance with the following provisions: (1) The Borrower shall procure and pay for, and shall furnish to the Servicer true copies of, all required governmental permits, certificates and approvals with respect to the Restoration. (2) The Borrower shall furnish the Servicer, within thirty (30) days of the casualty, evidence reasonably satisfactory to the Servicer of the cost to complete the Restoration. (3) If the Restoration involves structural work or the estimated cost to complete the Restoration exceeds $250,000, the Restoration shall be conducted under the supervision of an architect (the "Architect") selected by the Borrower and approved by the Servicer (which approval shall not be unreasonably withheld or delayed), and no such Restoration shall be made except in accordance with detailed plans and specifications, detailed cost estimates and detailed work schedules approved in writing by the Servicer (which approval shall not be unreasonably withheld or delayed). (4) The Restoration shall be prosecuted to completion with all due diligence and in an expeditious and good and workmanlike manner and in compliance with all laws and other governmental requirements, all permits, certificates and approvals, all requirements of fire underwriters and all insurance policies then in force with respect to the Mortgaged Property. The Restoration shall be performed under a general contract or construction management agreement approved by the Servicer, with all construction contracts and architect's agreements assigned to the Beneficiary. (5) At all times when any work is in progress, the Borrower shall maintain all insurance then required by law or customary with respect to such work, and, prior to the commencement of any work, shall furnish to the Servicer duplicate originals or certificates of the policies therefor. (6) Upon completion of the Restoration, the Borrower shall obtain (A) any occupancy permit which may be required for the Improvements and (B) all other governmental permits, certificates and approvals and all permits, certificates and approvals of fire underwriters which are required for or with respect to the Restoration, and shall furnish true copies thereof to the Servicer. (7) An Event of Default shall be deemed to have occurred under this Deed of Trust if the Borrower, after having commenced demolition or construction of any Improvements, shall abandon such demolition or the construction work or shall fail to complete such demolition and construction within a reasonable time after the 24 30 commencement thereof (subject to events beyond the reasonable control of the Borrower). (f) The Borrower and the Servicer shall jointly adjust and settle all insurance claims of $100,000 or more and, provided no Event of Default shall exist and be continuing, the Borrower shall adjust and settle all insurance claims less than $100,000. In the event any insured loss with respect to which the insurance proceeds exceed $100,000 (other than proceeds under public liability or workers' compensation insurance), the payment for such loss shall be made directly to a segregated account maintained by the Servicer (the "Loss Proceeds Account"). (g) If money in the Loss Proceeds Account is to be used for the Restoration, then such money shall be disbursed in accordance with the following provisions: (1) Each request for an advance of Insurance Proceeds shall be made on at least five days' prior notice to the Servicer and shall be accompanied by a certificate of the Architect, if required under Section 5.18(e)(3) above, otherwise by an executive officer or managing general partner of the Borrower, stating (A) that all work completed to date has been performed in compliance with the approved plans and specifications, if any, and in accordance with all provisions of law; (B) the sum requested is properly required to reimburse the Borrower for payments by the Borrower to, or is properly due to, the contractor, subcontractors, materialmen, laborers, engineers, architects or other persons rendering services or materials for the Restoration (giving a brief description of such services and materials), and that when added to all sums, if any, previously disbursed by the Servicer does not exceed the value of the work done to the date of such certificate; and (c) that the amount of such proceeds remaining in the hands of the Beneficiary or the Servicer will be sufficient on completion of the work to pay the same in full (giving in such reasonable detail as the Servicer may require an estimate of the cost of such completion); (2) Each request for an advance of Insurance Proceeds shall be accompanied by, if the estimated cost to complete the Restoration exceeds $250,000, or if otherwise requested by the Servicer, waivers of liens satisfactory to the Servicer covering that part of the Restoration previously paid for, if any; (3) No advance of Insurance Proceeds shall be made if there is an Event of Default or other material default continuing on the part of the Borrower (or any of its affiliates) under this Deed of Trust or any other Loan Document; (4) The request for an advance of Insurance Proceeds after the Restoration has been completed shall be accompanied by a copy of any certificate or certificates required by law for occupancy of the Mortgaged Property that have not theretofore been delivered to the Beneficiary or the Servicer; and 25 31 (5) If the Servicer reasonably believes at any time that the cost of the Restoration at any time shall exceed the amount of the Insurance Proceeds available therefor, Insurance Proceeds shall not be advanced until the Borrower shall deposit the full amount of the deficiency with the Servicer (or make or provide other arrangements or assurances reasonably satisfactory to the Servicer) and any amount so deposited shall first be applied toward the cost of the Restoration before any portion of the Insurance Proceeds is disbursed for such purpose. Upon notice to the Beneficiary by the Servicer of the failure on the part of the Borrower promptly to commence or diligently to continue the Restoration, or at any time upon request by the Borrower, the Beneficiary shall apply the amount of any such proceeds then or thereafter in the hands of the Beneficiary or the Servicer to the payment of the Secured Obligations by prepaying the Bonds; provided, however, that notwithstanding anything herein contained, the Beneficiary shall first apply such proceeds to the curing of any default that has not been cured within the applicable cure period under this Deed of Trust or any other Loan Document. (h) Insurance Proceeds and any additional funds deposited by the Borrower with the Beneficiary or Servicer shall constitute additional security for the Secured Obligations. The Borrower shall execute, deliver, file and/or record, at its own expense, such documents and instruments as the Beneficiary or Servicer deems necessary or advisable to grant to the Beneficiary a perfected, first priority security interest in the Insurance Proceeds and such additional funds. If the Borrower elects to have the Insurance Proceeds applied to Restoration, (i) the Insurance Proceeds shall be, at the Servicer's election, disbursed in installments by the Servicer, and (ii) the Borrower shall upon demand by the Servicer from time to time deposit with the Servicer, in a mutually acceptable interest-bearing account, the amount of any deductible under such insurance coverage and such amounts as reasonably determined by the Servicer in excess of the amount from time to time on deposit as may be necessary to complete the Restoration. SECTION 5.19. PAYMENT OF IMPOSITIONS, LIENS AND UTILITIES. (a) The Borrower shall pay or cause to be paid all Impositions as they become due and payable. The Borrower will deliver to the Servicer an Officer's Certificate certifying that the real estate taxes, assessments and similar items with respect to the Mortgaged Property have been so paid and are not then delinquent, which delivery shall occur promptly following such payment and, at the request of the Servicer, the Borrower will deliver evidence satisfactory to the Servicer with respect to the payment of such real estate taxes or any other Impositions. The Borrower shall not suffer or permit any lien or charge (including without limitation any mechanic's lien) against all or any part of the Mortgaged Property (other than inchoate liens for real estate taxes and other assessments not yet due and payable) and the Borrower shall promptly cause to be paid and discharged any lien or charge whatsoever which may be or become a lien or charge against the Mortgaged Property. The Borrower shall promptly pay or cause to be paid all bills for utility services provided to the Mortgaged Property. 26 32 (b) Notwithstanding the provisions of subsection (a) of this Section 5.19, the Borrower shall have the right to contest in good faith the amount or validity of any such lien or charge (including, without limitation, tax liens and mechanics' liens) referred to in subsection (a) above by appropriate legal proceedings and in accordance with all applicable law, after notice to, but without cost or expense to, the Beneficiary or Servicer, provided that: (i) the Borrower pays all Impositions as same become due and payable, unless the Borrower delivers evidence satisfactory to the Servicer that, as a result of the Borrower's contest, the Borrower's obligation to pay such Impositions has been deferred by the appropriate governmental authority, in which event the Borrower may defer such payment of such Impositions until the date specified by such governmental authority; (ii) such contest shall be promptly and diligently prosecuted by and at the expense of the Borrower; (iii) the Beneficiary shall not thereby suffer any civil penalty, or be subjected to any criminal penalties or sanctions; (iv) such contest shall be discontinued and such lien or charge promptly paid if at any time all or any part of the Mortgaged Property shall be in imminent danger of being foreclosed, sold, forfeited, or otherwise lost or if the lien of this Deed of Trust or the priority thereof shall be in imminent danger of being impaired; and (v) during such contest the Borrower shall indemnify and protect the Beneficiary against any liability, loss or injury by reason of such contest, and shall post a deposit with the Servicer representing 125% of the contested amount. SECTION 5.20. CONDEMNATION. The Borrower shall promptly give the Beneficiary and the Servicer written notice of the actual or (to the Borrower's knowledge) threatened commencement of any condemnation or eminent domain proceeding and shall deliver to the Servicer copies of any and all papers served in connection with such proceedings. The Servicer may participate in any such proceeding and the Borrower will deliver to the Servicer all instruments requested by the Servicer to permit such participation. Notwithstanding any taking by any public or quasi-public authority through eminent domain or otherwise (including but not limited to any transfer made in lieu of or in anticipation of the exercise of such taking), the Borrower shall continue to pay the Secured Obligations at the time and in the manner provided for in the Indenture, in this Deed of Trust and the other Loan Documents, and the Secured Obligations shall not be otherwise reduced, until any award or payment therefor shall have been actually received and applied by the Beneficiary or Servicer (after expenses of collection) to the discharge of the Secured Obligations. The Beneficiary shall not be limited to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award interest on the Secured Obligations at the rate or rates provided in the Loan Documents. If there exists no Event of Default, the Borrower will be entitled to receive payment of Condemnation Proceeds up to $100,000 to be applied to the Restoration of such Mortgaged Property, if Restoration is required. Condemnation Proceeds of more than $100,000 will be deposited into the Loss Proceeds Account maintained by the Servicer. Once Condemnation Proceeds are received, the Borrower shall proceed promptly with the Restoration of the Mortgaged Property; provided that if a condemnation or eminent domain proceeding of any Mortgaged Property is of such a nature that the Borrower and the Servicer determine that (i) the 27 33 Mortgaged Property can no longer be operated on an economically feasible basis, or (ii) restoration cannot reasonably be expected to be completed within a period of one year from the date of the condemnation, then the Borrower may, in its sole discretion, choose not to proceed with Restoration, and prepay the Bonds in accordance with the Indenture in an amount equal to the lesser of (x) the amount of the Condemnation Proceeds and (y) the Allocated Loan Amount, plus accrued interest through the Accounting Date for the Special Payment Date on which such Prepayment is applied on the Bonds in accordance with the Loan Documents, in each case without a Yield Maintenance Premium. In that event, any excess of the Condemnation Proceeds over the Allocated Loan Amount shall be deposited into the Central Account for application (or release to the Borrower) in accordance with the Servicing Agreement. In the event that the Borrower proceeds with the Restoration, and the Condemnation Proceeds exceed the costs of Restoration, such excess proceeds shall be deposited into the Central Account for application (or release to the Borrower) in accordance with the Servicing Agreement. If the Borrower elects to proceed with Restoration, then the net proceeds of such award or payment shall be treated for purposes of this Section 5.20 as Insurance Proceeds resulting from damage to the Mortgaged Property and shall be made available to the Borrower to construct such additional improvements subject to the terms and conditions of Sections 5.18(e), (f), (g) and (h). If the Mortgaged Property is sold, through foreclosure or otherwise, prior to the receipt by the Beneficiary or the Servicer of such award or payment, the Beneficiary shall have the right, whether or not a deficiency judgment on the Bonds shall have been sought, recovered or denied, to receive such award or payment, or a portion thereof sufficient to pay the Secured Obligations (by prepaying the Bonds in such manner and order of priority as set forth in the Indenture). SECTION 5.21. LEASES AND RENTS. (a) The Beneficiary acknowledges that the Borrower is a party to a lease agreement (the "Lease") with Lessee, pursuant to which the entire Mortgaged Property has been leased to the Lessee, and this Deed of Trust is subject to the terms of that Lease, which, inter alia, requires the Beneficiary to (i) give the Lessee the same notice, if any, given to the Borrower of any Default or acceleration of the Bonds or any foreclosure sale hereunder, (ii) permit the Lessee to cure Defaults during applicable cure periods on the Borrower's behalf and (iii) permit the Lessee to appear and to bid at any foreclosure sale. The Borrower represents and warrants that it has entered into no lease or occupancy agreement of any kind or nature with respect to the Mortgaged Property other than the Lease. The Borrower shall not amend or modify the Lease or cancel or terminate the Lease (except in connection with a Lease Event of Default or a termination otherwise permitted under the Lease) without the prior written consent of the Beneficiary, which consent will be given upon confirmation from the Rating Agency that such action will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds. To the extent any obligation of the Borrower hereunder is an obligation to be performed by the Lessee under the Lease, the Borrower shall fulfill such obligation by causing the Lessee to perform such obligation. (b) Section 3.1(c) of the Lease provides that if the Percentage Rent due for a Fiscal Year is less than that paid for such Fiscal Year, the Borrower, at its option, may reimburse the 28 34 excess or may credit such amount to the next month's Base Rent. As long as the Bonds are Outstanding, the Borrower shall not credit any such amounts to future Base Rent. (c) The Borrower hereby grants and assigns to the Beneficiary all the Rents from the Mortgaged Property and the right to enter the Mortgaged Property for the purpose of enforcing its interest in the Lease and the Rents, this Deed of Trust constituting a present, absolute assignment thereof. The Beneficiary grants to the Borrower a revocable license to operate and manage the Mortgaged Property and to collect the Rents; provided, however, the Beneficiary may revoke such license upon and during the continuation of an Event of Default. (d) Any future Lease on the Mortgaged Property shall be subordinate to this Deed of Trust, subject to non-disturbance provisions similar to those in the Subordination Agreement. (e) Without the prior written consent of the Beneficiary, which shall be given upon confirmation from the Rating Agency that the action will not cause a qualification, withdrawal or downgrading of the ratings then maintained by the Rating Agency with respect to the Bonds, the Borrower shall not (i) lease all or any part of the Mortgaged Property other than to the Lessee pursuant to the Lease (or a lease substantially similar to the Lease), (ii) consent to any assignment of the Lease or a sublet of all or part of the Mortgaged Property (other than a sublet of any retail or restaurant portion of such Mortgaged Property in accordance with the Lease) or (iii) further assign the whole or any part of the Lease or the Rents. (f) With respect to the Lease, the Borrower shall (i) timely fulfill or perform in all material respects each and every provision thereof on the Borrower's part to be fulfilled or performed, (ii) promptly send copies to the Servicer of all notices of default that the Borrower (and/or any person in possession under the Borrower) shall send or receive thereunder, and (iii) diligently enforce all of the terms, covenants and conditions contained in such Lease upon the lessee's part to be performed. Upon the occurrence of any Event of Default under this Deed of Trust, the Borrower (and/or any person in possession under the Borrower other than the Lessee) shall pay monthly in advance to the Beneficiary, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupation of the Mortgaged Property or part of the Mortgaged Property as may be occupied by the Borrower (or such person) and upon default in any such payment the Borrower (or such person) shall vacate and surrender possession of the Mortgaged Property to the Beneficiary or to such receiver and, in default thereof, the Borrower (or such person) may be evicted by summary proceedings or otherwise. (g) Neither this assignment nor any action taken pursuant hereto shall operate to place any obligations or liability for the control, care, management or repair of the Mortgaged Property upon the Beneficiary or Servicer, or for the carrying out of any of the terms and conditions of the Lease; nor shall either operate to make the Beneficiary or Servicer responsible or liable for any waste committed on the Mortgaged Property by the tenants or any other parties, or for any dangerous or defective condition of the Mortgaged Property, or for any negligence in the management, upkeep, repair or control of the Mortgaged Property resulting in loss or 29 35 injury or death to any tenant, licensee, employee or stranger; nor shall it make the Beneficiary a "mortgagee in possession." SECTION 5.22. MAINTENANCE OF MORTGAGED PROPERTY; WASTE. The Borrower shall maintain the Mortgaged Property in good and clean order and condition such that the utility and operation of the Mortgaged Property will not be affected in any materially adverse way, subject to ordinary wear and tear and casualty. Subject to the provisions herein regarding casualty and condemnation, the Borrower shall make or cause to be made all necessary or appropriate repairs, replacements and renewals to the Mortgaged Properties. The Borrower shall not commit or suffer any waste of the Mortgaged Property or make any change in the use of the Mortgaged Property that will in any way materially increase the risk of fire or other hazard arising out of the operation of the Mortgaged Property, or take any action that might invalidate or give cause for cancellation of any Required Insurance Policy, or do or permit to be done thereon anything that may in any way impair the value of the Mortgaged Property or the security of this Deed of Trust. SECTION 5.23. ALTERATIONS. The Borrower shall not make or permit to be made any Alterations to the Mortgaged Property unless such Alterations could not reasonably be expected to decrease the value of the Mortgaged Property or to affect adversely the ability of the Borrower to make payments under the Loan Documents when due. SECTION 5.24. COMPLIANCE WITH APPLICABLE LAW. (a) The Borrower shall promptly comply with all existing and future federal, state and local laws, orders, ordinances, governmental rules and regulations or court orders affecting the Mortgaged Property, or the use thereof ("Applicable Law"). (b) Notwithstanding any provisions set forth herein or in any document regarding the approval of Alterations of the Mortgaged Property by the Beneficiary or the Servicer, the Borrower shall not alter the Mortgaged Property in any manner which would materially increase the Borrower's responsibilities for compliance with Applicable Laws without the prior written approval of the Servicer. The Servicer's approval of the plans, specifications, or working drawings for alterations of the Mortgaged Property shall create no responsibility or liability on behalf of the Servicer for their completeness, design, sufficiency or their compliance with Applicable Laws. The Servicer may condition any such approval upon receipt of a certificate of compliance with Applicable Laws from an independent architect, engineer, or other Person acceptable to the Servicer. (c) The Borrower shall give prompt notice to the Servicer of the receipt by the Borrower of any notice related to a violation of any Applicable Laws and of the commencement of any proceedings or investigations that relate to compliance with Applicable Laws. (d) After prior written notice to the Servicer, the Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with 30 36 due diligence, the Applicable Laws affecting the Mortgaged Property, provided that (i) no Event of Default has occurred and is continuing under the Loan Documents; (ii) the Borrower is permitted to do so under the provisions of any other mortgage, deed of trust or deed to secure debt affecting the Mortgaged Property; (iii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which the Borrower is subject and shall not constitute a default thereunder; (iv) neither the Mortgaged Property nor any part thereof or interest therein nor any of the tenants or occupants thereof shall be affected in any material adverse way as a result of such proceeding; and (v) the Borrower shall have furnished to the Servicer all other items reasonably requested by the Servicer. SECTION 5.25. TRANSFER OR ENCUMBRANCE OF THE MORTGAGED PROPERTY. Except for the Permitted Liens and the granting of customary easements and similar rights in the ordinary course of business and except as otherwise expressly provided in the Loan Documents, the Borrower, without the prior written consent of the Servicer, shall not sell, convey, alienate, mortgage, encumber or otherwise transfer the Mortgaged Property or any part thereof or any interest therein, nor incur any additional indebtedness, nor permit or suffer the divestiture of its title or any interest therein, nor permit or suffer any merger, consolidation or dissolution or syndication affecting the Borrower, nor permit or suffer the pledge, assignment, encumbrance or transfer of any partnership interest in the Borrower. SECTION 5.26. ESTOPPEL CERTIFICATES. The Borrower, within ten (10) Business Days after written request by the Servicer, shall furnish the Servicer from time to time with a statement, setting forth (i) the then unpaid principal amount of the Secured Obligations, (ii) the rate of interest then payable on the Secured Obligations, (iii) the date through which all installments of interest, principal and other amounts secured by this Deed of Trust have been paid, (iv) any offsets or defenses to the payment of the Secured Obligations, and (v) that no default or Event of Default has occurred on the part of the Borrower or, to the Borrower's knowledge, the Beneficiary under this Deed of Trust, the Bonds or any other Loan Document which is then continuing, or if any such default or Event of Default has occurred, giving the particulars thereof. SECTION 5.27. OPERATING OF HOTEL. The Borrower shall operate (or cause to be operated) the Mortgaged Property as a hotel and may permit related uses. SECTION 5.28. CHANGES IN THE LAWS REGARDING TAXATION. If any law is enacted or adopted or amended after the date of this Deed of Trust which deducts the Secured Obligations or any portion thereof from the value of the Mortgaged Property for the purpose of taxation and which imposes a tax, either directly or indirectly, on the principal amount of the Bonds or the Beneficiary's interest in the Mortgaged Property, the Borrower will pay such tax, with interest and penalties thereon, if any. In the event the Beneficiary is advised by counsel chosen by it that the payment of such tax or interest and penalties by the Borrower would be unlawful or taxable to the Beneficiary or unenforceable or provide the basis for a defense of usury, then in any such event, the Beneficiary shall have the option, by written notice of not less than thirty days, to 31 37 require the Borrower to prepay immediately thereafter all principal and accrued interest then due and payable under the Bonds. SECTION 5.29. NO CREDITS ON ACCOUNT OF THE SECURED OBLIGATION. The Borrower will not claim or demand or be entitled to any credit or credits on account of the Secured Obligations for any part of the Impositions assessed against the Mortgaged Property or any part thereof and no deduction shall otherwise be made or claimed from the taxable value of the Mortgaged Property, or any part thereof, by reason of this Deed of Trust or the Secured Obligations. In the event such claim, credit or deduction shall be required by law, the Beneficiary shall have the option, by written notice of not less than thirty days, to require the Borrower to prepay immediately thereafter all principal and accrued interest then due and payable under the Bonds. SECTION 5.30. DOCUMENTARY STAMPS. If at any time the United States of America, any State thereof or any subdivision of any such State shall require revenue or other stamps to be affixed to the Bonds or this Deed of Trust, or impose any other tax or charge on the same, the Borrower will pay for the same, with interest and penalties thereon, if any. SECTION 5.31. RIGHT OF ENTRY. Subject to the rights of the Lessee under the Lease and any other requirements of the Lease, the Beneficiary and its agents shall have the right to enter and inspect the Mortgaged Property at any time during regular business hours upon reasonable advance notice to the Borrower. SECTION 5.32. PERFORMANCE OF OTHER AGREEMENTS. The Borrower shall observe and perform each and every term to be observed or performed by the Borrower pursuant to the terms of any agreement or recorded instrument affecting or pertaining to the Mortgaged Property, which the failure of the Borrower to perform or observe would have a Material Adverse Effect on the Borrower's operation of the Mortgaged Property or the Borrower's ability to perform its obligations under the Loan Documents. SECTION 6. RIGHTS AND REMEDIES. SECTION 6.01. APPRAISALS. If an Event of Default occurs and is continuing, the Servicer shall be entitled at any time to request an appraisal to be performed by an appraiser satisfactory to the Servicer and/or a market study to be performed by an MAI satisfactory to the Servicer with respect to the Mortgaged Property or all the Mortgaged Properties. The Borrower shall pay all reasonable fees for any appraisals and market studies performed pursuant to this Section 6.01. SECTION 6.02. EVENTS OF DEFAULT. Upon the occurrence of any Event of Default, the Secured Obligations, upon notice to the Borrower, shall immediately become due at the option of the Beneficiary (or certain Bondholders as provided in the Indenture) and the provisions of Section 6.03 shall apply. 32 38 SECTION 6.03. REMEDIES. (a) The Beneficiary may, to the extent permitted under applicable law, elect to treat the fixtures included in the Mortgaged Property either as real property or as personal property, or both, and proceed to exercise such rights as apply thereto. With respect to any sale of real property included in the Mortgaged Property made under the powers of sale herein granted and conferred, the Beneficiary may, to the extent permitted by applicable law, include in such sale any fixtures included in the Mortgaged Property and relating to such real property. (b) Upon the occurrence of any Event of Default, the Beneficiary may take such action, without notice or demand, as it deems advisable to protect and enforce its rights against the Borrower and in and to the Mortgaged Property or any part thereof or interest therein, including, but not limited to, the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as the Beneficiary may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of the Beneficiary: (i) enter into or upon the Premises, either personally or by its agents, nominees or attorneys, and dispossess the Borrower and its agents and servants therefrom, and thereupon the Beneficiary may (A) use, operate, manage, lease, control, insure, maintain, repair, restore and otherwise deal with all and every part of the Mortgaged Property and conduct the business thereat; (B) complete any construction on the Mortgaged Property in such manner and form as the Beneficiary deems advisable; (C) make alterations, additions, renewals, replacements and improvements to or on the Mortgaged Property; (D) exercise all rights and powers of the Borrower with respect to the Mortgaged Property, whether in the name of the Borrower or otherwise, including, without limitation, the right to make, cancel, enforce or modify leases, obtain and evict tenants, and demand, sue for, collect and receive all earnings, revenues, rents, issues, profits and other income of the Mortgaged Property and every part thereof; and (E) apply the receipts from the Mortgaged Property to the payment of the Secured Obligations (in such manner and order of priority as the Beneficiary shall elect in its sole and absolute discretion), after deducting therefrom all expenses (including reasonable attorneys' fees and expenses) incurred in connection with the aforesaid operations and all amounts necessary to pay the taxes, assessments, insurance and other charges in connection with the Mortgaged Property, as well as just and reasonable compensation for the services of the Beneficiary, its counsel, agents and employees in connection with the aforesaid operations; (ii) institute proceedings for the complete foreclosure of this Deed of Trust, in which case the Mortgaged Property may be sold for cash or upon credit in one or more parcels; (iii) with or without entry, to the extent permitted and pursuant to the procedures provided by applicable law, institute proceedings for the partial foreclosure of this Deed of Trust for the portion of the Secured Obligations then due and payable, subject to the continuing lien of this Deed of Trust for the balance of the Secured Obligations not then due; (iv) sell for cash or upon credit the Mortgaged Property or any part thereof and all or any part of any estate, claim, demand, right, title and interest of the Borrower therein and rights of redemption thereof, pursuant to power of sale or otherwise, at one or more sales, as an entity or in parcels, at such time and place, upon such terms and after such notice thereof as may be required or pertained by law, and in the event of a sale, by foreclosure or otherwise, of less than all of the Mortgaged Property, this Deed of Trust shall continue as a lien 33 39 on the remaining portion of or estate in the Mortgaged Property; (v) institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained herein or any other Loan Document or for mandatory or prohibitory injunctive relief, or other equitable relief requiring the Borrower to cure or refrain from repeating any default; (vi) recover judgment on the Bonds or any other Loan Document either before, during or after any proceedings for the enforcement of this Deed of Trust; (vii) apply for the appointment of a trustee, receiver, liquidator or conservator of the Mortgaged Property upon ex parte application to any court of competent jurisdiction, without regard for the adequacy of the security for the Secured Obligations and without regard for the solvency of the Borrower or of any person, firm or other entity liable for the payment of the Secured Obligations; (viii) with or without accelerating the maturity of the Secured Obligations, the Beneficiary may sue from time to time for any payment due under any Loan Documents; and/or (ix) pursue such other remedies as the Beneficiary may have under applicable law, in equity or under this Deed of Trust or any other Loan Document. (c) The purchase money proceeds or avails of any sale made under or by virtue of this Section 6.03, together with any other sums which then may be held by the Beneficiary under this Deed of Trust, whether under the provisions of this Section 6.03 or otherwise, shall be applied as follows: First: To the payment of the costs and expenses of any such sale, including cost of evidence of title in connection with the sale and reasonable compensation to the Trustee, its agents and counsel, and of any judicial proceedings wherein the same may be made, and of all expenses, liabilities and advances made or incurred by the Trustee under this Deed of Trust, together with interest as provided herein on all advances made by the Trustee and all taxes or assessments, except any taxes, assessments or other charges subject to which the Mortgaged Property shall have been sold. Second: To the payment of the whole amount of the Secured Obligations then due, owing or unpaid together with any and all applicable interest, fees and late charges, in such manner and order of priority as provided in the Indenture. Third: To the payment of any other sums required to be paid by the Borrower pursuant to any provision of this Deed of Trust, the Bonds or any other Loan Document. Fourth: To the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. The Beneficiary and any receiver of the Mortgaged Property, or any part thereof, shall be liable to account for only those proceeds of sale, rents, issues and profits actually received by it. 34 40 In the event that the proceeds of any such sale, collection or realization are insufficient to pay all amounts of the Secured Obligations to which the Beneficiary is legally entitled, the Borrower shall be liable for the deficiency (subject to Section 11.01), together with interest thereon at the Default Rate until such amounts are paid in full, together with the costs of collection and the reasonable fees and disbursements of any attorneys employed by the Beneficiary to collect such deficiency. (d) Any receiver appointed after an Event of Default and his agents shall be empowered (i) to take possession of the Mortgaged Property and any of the Borrower's business assets used in connection therewith, (ii) to exclude the Borrower and the Borrower's agents, servants, and employees from the Premises, (iii) to collect the Rents, (iv) to complete any construction which may be in progress, (v) to do such maintenance and make such repairs and alterations as the receiver deems necessary, (vi) to use all stores of materials, supplies, and maintenance equipment on the Mortgaged Property and replace such items at the expense of the receivership estate, (vii) to pay all taxes and assessments against the Mortgaged Property, all premiums for insurance thereon, all utility and other operating expenses, and all sums due under any prior or subsequent encumbrance, and (viii) generally to do anything which the Borrower could legally do if the Borrower were in possession of the Mortgaged Property. All reasonable expenses incurred by the receiver or his agents shall constitute a part of the Secured Obligations. Any revenues collected by the receiver shall be applied first to the expenses of the receivership, including reasonable attorneys' fees and disbursements incurred by the receiver and the Beneficiary, together with interest thereon at the Default Rate from the date incurred until repaid, then to the payment of the whole amount of the Secured Obligations then due, owing or unpaid, together with any and all applicable interest, fees and late charges (in such manner and order of priority as the Beneficiary shall elect in its sole and absolute discretion), and the balance to the payment of any other sums required to be paid by the Borrower pursuant to any provision of this Deed of Trust, the Bonds or the other Loan Documents or in such other manner as the court may direct. Unless sooner terminated with the express consent of the Beneficiary, any such receivership will continue until the Secured Obligations have been discharged in full, or until title to the Mortgaged Property has passed after foreclosure sale and all applicable periods of redemption have expired. (e) In the case of a foreclosure under this Deed of Trust, the said Mortgaged Property, real, personal and mixed, may be sold in one parcel or more than one parcel to the extent permitted by law. (f) At the Beneficiary's request, Trustee may adjourn from time to time any sale to be made under or by virtue of this Deed of Trust by announcement at the time and place appointed for such sale or for such adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, Trustee, at the Beneficiary's request, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. 35 41 (g) Upon the completion of any sale or sales under or by virtue of this Section 6.03, and the period of redemption (if any), the Trustee or an officer of any court empowered to do so, shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, conveying, assigning and transferring all estate, right, title and interest in and to the property and rights sold. The Trustee is hereby irrevocably appointed the true and lawful attorney of the Borrower, in its name and stead, to make all necessary conveyances, assignments, transfers and deliveries of the Mortgaged Property and rights so sold and for that purpose the Trustee may execute all necessary instruments of conveyance, assignment and transfer, and may substitute one or more persons with like power, the Borrower hereby ratifying and confirming all that its said attorney or such substitute or substitutes shall lawfully do by virtue hereof, it being agreed that such power of attorney shall be coupled with an interest. Any such sale or sales made under or by virtue of this Section 6.03, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, shall operate to divest all the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of the Borrower in and to the properties and rights 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 from, through or under the Borrower. (h) In the event of any sale made under or by virtue of this Section 6.03 (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale) the entire Secured Obligations, if not previously due and payable, immediately thereupon shall, anything in the Bonds, this Deed of Trust or the other Loan Documents to the contrary notwithstanding, become due and payable. (i) Upon any sale made under or by virtue of this (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale), the Beneficiary may bid for and acquire the Mortgaged Property or any part thereof and in lieu of paying cash therefor may make settlement for the purchase price by crediting upon the Secured Obligations the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which the Beneficiary is authorized to deduct under this Deed of Trust. (j) No recovery of any judgment by the Beneficiary and no levy of an execution under any judgment upon the Mortgaged Property or upon any other property of the Borrower shall affect in any manner or to any extent, the lien of this Deed of Trust upon the Mortgaged Property or any part thereof, or any liens, rights, powers or remedies of the Beneficiary hereunder, but such liens, rights, powers and remedies of the Beneficiary shall continue unimpaired as before. (k) So long as the Secured Obligations, or any part thereof, remain unpaid, the Borrower agrees that possession of the Mortgaged Property by the Borrower, or any person claiming under the Borrower, shall be as tenant, and, in case of a sale under power or upon foreclosure as provided in this Deed of Trust, the Borrower and any person in possession under 36 42 the Borrower, as to whose interest such sale was not made subject, shall, at the option of the purchaser at such sale, then become and be tenants holding over, and shall forthwith deliver possession to such purchaser, or be summarily dispossessed in accordance with the laws applicable to tenants holding over. If the Borrower (or such person) is permitted to remain or otherwise remains in possession, the possession shall be as a month-to-month tenant of the Beneficiary and, on demand, the Borrower (or such person) will pay to the Beneficiary (or any receiver of the Mortgaged Property) monthly, in advance, the fair and reasonable rental value for the space so occupied and in default thereof the Borrower (or such person) may be dispossessed by the usual summary proceedings or otherwise. (l) No remedy conferred upon or reserved to the Beneficiary by this Deed of Trust is intended to be exclusive of any other remedy or remedies available to the Beneficiary under the Loan Documents, at law, in equity or otherwise, and each and every such remedy hereunder and/or under any other Loan Documents, at law or in equity, shall be cumulative and shall be in addition to every other remedy given under this Deed of Trust and/or under any other Loan Document or now or hereafter existing at law or in equity. Any delay or omission of the Beneficiary to exercise any right or power accruing upon the occurrence of any Event of Default shall not impair any such right or power and shall not be construed to be a waiver of or acquiescence in any such Event of Default. Every power and remedy given by this Deed of Trust and/or under any other Loan Document and/or at law or in equity may be exercised from time to time concurrently or independently, when and as often as may be deemed expedient by the Beneficiary in such order and manner as the Beneficiary, in its sole and absolute discretion, may elect. If the Beneficiary accepts any moneys required to be paid by the Borrower under this Deed of Trust after the same become due, such acceptance shall not constitute a waiver of the right either to require prompt payment, when due, of all other sums secured by this Deed of Trust or to declare an Event of Default with regard to subsequent defaults. If the Beneficiary accepts any moneys required to be paid by the Borrower under this Deed of Trust in an amount less than the sum then due, such acceptance shall be deemed an acceptance on account only and on the condition that it shall not constitute a waiver of the obligation of the Borrower to pay the entire sum then due, and the Borrower's failure to pay the entire sum then due shall be and continue to be a default hereunder notwithstanding acceptance of such amount on account. (m) The state-specific provisions of Annex I are hereby incorporated by reference herein as though set forth in full herein. Section 6.04. Right to Cure Defaults. Upon the occurrence of any Event of Default or if the Borrower fails to make any payment or to do any act as herein provided, the Beneficiary may, but without any obligation to do so and without notice, except as otherwise provided herein, to or demand on the Borrower and without releasing the Borrower from any obligation hereunder, make or do the same in such manner and to such extent as the Beneficiary may reasonably deem necessary to protect the security hereof. The Beneficiary is authorized to enter upon the Mortgaged Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Mortgaged Property or to foreclose this Deed of Trust or collect the Secured Obligations, and the cost and expense thereof (including, without 37 43 limitation, reasonable attorneys' fees and disbursements to the extent permitted by law), with interest as provided in this Section 6.04, shall be immediately due and payable to the Beneficiary upon demand by the Beneficiary therefor. All such costs and expenses incurred by the Beneficiary in remedying such Event of Default or failure of the Borrower or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate, for the period from the date that such cost or expense was incurred to the date of payment to the Beneficiary, and such costs, expenses and interest shall be added to the Secured Obligations and shall be secured by this Deed of Trust. Section 6.05. Appointment of Receiver. The Beneficiary, upon the occurrence of an Event of Default or in any action to foreclose this Deed of Trust or upon the actual or threatened waste to any part of the Mortgaged Property, shall be entitled forthwith as a matter of right, concurrently or independently of any other right or remedy hereunder, either before or after declaring the Secured Obligations (or any part thereof) to be due and payable, to the appointment of a receiver or other custodian ex parte and without notice and without regard to the value of the Mortgaged Property as security for the Secured Obligations, or the solvency or insolvency of any person liable for the payment of the Secured Obligations, and whether or not foreclosure proceedings have been commenced. SECTION 7. WAIVER. SECTION 7.01. WAIVER OF COUNTERCLAIM. To the fullest extent permitted by applicable law, the Borrower hereby waives the right to assert a claim or counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by the Beneficiary with respect to any Event of Default. SECTION 7.02. SOLE DISCRETION OF THE BENEFICIARY. Wherever pursuant to this Deed of Trust, the Beneficiary or its agents exercise any right given to them to approve or disapprove, or any arrangement or term is to be satisfactory to the Beneficiary or its agents, the decision of the Beneficiary or its agents to approve or disapprove or to decide that such arrangements or terms are satisfactory or not satisfactory shall be in the sole discretion of the Beneficiary or its agents and shall be final and conclusive, except as may be otherwise specifically provided herein. SECTION 7.03. WAIVER OF NOTICE. The Borrower shall not be entitled to any notices of any nature whatsoever from the Beneficiary except with respect to matters for which this Deed of Trust or the other Loan Documents specifically and expressly provide for the giving of notice by the Beneficiary to the Borrower and except with respect to matters for which the Beneficiary is required by applicable law to give notice, and the Borrower hereby expressly waives the right to receive any notice from the Beneficiary with respect to any matter for which this Deed of Trust or other Loan Documents do not specifically and expressly provide for the giving of notice by the Beneficiary to the Borrower. 38 44 SECTION 7.04. OTHER MORTGAGES; NO ELECTION OF REMEDIES. (a) This Deed of Trust is made contemporaneously with other Mortgages of even date herewith (the "Other Mortgages") given by the Borrower to or for the benefit of the Beneficiary and that cover other property (the "Other Mortgaged Properties"). The Other Mortgages secure the Secured Obligations and the performance of the other covenants and agreements of the Borrower set forth in the Loan Documents. Upon the occurrence of an Event of Default, the Beneficiary may proceed under this Deed of Trust and/or the Other Mortgages against any of the Mortgaged Property and/or the Other Mortgaged Properties in one or more parcels and in such manner and order as the Beneficiary shall elect. The Borrower hereby irrevocably waives and releases, to the extent permitted by law, and whether now or hereafter in force, any right to have the Mortgaged Property and/or the Other Mortgaged Properties marshalled upon any foreclosure of this Deed of Trust or the Other Mortgages. (b) Without limiting the generality of the foregoing, and without limitation as to any other right or remedy provided to the Beneficiary in this Deed of Trust or the other Loan Documents, and to the extent permitted by law, in the case of an Event of Default (i) the Beneficiary shall have the right to pursue all of its rights and remedies under this Deed of Trust and the Loan Documents, at law and/or in equity, in one proceeding, or separately and independently in separate proceedings from time to time, as the Beneficiary, in its sole and absolute discretion, shall determine from time to time, (ii) the Beneficiary shall not be required to either marshall assets, sell Mortgaged Property and/or Other Mortgaged Properties in any particular order of alienation (and may sell the same simultaneously and together or separately), or be subject to any "one action" or "election of remedies" law or rule with respect to the Mortgaged Property and the Other Mortgaged Properties, (iii) the exercise by the Beneficiary of any remedies against any one item of Mortgaged Property and/or Other Mortgaged Properties will not impede the Beneficiary from subsequently or simultaneously exercising remedies against any other item of Mortgaged Property and/or Other Mortgaged Properties, (iv) all liens and other rights, remedies or privileges provided to the Beneficiary herein shall remain in full force and effect until the Beneficiary has exhausted all of its remedies against the Mortgaged Property and all Mortgaged Properties have been foreclosed, sold and/or otherwise realized upon in satisfaction of the Secured Obligations, and (v) the Beneficiary may resort for the payment of the Secured Obligations to any security held by the Beneficiary in such order and manner as the Beneficiary, in its discretion, may elect and the Beneficiary may take action to recover the Secured Obligations, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of the Beneficiary thereafter to foreclose this Deed of Trust. (c) Without notice to or consent of the Borrower and without impairment of the lien and rights created by this Deed of Trust, the Beneficiary may, at any time (in its sole and absolute discretion, but the Beneficiary shall have no obligation to), execute and deliver to the Borrower a written instrument releasing all or a portion of the lien of this Deed of Trust as security for any or all of the obligations of the Borrower now existing or hereafter arising under or in respect of the Indenture and each of the other Loan Documents, whereupon following the 39 45 execution and delivery by the Beneficiary to the Borrower of any such written instrument of release, this Deed of Trust shall no longer secure such obligations of the Borrower so released. SECTION 7.05. NOTICES. Any notice, demand, statement, request or consent made hereunder shall be effective and valid only if in writing, referring to this Deed of Trust, signed by the party giving such notice, and delivered either personally to such other party, or sent by telecopy, by nationally recognized overnight courier delivery service or by certified mail of the United States Postal Service, postage prepaid, return receipt requested, addressed to the other party, as follows (or to such other address or person as either party or person entitled to notice may by notice to the other party specify): To the Beneficiary: LaSalle National Bank, as Indenture Trustee 135 South LaSalle Street, 17th Floor, Chicago, Illinois 60674-4107, Attention: Asset-Backed Securities Trust Services Group Reference: RFS Financing Partnership, L.P., Commercial Mortgage Bonds, Series 1996-1 Telecopy No.: (312) 904-2084 and a copy concurrently to: Weil, Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Attention: Paul Cohn, Esq. Telecopy No.: (212) 310-8000 To the Servicer: Midland Loan Services, L.P. 210 West Tenth Street Kansas City, MO 64105 Attention: Lawrence D. Ashley Telecopy No.: 816-435-2326 40 46 To the Borrower: RFS Financing Partnership, L.P. 889 Ridge Lake Boulevard, Suite 100 Memphis, Shelby County, Tennessee 38120 Attention: Michael J. Pascal Telecopy No.: (901) 767-5156 and with a copy concurrently to: Hunton & Williams 2000 Riverview Tower 900 South Gay Street Knoxville, Tennessee 37902 Attention: David C. Wright, Esq. Telecopy No. (423) 549-7704 Unless otherwise specified, notices shall be deemed given as follows: (i) if delivered personally, when delivered, (ii) if delivered by telecopy, when transmitted and receipt confirmed, (iii) if delivered by nationally recognized overnight courier delivery service, on the day following the day such material is sent, or (iv) if delivered by certified mail, on the third day after the same is deposited with the United States Postal Service as provided above. SECTION 7.06. NON-WAIVER. The failure of the Beneficiary to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Deed of Trust. The Borrower shall not be relieved of the Borrower's obligations hereunder by reason of (a) failure of the Beneficiary to comply with any request of the Borrower to take any action to foreclose this Deed of Trust or otherwise enforce any of the provisions hereof or the other Loan Documents, (b) the release, regardless of consideration, of the whole or any part of the Mortgaged Property, or of any person liable for the Secured Obligations or portion thereof, or (c) any agreement or stipulation by the Beneficiary extending the time of payment or otherwise modifying or supplementing the terms of this Deed of Trust or the other Loan Documents. SECTION 8. SECURITY AGREEMENT RECORDATION. SECTION 8.01. SECURITY AGREEMENT. (a) This Deed of Trust is both a real property Deed of Trust and a "security agreement" within the meaning of the Uniform Commercial Code. The Mortgaged Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of the Borrower in the Mortgaged Property. The Borrower, by executing and delivering this Deed of Trust, has granted to the Beneficiary, as security for the Secured Obligations, a security interest in the Mortgaged Property to the full extent that the Mortgaged Property may be subject to the Uniform Commercial Code of the State in which the Mortgaged 41 47 Property is located (said portion of the Mortgaged Property so subject to the Uniform Commercial Code being called in this Section 8.01 the "UCC Collateral"). If an Event of Default shall occur, the Beneficiary, in addition to any other rights and remedies which it may have, shall have and may exercise immediately and without demand, any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, including, without limiting the generality of the foregoing, the right to take possession of the UCC Collateral or any part thereof, and to take such other measures as the Beneficiary may deem necessary for the care, protection and preservation of the UCC Collateral. Upon request or demand of the Beneficiary, the Borrower shall at its expense assemble the UCC Collateral and make it available to the Beneficiary at a convenient place acceptable to the Beneficiary. The Borrower shall pay to the Beneficiary on demand any and all expenses, including legal expenses and attorneys' fees and disbursements, incurred or paid by the Beneficiary in protecting its interest in the UCC Collateral and in enforcing its rights hereunder with respect to the UCC Collateral. Any notice of sale, disposition or other intended action by the Beneficiary with respect to the UCC Collateral sent to the Borrower in accordance with the provisions hereof at least ten (10) days prior to such action, shall constitute reasonable notice to the Borrower. The proceeds of any disposition of the UCC Collateral, or any part thereof, may be applied by the Beneficiary to the payment of the Secured Obligations in such priority and proportions as the Beneficiary in its sole and absolute discretion shall deem proper. (b) Except as provided for in the Lease, that portion of the Mortgaged Property consisting of personal property and equipment shall be owned by the Borrower and shall not be the subject matter of any lease or other transaction whereby the ownership or any beneficial interest in any of such property is held by any person or entity other than the Borrower nor shall the Borrower create or suffer to be created any security interest covering any such property as it may from time to time be replaced, other than the security interest created herein and as set forth in the Permitted Liens. SECTION 8.02. RECORDING OF DEED OF TRUST, ETC. The Borrower forthwith, upon the execution and delivery of this Deed of Trust, will cause this Deed of Trust, and any security instrument creating a lien or security interest or evidencing the lien hereof upon the Mortgaged Property (including any assignment of leases and rents), to be filed, registered or recorded, and thereafter from time to time, each such other instrument of further assurance to be filed, registered or recorded, all in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien or security interest hereof upon, and the interest of the Beneficiary in, the Mortgaged Property. The Borrower will pay (a) all filing, registration and recording fees and taxes (including, without limitation, mortgage recording taxes, intangible taxes and documentary stamps), and all other expenses (including, without limitation, attorneys' fees and disbursements), incident to or arising in connection with the Secured Obligations and/or the preparation, execution, acknowledgment, enforcement, delivery and/or recording of this Deed of Trust, any mortgage supplemental hereto, any security instrument with respect to the Mortgaged Property (including, without limitation, any assignment of leases and rents) and any instrument of further assurance (including, without limitation, any fees and taxes due in connection with any future advances, re-advances or re-loans under the 42 48 Bonds), and (b) all federal, state, county and municipal, taxes, duties, imposts, assessments and charges arising out of or in connection with the Secured Obligations and/or the making, execution, enforcement, delivery and/or recording of this Deed of Trust, any mortgage supplemental hereto, any security instrument with respect to the Mortgaged Property (including any assignment of leases and rents), and/or any instrument of further assurance (including, without limitation, any such fees and taxes due in connection with any future advances, re-advances or re-loans under the Bonds), except where prohibited by law so to do. In default thereof, the Beneficiary may advance the same and the amount so advanced shall be payable by the Borrower to the Beneficiary within ten (10) days after demand therefor, together with interest thereon at the Default Rate from the date of the advance thereof until such amount(s) are repaid in full. The Borrower shall hold harmless and indemnify the Beneficiary, its successors and assigns, against any liability incurred by reason of the imposition of any tax on the making, execution, delivery and/or recording of this Deed of Trust, any mortgage supplemental hereto, any security instrument with respect to the Mortgaged Property or any instrument of further assurance. SECTION 9. RIGHTS OF THE BENEFICIARY. SECTION 9.01. FURTHER ACTS, ETC. The Borrower will, at the sole cost of the Borrower, and without expense to the Beneficiary, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, deeds of trust, assignments, notices of assignments, transfers and assurances as the Servicer shall, from time to time, reasonably require, for the better assuring, conveying, assigning, transferring, and confirming unto the Beneficiary the property and rights hereby granted, bargained, sold, and conveyed or intended now or hereafter so to be, or which the Borrower may be or may hereafter become bound to grant, convey, bargain or sell or assign to the Beneficiary, or for carrying out the intention or facilitating the performance of the terms of this Deed of Trust or for filing, registering or recording this Deed of Trust and, on demand, will execute and deliver within five (5) business days after request of the Servicer, and if the Borrower fails to so deliver, hereby authorizes the Servicer thereafter to execute in the name of the Borrower or without the signature of the Borrower to the extent the Servicer may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien hereof upon the Mortgaged Property. The Borrower grants to the Servicer an irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to the Beneficiary at law and in equity, including, without limitation, such rights and remedies available to the Beneficiary pursuant to this Section 9.01. SECTION 9.02. RECOVERY OF SUMS REQUIRED TO BE PAID. The Beneficiary shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Secured Obligations as the same become due, without regard to whether or not the balance of the Secured Obligations shall be due, and without prejudice to the right of the Beneficiary thereafter to bring an action of foreclosure, or any other action, for a default or defaults by the Borrower existing at the time such earlier action was commenced. 43 49 SECTION 9.03. COSTS OF DEFENDING AND UPHOLDING THE LIEN. In addition to, and not in limitation of, Sections 9.04 and 11.03, if any action or proceeding is commenced to which action or proceeding the Beneficiary is made a party or in which it becomes necessary to defend or uphold the lien of this Deed of Trust or the Beneficiary's rights under any assignment of leases and rents, the Borrower shall, on demand, reimburse the Beneficiary for all expenses (including, without limitation, reasonable attorneys' fees and reasonable appellate attorneys' fees) incurred by the Beneficiary in any such action or proceeding, together with interest at the Default Rate, and all such amounts shall be secured hereby and be a part of the Secured Obligations. In any action or proceeding to foreclose this Deed of Trust or to recover or collect the Secured Obligations, the provisions of law relating to the recovering of costs, disbursements and allowances shall prevail unaffected by this covenant. SECTION 9.04. ADDITIONAL ACTIONS. In addition to, and not in limitation of, the provisions of Sections 9.03 and 11.03, the Beneficiary shall have the right to appear in and defend any action or proceeding, in the name and on behalf of the Borrower, which the Beneficiary in its discretion, feels may adversely affect the Mortgaged Property or this Deed of Trust, and the Beneficiary shall also have the right to institute any action or proceeding which the Beneficiary, in its discretion, feels should be brought to protect its interest in the Mortgaged Property or its rights hereunder or the Beneficiary's rights under any assignment of leases and rents. All costs and expenses incurred by the Beneficiary in connection with such actions or proceedings, including, without limitation, reasonable attorneys' fees, and appellate attorneys' fees, together with interest at the Default Rate, shall be paid by the Borrower, on demand, and shall be secured hereby and shall be a part of the Secured Obligations. SECTION 9.05. ADDITIONAL SECURITY. Without notice to or consent of the Borrower and without impairment of the lien and rights created by this Deed of Trust, the Beneficiary may accept (but the Borrower shall not be obligated to furnish except as otherwise provided in the Loan Documents) from the Borrower or from any other person or persons, additional security for the Secured Obligations. Neither the giving of this Deed of Trust nor the acceptance of any such additional security shall prevent the Beneficiary from resorting, first, to such additional security, and, second, to the security created by this Deed of Trust and the other Loan Documents without affecting the Beneficiary's lien and rights under this Deed of Trust. SECTION 10. APPLICABLE LAWS. SECTION 10.01. USURY LAWS. This Deed of Trust and the other Loan Documents are subject to the express condition that at no time shall the Borrower be obligated or required to pay interest (inclusive of fees and charges which are or could be in the nature of interest) on the Secured Obligations at a rate which could subject the Beneficiary to either civil or criminal liability as a result of being in excess of the maximum interest rate which the Borrower is permitted by law to contract or agree to pay. If by the terms of this Deed of Trust or the other Loan Documents, the Borrower is at any time required or obligated to pay interest (inclusive of any such fees and charges) on the Secured Obligations at a rate in excess of such maximum rate, the rate of interest (inclusive of any such fees and charges) on the Secured Obligations shall be 44 50 deemed to be immediately reduced to such maximum rate and the interest (inclusive of any such fees and charges) payable shall be computed at such maximum rate and all prior interest payments (inclusive of any such fees and charges) in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Secured Obligations and the principal balance of the Secured Obligations shall be reduced by such amount in such manner and order of priority as the Beneficiary shall elect in its sole and absolute discretion. SECTION 10.02. GOVERNING LAW; JURISDICTION; WAIVER OF TRIAL BY JURY. THIS DEED OF TRUST SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE IN WHICH THE MORTGAGED PROPERTY IS LOCATED WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF. EACH BORROWER AND EACH ENDORSER HEREBY SUBMITS TO PERSONAL JURISDICTION IN SAID STATE AND IN THE STATE OF NEW YORK AND THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN SAID STATE AND IN THE STATE OF NEW YORK (AND ANY APPELLATE COURTS TAKING APPEALS THEREFROM) FOR THE ENFORCEMENT OF SUCH BORROWER'S OBLIGATIONS HEREUNDER AND WAIVES ANY AND ALL PERSONAL RIGHTS UNDER THE LAW OF ANY OTHER STATE TO OBJECT TO JURISDICTION WITHIN SUCH STATE FOR THE PURPOSES OF SUCH ACTION, SUIT, PROCEEDING OR LITIGATION TO ENFORCE SUCH OBLIGATIONS OF SUCH BORROWER OR ENDORSER. EACH BORROWER AND EACH ENDORSER HEREBY WAIVES AND AGREES NOT TO ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS DEED OF TRUST (A) THAT IT IS NOT SUBJECT TO SUCH JURISDICTION OR THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN THOSE COURTS OR THAT THIS DEED OF TRUST MAY NOT BE ENFORCED IN OR BY THOSE COURTS OR THAT IT IS EXEMPT OR IMMUNE FROM EXECUTION, (B) THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR (C) THAT THE VENUE OF THE ACTION, SUIT OR PROCEEDING IS IMPROPER. IN THE EVENT ANY SUCH ACTION, SUIT, PROCEEDING OR LITIGATION IS COMMENCED, THE BORROWER AND ENDORSER AGREE THAT SERVICE OF PROCESS MAY BE MADE, AND PERSONAL JURISDICTION OVER SUCH BORROWER OR ENDORSER OBTAINED, BY SERVICE OF A COPY OF THE SUMMONS, COMPLAINT AND OTHER PLEADINGS REQUIRED TO COMMENCE SUCH LITIGATION BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED UPON SUCH BORROWER OR ENDORSER AT RFS FINANCING PARTNERSHIP, L.P., 889 RIDGE LAKE BOULEVARD, SUITE 100, MEMPHIS, SHELBY COUNTY, TENNESSEE 38120, ATTENTION: MICHAEL J. PASCAL. THE BORROWER HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATED TO THE ENFORCEMENT OF THIS DEED OF TRUST. 45 51 SECTION 11. MISCELLANEOUS. SECTION 11.01. EXCULPATION. Notwithstanding anything herein or in any other Loan Document to the contrary, except as otherwise set forth in this Section 11.01 to the contrary, the Beneficiary shall not enforce the liability and obligation of the Borrower to perform and observe the obligations contained in this Deed of Trust, the Bonds or any of the other Loan Documents executed and delivered by the Borrower by any action or proceeding wherein a money judgment shall be sought against the Borrower or its partners. The provisions of this Section 11.01 shall not, however, (a) impair the validity of the Indebtedness evidenced by the Bonds or in any way affect or impair the Liens of the Mortgages or any of the other Loan Documents or the right of the Beneficiary to foreclose the Mortgages following an Event of Default; (b) impair the right of the Beneficiary to name the Borrower as a party defendant in any action or suit for judicial foreclosure and sale under any of the Mortgages; (c) affect the validity or enforceability of the Bonds or the other Loan Documents; (d) impair the right of the Beneficiary to obtain the appointment of a receiver; (e) impair the right of the Beneficiary to bring suit for actual damages, losses and costs resulting from fraud or intentional misrepresentation by the Borrower in connection with this Deed of Trust, the Bonds or the other Loan Documents; (f) impair the right of the Beneficiary to bring suit with respect to the Borrower's misappropriation of Rents collected more than one month in advance; (g) impair the right of the Beneficiary to obtain Insurance Proceeds or Condemnation Proceeds due to the Beneficiary pursuant to the Mortgages; (h) impair the right of the Beneficiary to enforce Section 5.17 (the environmental covenants) of this Deed of Trust even after repayment in full of the Indebtedness; (i) prevent or in any way hinder the Beneficiary from exercising, or constitute a defense, or counterclaim, or other basis for relief in respect of the exercise of, any other remedy against any or all of the collateral securing the Bonds as provided in the Loan Documents; or (j) impair the right of the Beneficiary to bring suit with respect to any misapplication of any funds. Notwithstanding the foregoing, in the event a Mortgaged Property is released from the lien created by the Mortgages, the Borrower shall be released in all respects from any further liability with respect to the Bonds other than any further liability for breaches of Section 5.17. SECTION 11.02. DUPLICATE ORIGINALS. This Deed of Trust may be executed in any number of duplicate originals and each such duplicate original shall be deemed to constitute but one and the same instrument. SECTION 11.03. INDEMNITY AND THE BENEFICIARY'S COSTS. The Borrower agrees to pay all costs, including, without limitation, reasonable attorneys' fees and expenses, incurred by the Beneficiary in enforcing the terms hereof or of any assignment of leases and rents whether or not suit is filed and waives to the full extent permitted by law all right to plead any statute of limitations as a defense to any action under this Deed of Trust or any assignment of leases and rents. The Borrower agrees to indemnify and hold the Beneficiary harmless from any and all liability, loss, damage or expense (including, without limitation, attorneys' fees and disbursements) that it may or might incur under this Deed of Trust or any assignment of leases and rents or in connection with the enforcement of any of the Beneficiary's rights or remedies under this Deed of Trust or any assignment of leases and rents, any action taken by the 46 52 Beneficiary under this Deed of Trust or any assignment of leases and rents, or by reason or in defense of any and all claims and demands whatsoever that may be asserted against the Beneficiary arising out of the Mortgaged Property (except to the extent that such liability, loss, damage or expense is the result of the gross negligence or the intentional misconduct of the Beneficiary, the Indenture Trustee or the Servicer) and should the Beneficiary incur any such liability, loss, damage or expense, the amount thereof with interest thereon at the Default Rate shall be payable by the Borrower immediately without demand, shall be secured by this Deed of Trust, and shall be a part of the Secured Obligations. The Borrower agrees to pay or reimburse the Beneficiary for paying: (a) all reasonable costs and expenses of the Beneficiary and the Servicer (including reasonable counsel fees and expenses) in connection with any Default and any enforcement or collection proceedings resulting therefrom including in connection with any bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings involving the Borrower; (b) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Deed of Trust, the other Loan Documents or any other document referred to herein or therein and all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by this Deed of Trust the other Loan Documents or any document referred to therein; and (c) all taxes and assessments, recording fees, registration taxes, title insurance premiums, appraisal fees, costs of surveys, fees of third-party consultants and all other fees and expenses reasonably incurred by the Beneficiary and the Servicer in connection with any Mortgaged Properties (including all Servicing Fees). The Borrower hereby agrees to indemnify the Beneficiary and the Servicer and their respective directors, officers, employees and agents (including the general partner of the Servicer and such general partner's directors, officers, employees and agents) from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any claim of any Person relating to or arising out of any Loan Document or resulting from the ownership or financing of any Mortgaged Property or any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to any actual or proposed use by the Borrower of the proceeds of the Bonds, including the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Beneficiary or any other Person to be indemnified). SECTION 11.04. Incorporation by Reference. All of the covenants, conditions and agreements contained in all and any of the Loan Documents now or hereafter executed by the Borrower and/or others and by or in favor of the Beneficiary are hereby made a part of this Deed of Trust to the same extent and with the same force as if fully set forth herein. 47 53 SECTION 11.05. AMENDMENTS. (a) This Deed of Trust, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of the Borrower or the Beneficiary, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. (b) Moreover, this Deed of Trust may not be modified, amended, waived, extended, changed, discharged or terminated unless (i) the Beneficiary has obtained the written consent of Bondholders who hold 66 2/3% of the principal balance of the Bonds or (ii) the amendment is designed (A) to correct or clarify the description of any property subject to the lien of the Deed of Trust, (B) to pledge additional property to the Beneficiary, (C) to add other covenants and agreements thereafter to be observed by the Borrower or to surrender any right or power reserved to or conferred on the Borrower by the Deed of Trust or other Loan Documents, (D) to cure any ambiguity, or to cure, correct or otherwise supplement any defective or inconsistent provision contained herein or in any other Loan Document (other than the Indenture), provided that such change does not adversely affect the interests of any Bondholder in any material respect, which shall be deemed to be the case upon receipt of written confirmation from the Rating Agency that such change will not adversely affect the then current ratings on the Bonds, (E) to evidence any succession and the assumption by any such successor of the respective covenants herein, or (F) in connection with any amendment of the Indenture or Servicing Agreement that is approved as provided therein. No amendment may be made that would impair the Servicer's, the Trustee's or the Beneficiary's rights hereunder without the consent of such party. SECTION 11.06. HEADINGS, ETC. The headings and captions of various paragraphs of this Deed of Trust are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. SECTION 11.07. ADDRESSES OF MORTGAGED PROPERTIES. The street addresses of the Mortgaged Properties are as set forth on Schedule D hereto. SECTION 11.08. WIRE TRANSFER. All payments of principal and interest and other amounts due under this Deed of Trust shall be paid to the Beneficiary by wire transfer of immediately available funds to such bank or place, or in such manner, as the Beneficiary may from time to time designate. SECTION 11.09. SEVERABILITY. In the event any one or more of the provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Deed of Trust, but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. The invalidity of any 48 54 provision of this Deed of Trust in any one jurisdiction shall not affect or impair in any manner the validity of such provision in any other jurisdiction. SECTION 11.10. COVENANTS TO RUN WITH THE LAND. All of the grants, covenants, terms, provisions and conditions in this Deed of Trust shall run with the Mortgaged Property and shall apply to, and bind the successors and assigns of the Borrower. Without limiting the generality of the foregoing, the Beneficiary may, at any time and from time to time without the consent of the Borrower, sell, assign, syndicate or otherwise transfer and/or dispose of all or any portion of its rights and remedies under this Deed of Trust and any other security instrument or document affecting the Mortgaged Property (including, without limitation, any assignment of leases and rents) to any other person or entity, either separately or together with other property of the Beneficiary for such purposes and on such terms as the Beneficiary shall elect, and such other person or entity shall thereupon become vested with all of the rights and obligations in respect thereof granted to the Beneficiary herein, therein or otherwise. Each representation and agreement made by the Borrower in this Deed of Trust and any other security instrument or document affecting the Mortgaged Property (including, without limitation, any assignment of leases and rents) shall be deemed to run to the Beneficiary and all of its successors and assigns. None of the rights or obligations of the Borrower hereunder may be assigned or otherwise transferred without the prior written consent of the Beneficiary. SECTION 11.11. TRUSTEE'S DUTIES. Trustee shall not be liable for any error of judgment or act done by Trustee, or be otherwise responsible or accountable under any circumstances whatsoever, except if the result of Trustee's gross negligence or willful misconduct. Trustee shall not be personally liable in case of entry by him or anyone acting by virtue of the powers herein granted him upon the Mortgaged Property for debts contracted or liability or damages or damages incurred in the management or operation of the Mortgaged Property. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by him hereunder or believed by him to be genuine. Trustee shall be entitled to reimbursement for actual expenses incurred by him in the performance of his duties hereunder and to reasonable compensation for such of his services hereunder as shall be rendered. The Borrower will, from time to time, reimburse Trustee for and save and hold him harmless from and against any and all loss, cost, liability, damage and expense whatsoever incurred by him in the performance of his duties. All monies received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other monies (except to the extent required by law) and Trustee shall be under no liability for interest on any monies received by him hereunder. Trustee may resign by giving of notice of such resignation in writing to the Beneficiary. If Trustee shall die, resign or become disqualified from acting in the execution of this trust or shall fail or refuse to exercise the same when requested by the Beneficiary or if for any or no reason and without cause the Beneficiary shall prefer to appoint a substitute trustee to act instead of the original Trustee named herein, or any prior successor or substitute trustee, the Beneficiary shall, without any formality or notice to the Borrower or any other person, have full power to appoint a substitute trustee and, if the Beneficiary so elects, several substitute trustees in succession who shall succeed to all the estate, rights, powers and 49 55 duties of the aforenamed Trustee. Any new Trustee appointed pursuant to any of the provisions hereof shall, without any further act, deed or conveyance, become vested with all the estates, properties, rights, powers and trusts of its or his predecessor in the rights hereunder with like effect as if originally named as Trustee herein; but, nevertheless, upon the written request of the Beneficiary or his successor trustee, Trustee ceasing to act shall execute and deliver an instrument transferring to such successor trustee, upon the trust herein expressed, all the estates, properties, rights, powers and trusts of Trustee so ceasing to act, and shall duly assign, transfer and deliver any of the property and monies held by Trustee to the successor trustee so appointed in its or his place. Trustee may authorize one or more parties to act on his behalf to perform the ministerial functions required of him hereunder, including without limitation, the transmittal and posting of any notices. SECTION 11.12. BUSINESS DAYS. In the event any time period or any date provided in this Deed of Trust ends or falls on a day other than a Business Day, then such time period shall be deemed to end and such date shall be deemed to fall on the next succeeding Business Day, and performance herein may be made on such Business Day, with the same force and effect as if made on such other day. SECTION 11.13. RELATIONSHIP. The relationship of the Beneficiary to the Borrower hereunder is strictly and solely that of the Borrower and the Beneficiary and nothing contained in the Bonds, this Deed of Trust or any other Loan 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 Beneficiary and the Borrower other than as mortgagor and the Beneficiary. SECTION 11.14. NO MERGER. The rights and estate created by this Deed of Trust shall not, under any circumstances, be held to have merged into any other estate or interest now owned or hereafter acquired by the Beneficiary unless the Beneficiary shall have consented to such merger in writing. 50 56 IN WITNESS WHEREOF, the Borrower has duly executed this Deed of Trust as of the day and year first above written. RFS FINANCING PARTNERSHIP L.P., a Tennessee limited partnership By: RFS FINANCING CORPORATION, a Tennessee corporation, its duly authorized general partner Signed and acknowledged in the presence of: By:______________________________ Name: Michael J. Pascal ________________________________ Title: Vice President Name: [SEAL] Post Office Address of Individual Signatory: ____________________________________________ ____________________________________________ ____________________________________________ 51 57 STATE OF _________________ ) ) ss: COUNTY OF ________________ ) On this_____ day of ____ , before me ________________________, a Notary Public in and for said County and State, personally appeared ______________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument he, or the entity upon behalf of which he acted, executed the instrument. ------------------------------------ Notary Public My Commission expires: __________________ 52 58 LIST OF SCHEDULE AND EXHIBITS Schedule A Description of Premises Schedule B Exceptions to Good Condition Schedule C Environmental Reports Schedule D Street Address of Mortgaged Properties Annex I Local Law Provisions 53 59 SCHEDULE A Description of Premises [LEGAL DESCRIPTION] 54 60 SCHEDULE D Street Addresses of the Mortgaged Properties 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 55 61 ANNEX I 56 EX-13.1 14 ANNUAL REPORT 1 EXHIBIT 13 The Company commenced operations in August 1993 upon completion of its initial public offering and the simultaneous acquisition of seven hotels with 1,118 rooms. The following chart summarizes information regarding the 53 hotels (the "Hotels") owned at December 31, 1996 through the Company's operating partnership, RFS Partnership, L.P., and its subsidiaries (collectively, the "Partnership").
Full Service Hotels: Holiday Inn . . . . . . . . . . . . . . . . . . . 6 . . . . . . 1,206 Doubletree . . . . . . . . . . . . . . . . . . . 1 . . . . . . . 220 Courtyard by Marriott . . . . . . . . . . . . . . 1 . . . . . . . 102 Independent . . . . . . . . . . . . . . . . . . . 1 . . . . . . . 115 Sub-total . . . . . . . . . . . . . . . . . . 9 . . . . . . 1,643 Extended Stay Hotels: Residence Inn by Marriott . . . . . . . . . . . 12 . . . . . . 1,575 Hawthorn Suites . . . . . . . . . . . . . . . . . 1 . . . . . . . 220 Homewood Suites . . . . . . . . . . . . . . . . . 1 . . . . . . . . 98 Sub-total . . . . . . . . . . . . . . . . . . 14 . . . . . . 1,893 Limited Service Hotels: Hampton Inn . . . . . . . . . . . . . . . . . . . 17 . . . . . . 2,203 Holiday Inn Express . . . . . . . . . . . . . . . 7 . . . . . . . 861 Comfort Inn . . . . . . . . . . . . . . . . . . 6 . . . . . . . 787 Sub-total . . . . . . . . . . . . . . . . . 30 . . . . . . 3,851 Total . . . . . . . . . . . . . . . . . . . . 53 . . . . . . 7,387
The Hotels are located in 23 states. Management believes it is prudent to diversify geographically and among franchise brands. To maintain the Company's federal income tax status as a REIT, neither the Company nor the Partnership can operate hotels. The Partnership leases the Hotels to wholly-owned subsidiaries of Doubletree Corporation, (collectively, the "Lessees") pursuant to leases (the "Percentage Leases") which provide for annual rent equal to the greater of (i) fixed base rent, or (ii) rent payments based on percentages of the Hotels' revenues. Base rent is payable monthly. Percentage rent is payable quarterly. The Lessees operate 49 Hotels. Three Hotels are operated by Alpha Inn Management Company and one by TMH, Inc. pursuant to management agreements between the RFS, Inc. and Alpha Inn Management Company and TMH, Inc. RFS, Inc. has a right of first refusal, subject to certain exceptions, to lease hotels acquired by the Partnership, through February 27, 2006. Comparison of the Year Ended December 31, 1996 to 1995 Increases in lease revenue for the year ended December 31, 1996 over 1995 are due to (i) an increased number of hotels being owned by the Partnership and leased to the Lessees during 1996, and (ii) increases in revenue per available room ("REVPAR") at the hotels owned throughout both periods. At December 31, 1994, the Partnership owned 41 hotels. The Partnership acquired or opened seven hotels during 1995 in the following months (the number of hotels is indicated in parenthesis following the date): January (1), March (1), April (1), August (1), October (3). Additionally, the Partnership acquired or opened hotels during 1996 as follows: January (1), May (1), July (1), November (2) and, December (1). One hotel was sold in March of 1996. The following table shows statistical data regarding the Hotels on an actual basis and a pro forma basis. The pro forma basis includes 47 of the 53 Hotels owned at December 31, 1996; the 6 hotels not included were opened or expanded since January 1, 1995.
Occupancy 76.2% 76.3% (0.1) 76.9% 76.9% -- ADR $69.13 $62.52 10.6 $69.88 $64.81 7.8 REVPAR $52.68 $47.73 10.4 $53.72 $49.86 7.7
Interest income results, in large part, from the temporary investment of the Company's cash. As cash was used principally to acquire hotels, interest income decreased in 1996 over 1995. Increases in real estate taxes and property taxes and casualty insurance and depreciation in 1996 over 1995 are due to the increased number of hotels owned by the Partnership during 1996 over 1995 and higher tax assessments. 8 2 Increases in amortization of franchise fees and unearned compensation are primarily due to increased amortization of unearned compensation as a result of a grant of restricted stock to the newly appointed president of the Company in the second quarter of 1996. Increases in compensation expense in 1996 over the same period in 1995 are primarily due to an increased number of employees in 1996 over 1995. Increased general and administrative expenses in 1996 over 1995 is due to increased professional fees and travel expenses, as well as the reversal of accruals during 1995 which management believed were needed at December 31, 1994. The increased costs in 1996 were primarily related to potential acquisitions, New York Stock Exchange Listing fees and the write-off of costs incurred to form a new REIT, Lodging Trust USA. The write-down of a hotel property of $.7 million in 1996 is a result of a contract to sell a hotel. The write-down adjusts the carrying value of the hotel to the estimated net proceeds expected from the sale. Interest expense increased in 1996 over 1995 as a result of increased borrowings under the Credit Line to fund the purchase of hotels, interest associated with the issuance of bonds payable and the assumption of a promissory note payable in connection with the purchase of a hotel during the fourth quarter of 1995. Comparison of the Year Ended December 31, 1995 to 1994. Increases in lease revenue for the year ended December 31, 1995 over 1994 are due to (i) an increased number of hotels being owned by the Partnership throughout 1995 and, (ii) increases in REVPAR at the hotels owned throughout both periods. At December 31, 1994, the Partnership owned 41 hotels. The Partnership acquired seven hotels during 1995 on the following dates: January 4, 1995, March 15, 1995, April 20, 1995, August 8, 1995, October 2, 1995, October 5, 1995, October 18, 1995. The following table shows statistical data regarding the hotels on an actual and a pro forma basis; the pro forma information assumes the 48 hotels owned at December 31, 1995 were owned from January 1, 1994:
Occupancy 76.3% 75.0% 1.8 76.2% 75.1% 1.5 ADR $62.52 $55.17 13.3 $62.06 $58.87 5.4 REVPAR $47.73 $41.38 15.3 $47.32 $44.21 7.0
Interest income results, in large part, from the temporary investment of a portion of the net proceeds from the Company's public offerings. As proceeds were used to acquire hotels, interest income decreased in 1995 over 1994. Increases in real estate taxes and insurance and depreciation and amortization expenses in 1995 over 1994 are due primarily to the increased number of hotels owned by the Partnership throughout 1995 and higher real estate tax assessments at certain Hotels. An accrual was made in the first six months of 1995 to provide for potential increases in real estate taxes as a result of re-valuations by local authorities. Management believes that, as of December 31, 1995, adequate provisions for such potential increases have been made. Increases in compensation expense in 1995 over 1994 are due to an increased number of employees in 1995 over 1994, bonuses and, effective January 1, 1995, 10% salary increases for the three executive officers of the Company. Decreases in franchise tax expense in 1995 over 1994 are due to changes in the estimated franchise tax expense for 1995 resulting from structural changes in the Company. Franchise tax expense for 1995 represents accruals for estimated 1995 franchise taxes. Franchise tax expense for 1994 represents accruals for estimated 1994 franchise taxes plus $40,000 of payments made in 1994 for 1993 franchise taxes. General and administrative expenses in 1995 decreased as compared to 1994 due to decreases in other professional services and legal and accounting fees. In 1994, the Company accrued for estimated costs associated with a potential restructuring which ultimately did not occur. Overaccruals for these estimated costs were reversed during 1995. Additionally, approximately $.2 million of deferred loan costs associated with the Company's $10 million line of credit were written off in 1994 when the Company obtained its $50 million line of credit. These decreases were partially offset by a ground lease the Partnership entered into in connection with the acquisition of a hotel. This expense was $.2 million in 1995. Interest expense increased in 1995 over 1994 as a result of increased borrowings during 1995 on the Credit Line and the assumption of a promissory note payable in connection with the purchase of a hotel during the fourth quarter of 1995. 9 3 The Company has a $75 million line of credit (the "Credit Line") which expires on September 8, 1998. The Credit Line may be used to fund working capital requirements and to fund investments in hotel properties. Borrowings under the Credit Line bear interest at the 90-day LIBOR rate (5.625% at December 31, 1996) plus 1.75%. The Credit Line is secured by a first mortgage on 27 hotels (the "Collateral Pool") with a net book value of $183.0 million at December 31, 1996. The Credit Line contains various covenants, including maintenance of debt coverage ratios, as defined, on all debt and all hotels of 3.0:1 and on the Credit Line and Collateral Pool of 1.75:1. The Company must also maintain a minimum net worth in an amount equal to the net worth in its most recent year-end audited financial statements and a minimum operating income, as defined, from the Collateral Pool of approximately $26.3 million. The Company had outstanding borrowings of $50.0 million on the Credit Line at December 31, 1996. The Company is in the process of increasing the Credit Line to $150 million. The Credit Line contains a term loan option which allows the Company to convert the principal balance outstanding on September 8, 1998, not to exceed $75 million, to a term loan (the "Term Loan"). The Term Loan would bear interest at a fixed rate equal to the 5-year U.S. Treasury Bond yield plus 2-1/2% or a variable rate equal to the lender's floating corporate base rate plus 1%. The Term Loan would be payable over 5 years in 59 equal monthly installments of principal plus interest, given a 10 year amortization, plus a sixtieth payment of remaining principal plus interest. The Company, through a subsidiary, issued $75 million of commercial mortgage bonds, (the "Bonds") series 1996-1 as follows:
Class A $50 Million 6.83% August 20, 2008 Class B $25 Million 7.30% November 21, 2011
Principal payments on the Class A Bonds are payable based on a 141-month amortization schedule beginning in December 1996; principal payments on the Class B Bonds are payable based on a 39-month amortization schedule beginning in September 2008. The total monthly principal and interest payments approximate $.7 million. In connection with the purchase of a hotel in Fishkill, NY, the Partnership assumed approximately $2.4 million of indebtedness pursuant to industrial development bonds, (the "IDB's") issued in 1988 and which are due December 1, 2002. The IDB's bear interest at a variable rate which, as of December 31, 1996, was approximately three and one-half percent (3.5%) per annum. Principal is payable in installments of $.6 million every three years with the next installment due in 1997. In connection with the purchase of a hotel in Atlanta, GA, the Partnership assumed a promissory note payable with a principal balance of approximately $5.9 million. The promissory note bears interest at 10.15% and is due in monthly principal and interest installments of $53,000. The note is due July 1, 1998 and contains a severe prepayment premium. On February 27, 1996, the Company issued 973,684 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $18.5 million. On January 2, 1997, the Partnership consummated the acquisition of 4 Sheraton Hotels in California for an aggregate purchase price of approximately $91 million. The purchase price was paid with funds from the Credit Line and the issuance of 2,244,934 units of limited partnership interest in the Partnership. The Company budgeted $12.1 million for capital improvements in 1996 at the 53 hotels owned at December 31, 1996. At December 31, 1996, the Partnership had spent approximately $11.0 million of the budgeted amounts. The Company will use cash generated from operations to fund the remaining $1.1 million of expenditures. The Company intends to substantially complete these improvements by the second quarter of 1997. Additionally, the Company has budgeted approximately $13.8 million in 1997 for capital improvements at 52 Hotels owned at December 31, 1996. This does not include one Hotel at which extensive renovations are being contemplated. The Partnership is developing the following hotels:
Residence Inn Jacksonville, FL 120 $8.3 million Courtyard Crystal Lake, IL 90 $6.0 million Homewood Suites Chandler, Az 83 $6.4 million Homewood Suites Plano, TX 99 $8.2 million Hampton Inn Chandler, Az 101 $5.3 million Hampton Inn Sedona, AZ 56 $5.7 million
10 4 Completion of these hotels is expected by the end of 1997. Additionally, the Partnership plans to construct a 42-suite addition to the Residence Inn in Ann Arbor, MI. Construction costs are estimated at $3.7 million. Completion of the addition is expected in the second quarter of 1997. In addition to purchasing existing hotel properties at targeted rates of return, management anticipates that the Company will both develop additional hotels and enter into contracts to acquire hotels from third parties after development. It is expected that future investments in hotel properties will be financed, in whole or in part, with cash generated from operations, short-term investments, proceeds from additional issuances of Common Stock, borrowings under the Credit Line or other securities or borrowings. The Company in the future may seek to increase further the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. In June 1996, the Company's shareholders approved an amendment to the Company's charter to delete the charter limitation on indebtedness. Although the Company no longer has any charter restrictions on the amount of indebtedness the Company may incur, the Board of Directors of the Company has adopted a policy limiting the amount of indebtedness that the Company will incur to an amount not in excess of approximately 40% of the Company's investment in hotel properties, at cost, after giving effect to the Company's use of proceeds from any indebtedness and accounting for all investments in hotel properties under the purchase method of accounting. Any debt incurred or issued by the Company may be secured or unsecured, long-term or short-term, may charge a fixed or variable interest rate and may be subject to such other terms as the Board of Directors of the Company in its discretion, may approve. The Company has filed a Shelf Registration Statement on Form S-3 (the "Shelf") with the Securities and Exchange Commission for the issuance from time to time of preferred stock, common stock and depositary shares representing entitlement to all rights and preferences of a fraction of a share of preferred stock of a specified series ("Depositary Shares") in the aggregate amount of up to $250 million. The Shelf became effective July 30, 1996. The Company intends to fund cash distributions to shareholders principally out of cash generated from operations. The Company may incur, or cause the Partnership to incur, indebtedness to meet distribution requirements imposed on a REIT under the Code (including the requirement that a REIT distribute to its shareholders annually at least 95% of its taxable income) to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions. In 1996, the Partnership has, through December 31, 1996, made cash distributions to its partners, including the Company, of $34.3 million or $1.39 per Partnership unit, from which the Company made cash distributions to common shareholders of $33.9 million, or $1.39 per share. The Company also made cash distributions to the preferred shareholder of $.8 million, or $0.86 per share which represents the pro rata quarterly distribution from February 27, 1996 (date of issuance) through December 31, 1996. The Company and the Partnership utilized available cash to fund such distributions. The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy during the second and third quarters. This seasonality can be expected to cause fluctuations in the Partnership's quarterly lease revenue to the extent that it receives Percentage Rent. Operators of hotels generally posses the ability to adjust room rates quickly. However, competitive pressures have limited, and may in the future, limit the ability of the hotels' operators to raise rates in the face of inflation. Industry-wide ADR generally failed to keep pace with inflation from 1987 through 1993. The National Association of Real Estate Investment Trusts has adopted a new definition of funds from operations ("FFO"). Under the new definition, FFO consists of net income excluding gains (or losses) from debt restructuring or sales of properties, plus depreciation of real property and after adjustments for unconsolidated partnerships and joint ventures. Under this new definition, the Company's FFO is computed as follows:
Income before minority interest $35,087 $31,085 Add depreciation 10,919 8,578 Add loss on sale and write-down of hotel properties 912 -- Less preferred dividend (1,195) -- FFO $45,723 $39,663 Weighted average shares and partnership units outstanding 24,677 24,620 FFO per share $ 1.85 $ 1.61
11 5
(in thousands, except per share data) for the years ended December 31, Revenue: Leases $61,594 $47,249 $21,666 Interest 392 1,058 1,688 Total revenue 61,986 48,307 23,354 Expenses: Real estate taxes and property and casualty insurance 6,289 5,019 2,201 Depreciation 10,919 8,578 3,758 Amortization of franchise fees and unearned compensation 760 536 381 Compensation 2,120 936 391 Franchise taxes 260 283 542 General and administrative 2,037 968 1,588 Loss on sale of hotel property 244 Write-down of a hotel property 668 Amortization of loan costs 398 310 117 Interest expense, net 3,204 592 25 Total expenses 26,899 17,222 9,003 Income before minority interest 35,087 31,085 14,351 Minority interest 500 439 195 Net income 34,587 30,646 14,156 Preferred stock dividends 1,195 Net income applicable to common shareholders $33,392 $30,646 $14,156 Net income per common and common equivalent share $1.37 $1.26 $0.94 Weighted average shares and partnership units outstanding 24,677 24,620 15,348 The accompanying notes are an integral part of these consolidated financial statements.
12 6
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share and per share data) Balances at December 31, 1993 7,494,000 $75 $78,106 $765 ($139) $78,807 Issuance of common stock, 16,670,000 167 256,245 256,412 net of offering expenses Issuance of restricted common 130,000 1 1,993 (1,994) stock to officers and directors Distributions on common shares, (13,790) (13,790) ($0.97 per share) Amortization of unearned 308 308 compensation Net Income 14,156 14,156 Balances at December 31, 1994 24,294,000 243 336,344 1,131 (1,825) 335,893 Distributions on common shares ($1.18 per share) (28,666) (28,666) Allocation from minority interest 513 513 Amortization of unearned compensation 427 427 Net Income 30,646 30,646 Balances at December 31, 1995 24,294,000 243 336,857 3,111 (1,398) 338,813 Issuance of preferred stock, net of expenses of $357 973,684 10 18,133 18,143 Issuance of restricted common stock to officers and directors 90,000 1 1,558 (1,559) 0 Distributions on common shares, ($1.39 per share) (33,854) (33,854) Distributions on Preferred shares, ($0.86 per share) (839) (839) Amortization of unearned compensation 632 632 Net Income 34,587 34,587 Balances at December 31, 1996 973,684 $10 24,384,000 $244 $356,548 $3,005 ($2,325) $357,482 The accompanying notes are an integral part of these consolidated financial statements.
13 7
(in thousands, except share data) as of December 31, Investment in Hotel Properties, net $415,618 $363,014 Hotels under development 7,325 1,083 Cash and cash equivalents 57,935 2,680 Accounts receivable-Lessees 7,187 5,795 Deferred expenses, net 3,598 1,579 Prepaid and other assets 1,402 574 Escrow deposits 6,064 2,201 $499,129 $376,926 Accounts payable and accrued expenses $ 2,258 $ 1,758 Accrued real estate taxes 1,774 1,660 Borrowings on line of credit 50,000 21,850 Bonds 74,769 Other debt 8,295 8,336 Minority interest 4,551 4,509 141,647 38,113 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, 973,684 shares outstanding at December 31, 1996 10 Common stock, $.01 par value, 100,000,000 shares authorized, 24,384,000 and 24,294,000 shares outstanding at December 31, 1996 and December 31, 1995 respectively 244 243 Paid-in capital 356,548 336,857 Undistributed income 3,005 3,111 Unearned directors' and officers' compensation (2,325) (1,398) Total shareholders' equity 357,482 338,813 $499,129 $376,926 The accompanying notes are an integral part of these consolidated financial statements.
14 8
(in thousands, except share unit and per share data) for the years ended December 31, Cash flows from operating activities: Net income $34,587 $30,646 $14,156 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,077 9,424 4,256 Income allocated to minority interest 500 439 195 Loss on sale and write-down of hotel properties 912 Changes in assets and liabilities: Accounts receivable-Lessees (1,414) (1,898) (3,351) Prepaids and other assets (828) 206 (542) Accounts payable and other liabilities 614 79 2,607 Net cash provided by operating activities 46,448 38,896 17,321 Cash flows from investing activities: Investment in hotel properties and hotels under development (73,356) (71,248) (241,992) Proceeds from sale of hotel property 3,891 Escrow deposits and prepayments under purchase agreements (5,053) (2,201) (1,002) Cash paid for franchise agreements (579) (411) Sale of short-term investments 8,109 Net cash used by investing activities (74,518) (74,028) (235,296) Cash flows from financing activities: Net proceeds from sale of common stock 256,412 Net proceeds from sale of preferred stock 18,143 Proceeds from issuance of bonds 75,000 Distributions to common and preferred shareholders (34,693) (28,666) (13,790) Distributions to limited partners (458) (510) (58) Borrowings under revolving credit agreement 92,750 21,850 Payments on revolving credit agreement (64,600) Payments on debt and bonds (272) Redemption of shares/units (125) (18) Loan fees paid (2,545) (387) (250) Net cash provided (used) by financing activities 83,325 (7,838) 242,296 Net increase (decrease) in cash and cash equivalents 55,255 (42,970) 24,321 Cash and cash equivalents at beginning of year 2,680 45,650 21,329 Cash and cash equivalents at ending of year $57,935 $2,680 $45,650 Supplemental disclosures of cash flow information: Cash paid for interest $3,820 $450 $24 Supplemental disclosures of non-cash investing and financing activities: In 1996, the Company issued 90,000 shares of Restricted Common Stock, which at date of issuance, were valued from $15 5/8 to $17 5/8 per share. In 1996, the Partnership applied deposits of $1,190 toward the purchase of aquired hotels and land. In 1995, the Company recorded a $513 allocation to paid-in capital from minority interest. In 1995, the Partnership assumed a note payable of $5,916 in connection with the purchase of a hotel. In 1995, the Partnership applied a deposit of $1,002 toward the purchase of an acquired hotel. In 1994, the Company issued an additional 5,000 shares of Restricted Common Stock to an independent director, which, at the date of issuance, were valued at $14.50 per share. In 1994, the Partnership applied a deposit of $250 toward the purchase of an acquired hotel. In 1994, the Company issued 125,000 shares of Restricted Common Stock to its officers and directors at prices of $13 1/2 and $16 5/8. In 1994, the Partnership issued 223,567 limited partnership units valued at $3,884 in connection with the purchase of two hotels. In 1994, the Partnership assumed $2,420 of Industrial Development Bonds indebtedness in connection with the purchase of a hotel. The accompanying notes are an integral part of these consolidated financial statements.
15 9 RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee on June 1, 1993 and is a self-administered real estate investment trust ("REIT"). The Company contributed substantially all of the net proceeds of its public offerings to RFS Partnership, L.P. (the "Partnership") in exchange for the sole general partnership interest in the Partnership. The Partnership began operations in August 1993. At December 31, 1996, and 1995, the Company owned approximately 98.7% of the Partnership. RFS Managers, Inc. ("Managers") a wholly-owned subsidiary of the Company, was formed effective January 1, 1995 to provide management services to the Company. During 1996, RFS Financing Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single purpose Tennessee limited partnership, was formed to issue commercial mortgage bonds (the "Bonds"). The Company, through its subsidiary partnerships, acquires or develops and owns hotel properties. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Hotel properties are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets of 40 years for buildings and improvements and 5 to 7 years for furniture and equipment. Upon disposition, both the asset and accumulated depreciation accounts are relieved and the related gain or loss is credited or charged to the income statement. Major renewals, betterments and improvements are capitalized. At each reporting period, the Company reviews the carrying value of each hotel property, for which management has not committed to a plan of disposition, to determine if facts and circumstances exist which would suggest that the investment in the hotel property may be impaired or that the depreciation period should be modified. The Company does not believe that there are any current facts or circumstances indicating any material impairment of any hotel property for which management has not committed to a plan of disposition at December 31, 1996. For hotel properties for which management has committed to a plan of disposition, the Company adjusts the carrying value to the lower of carrying value or fair value less costs of disposition. During 1996, the Company contracted to sell a hotel property and has adjusted the carrying amount to the estimated net proceeds expected from the sale. All highly liquid investments with the maturity of three months or less when purchased are considered to be cash equivalents. The Company invests portions of its excess cash in money market funds. Deferred expenses consist of initial fees paid to franchisors, annual loan fees and costs incurred in issuing the Bonds, and are recorded at cost. Amortization of franchise fees is computed using the straight-line method over the lives of the franchise agreements which range from 10 to 15 years. Amortization of annual loan fees is computed using the straight-line method over 12 months. Amortization of the costs incurred in issuing the Bonds is computed using the interest method over the stated maturity of the Bonds. Accumulated amortization of the deferred expenses is $1.1 million and $.6 million at December 31, 1996 and 1995 respectively. The Partnership leases the hotels to RFS, Inc., and other wholly-owned subsidiaries of Doubletree Corporation, (collectively, the "Lessees"), pursuant to lease agreements The Percentage Leases provide for the payment of rent equal to the greater of (i) fixed base rent or (ii) percentage rent based on a percentage of gross room revenue, beverage revenue and food revenue at the hotels. Lease revenue is recognized as earned from the Lessee under the Percentage Leases from the date of acquisition. Relevant lease dates, with the number of properties acquired indicated in parentheses, are as follows: February 1994 (1), April 1994 (3), June 1994 (16), August 1994 (3), September 1994 (1), October 1994 (5), November 1994 (1), December 1994 (1), January 1995 (1), March 1995 (1), April 1995 (1), August 1995 (1), October 1995 (3), January 1996 (1), May 1996 (1), July 1996 (1), November 1996 (2), December 1996 (1). Minority interest in the Partnership represents the limited partners proportionate share of the equity in the Partnership. Income is allocated to minority interests based on the weighted average percentage ownership throughout the year. Net income per common share is computed by dividing net income before minority interest less preferred dividends by the weighted average number of shares of common stock and common stock equivalents outstanding for the reporting period. Limited partnership interests in the Partnership and Options are considered common stock equivalents. The Company has qualified as a Real Estate Investments Trust ("REIT") under Sections 856 to 860 of the Internal Revenue Code. Accordingly, no provision for federal income taxes has been reflected in the consolidated financial statements. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from net 16 10 income reported for financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives used to compute depreciation and in the recognition of unearned compensation to officers and directors. Distributions made in 1996, 1995, and 1994 were considered 100% ordinary income for federal income tax purposes. The Company intends to pay regular quarterly distributions which are dependent upon receipt of distributions from the Partnership in order to maintain its REIT status under the Internal Revenue Code. The Company places cash deposits at financial institutions. At December 31, 1996, bank account balances exceeded federal depository insurance limits by $58.3 million. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications to conform to the 1996 presentation have been made in the 1995 and 1994 consolidated financial statements with no effect on previously reported total assets, total shareholders' equity or net income. The investment in hotel properties consists of the following at December 31, 1996, and 1995, respectively (in thousands):
Land $ 50,265 $ 43,694 Building and improvements 351,889 305,833 Furniture and equipment 24,736 13,799 Capital improvements program expenditures 11,999 12,365 438,889 375,691 Less accumulated depreciation 23,271 12,677 $415,618 $363,014
Capitalized interest in 1996 was $.5 million. At December 31, 1996, the Company owned 53 hotel properties in 23 states. Fifty-two of the hotels are affiliated with national franchises. The Company has a $75 million line of credit (the "Credit Line") which expires on September 8, 1998. The Credit Line may be used for working capital and future investments in hotel properties. Borrowings under the Credit Line bear interest at the 90-day LIBOR rate (5.625% at December 31, 1996), plus 1.75%. The Credit Line is collateralized by a first mortgage on 27 hotels (the "Collateral Pool") with a net book value of approximately $183.0 million at December 31, 1996. The Credit Line contains various covenants, including maintenance of debt coverage ratios, as defined, on all debt and all hotels of 3.0:1 and on the Credit Line and Collateral Pool of 1.75:1. The Company must also maintain a minimum net worth in an amount equal to the net worth in its most recent year-end audited financial statements and a minimum operating income, as defined, from the Collateral Pool of $26.3 million. The Company was in compliance with these covenants at December 31, 1996. The Company had borrowed $50 million on the Credit Line as of December 31, 1996. The Credit Line contains a term loan option which allows the Company to convert the principal balance outstanding on September 8, 1998, not to exceed $75 million, to a term loan (the "Term Loan"). The Term Loan would bear interest at a fixed rate equal to the 5-year U.S. Treasury Bond yield, plus 21/2% or a variable rate equal to the lender's floating corporate base rate plus 1%. The Term Loan would be payable over 5 years in 59 equal monthly installments of principal plus interest, given a 10 year amortization, plus a sixtieth payment of remaining principal plus interest. In November, 1996, the Financing Partnership issued $75 million of commercial mortgage bonds, series 1996-1 as follows: Class A $50 Million 6.83% August 20, 2008 Class B $25 Million 7.30% November 21, 2011 17 11 Principal payments on the Class A Bonds are based on a 141-month amortization schedule beginning in December 1996; principal payments on the Class B Bonds are payable based on a 39-month amortization schedule beginning in September 2008. Total monthly principal and interest payments approximate $.7 million. Aggregate annual principal payments for the next five years at December 31, 1996 for the Bonds are as follows (in thousands):
1997 $ 2,877 1998 3,082 1999 3,302 2000 3,537 2001 3,790
The Bonds are collateralized by first priority mortgage liens on 15 hotel properties with an aggregate net book value of $136.6 million at December 31, 1996. The Bonds cannot be prepaid for five years, and thereafter, only upon payment of a yield maintenance premium. In connection with the purchase of a hotel in Fishkill, NY, the Partnership assumed approximately $2.4 million of industrial development bonds, ("IDB's"), issued in 1988 and which are due December 1, 2002. The IDB's bear interest at a variable rate which, as of December 31, 1996, was approximately three and one-half percent (3.5%) per annum. Interest is payable quarterly; principal is payable in installments of $.6 million every three (3) years with the next installment due in 1997. The Fishkill hotel is collateral for the IDB's and has a net book value of $12.7 million at December 31, 1996. In connection with a purchase of a hotel in Atlanta, GA, the Partnership assumed a promissory note payable with a principal balance of $5.9 million. The promissory note bears interest at 10.15% and is due in monthly principal and interest installments of $53,000. The note is due July 1, 1998 and contains a severe prepayment premium. A Residence Inn in Atlanta is collateral for the note and has a net book value of $11.8 million at December 31, 1996. Aggregate annual principal payments for the next five years at December 31, 1996 for the above long-term debt are as follows (in thousands):
1997 $ 646 1998 5,829 1999 -- 2000 600 2001 --
The Company has entered into master agreements with the Lessees. The master agreements require the Lessees to maintain a certain net worth, as defined, grants RFS, Inc. a ten-year right to lease hotel properties acquired or developed by the Partnership or the Company, subject to certain exceptions, and restricts, for a period of time, changes in control of the Lessees, among other items. The Company must rely on the Lessees to generate sufficient cash flow from the operation of the hotel properties to enable the Lessees to meet rent obligations under the Percentage Leases. The rent obligations under the Percentage Leases are unsecured and are not guaranteed by Doubletree. At December 31, 1996, the Lessees are in compliance with the provisions of the master agreement and the Percentage Leases. Both the base rent and the percentage rent threshold room revenue in each lease computation are subject to adjustments for changes in the Consumer Price Index ("CPI"). The adjustment is made for all leases entered into after December 31, 1993 and is calculated at the beginning of each calendar year following the year of acquisition. Effective January 1, 1996, adjustments to the leases were computed using the average CPI increase for 1995 of 2.8%. In 1996, 1995, and 1994, the Company earned base rents of $25.9 million, $22.0 million and $10.7 million, respectively, and percentage rents in excess of the base rents, of $35.7 million, $25.3 million and $11.0 million, respectively. Under the Percentage Leases, the Partnership is obligated to pay the costs of real estate taxes, property insurance, maintenance of underground utilities and structural elements of the hotel properties, and for the periodic replace- 18 12 ment or refurbishment of furniture, fixtures and equipment required for the retention of the franchise licenses with respect to the hotel properties. The Company has future lease commitments under the various Percentage Leases from the Lessees for various terms extending through 2015. Minimum future rental income under these Percentage Leases for the next five (5) years is $34.3 million per year. Aggregate future minimum rental income under these Percentage Leases is $347.1 million at December 31, 1996. The Partnership is developing the following hotels:
Residence Inn Jacksonville, FL 120 $8.3 Million Courtyard Crystal Lake, IL 90 $6.0 Million Homewood Suites Chandler, AZ 83 $6.4 Million Homewood Suites Plano, TX 99 $8.0 Million Hampton Inn Chandler, AZ 101 $5.2 Million Hampton Inn Sedona, AZ 56 $5.5 Million
Completion of the above hotels is expected during 1997. Additionally, the Partnership plans to construct a 42-suite addition to the Residence Inn in Ann Arbor, MI. Construction costs are estimated at $3.3 million. Completion of the addition is expected in the second quarter of 1997. At December 31, 1996, the Company intends to spend, in 1997, a remaining $1.1 million to complete the 1996 capital improvement programs with respect to the Hotels. The Board of Directors is authorized to provide for the issuance of shares of Preferred Stock in one or more series, to establish the number of shares in each series and to fix the designation, powers, preferences and rights of each such series and the qualifications, limitations or restrictions thereof. The Company has issued to one of the Lessees 973,684 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock has an initial preference value of $19.00 per share (the "Stated Value"), a par value of $0.01, and is senior to the Company's common stock as to dividends and upon liquidation of the Company. The shares of Series A Preferred Stock are entitled to a $1.45 cumulative annual dividend per share. Each share of Series A Preferred Stock has one vote and is convertible into one share of common stock after the seventh anniversary of issuance. The shares of Series A Preferred Stock have mandatory redemption rights upon the occurrence of certain events which are under the Company's control. The Company can redeem the Series A Preferred Stock after the seventh anniversary of issuance at the Stated Value, together with all accrued and unpaid dividends. Pursuant to the Partnership Agreement, holders of units of limited partnership interests in the Partnership have certain rights ("Redemption Rights") which enable them to cause the Partnership to redeem their units of limited partnership interest in the Partnership for cash, or, at the Company's option, for shares of Common Stock on a one-for-one basis. At December 31, 1996, an aggregate of 324,675 shares are issuable upon exercise of Redemption Rights. The units of limited partnership interests were valued at the fair market value of Common Stock on the date of issuance of the units. In 1995 and 1994, 8,626 and 1,437 limited partnership units were redeemed for approximately $125,000 and $18,000 in cash, respectively. The number of shares issuable upon exercise of the Redemption Rights will be adjusted upon the occurrence of stocks splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners. The Company's Amended and Restated 1993 Restricted Stock and Stock Option Plan (the "Plan") provides for the grant of stock options to purchase a specified number of shares of Common Stock ("Options") or grants of Restricted Shares of Common Stock ("Restricted Stock"). The Plan is administered as two separate plans, with 1,600,000 shares of Common Stock, of which 250,000 shares may be Restricted Stock, being available for awards to the officers and key employees of the Company and its subsidiaries and affiliates and 400,000 shares, of which 50,000 shares may be Restricted Stock, being available for awards to Directors of the Company who are not officers or employees. The Company may grant incentive stock options ("ISO's"), non-qualified stock options or both to purchase the Company's Common Stock. Under the Plan, the exercise price of an ISO may not be less than 100% of the fair market value of the common shares at the date of grant, and must be at least 110% of the fair market value at the date grant if the grantee possesses more than 10% of the voting power of the outstanding stock. Options issued under the plan have a maximum term of ten years from the date of grant. The exercise price of the options shall be determined on the date of each grant. 19 13 The following table summarizes the option activity under the Plan:
Shares under options at beginning of year 525,000 500,000 175,000 Granted 250,000 25,000 325,000 Exercised -- -- -- Lapsed -- -- -- Terminated -- -- -- Shares under option at end of year 775,000 525,000 500,000 Shares under option exercisable at end of year 240,000 135,000 35,000 Price range of shares under option at end of year 13.50-17.00 13.50-16.625 13.50-16.625 Options available for future grant 925,000 345,000 370,000
Also, under the Plan, the Company granted 90,000 and 125,000 shares of Restricted Stock in 1996 and 1994, respectively subject to vesting. At December 31, 1996, 60,000 shares were vested. The Company has also granted 20,000 shares of Restricted Stock at prices ranging from $10.00 to $14.50 per share subject to vesting. These grants were not granted under the Plan. At December 31, 1996, 11,000 shares were vested. Options and Restricted Stock shares vest at 20% per year. Prior to vesting, holders of the Restricted Stock are entitled to vote and receive distributions with respect to unvested shares. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The carrying amount approximates fair value because of the short majority of those instruments. The carrying amount approximates fair value due to the Company's ability to obtain such borrowings at comparable interest rates. The fair value of the Company's Bonds and other debt is based on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's financial instruments at December 31, 1996 are as follows (in thousands):
Cash and cash equivalents $57,935 $57,935 Borrowing on Line of Credit 50,000 50,000 Bonds and Other Debt 83,064 82,969
The Company applies APB Opinion No. 25 and related Interpretations in accounting for The Plan. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of the expense recognition provisions of SFAS 123 is optional; however, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 in 1995 are presented below. The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend of $1.44, (2) expected volatility of .24, (3) risk- free interest rate of 6.94%, and (4) expected life of 10 years. 20 14 Had compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income, and net income per common share for 1996 and 1995 would approximate the pro forma amounts below:
Net Income $34.6 Million $34.5 $30.6 Million $30.6 Net Income per common and common equivalent share $ 1.37 $1.37 $ 1.26 $1.26
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. The unaudited pro forma condensed statements of operations of the Company are presented as if the acquisition of the 53 hotel properties which are owned at December 31, 1996 had occurred on January 1, 1995. These unaudited pro forma condensed statements of operations are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1995, nor does it purport to represent the results of operations for future periods.
Operating Data: (in thousands) Total Revenue $71,582 $63,741 Real estate taxes and property casualty and insurance 7,397 7,217 Depreciation and amortization 15,045 14,755 Compensation 2,120 936 Franchise taxes 260 283 General and administrative 2,037 968 Loss on sale of hotel property 244 -- Write-down of a hotel property 668 -- Interest expense 7,403 7,403 Income before minority interest 36,408 32,179 Minority Interest 3,459 3,057 Net Income $32,949 $29,122 Net Income and common equivalent per common share $ 1.31 $ 1.19 Weighted average shares and partnership units outstanding 26,954 26,954
In January 1997, the Partnership consummated the acquisition of 4 Sheraton Hotels in California for an aggregate purchase price of approximately $91 million. The purchase price was paid with funds from the Credit Line and the issuance of units of limited partnership interest in the Partnership. On January 22, 1997, the Company declared a $0.36 cash distribution on each share of Common Stock outstanding on February 3, 1997. The dividend was paid on February 17, 1997. 21 15 To the Board of Directors and Shareholders RFS Hotel Investors, Inc. We have audited the accompanying consolidated balance sheets of RFS Hotel Investors, Inc. as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company'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 the audits 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 consolidated financial position of RFS Hotel Investors, Inc. as of December 31, 1996 and 1995 and the consolidated results of their cash flows for each of three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Memphis, Tennessee January 22, 1997 16
(unaudited) (in thousands, except share data) Lease Revenue $61,594 $47,249 $21,666 $1,907 Hotels' total revenue $11,668 $19,596 Income before interest depreciation and amortization 50,368 41,101 18,632 1,608 2,020 3,136 Income (loss) before minority interest or extraordinary gain 35,087 31,085 14,351 1,236 (911) (1,329) Net income (loss) 34,587 30,646 14,156 1,208 (911) (1,060) Net income per share 1.37 1.26 0.94 0.25 n/a n/a Total assets 499,129 376,926 346,870 80,754 n/a n/a Total debt 133,064 30,186 2,420 0 n/a 23,772 (1) Information for the initial Hotels relates to periods prior to August 13, 1993, the date of acquisition of the initial Hotels by the Company. Under the rules and regulations of the Securities and Exchange Commission, the initial Hotels are deemed to be a predecessor to the Company. Information since August 13, 1993 is for the Company. (unaudited) (in thousands, except share data) 1996: Revenue $13,337 $16,174 $18,342 $14,135 $61,986 Income before minority interest 7,344 9,987 11,553 6,203 35,087 Net income 7,236 9,850 11,392 6,109 34,587 Earnings per share 0.29 0.39 0.45 0.24 1.37 Dividends paid 0.33 0.34 0.36 0.36 1.39 FFO per share (1) 0.40 0.50 0.57 0.38 1.85 1995: Revenue $10,366 $12,369 $13,763 $11,809 $48,307 Income before minority interest 6,081 8,713 9,640 6,651 31,085 Net income 5,898 8,602 9,513 6,542 30,646 Earnings per share 0.25 0.35 0.39 0.38 1.26 Dividends paid 0.28 0.29 0.30 0.31 1.18 FFO per share (1) 0.33 0.44 0.48 0.37 1.61 1994: Revenue $2,206 $4,056 $8,063 $9,209 $23,354 Income before minority interest 1,463 2,695 5,078 5,115 14,351 Net income 1,437 2,680 4,996 5,043 14,156 Earnings per share 0.19 0.22 0.31 0.21 0.94 Dividends paid 0.23 0.24 0.24 0.26 0.97 FFO per share (1) 0.23 0.26 0.38 0.28 1.18 (1) The National Association of Real Estate Investment Trusts has adopted a new definition of funds from operations (FF0). Under the definition, FFO represents net income excluding gains (or losses) from debt restructuring or sales of properties, plus depreciation of real property and after adjustments for unconsolidated partnerships and joint ventures.
EX-21.1 15 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT State of Name Incorporation - - ---- ------------- RFS Partnership, L.P. Tennessee RFS Managers, Inc. Tennessee RFS Financing Corporation Tennessee RFS Financing Partnership, L.P. Tennessee EX-23.1 16 CONSENT OF COOPERS & LYBRAND 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of RFS Hotel Investors, Inc. on Form S-3 (file no. 3333-03307) and on Form S-8 (file no. 333-19411) of our report dated January 22, 1997, on our audits of the consolidated financial statements of RFS Hotel Investors, Inc. as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, and our report dated January 22, 1997 on our audit of the financial statement schedule of RFS Hotel Investors, Inc. as of December 31, 1996, which reports are included in, or incorporated by reference, in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Memphis, Tennessee March 24, 1997 EX-23.2 17 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23.2 [KPMG PEAT MARWICK LLP LETTERHEAD] ACCOUNTANTS' CONSENT The Board of Directors RFS, Inc.: We consent to incorporation by reference in the Registration Statement (No. 333-03307) on Form S-3 and the Registration Statement (No. 333-19411) on Form S-8 of RFS Hotel Investors, Inc. of our report dated January 20, 1997, relating to the consolidated balance sheet of RFS, Inc. and subsidiary as of December 31, 1996, and the related consolidated statement of operations, stockholder's equity, and cash flows for the year ended December 31, 1996, which report is included in the 1996 annual report on Form 10-K of RFS Hotel Investors, Inc. KPMG Peat Marwick LLP Memphis, Tennessee March 26, 1997 EX-27 18 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 57,935 0 7,187 0 0 0 446,214 23,271 499,129 0 133,064 0 10 244 357,228 499,129 61,594 61,986 0 0 26,899 0 0 0 0 35,087 0 0 0 34,587 1.37 1.37
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