-----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, NctOYJVbKwWHf81DPMKKXqOkeG720orOHhZ6sjyZXoKJ8RL+PY80uQHnI3x+iUWb VvQAYPitLBF6F12co5TwrA== 0000950144-01-001201.txt : 20010123 0000950144-01-001201.hdr.sgml : 20010123 ACCESSION NUMBER: 0000950144-01-001201 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010101 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RFS HOTEL INVESTORS INC CENTRAL INDEX KEY: 0000906408 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621534743 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12011 FILM NUMBER: 1508788 BUSINESS ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 BUSINESS PHONE: 9017677005 MAIL ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 8-K 1 g66434e8-k.txt RFS HOTEL INVESTORS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT January 1, 2001 (Date of earliest event reported) 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 Jurisdiction of (I.R.S. employer Incorporation or Organization) identification no.) 850 Ridge Lake Boulevard, Suite 220, (901) 767-7005 Memphis, TN 38120 (Registrant's Telephone Number (Address of Principal Executive Offices) Including Area Code) (Zip Code) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On January 1, 2001, RFS Hotel Investors, Inc., a Tennessee corporation, (the "Company") terminated its operating lease and management contract relationships with Hilton Hotels Corporation ("Hilton") for approximately $60 million. In connection with the termination of the leases, the Company purchased 973,684 shares of the Company's convertible preferred stock (Series A Preferred Stock) owned by Hilton for approximately $13 million. The $73 million in payments to Hilton were financed as follows: - Sale of two hotels during 2000 for proceeds of $25 million; - Placement, with Banc of America Mortgage Capital Corporation, of a new issue of $25 million of non-convertible, preferred stock with a 12.5% dividend; and - Approximately $23 million borrowed under the Company's line of credit Under the REIT Modernization Act, which became effective January 1, 2001, the Company is permitted to lease its hotels to wholly-owned subsidiaries, provided that the subsidiary lessees engage a third-party management company to manage the hotels. The Company announced, on November 29, 2000, that simultaneous with entering into the new leases, the newly-formed lessee subsidiaries of RFS would enter into new management contracts with Flagstone Hospitality Management Company (Flagstone). Flagstone is a newly-formed company jointly owned by Angie Mock, its CEO and formerly Executive Vice President of the Company, and MeriStar Hotels and Resorts, the nation's largest hotel management company. Flagstone has employed substantially all of the former employees of the subsidiary of Hilton, which previously managed the hotels. Effective January 1, 2001, Flagstone will manage 53 of the Company's 60 hotels and the remaining seven hotels will be managed by four other third-party management companies. Only five of the Company's hotels will be operated under long-term leases with third parties. The $60 million payment represents the cancellation of an executory contract and has been expensed on January 1, 2001. The Company recognized as income approximately $5 million on the re-purchase of the Series A Preferred Stock. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired Even though the $60 million payment will be expensed, pursuant to Rules 3-05 and 11-01(d) of Regulation S-X, the transaction constitutes an acquisition of a business subject to the reporting requirements of Item 2, Acquisition or Disposition of Assets. Financial statements of the acquired business required by this item are not included in this initial report on Form 8-K. Such financial statements will be filed by amendment to this report on Form 8-K as soon as they are available, but in no event later than sixty (60) days after the date of this initial report. (b) Pro Forma Financial Information Pro forma financial information of the acquired business required by this item is not included in this initial report on Form 8-K. Such pro forma financial information will be filed by amendment to this report on Form 8-K as soon as they are available, but in no event later than sixty (60) days after the date of this initial report. 3 (c) Exhibits 3.1 Articles of Amendment to the Second Amended and Restated Charter of RFS Hotel Investors, Inc. Designating and Fixing the Rights and Preferences of a Series of Shares of Preferred Stock. 10.1 Form of Percentage Lease between RFS Partnership, L.P. and RFS Leasing II-VII, Inc., as applicable. 10.2 Form of Management Agreement between Flagstone Hospitality Management LLC and RFS Leasing II-VII, Inc., as applicable. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. RFS HOTEL INVESTORS, INC. Dated as of January 16, 2001 By: Kevin M. Luebbers /s/ Kevin M. Luebbers ---------------------------------- Its: Executive Vice President & Chief Financial Officer EX-3.1 2 g66434ex3-1.txt ARTICLES OF AMENDMENT 1 EXHIBIT 3.1 RFS HOTEL INVESTORS, INC. ARTICLES OF AMENDMENT TO THE [SECOND] AMENDED AND RESTATED CHARTER DESIGNATING AND FIXING THE RIGHTS AND PREFERENCES OF A SERIES OF SHARES OF PREFERRED STOCK To the Secretary of State of the State of Tennessee: Pursuant to the provisions of Section 48-20-106 of the Tennessee Business Corporation Act, the undersigned Tennessee corporation adopts the following amendments to its [Second] Restated Charter (the "Charter"). 1. The name of the corporation is RFS Hotel Investors, Inc. (the "Corporation"). 2. The text of the amendments adopted to the Charter are as follows: FIRST: Pursuant to the authority expressly vested in the Board of Directors of the Corporation by Article 5 of the Charter and by Section 48-16-102 of the Tennessee Business Corporation Act, as amended, the Board of Directors has, by resolution, duly divided and classified 250,000 shares of the preferred stock of the Corporation into a series designated Series B Cumulative Preferred Stock (the "Series B Preferred Stock") and has provided for the issuance of the Series B Preferred Stock. SECOND: Article 5 of the Charter is hereby amended by adding the following [as a new subsection (a)] to such Article 5: 1. DESIGNATION AND NUMBER. A series of Preferred Stock, designated the Series B Cumulative Preferred Stock (the "Series B Preferred Stock"), is hereby established. The maximum number of authorized shares of the Series B Preferred Stock shall be 250,000. 2. RANK. The Series B Preferred Stock will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Corporation, rank (a) prior or senior to any class or series of Common Stock of the Corporation and any other class or series of equity securities of the Corporation, if the holders of Series B Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of shares of such class or series ("Junior Stock"); (b) on a parity with the Series A Preferred Stock and any other class or series of equity securities of the Corporation if, pursuant to the specific terms of such class or series of equity securities, the holders of such class or series of equity securities and the Series B Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Parity Stock"); (c) junior to any class or series of equity securities of the Corporation if, pursuant to the specific terms of such class or series, the holders of such class or series shall be entitled to the receipt of dividends or amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of the Series B Preferred Stock ("Senior Stock"); and (d) junior to all existing and future indebtedness of the Corporation. The term "equity securities" does not include convertible debt securities, which will rank senior to the Series B Preferred Stock prior to conversion. 2 3. DIVIDENDS. (a) Holders of Series B Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of funds of the Corporation legally available for payment, cash dividends payable quarterly on or before the last day of March, June, September, December of each year (or, if not a business day, the next succeeding business day, each a "Dividend Payment Date"), commencing March 31, 2001 as follows: (i) For the period prior to December 31, 2005 at the annual rate of 12.5% of the Liquidation Preference (as defined in Section 4(a) below) or 3.125% of the Liquidation Preference per quarter per share; (ii) Beginning on January 1, 2006, the dividend rate shall increase each quarter at the rate of 2.0% of the Liquidation Preference per annum per share (at a quarterly rate of increase of 0.5% of the Liquidation Preference per quarter per share) up to a maximum rate per annum per share of 20.5% of the Liquidation Preference as follows:
Quarterly Dividend Rate ----------------------- Quarter ending March 31, 2006 3.625% of the Liquidation Preference Quarter ending June 30, 2006 4.125% of the Liquidation Preference Quarter ending September 30, 2006 4.625% of the Liquidation Preference Quarter ending December 31, 2006 and thereafter 5.125% of the Liquidation Preference
(iii) For so long as any shares of Series B Preferred Stock are outstanding, in the event the Consolidated Total Indebtedness (as defined below) of the Corporation exceeds 60% of Total Asset Value (as defined below) of the Corporation, and for so long as Consolidated Total Indebtedness exceeds 60% of Total Asset Value, the then existing annual dividend rate shall be increased by 2.5% of the Liquidation Preference (equivalent to 0.625% of the Liquidation Preference per quarter per share). (iv) For purposes of subsection (iii) above, the following terms shall have the following definitions. "Adjusted Cash Flow" means Property Operating Income (as defined herein, but before deducting real estate taxes, insurance, any capital expenditures and any management fee) for the trailing twelve (12) months less real estate taxes for the latest available year, property insurance, the Capital Expenditure Reserve Amount and the greater of (a) actual management fees paid over the prior twelve (12) months or (b) two and one half percent (2.5%) of gross room revenue for the trailing twelve (12) months. For a Hotel Property leased to a third party which is not a Subsidiary of the Corporation "Adjusted Cash Flow" means the lesser of (i) lease payments for the trailing twelve (12) months less real estate taxes for the latest available year, property insurance and the Capital Expenditure Reserve Amount or (ii) Property Operating Income (as defined herein, but before deducting real estate taxes, insurance, any capital expenditures and any management fee) for the trailing twelve (12) months less real estate taxes for the latest available year, property insurance, the Capital Expenditure Reserve Amount and a management fee equal to four percent (4%) of trailing twelve (12) month gross room revenues. "Applicable Cap Rate" means 11.5%. 2 3 "Capital Expenditure Reserve Amount" means, for any period, 4% of the trailing twelve (12) month gross revenues. "Capitalized Lease" of a Person means any lease of property imposing obligations on such Person, as lessee thereunder, which are required in accordance with GAAP to be capitalized on a balance sheet of such Person. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with GAAP. "Cash Equivalents" means, as of any date, (i) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof having maturities of not more than one year from such date, (ii) time deposits and certificates of deposit having maturities of not more than one year from such date and issued by any domestic commercial bank having (A) senior long-term unsecured debt rated at least A or the equivalent thereof by Standard & Poor's or A2 or the equivalent thereof by Moody's Investor Service and (B) capital and surplus in excess of $100,000,000, (iii) commercial paper rated at least A-1 or the equivalent thereof by S&P or P-1 or the equivalent thereof by Moody's and in either case maturing within 120 days from such date; and (iv) shares of any money market fund rated at least AAA or the equivalent thereof by S&P or at least AAA or the equivalent thereof by Moody's. "Consolidated Total Indebtedness" means, as of any date of determination, all Indebtedness of the Corporation and any Subsidiary, determined on a consolidated basis, such consolidation to be in accordance with GAAP, after eliminating intercompany items, plus the amount of the aggregate Liquidation Preference with respect to all outstanding shares of Series B Preferred Stock plus the liquidation preference with respect to any other outstanding shares of preferred stock of the Corporation. "Cost" means for any Hotel Property the purchase price of such Hotel Property plus the cost of any capital improvements which exceed 4% of the Hotel Property's revenues for the four quarter period following the purchase date of the Hotel Property. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements of the Corporation. "Guarantee Obligation" means, as to any Person (the "guaranteeing person"), any obligation (determined without duplication) of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any Letter of Credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counter-indemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase any property, securities or services primarily for 3 4 the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the maximum stated amount of the primary obligation relating to such Guarantee Obligation (or, if less, the maximum stated liability set forth in the instrument embodying such Guarantee Obligation), provided, that in the absence of any such stated amount or stated liability, the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Corporation in good faith. "Hotel Property" means any parcel of real property owned by the Corporation, or any Subsidiary, Investment Affiliate, or Joint Venture, on which parcel is either located a hotel, or on which construction of a hotel has commenced. "Implied Value" means for any Hotel Property an amount arrived at based upon that Hotel Property's Adjusted Cash Flow, divided by the Applicable Cap Rate. "Indebtedness" of any Person at any date means without duplication, (a) all indebtedness of such Person for borrowed money which is outstanding according to GAAP, (b) all obligations of such Person for the deferred purchase price of property or services, (c) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (d) all Capitalized Lease Obligations, (e) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (f) all Guarantee Obligations of such Person (excluding in any calculation of consolidated indebtedness of the Corporation, Guarantee Obligations of the Corporation or any Subsidiary in respect of primary obligations of any Subsidiary), (g) all reimbursement obligations of such Person for Letters of Credit and other contingent liabilities, (h) all liabilities secured by any lien (other than liens for taxes not yet due and payable) on any property owned by such Person even though such Person has not assumed for otherwise become liable for the payment thereof, (i) any repurchase obligation or liability of such Person or any of its Subsidiaries with respect to accounts or notes receivable sold by such Person or any of its Subsidiaries, (j) the Corporation's (or Subsidiary's) pro rata share of debt in Investment Affiliates and 100% any loans where the Corporation is liable as a general partner, (k) the greater of (i) the Corporation's and all Subsidiaries' recourse interest in an Investment Affiliate's debt that is not consolidated with the Corporation's financial statements, or (ii) pro rata interest in all debt owed by an Investment Affiliate which is either recourse or non-recourse to the Corporation or any Subsidiary, as applicable, that is not consolidated with the Corporation's or any Subsidiaries' financial statements, (l) any pre-sale obligations of such Person relating to the purchase of any real or personal property, (m) Total Liabilities, (n) any amounts payable under any interest rate protection product, (o) any other amounts considered debt by rating agencies and (p) any forward equity commitments. Notwithstanding the foregoing, 100% of all Indebtedness of RFS Partnership, L.P. or any successor thereto shall be deemed to be Indebtedness of the Company. "Investment Affiliate" means any Person in which the Corporation or any Subsidiary, directly or indirectly, has an ownership interest, including, without limitation, any Joint Venture, whose financial results are not consolidated under GAAP with the financial results of the Person having the ownership interest in its consolidated financial statements. 4 5 "Joint Venture" means any joint venture partnership in which the Corporation or any Subsidiary is a joint venture partner. "Letter of Credit" means a letter of credit of a Person which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Person" means any corporation, joint venture, partnership, association, enterprise, trust, limited liability company or other entity or organization. "Property Operating Income" means, with respect to any Hotel Property owned by the Corporation, any Subsidiary or any Investment Affiliate, for any period, earnings from rental operations (computed in accordance with GAAP but without deduction for reserves) attributable to such Hotel Property plus depreciation, amortization and interest expense for such period, and, if such period is less than a year, adjusted by straight lining various ordinary operating expenses which are payable less frequently than once during every such period (e.g. real estate taxes and insurance). "SAB 101" means Staff Accounting Bulletin No. 101 of the Securities and Exchange Commission issued December 3, 1999. "Subsidiary" means a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by the Corporation, and provided such corporation, partnership or other entity is consolidated with the Corporation for financial reporting purposes under GAAP. "Total Asset Value" means the sum of (a) for each open Hotel Property owned or open for less than four (4) fiscal quarters, 100% of the Cost of the Hotel Property plus (b) for each open Hotel Property owned or open for four (4) fiscal quarters or more, the Implied Value of the Hotel Property, plus (c) 100% of cash and Cash Equivalents in accordance with GAAP; provided, however, that with respect to a Hotel Property owned by an Investment Affiliate or Joint Venture, the Cost or Implied Value of the Hotel Property shall be multiplied by a percentage equal to the percentage of ownership of the Corporation or a Subsidiary in the Investment Affiliate or Joint Venture. Notwithstanding the foregoing, the Cost or Implied Value of any Hotel Property owned by RFS Partnership, L.P. or any successor thereto shall be 100% of the Cost or Implied Value of such Hotel Property. "Total Liabilities" means all GAAP liabilities (not inclusive of GAAP minority interest or GAAP deferred/unearned revenue liability arising solely from the application of the policies and procedures prescribed by SAB 101) of the Corporation and its Subsidiaries. Such dividends shall be cumulative from the date of original issue, whether or not in any dividend period or periods (i) such dividends shall be declared, (ii) there shall be funds of the Corporation legally available for the payment of such dividends or (iii) any agreement of the Corporation 5 6 prohibits payment of such dividends. Dividends not paid when due as described in Section 3(a) above shall bear interest at a per annum rate equal to the dividend rate in effect from time to time. Any dividend payable on the Series B Preferred Stock for any partial dividend period will be computed on the basis of twelve 30-day months and a 360 day year. Dividends will be payable in arrears to holders of record as they appear on the stock records of the Corporation at the close of business on the 15th day of March, June, September and December immediately preceding such Dividend Payment Date. Holders of Series B Preferred Stock shall not be entitled to receive any dividends in excess of cumulative dividends on the Series B Preferred Stock. (b) When dividends are not paid in full upon the Series B Preferred Stock or any other class or series of Parity Stock, or a sum sufficient for such payment is not set apart, all dividends declared upon the Series B Preferred Stock and any other class or series of Parity Stock shall be declared ratably in proportion to the respective amounts of dividends accumulated, accrued and unpaid, together with interest thereon (if any), on the Series B Preferred Stock and dividends accumulated, accrued and unpaid on such Parity Stock, together with interest thereon (if any). Except as set forth in the preceding sentence, unless dividends on the Series B Preferred Stock equal to the full amount of accumulated, accrued and unpaid dividends, together with interest thereon (if any), have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof set apart for such payment for all past dividend periods, no dividends shall be declared or paid or set aside for payment by the Corporation with respect to any class or series of Parity Stock. Unless full cumulative dividends on the Series B Preferred Stock, together with interest thereon (if any), have been paid or declared and set apart for payment for all past dividend periods, no dividends (other than dividends paid in shares of Junior Stock or options, warrants or rights to subscribe for or purchase shares of Junior Stock) shall be declared or paid or set apart for payment by the Corporation with respect to any shares of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or otherwise acquired (except for purposes of an employee benefit plan) for any consideration (except by conversion or exchange for shares of Junior Stock, or options, warrants or rights to subscribe for or purchase shares of Junior Stock), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of shares of Junior Stock. Notwithstanding the above, the Corporation shall not be prohibited from (i) declaring or paying or setting apart for payment any dividend or distribution on any shares of Parity Stock or (ii) or redeeming, purchasing or otherwise acquiring any Parity Stock, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Corporation's qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). (c) No dividends on shares of Series B Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Corporation at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law. (d) If, for any taxable year, the Corporation elects to designate as "capital gain dividends" (as defined in Section 857 of the Code) any portion (the "Capital Gains Amount") of the dividends (as determined for federal income tax purposes) paid or made available for the year to holders of all classes of stock (the "Total Dividends"), then the portion of the Capital Gains Amount that shall be allocable to the holders of Series B Preferred Stock shall be the amount that 6 7 the total dividends (as determined for federal income tax purposes) paid or made available to the holders of the Series B Preferred Stock for the year bears to the Total Dividends. The Corporation may elect to retain and pay income tax on its net long-term capital gains. In such a case, the holders of Series B Preferred Stock would include in income their proportionate share of the Corporation's undistributed long-term capital gains, as designated by the Corporation. 4. LIQUIDATION PREFERENCE. (a) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any payment or distribution by the Corporation shall be made to or set apart for the holders of any shares of Junior Stock, the holders of shares of Series B Preferred Stock shall be entitled to receive a liquidation preference of $100 per share (the "Liquidation Preference"), plus an amount equal to all accumulated, accrued and unpaid dividends (whether or not declared), together with interest thereon (if any), to the date of final distribution to such holders, but such holders shall not be entitled to any further payment. Until the holders of the Series B Preferred Stock have been paid the Liquidation Preference in full, plus an amount equal to all accumulated, accrued and unpaid dividends (whether or not declared) to the date of final distribution to such holders, no payment shall be made to any holder of Junior Stock upon the liquidation, dissolution or winding up of the Corporation. (b) If upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of Series B Preferred Stock shall be insufficient to pay in full the above described preferential amount and liquidating payments on any other shares of any class or series of Parity Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of Series B Preferred Stock and any such other Parity Stock ratably in the same proportion as the respective amounts that would be payable on such Series B Preferred Stock and any such other Parity Stock if all amounts payable thereon were paid in full. (c) A voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall not include any Redemption Event described in Section 5(c) below. (d) Upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the holders of Series B Preferred Stock and any Parity Stock, any series or class or classes of Junior Stock shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series B Preferred Stock and any Parity Stock shall not be entitled to share therein. 5. REDEMPTION. (a) Shares of Series B Preferred Stock shall not be redeemable by the Corporation prior to December 31, 2003. However, in order to ensure that the Corporation will continue to meet the requirement for qualification as a real estate investment trust under the Code, the Series B Preferred Stock will be subject to the provisions of Article 14 of the Corporation's Charter (the "Charter") pursuant to which shares of Preferred Stock and Common Stock of the Corporation owned by a shareholder in excess of 9.9% in value of the outstanding shares of capital stock of the Corporation (the "Ownership Limit") will be deemed "Shares-in-Trust" (as defined in such Article 14). The Corporation may redeem shares of Series B Preferred Stock, in whole but not in part (a "Voluntary Redemption"), (i) on and after December 31, 2003 at a cash redemption price 7 8 equal to 100% of the Liquidation Preference plus all accrued and unpaid dividends, together with interest thereon (if any), to the date fixed for redemption (the "Redemption Date"), (ii) at any time during which the Consolidated Total Indebtedness of the Corporation exceeds 60% of Total Asset Value of the Corporation as determined in accordance with Sections 3(a)(iii) and 3(a)(iv) above at a cash redemption price determined in accordance with Section 5(b) below or (iii) immediately prior to consummation of a Change of Control (as defined in Section 5(c)(ii)) at a cash redemption price determined in accordance with Section 5(b) below. (b) Upon the occurrence of a Redemption Event (as defined below), the Corporation shall offer, in accordance with subsections (d) and (e) below, to redeem all of the outstanding Series B Preferred Stock at the applicable redemption price reflected below, plus accrued and unpaid dividends, together with interest thereon (if any), to the date of redemption:
Redemption Price Date of Redemption Per Share ------------------ ---------------- Prior to December 31, 2001 $103.00 January 1, 2002 through December 31, 2002 $102.00 January 1, 2003 through December 31, 2003 $101.00 After January 1, 2004 $100.00
(c) As used in this Section 5: (i) A "Redemption Event" shall mean (1) the execution by the Corporation or any of its subsidiaries or affiliates of any agreement with respect to any proposed transaction or event or series of transactions or events which, individually or in the aggregate, may reasonably be expected to result in a Change of Control (as defined below); (2) the failure of the Corporation and its subsidiaries to complete on or before April 15, 2001 (A) the termination or assignment of certain lease agreements between subsidiaries of the Corporation, as lessor, and subsidiaries of Hilton Hotels Corporation, as lessee, and (B) the purchase from RFS, Inc. of 973,684 shares of the Corporation's convertible Preferred Stock, Series A, all as set forth in the Termination Agreement dated as of January 26, 2000, among the Corporation and certain of its subsidiaries and Hilton Hotels Corporation and certain of its subsidiaries; or (3) the Corporation fails to satisfy the requirements for qualification as a real estate investment trust under the Code. (ii) A "Change of Control" shall be deemed to have occurred at such time as (1) a "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the ultimate "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have beneficial ownership of all shares of Voting Stock that such person or group has the right to acquire regardless of when such right is first exercisable), directly or indirectly, of voting stock representing more than 20% of the total voting power of the total voting stock of the Corporation on a fully diluted basis; (2) the date the Corporation sells, transfers or otherwise disposes of all or substantially all of the assets of the Corporation or the Operating Partnership, other than to a subsidiary of the Corporation; and (3) the date of the consummation of a merger or share exchange of the Corporation with another corporation where 8 9 the shareholders of the Corporation immediately prior to the merger or share exchange would not beneficially own immediately after the merger or share exchange, shares entitling such shareholders to 50% or more of all votes (without consideration of the rights of any class of stock to elect directors by a separate group vote) to which all shareholders of the corporation issuing cash or securities in the merger or share exchange would be entitled in the election of directors, or where members of the Board of Directors of the Corporation immediately prior to the merger or share exchange would not immediately after the merger or share exchange constitute a majority of the board of directors of the corporation issuing cash or securities in the merger or share exchange. (iii) "Voting Stock" shall mean capital stock of any class or kind having the power to vote generally for the election of directors of the Corporation. (d) In the event of a Voluntary Redemption by the Corporation pursuant to subsection (a) above or upon the occurrence of a Redemption Event as defined in subsection (c) above, the Corporation shall select a Redemption Date which shall not be less than 30 days nor more than 60 days after the date notice of redemption is sent by the Corporation (in accordance with subsection (e) below), in the case of a Voluntary Redemption, or the offer to redeem is sent, in the case of an occurrence of a Redemption Event. If full cumulative dividends on all outstanding shares of Series B Preferred Stock have not been paid or declared and set apart for payment, no shares of Series B Preferred Stock may be redeemed unless all outstanding shares of Series B Preferred Stock are simultaneously redeemed. (e) Notice of redemption of the Series B Preferred Stock, in the case of a Voluntary Redemption, or an offer of redemption, in the case of an occurrence of a Redemption Event, shall be mailed by the Corporation to each holder of record of the shares to be redeemed or offered to be redeemed by first class mail, postage prepaid at such holder's address as the same appears on the stock records of the Corporation no later than ten (10) business days following the occurrence of a Redemption Event. Any notice which was mailed as described above shall be conclusively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each notice shall state: (i) the Redemption Date; (ii) the redemption price; and (iii) the place or places where certificates for such shares of Series B Preferred Stock are to be surrendered for cash. From and after the Redemption Date, dividends on the shares of Series B Preferred Stock to be redeemed will cease to accrue, such shares shall no longer be deemed to be outstanding and all rights of the holders thereof shall cease (except the right to receive the cash payable upon such redemption); provided, however, that if the Company does not fund the redemption of the Series B Preferred Stock on the Redemption Date, dividends shall continue to accrue from the Redemption Date until the funding date. (f) The Series B Preferred Stock has no stated maturity and will not be subject to any sinking fund or mandatory redemption provisions except as provided under Article 14 of the Charter. (g) Subject to applicable law and the limitation on purchases when dividends on the Series B Preferred Stock are in arrears, the Corporation may, at any time and from time to time, purchase any shares of Series B Preferred Stock in the open market, by tender or by private agreement. 6. VOTING RIGHTS. 9 10 (a) Holders of the Series B Preferred Stock will not have any voting rights, except as set forth below or as otherwise from time to time required by law. (b) If and whenever dividends on any shares of Series B Preferred Stock shall be in arrears for two or more quarterly periods (whether or not consecutive), the holders of such shares of Series B Preferred Stock (voting together as a single class) will be entitled to vote for the election of two additional directors of the Corporation at any annual meeting of stockholders or at a special meeting of the holders of the Series B Preferred Stock called for that purpose and the number of directors then constituting the Board of Directors shall be increased by two. The Corporation must call such special meeting upon the request of holders of record of at least 66 2/3% of the outstanding shares of Series B Preferred Stock. Whenever dividends in arrears on outstanding shares of the Series B Preferred Stock shall have been paid and dividends thereon for the current quarterly dividend period shall have been paid or declared and set apart for payment, then the right of the holders of the Series B Preferred Stock to elect such additional two directors shall cease and the terms of office of such directors shall terminate and the number of directors constituting the Board of Directors shall be reduced accordingly; provided however, that if, thereafter, dividends on any shares of Series B Preferred Stock shall be in arrears for any quarterly period, the voting rights of the holders of such shares of Series B Preferred Stock shall again become exercisable with respect to the election of two additional directors of the Corporation in accordance with the provisions of this subsection (b) and any additional directors so elected shall serve for a term described above. (c) The affirmative vote or consent of at least 66 2/3% of the votes entitled to be cast by the holders of the outstanding shares of Series B Preferred Stock, voting as a single class, will be required to (i) authorize the issuance of any shares of any class of Senior Stock or any security convertible into shares of any class of Senior Stock or (ii) amend, alter or repeal any provision of, or add any provision to, the Charter (including any amendment, alteration, repeal or addition resulting from a merger or consolidation), including the Articles of Amendment, or the Corporation's bylaws, if such action would materially adversely affect the voting powers, rights or preferences of the holders of the Series B Preferred Stock, including any amendment which adversely affects the voting rights of the Series B Preferred Stock described in Section 6(b) above or any amendment to the Charter which alters the requirement that the Independent Directors approve the issuance of Parity Stock or which reduces the percentage of Independent Directors (as defined in the Charter). Notwithstanding the foregoing, the amendment of the Charter to authorize, create, or to increase the authorized amount of capital stock, shall not be deemed to materially adversely affect the voting powers, rights or preferences of the holders of Series B Preferred Stock. No such vote of the holders of Series B Preferred Stock as described above shall be required if provision is made to redeem all shares of Series B Preferred Stock at or prior to the time such amendment, alteration or repeal is to take effect, or when the issuance of any such shares or convertible security is to be made, as the case may be. (d) The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series B Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption. 7. CONVERSION. The Series B Preferred Stock is not convertible into or exchangeable for any other property or securities of the Corporation. 10 11 8. PARITY STOCK. Any issuance of Parity Stock shall be approved by a majority of the Independent Directors (as defined in the Charter) for fair market value as determined by such directors in their sole discretion. THIRD: The above-listed amendments are to become effective when these articles of amendment are accepted for filing by the Secretary of State of the State of Tennessee. FOURTH: The above-listed amendments do not provide for the exchange, reclassification or cancellation of existing shares. FIFTH: The above-listed amendments were duly adopted by the Board of Directors of the Corporation as of December 22, 2000, and were not required to be adopted by the shareholders of the Corporation. Dated this the 27th day of December, 2000. RFS HOTEL INVESTORS, INC. By: /s/Kevin M. Luebbers -------------------------------------------- Name: Kevin M. Luebbers Title: Vice President, Secretary and Treasurer 11 EX-10.1 3 g66434ex10-1.txt FORM OF PERCENTAGE LEASE 1 EXHIBIT 10.1 MASTER LEASE AGREEMENT DATED AS OF _______________, 2001 BETWEEN RFS PARTNERSHIP, L.P. AS LESSOR AND RFS LEASING VII, INC. AS LESSEE 2 TABLE OF CONTENTS
SECTION PAGE ARTICLE I.........................................................................................................1 1.1. Leased Property.....................................................................................1 --------------- 1.2. Term................................................................................................2 ---- ARTICLE II........................................................................................................2 Definitions..............................................................................................2 ----------- ARTICLE III......................................................................................................11 3.1. Rent...............................................................................................11 ---- 3.2. Confirmation of Percentage Rent....................................................................15 ------------------------------- 3.3. Additional Charges.................................................................................14 ------------------ 3.4. Net Lease Provision................................................................................16 ------------------- 3.5. Conversion of Property.............................................................................16 ---------------------- ARTICLE IV.......................................................................................................15 4.1. Payment of Impositions.............................................................................15 ---------------------- 4.2. Notice of Impositions..............................................................................16 --------------------- 4.3. Adjustment of Impositions..........................................................................18 ------------------------- 4.4. Utility Charges....................................................................................18 --------------- 4.5. Insurance Premiums.................................................................................18 ------------------ ARTICLE V........................................................................................................18 5.1. No Termination, Abatement, etc.....................................................................18 ------------------------------- 5.2. Abatement Procedures...............................................................................19 -------------------- ARTICLE VI.......................................................................................................19 6.1. Ownership of the Leased Property...................................................................19 -------------------------------- 6.2. Lessee's Personal Property.........................................................................19 -------------------------- 6.3. Lessor's Lien......................................................................................20 ------------- ARTICLE VII......................................................................................................20 7.1. Condition of the Leased Property...................................................................20 -------------------------------- 7.2. Use of the Leased Property.........................................................................21 -------------------------- 7.3. Lessor to Grant Easements, etc.....................................................................22 ------------------------------- ARTICLE VIII.....................................................................................................22 8.1. Compliance with Legal and Insurance Requirements, etc..............................................22 ------------------------------------------------------ 8.2. Legal Requirement Covenants........................................................................22 --------------------------- 8.3. Environmental Covenants............................................................................23 ----------------------- ARTICLE IX.......................................................................................................25 9.1. Maintenance and Repair.............................................................................25 ---------------------- 9.2. Encroachments, Restrictions, Etc...................................................................26 -------------------------------- ARTICLE X........................................................................................................27 10.1. Alterations.......................................................................................27 ----------- 10.2. Salvage...........................................................................................27 -------
3 10.3. Joint Use Agreements..............................................................................27 -------------------- ARTICLE XI.......................................................................................................28 Liens...................................................................................................28 ----- ARTICLE XII......................................................................................................28 Permitted Contests......................................................................................28 ------------------ ARTICLE XIII.....................................................................................................29 13.1. General Insurance Requirements....................................................................29 ------------------------------ 13.2. Replacement Cost..................................................................................30 ---------------- 13.3. Worker's Compensation.............................................................................30 --------------------- 13.4. Waiver of Subrogation.............................................................................30 --------------------- 13.5. Form Satisfactory, etc............................................................................31 ---------------------- 13.6. Increase in Limits................................................................................31 ------------------ 13.7. Blanket Policy....................................................................................31 -------------- 13.8. No Separate Insurance.............................................................................31 --------------------- ARTICLE XIV......................................................................................................32 14.1. Insurance Proceeds................................................................................32 ------------------ 14.2. Reconstruction in the Event of Damage or Destruction Covered by Insurance.........................32 -------------------------------------------------------------------------- 14.3. Reconstruction in the Event of Damage or Destruction Not Covered by Insurance.....................33 ----------------------------------------------------------------------------- 14.4. Lessee's Property.................................................................................33 ----------------- 14.5. Abatement of Rent.................................................................................33 ----------------- 14.6. Damage Near End of Term...........................................................................33 ----------------------- 14.7. Waiver............................................................................................33 ------ ARTICLE XV.......................................................................................................33 15.1. Definitions.......................................................................................33 ----------- 15.2. Parties' Rights and Obligations...................................................................34 ------------------------------- 15.3. Total Taking......................................................................................34 ------------ 15.4. Allocation of Award...............................................................................34 ------------------- 15.5. Partial Taking....................................................................................34 -------------- 15.6. Temporary Taking..................................................................................35 ---------------- ARTICLE XVI......................................................................................................35 16.1. Events of Default.................................................................................35 ----------------- 16.2. Surrender.........................................................................................37 --------- 16.3. Damages...........................................................................................37 ------- 16.4. Waiver............................................................................................38 ------ 16.5. Application of Funds..............................................................................38 -------------------- ARTICLE XVII.....................................................................................................38 Lessor's Right to Cure Lessee's Default.................................................................38 --------------------------------------- ARTICLE XVIII....................................................................................................39 INTENTIONALLY OMITTED...................................................................................39 ARTICLE XIX......................................................................................................39 19.1. REIT Requirements.................................................................................39 -----------------
ii 4 19.2. Lessee Officer and Employee Limitation............................................................40 -------------------------------------- 19.3. Management Agreement..............................................................................40 -------------------- ARTICLE XX.......................................................................................................41 Holding Over............................................................................................41 ------------ ARTICLE XXI......................................................................................................41 Risk of Loss............................................................................................41 ------------ ARTICLE XXII.....................................................................................................41 Indemnification.........................................................................................41 --------------- ARTICLE XXIII....................................................................................................42 23.1. Subletting and Assignment.........................................................................42 -------------------------- 23.2. Attornment........................................................................................43 ---------- ARTICLE XXIV.....................................................................................................43 24.1. Officer's Certificates; Financial Statements; Budgets; Lessor's Estoppel Certificates and ------------------------------------------------------------------------------------------ Covenants......................................................................................43 --------- 24.2. Operating Budget..................................................................................44 ---------------- 24.3. Marketing Plan....................................................................................44 -------------- 24.4. Capital Budget....................................................................................44 -------------- 24.5. Disputes..........................................................................................44 -------- ARTICLE XXV......................................................................................................44 Lessor's Right to Inspect...............................................................................44 ------------------------- ARTICLE XXVI.....................................................................................................45 No Waiver...............................................................................................45 --------- ARTICLE XXVII....................................................................................................45 Remedies Cumulative.....................................................................................45 ------------------- ARTICLE XXVIII...................................................................................................45 Acceptance of Surrender.................................................................................45 ----------------------- ARTICLE XXIX.....................................................................................................45 No Merger of Title......................................................................................45 ------------------ ARTICLE XXX......................................................................................................45 Conveyance by Lessor....................................................................................45 -------------------- ARTICLE XXXI.....................................................................................................46 Quiet Enjoyment.........................................................................................46 --------------- ARTICLE XXXII....................................................................................................46 Notices.................................................................................................46 ------- ARTICLE XXXIII...................................................................................................46 Appraisers..............................................................................................46 ----------
iii 5 ARTICLE XXXIV....................................................................................................47 34.1. Lessor May Grant Liens............................................................................47 ---------------------- 34.2. Lessee's Right to Cure............................................................................47 ---------------------- 34.3. Breach by Lessor..................................................................................48 ---------------- ARTICLE XXXV.....................................................................................................48 35.1. Miscellaneous.....................................................................................48 ------------- 35.2. Transfer of Licenses..............................................................................48 -------------------- 35.3. Waiver of Presentment, etc........................................................................49 --------------------------- ARTICLE XXXVI....................................................................................................49 Memorandum of Lease.....................................................................................49 ------------------- ARTICLE XXXVII...................................................................................................49 Lessor's Option to Purchase Assets of Lessee............................................................49 -------------------------------------------- ARTICLE XXXVIII..................................................................................................49 Lessor's Option to Terminate Lease......................................................................49 ---------------------------------- ARTICLE XXXIX....................................................................................................50 Compliance with Franchise Agreement.....................................................................50 ----------------------------------- ARTICLE XL.......................................................................................................50 40.1. Lessor Approval of Capital Expenditures...........................................................50 --------------------------------------- 40.2. Inventory.........................................................................................51 ---------
EXHIBIT A - Property Description EXHIBIT B - Percentage Rent EXHIBIT C - Capital Expenditures Policy EXHIBIT D - Management Agreement EXHIBIT E - Lease Termination Payments iv 6 LEASE AGREEMENT THIS LEASE AGREEMENT (hereinafter called "Lease"), made as of the ____ day of _______________, 2001, by and between RFS Partnership, L.P., a Tennessee limited partnership (hereinafter called "Lessor"), and RFS Leasing II, Inc., a Tennessee corporation (hereinafter called "Lessee"), provides as follows. W I T N E S S E T H: Lessor owns fee title to the Leased Property (as defined below); Lessor and Lessee desire to enter this Lease Agreement as a separate lease for each Leased Property. NOW, THEREFORE, intending to be legally bound, Lessor, in consideration of the payment of rent by Lessee to Lessor, the covenants and agreements to be performed by Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased Property. ARTICLE I 1.1. Leased Property. The Leased Property is comprised of Lessor's interest in each of the hotel properties described in Exhibit "A" attached hereto, as it may be amended from time to time (each a "Leased Property") as follows: (a) the land or ground leasehold interests described in Exhibit "A" attached hereto and by reference incorporated herein (the "Land"); (b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and offsite), parking areas and roadways appurtenant to such buildings and structures presently situated upon the Land (collectively, the "Leased Improvements"); (c) all easements, rights and appurtenances relating to the Land and the Leased Improvements; (d) all equipment, machinery, fixtures, and other items of property required or incidental to the use of the Leased Improvements as a hotel, including all components thereof, now and hereafter permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (collectively, the "Fixtures"); (e) all furniture and furnishings and all other items of personal property (excluding Inventory and personal property owned by Lessee) located on, and used in connection with, the operation 7 of the Leased Improvements as a hotel, together with all replacements, modifications, alterations and additions thereto; and (f) all existing leases of space within the Leased Property (including any security deposits or collateral held by Lessor pursuant thereto). THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF. 1.2. Term. The term of the Lease (the "Term") shall commence on the Commencement Date and shall end on the Expiration Date, unless sooner terminated in accordance with the provisions hereof. ARTICLE II Definitions. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as are at the time applicable, (c) all references in this Lease to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease and (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision. Additional Charges: As defined in Section 3.3. Affiliate: As used in this Lease the term "Affiliate" of a person shall mean (a) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (b) any other person that owns, beneficially, directly or indirectly, five percent or more of the outstanding capital stock, shares or equity interests of such person, or (c) any officer, director, employee, partner or trustee of such person or any person controlling, controlled by or under common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term "person" means and includes individuals, corporations, general and limited partnerships, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. 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. Average Daily Rate: Total Room Revenues divided by occupied rooms at the Facility. Award: As defined in Section 15.1(c). 2 8 Base Rate: The rate of interest announced publicly by Citibank, N.A., in New York, New York, from time to time, as such bank's base rate. If no such rate is announced or becomes discontinued, then such other rate as Lessor may reasonably designate. Base Rent: As defined in Article III. Beverage Sales: Shall mean gross revenue from (i) the sale of wine, beer, liquor or other alcoholic beverages, whether sold in the bar or lounge, delivered to a guest room, sold at meetings or banquets or at any other location at the Leased Property or (ii) non-alcoholic beverages sold in the bar or lounge. Such revenues shall not include the following: (a) Any gratuity or service charge added to a customer's bill or statement in lieu of a gratuity which is paid to an employee; (b) Any revenues that are subsequently credited, rebated or refunded in the ordinary course of business; and (c) Sales taxes or taxes of any other kind imposed on the sale of alcoholic or other beverages. Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the City of New York, New York, or in the municipality wherein the Leased Property is located are closed. Capital Budget: As defined in Section 24.4. Capital Expenditures: Amounts advanced to pay the costs of Capital Improvements. Capital Improvements: Improvements to (A) the external walls and internal load bearing walls (other than windows and plate glass), (B) the roof of the Facility, (C) private roadways, parking areas, sidewalks and curbs appurtenant thereto that are under Lessee's control (other than cleaning, patching and striping), (D) mechanical, electrical and plumbing systems that service common areas, entire wings of the Facility or the entire Facility, including conduit and ductware connected thereto, and (E) items of the types described on Exhibit " C" attached hereto as items which should be capitalized. CERCLA: The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Code: The Internal Revenue Code of 1986, as amended. Commencement Date: The date set forth on Exhibit "A" attached hereto as the commencement date with respect to the Facility. Condemnation, Condemnor: As defined in Section 15.1. Consolidated Financials: For any fiscal year or other accounting period for Lessee and its consolidated subsidiaries, statements of earnings and retained earnings and of changes in financial position for such period and for the period from the beginning of the respective fiscal year to the end of such period and the related balance sheet as at the end of such period, together with the notes thereto, all in reasonable 3 9 detail and setting forth in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, and prepared in accordance with generally accepted accounting principles and audited by nationally recognized independent certified public accountants. Consumer Price Index: Consumer Price Index, all Items for all Urban Consumers, published by the Bureau of Labor Statistics of the United States Department of Labor, as reported in The Wall Street Journal. CPI Adjustment Year: The calendar year next following the year in which the Commencement Date occurs, if the Commencement Date occurs between January 1 and June 30, or the second calendar year following the year in which the Commencement Date occurs, if the Commencement Date occurs between July 1 and December 31. Date of Taking: As defined in Section 15.1(b). Encumbrance: As defined in Section 34.1. Eligible Independent Contractor: A management company that meets the following requirements: (a) The management company does not own, directly or indirectly, more than 35% of the outstanding stock of RFS. (b) If the management company is a corporation, no more than 35% of the total combined voting power of its outstanding stock (or 35% of the total shares of all classes of its outstanding stock) or, if it is not a corporation, no more than 35% of the ownership interest in its assets or profits is owned, directly or indirectly, by one or more Persons owning 35% or more of the outstanding stock of RFS. (c) Neither RFS, the Lessor, the Lessee, nor any Affiliate thereof derives any income from the management company. (d) At the time that the management company enters into a management agreement with the Lessee to operate the Leased Property, the management company (or any "related person" within the meaning of Section 856(d)(9)(F) of the Code) is actively engaged in the trade or business of operating "qualified lodging facilities" within the meaning of Section 856(d)(9)(D) of the Code for any Person who is not a "related person" within the meaning of Section 856(d)(9)(F) of the Code with respect to RFS or the Lessee (an "Unrelated Person"). For purposes of determining whether the requirement of this paragraph (d) has been met, a management company shall be treated as being actively engaged in such a trade or business if the management company (i) derives at least 10% of both its profits and revenue from operating "qualified lodging facilities" within the meaning of Section 856(d)(9)(D) of the Code for Unrelated Persons or (ii) complies with any regulations or other administrative guidance under Section 856(d)(9) of the Code that provide a "safe harbor" rule with respect to the amount of hotel management business with Unrelated Persons that is necessary to qualify as an "eligible independent contractor" within the meaning of such Code section. Environmental Authority: Any department, agency or other body or component of any Government that exercises any form of jurisdiction or authority under any Environmental Law. Environmental Authorization: Any license, permit, order, approval, consent, notice, registration, filing or other form of permission or authorization required under any Environmental Law. 4 10 Environmental Laws: All applicable federal, state, local and foreign laws and regulations relating to pollution of the environment (including without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA. Environmental Liabilities: Any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney's fees, fees for witnesses and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of: (a) Failure of Lessee, Lessor, any Predecessor or the Leased Property to comply at any time with all Environmental Laws; (b) Presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property; (c) A Release at any time of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property; (d) Identification of Lessee, Lessor or any Predecessor as a potentially responsible party under CERCLA or under any Environmental Law similar to CERCLA; (e) Presence at any time of any above-ground and/or underground storage tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or under the Leased Property or any adjacent site or facility; or (f) Any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof or any adjoining property. Event of Default: As defined in Section 16.1. Expiration Date: The date set forth on Exhibit "A" attached hereto as the expiration date with respect to the Facility. Facility: The hotel and/or other facility offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property. [Fair Market Value: The fair market value of the leasehold estate hereunder, or under a replacement lease offered under Article XXXVIII, means an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for such leasehold estate, calculated based upon the present value (discounted at a rate of interest mutually agreeable to the parties), of the net income stream reasonably projected by the parties to be earned by Lessee under such lease for the then remaining 5 11 term of such lease, determined in accordance with the appraisal procedures set forth in Article XXXIII (with the understanding that such appraisers will be instructed to utilize the income stream approach as aforesaid) or in such other manner as shall be mutually acceptable to Lessor and Lessee, and assuming that such seller must pay customary closing costs.] FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as amended. Fiscal Year: The 12-month period from January 1 to December 31. Fixtures: As defined in Section 1.1. Food Sales: Shall mean gross revenue from the sale, for on-site consumption, of food and non-alcohol beverages sold at the Leased Property, including in respect to guest rooms, banquet rooms, meeting rooms and other similar rooms. Such revenues shall not include the following: (a) Vending machine sales; (b) Any gratuities or service charges added to a customer's bill or statement in lieu of a gratuity which is paid to an employee; (c) Non-alcoholic beverages sold from the bar or lounge; (d) Sales taxes or taxes of any other kind imposed on the sale of food or non-alcoholic beverages; and (e) Any revenues that are subsequently credited, refunded or rebated in the ordinary course of business. Franchise Agreement: Any franchise license agreement with a national franchisor under which the Facility is operated. GAAP: GAAP shall mean, as of any date of determination, accounting principles (a) set forth as generally accepted in then currently effective Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) set forth as generally accepted in then currently effective Statements of the Financial Accounting Standards Board or (c) that are then approved by such other entity as may be approved by a significant segment of the accounting profession in the United States of America. The term "consistently applied," as used in connection therewith, means that the accounting principles applied are consistent in all material respects to those applied at prior dates or for prior periods. Government: The United States of America, any state, district or territory thereof, any foreign nation, any state, district, department, territory or other political division thereof, or any political subdivision of any of the foregoing. Gross Revenues: All revenues, receipts, and income of any kind derived directly or indirectly by Lessee from or in connection with the Facility (including rentals or other payments from tenants, lessees, licensees or concessionaires but not including their gross receipts) whether on a cash basis or credit, paid or collected, determined in accordance with GAAP and the Uniform System, excluding, however: (i) funds furnished by Lessor, (ii) federal, state and municipal excise, sales, and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, 6 12 admissions, cabaret or similar or equivalent taxes and paid over to federal, state or municipal governments, (iii) gratuities paid to employees, (iv) proceeds of insurance and condemnation, (v) proceeds from sales other than sales in the ordinary course of business, (vi) all loan proceeds from financing or refinancings of the Facility or interests therein or components thereof, (vii) judgments and awards, except any portion thereof arising from normal business operations of the Facility, and (viii) items constituting "allowances" under the Uniform System. Hazardous Materials: All chemicals, pollutants, contaminants, wastes and toxic substances, including without limitation: (a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law; (b) Hazardous substances, as defined in CERCLA or in any Environmental Law; (c) Toxic substances, as defined in TSCA or in any Environmental Law; (d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law; and (e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenols, asbestos and urea formaldehyde. Impositions: Collectively, all taxes (including, without limitation, all ad valorem, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Lessee or its business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), ground rents, water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Lessee (including all interest and penalties thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term hereof may be assessed or imposed on or with respect to or be a lien upon (a) Lessor's interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee. Nothing contained in this definition of Impositions shall be construed to require Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor or any other person, or (2) any net revenue tax of Lessor or any other person, or (3) any tax imposed with respect to the sale, exchange or other disposition by Lessor of any Leased Property or the proceeds thereof, or (4) any single business, gross receipts (other than a tax on any rent received by Lessor from Lessee), transaction, privilege or similar taxes as the same relate to or are imposed upon Lessor, except to the extent that any tax, assessment, tax levy or charge that Lessee is obligated to pay pursuant to the first sentence of this definition and that is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is levied, assessed or imposed expressly in lieu thereof. Indemnified Party: Either of a Lessee Indemnified Party or a Lessor Indemnified Party. 7 13 Indemnifying Party: Any party obligated to indemnify an Indemnified Party pursuant to Sections 8.3 or 22.1. Insurance Requirements: All terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy. Inventory: All "Inventories of Merchandise" and "Inventories of Supplies" as defined in the Uniform System and including any property of the type described in Section 1221(1) of the Code. Land: As defined in Section 1.1(a). Lease: This Lease. Lease Year: Any 12-month period from January 1 through December 31 during the Term, or any shorter period at the beginning or end of the Term. Leased Improvements; Leased Property: Each as defined in Section 1.1. Legal Requirements: All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use or alteration thereof (whether by Lessee or otherwise), whether or not hereafter enacted and in force, including (a) all laws, rules or regulations pertaining to the environment, occupational health and safety and public health, safety or welfare, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations and regulations relating thereto and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property. Lending Institution: Any insurance company, credit company, federally insured commercial or savings bank, national banking association, savings and loan association, employees welfare, pension or retirement fund or system, corporate profit sharing or pension trust, college or university, or real estate investment trust, including any corporation qualified to be treated for federal tax purposes as a real estate investment trust, such trust having a net worth of at least $10,000,000. Lessee: The Lessee designated on this Lease and its respective permitted successors and assigns. Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest (including a stockholder's interest) in Lessee, the officers, directors, stockholders, employees, 8 14 agents and representatives of Lessee and any corporate stockholder, agent, or representative of Lessee, and the respective heirs, personal representatives, successors and assigns of any such officer, director, stockholder, employee, agent or representative. Management Agreement: As defined in Section 19.3. Manager: As defined in Section 19.3. Net Worth: The excess of total assets over total liabilities, total assets and total liabilities each to be determined in accordance with GAAP, excluding, however, from the determination of total assets: (a) unamortized goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, and other similar intangibles; (b) all deferred charges that are not required to be capitalized in accordance with GAAP or unamortized debt discounts and expense; (c) treasury stock; (d) securities which are not readily marketable (other than preferred stock or common stock of RFS or partnership interests of the Lessor); (e) any write-up in the book value of any asset resulting from a revaluation thereof; (f) this Lease or any other lease between the Lessor and the Lessee; and (g) any items not included in clauses (a) through (f) above that are treated as intangibles in conformity with GAAP. Notice: A notice given pursuant to Article XXXII. Officer's Certificate: A certificate of Lessee signed by the chief financial officer or another officer authorized so to sign by the board of directors or by-laws of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any such officer. Operating Budget: As defined in Section 24.2. Other Income: All revenues, receipts, and income of any kind derived directly or indirectly from or in connection with the Facility and included in Gross Revenues, other than Room Revenues, Food Sales and Beverage Sales. Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per annum, but in no event greater than the maximum rate then permitted under applicable law. Payment Date: Any due date for the payment of any installment of Base Rent. Percentage Rent: As defined in Section 3.1(b). Person: Any Government, natural person, corporation, partnership or other legal entity. Predecessor: Any Person whose liabilities arising under any Environmental Law have or may have been retained or assumed by Lessee, either contractually or by operation of law, relating to the Leased Property. Primary Intended Use: As defined in Section 7.2(b). Proceeding: Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution. 9 15 RCRA: The Resource Conservation and Recovery Act, as amended. Real Estate Taxes: All real estate taxes, including general and special assessments, if any, which are imposed upon the Land, and any improvements thereon. REIT Requirements: As defined in Section 19.1. Release: A "Release" as defined in CERCLA or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits. Rent: Collectively, the Base Rent, Percentage Rent, and Additional Charges. RFS: RFS Hotel Investors, Inc., a Tennessee corporation. Room Revenues: Shall mean gross revenue from the rental of guest rooms, whether to individuals, groups or transients, but excluding the following: (a) The amount of all credits, rebates or refunds to customers, guests or patrons; (b) All sales taxes or any other taxes imposed on the rental of such guest rooms; and (c) Any fees collected for amenities including, but not limited to: telephone, laundry, movies or concessions. SARA: The Superfund Amendments and Reauthorization Act of 1986, as amended. State: The State or Commonwealth of the United States in which the Leased Property is located. Subsidiaries: Corporations in which Lessee owns, directly or indirectly, more than 50% of the voting stock or control, as applicable (individually, a "Subsidiary"). Taking: A taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced. Term: As defined in Section 1.2. Transition Date: As defined in Section 7.2(f). TSCA: The Toxic Substances Control Act, as amended. Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto unless such lack of funds is caused by the failure of the other party hereto to perform any obligations of such party under this Lease or any guaranty of this Lease. 10 16 Uneconomic for its Primary Intended Use: A state or condition of the Facility such that, in the good faith judgment of Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Lessee, the Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, taking into account, among other relevant factors, the number of usable rooms and projected revenues, such that Lessee intends to, and shall, complete the cessation of operations at the Leased Facility. Uniform System: Shall mean the "Uniform System of Accounts for Hotels" (9th Revised Edition, 1996) as published by the American Hotel and Motel Association, as it may be amended from time to time with such exceptions as may be required by the provisions of this Lease. Unsuitable for its Primary Intended Use: A state or condition of the Facility such that, in the good faith judgment of Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Lessee, due to casualty damage or loss through Condemnation, the Facility cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel. ARTICLE III 3.1. Rent. Lessee will pay to lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, in immediately available funds, at Lessor's address set forth in Article XXXII hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Base Rent, Percentage Rent and Additional Charges, during the Term, as follows: (a) Base Rent: An annual sum in the amount set forth on Exhibit "B" hereto as the "Base Rent" for the Leased Property, payable in advance in equal, consecutive monthly installments, on or before the tenth day of each calendar month of the Term ("Base Rent"); provided, however, that the first monthly payment of Base Rent shall be payable on the Commencement Date and that the first and last monthly payments of Base Rent shall be pro rated as to any partial month (subject to adjustment as provided in Sections 5.2, 14.5, 15.3, 15.5, and 15.6); and (b) Percentage Rent: For each Fiscal Year during the Term commencing with the Fiscal Year in which the Commencement Date occurs, Tenant shall pay percentage rent ("Percentage Rent") 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 Fiscal Year, in an amount calculated by the following formula: The amount equal to the Quarterly Revenues Computation (as defined on Exhibit "B" attached hereto) less an amount equal to the Base Rent paid year to date for the applicable Fiscal Year less an amount equal to Percentage Rent paid year to date for the applicable Fiscal Year equals Percentage Rent for the applicable quarter. 11 17 Notwithstanding the amounts of Percentage Rent paid quarterly pursuant to the formula set forth above, for any Fiscal Year during the Term commencing with the Fiscal Year in which the Commencement Date occurs, the Percentage Rent payable under this Lease shall be no less than or greater than the amount calculated by the following formula: The amount equal to the Annual Revenues Computation (as defined on Exhibit "B" attached hereto) less an amount equal to the Base Rent paid year to date for the applicable Fiscal Year equals Percentage Rent for the applicable Fiscal Year. Set forth on Exhibit "B" attached hereto is an example of the Calculation of Percentage Rent. (c) Officer's Certificates. Additionally, an Officer's Certificate in form reasonably acceptable to Lessor shall be delivered to Lessor quarterly, together with such quarterly Percentage Rent payment, setting forth the calculation of such rent payment for such quarter within 35 days after each of the first three quarters of each Fiscal Year (or part thereof) in the Term. Such quarterly payments shall be based on the formula set forth in Section 3.1(b). There shall be no reduction in the Base Rent regardless of the result of the Revenue Computations. In addition, on or before February 10 of each year, commencing with the February 10 first following the end of the Fiscal Year in which the Commencement Date occurs, Lessee shall deliver to Lessor an Officer's Certificate reasonably acceptable to Lessor setting forth the computation of the actual Percentage Rent that accrued for the last quarter of the Fiscal Year that ended on the immediately preceding December 31 and shall pay to Lessor Percentage Rent, if due and payable, for the last quarter of the applicable Fiscal Year. The Officer's Certificate shall also set forth the computation of the Percentage Rent accrued and paid during the Fiscal Year that ended on the immediately preceding December 31. If the annual Percentage Rent due and payable for any Fiscal Year (as shown in the applicable Officer's Certificate) exceeds the amount actually paid as Percentage Rent by Lessee for such year, Lessee also shall pay such excess to Lessor at the time such certificate is delivered. If the Percentage Rent actually due and payable for such Fiscal Year is shown by such certificate to be less than the amount actually paid as Percentage Rent for the applicable Fiscal Year, Lessor, at its option, shall reimburse such amount to Lessee or credit such amount against the following months' Base Rent and, to the extent necessary, the next quarters' Percentage Rent payments. Any such credit to Base Rent shall not be applied for purposes of calculating Percentage Rent payable for any subsequent quarter. Any difference between the annual Percentage Rent due and payable for any Fiscal Year (as shown in the applicable Officer's Certificate or as adjusted pursuant to Section 3.3) and the total amount of quarterly payments for such Fiscal Year actually paid by Lessee as Percentage Rent, whether in favor of Lessor or Lessee, shall bear interest at the Overdue Rate, which interest shall accrue from the close of such Fiscal Year until the amount of such difference shall be paid or otherwise discharged. Any such interest payable to Lessor shall be deemed to be and shall be payable as Additional Charges. 12 18 The obligation to pay Percentage Rent shall survive the expiration or earlier termination of the Term, and a final reconciliation, taking into account, among other relevant adjustments, any adjustments which are accrued after such expiration or termination date but which related to Percentage Rent accrued prior to such termination date, and Lessee's good faith best estimate of the amount of any unresolved contractual allowances, shall be made not later than two years after such expiration or termination date, but Lessee shall advise Lessor within 60 days after such expiration or termination date of Lessee's best estimate at that time of the approximate amount of such adjustments, which estimate shall not be binding on Lessee or have any legal effect whatsoever. (d) CPI Adjustments to Rent. For each Fiscal Year of the Term beginning on or after the CPI Adjustment Year, the Base Rent then in effect, and the threshold Room Revenues then included in the Quarterly and Annual Revenues Computations set forth in Section 3.1(b) shall be adjusted from time to time beginning in the CPI Adjustment Year as follows: (1) The average Consumer Price Index for the most recently ended Fiscal Year shall be divided by the average Consumer Price Index for the immediately preceding Fiscal Year. (A) The new Base Rent for the then current Fiscal Year shall be the adjusted amount obtained by multiplying the Base Rent for the immediately preceding Fiscal Year by the quotient obtained in subparagraph (d)(1) above. (B) The new threshold dollar amount in the Quarterly and Annual Revenues Computations described in Section 3.1(b) above for the then current Fiscal Year shall be the product of the threshold dollar amount of Room Revenues in effect in the most recently ended Fiscal Year and the quotient obtained in subparagraph (1) above. By way of example, if the CPI Adjustment Year were 2002, the amount of Base Rent and the threshold Room Revenues amounts (and Food Sales and Beverage Sales amounts, if applicable) in the Quarterly and Annual Revenues Computations for the Fiscal Year commencing January 1, 2002 would be adjusted to reflect any change in the average Consumer Price Index from the Fiscal Year ended December 31, 2000 as compared to the Fiscal Year ended December 31, 2001. Base Rent and the threshold Room Revenues amounts (and Food Sales and Beverage Sales amounts, if applicable) in the Quarterly and Annual Revenues Computations for the Fiscal Year commencing January 1, 2003 would be the Base Rent and threshold Room Revenues amounts (and Food Sales and Beverage Sales amounts, if applicable) applicable for the fiscal year ended December 31, 2002 as further adjusted to reflect any change in the average Consumer Price Index from December 31, 2002 as compared to December 31, 2001. Lessor shall calculate the annual adjustments as soon as reasonably possible after the Consumer Price Index becomes available and shall notify Lessee in writing of the amount of the annual adjustment, together with a copy of the computation showing the adjustment amount. Adjustments calculated as set forth above in the Base Rent and threshold Room Revenues amounts (and Food Sales and Beverage Sales amounts, if applicable) shall be effective on January 1 of the Fiscal Year to which such adjusted amounts apply. If Rent is paid in any Fiscal Year prior to the determination of the amount of any adjustment to Base Rent or the threshold Room Revenues (and Food Sales and Beverage Sales amounts, if applicable) applicable for such Fiscal Year, payment adjustments for any shortfall in or overpayment of rent paid shall be made with the first Base Rent Payment due after the amount of the adjustments are determined. 13 19 The "average Consumer Price Index" for any period shall be the average of the Consumer Price Index for each month during the period. (2) If (i) a significant change is made in the number or nature (or both) of items used in determining the Consumer Price Index, or (ii) the Consumer Price Index shall be discontinued for any reason, the Bureau of Labor Statistics shall be requested to furnish a new index comparable to the Consumer Price Index, together with information which will make possible a conversion to the new index in computing the adjustments to Rent hereunder. If for any reason the Bureau of Labor Statistics does not furnish such an index and such information, the parties will instead mutually select, accept and use such other index or comparable statistics on the cost of living that is computed and published by an agency of the United States or a responsible financial periodical of recognized authority. 3.2. Confirmation of Percentage Rent. Lessee shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with its usual and customary practices, and in accordance with generally accepted accounting principles and the Uniform System, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain, for at least four years after the expiration of each Fiscal Year (and in any event until the reconciliation described in Section 3.1(c) for such Fiscal Year has been made), reasonably adequate records conforming to such accounting system showing all data necessary to compute Percentage Rent for the applicable Fiscal Years. Lessor, at its expense (except as provided hereinbelow), shall have the right from time to time by its accountants or representatives to audit the information that formed the basis for the data set forth in any Officer's Certificate provided under Section 3.1(c) and, in connection with such audits, to examine all Lessee's records (including supporting data, franchisor reports and sales and excise tax returns) reasonably required to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under Legal Requirements. If any such audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of such audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of payment thereof; provided, however, that as to any audit that is commenced more than two years after the date Percentage Rent for any Fiscal Year is reported by Lessee to Lessor, the deficiency, if any, with respect to such Percentage Rent shall bear interest at the Overdue Rate only from the date such determination of deficiency is made unless such deficiency is the result of gross negligence or willful misconduct on the part of Lessee, in which case interest at the Overdue Rate will accrue from the date such payment should have been made to the date of payment thereof. If any such audit discloses that the Percentage Rent actually due from Lessee for any Fiscal Year exceed those reported and paid by Lessee by more than 3%, Lessee shall pay the cost of such audit and examination. Any proprietary information obtained by Lessor pursuant to the provisions of this Section shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation between the parties and except further that Lessor may disclose such information to prospective lenders. The obligations of Lessee contained in this Section shall survive the expiration or earlier termination of this Lease. 3.3. Additional Charges. In addition to the Base Rent and Percentage Rent, (a) Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and Impositions that Lessee assumes or agrees to pay under this Lease, and (b) in the event of any failure on the part of Lessee to pay any of those items referred to in clause (a) of this Section 3.3, Lessee also will promptly pay and discharge every fine, penalty, interest and cost that may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) of this Section 3.3 being additional 14 20 rent hereunder and being referred to herein collectively as the "Additional Charges"), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Base Rent, including, but not limited to, the right, but not the obligation to pay such Additional Charges on behalf of the Lessee and to require reimbursement thereof by Lessee, together with interest thereon at the Overdue Rate. If any installment of Base Rent, Percentage Rent or Additional Charges (but only as to those Additional Charges that are payable directly to Lessor) shall not be paid on its due date, Lessee will pay Lessor on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of its obligation to pay such Additional Charges to the entity to which they would otherwise be due and Lessor shall pay same from monies received from Lessee. 3.4. Net Lease Provision. The Rent shall be paid absolutely net to Lessor, so that this Lease shall yield to Lessor the full amount of the installments of Base Rent, Percentage Rent and Additional Charges throughout the Term, all as more fully set forth in Article V, but subject to any other provisions of this Lease that expressly provide for adjustment or abatement of Rent or other charges or expressly provide that certain expenses or maintenance shall be paid or performed by Lessor. 3.5. Conversion of Property. If, during the Term, Lessee wishes to cease food and beverage operations or institute food and beverage operations at the Facility (all in accordance with the requirements of any applicable Franchise Agreement), Lessee shall give notice of such desire to Lessor. If, during the Term, Lessor wishes (a) Lessee to cease food and beverage operations or to institute food and beverage operations at the Facility (all in accordance with the requirements of any applicable Franchise Agreement), or (b) to change the franchise affiliation of the Facility or to make substantial renovations to the Facility, Lessor shall give notice thereof to Lessee. Following any such notice, Lessor and Lessee shall commence negotiations to adjust Rent to reflect the proposed renovation or change to the operation of the Facility, each acting reasonably and in good faith, and subject to Lessor's reasonable satisfaction that any Rent adjustment will not adversely affect RFS' status as a real estate investment trust under the Code. All other terms of this Lease will remain substantially the same. During negotiations, which shall not extend beyond 60 days, Lessee shall not "convert" the Facility and Lessor shall not change the franchise or commence substantial renovations and Lessee shall continue fulfilling its obligations under the existing terms of this Lease. If no agreement is reached after such 60-day period, Lessee or Lessor, as appropriate, shall withdraw such notice and this Lease shall continue in full force. ARTICLE IV 4.1. Payment of Impositions. Subject to Article XII relating to permitted contests, Lessee will pay, or cause to be paid, all Impositions (other than Real Estate Taxes, which shall be paid by Lessor) before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing or other authorities where feasible, and will promptly furnish to Lessor copies of official receipts or other satisfactory proof evidencing such payments. Lessee's obligation to pay such Impositions shall be deemed absolutely fixed upon the date such Impositions become a lien upon the Leased Property or any part thereof. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and in such event, shall pay such installments during the Term hereof (subject 15 21 to Lessee's right of contest pursuant to the provisions of Article XII) as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. Lessor, at its expense, shall, to the extent required or permitted by applicable law, prepare and file all tax returns in respect of Lessor's net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes, Real Estate Taxes and taxes on its capital stock, and Lessee, at its expense, shall, to the extent required or permitted by applicable laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by governmental authorities. If any refund shall be due from any taxing authority in respect of any Imposition paid by Lessee, the same shall be paid over to or retained by Lessee if no Event of Default shall have occurred hereunder and be continuing. If an Event of Default shall have occurred and be continuing, any such refund shall be paid over to or retained by Lessor. Any such funds retained by Lessor due to an Event of Default shall be applied as provided in Article XVI. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. Lessee shall file all personal property tax returns in such jurisdictions where it is legally required to so file. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property. Where Lessor is legally required to file personal property tax returns, Lessor shall provide Lessee with copies of assessment notices in sufficient time for Lessee to file a protest. Lessee may, upon notice to Lessor, at Lessee's option and at Lessee's sole expense, protest, appeal, or institute such other proceedings (in its or Lessor's name) as Lessee may deem appropriate to effect a reduction of real estate or personal property assessments for those Impositions to be paid by Lessee, and Lessor, at Lessee's expense as aforesaid, shall fully cooperate with Lessee in such protest, appeal, or other action. Lessee hereby agrees to indemnify, defend, and hold harmless Lessor from and against any claims, obligations, and liabilities against or incurred by Lessor in connection with such cooperation. Billings for reimbursement of personal property taxes by Lessee to Lessor shall be accompanied by copies of a bill therefor and payments thereof which identify the personal property with respect to which such payments are made. Lessor, however, reserves the right to effect any such protest, appeal or other action and, upon notice to Lessee, shall control any such activity, which shall then go forward at Lessor's sole expense. Upon such notice, Lessee, at Lessor's expense, shall cooperate fully with such activities. 4.2. Notice of Impositions. To the extent Lessor is notified of any Impositions, Lessor shall give prompt Notice to Lessee of such Impositions payable by Lessee hereunder, provided that Lessor's failure to give any such Notice shall in no way diminish Lessee's obligations hereunder to pay such Impositions, but such failure shall obviate any default hereunder for a reasonable time after Lessee receives Notice of any Imposition which it is obligated to pay during the first taxing period applicable thereto. 4.3. Adjustment of Impositions. Impositions imposed in respect of the tax-fiscal period during which the Term terminates shall be adjusted and prorated between Lessor and Lessee, whether or not such Imposition is imposed before or after such termination, and Lessee's obligation to pay its prorated share thereof after termination shall survive such termination. 4.4. Utility Charges. Lessee will be solely responsible for obtaining and maintaining utility services to the Leased Property and will pay or cause to be paid all charges for electricity, gas, oil, water, sewer and other utilities used in the Leased Property during the Term. 16 22 4.5. Insurance Premiums. Lessee will pay or cause to be paid all premiums for the insurance coverages required to be maintained by it under Article XIII. ARTICLE V 5.1. No Termination, Abatement, etc.. Except as otherwise specifically provided in this Lease, and except for loss of the Franchise Agreement solely by reason of any action or inaction by Lessor, Lessee, to the extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the written consent of Lessor to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of the Rent, or setoff against the Rent, nor shall the obligations of Lessee be otherwise affected by reason of (a) any damage to, or destruction of, any Leased Property or any portion thereof from whatever cause or any Taking of the Leased Property or any portion thereof, (b) the lawful or unlawful prohibition of, or restriction upon, Lessee's use of the Leased Property, or any portion thereof, or the interference with such use by any Person, corporation, partnership or other entity, or by reason of eviction by paramount title, (c) any claim which Lessee has or might have against Lessor by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, or (e) for any other cause whether similar or dissimilar to any of the foregoing other than a discharge of Lessee from any such obligations as a matter of law. Lessee hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (1) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (2) entitle Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or by termination of this Lease other than by reason of an Event of Default. 5.2. Abatement Procedures. In the event of a partial Taking as described in Section 15.5, the Lease shall not terminate, but the Base Rent shall be abated in the manner and to the extent that is fair, just and equitable to both Lessee and Lessor, taking into consideration, among other relevant factors, the number of usable rooms, the amount of square footage, or the revenues affected by such partial Taking. If Lessor and Lessee are unable to agree upon the amount of such abatement within 30 days after such partial Taking, the matter may be submitted by either party to a court of competent jurisdiction for resolution. ARTICLE VI 6.1. Ownership of the Leased Property. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease. 6.2. Lessee's Personal Property. Lessee will acquire and maintain throughout the Term such Inventory as is required to operate the Leased Property in the manner contemplated by this Lease. Lessee may (and shall as provided hereinbelow), at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements, any items of personal property (including Inventory) 17 23 owned by Lessee. Lessee, at the commencement of the Term, and from time to time thereafter, shall provide Lessor with an accurate list of all such items of Lessee's personal property (collectively, the "Lessee's Personal Property"). Lessee may, subject to the first sentence of this Section 6.2 and the conditions set forth below, remove any of Lessee's Personal Property set forth on such list at any time during the Term or upon the expiration or any prior termination of the Term. All of Lessee's Personal Property, other than Inventory, not removed by Lessee within ten days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving Notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 9.1(d), including repair of all damage to the Leased Property caused by the removal of Lessee's Personal Property, whether effected by Lessee or Lessor. Upon the expiration or earlier termination of the Term, Lessee shall sell and Lessor, or its designee, shall purchase all Inventory on hand at the Leased Property at the time of such expiration or termination for a sale price equal to Lessee's actual cost of such Inventory, as evidenced by invoices, receipts, or other reasonable documentation. Lessee may make such financing arrangements, title retention agreements, leases or other agreements with respect to the Lessee's Personal Property as it sees fit provided that Lessee first advises Lessor of any such arrangement and such arrangement expressly provides that in the event of Lessee's default thereunder, Lessor (or its designee) may assume Lessee's obligations and rights under such arrangement. 6.3. Lessor's Lien. To the fullest extent permitted by applicable law, Lessor is granted a lien and security interest on all Lessee's personal property now or hereinafter placed in or upon the Leased Property, and such lien and security interest shall remain attached to such Lessee's personal property until payment in full of all Rent and satisfaction of all of Lessee's obligations hereunder; provided, however, Lessor shall subordinate its lien and security interest to that of any non-Affiliate of Lessee which finances such Lessee's personal property or any non-Affiliate conditional seller of such Lessee's personal property, the terms and conditions of such subordination to be satisfactory to Lessor in the exercise of reasonable discretion. Lessee shall, upon the request of Lessor, execute such financing statements or other documents or instruments reasonably requested by Lessor to perfect the lien and security interests herein granted. ARTICLE VII 7.1. Condition of the Leased Property. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Lessee is leasing the Leased Property "as is" in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Provided, however, to the extent permitted by law, Lessor hereby assigns to Lessee all of Lessor's rights to proceed against any predecessor in title other than Lessee for breaches of warranties or representations or for latent defects in the Leased Property. Lessor shall fully cooperate with Lessee in the prosecution of any such claim, in Lessor's or Lessee's name, all at Lessee's sole cost and expense. Lessee hereby 18 24 agrees to indemnify, defend and hold harmless Lessor from and against any claims, obligations and liabilities against or incurred by Lessor in connection with such cooperation. 7.2. Use of the Leased Property. (a) Lessee covenants that it will proceed with all due diligence and will exercise its best efforts to obtain and to maintain all approvals needed to use and operate the Leased Property and the Facility under applicable local, state and federal law. (b) Lessee shall use or cause to be used the Leased Property only as a hotel facility, and for such other uses as may be necessary or incidental to such use or such other use as otherwise approved by Lessor (the "Primary Intended Use"). Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Lessor, which consent may be granted, denied or conditioned in Lessor's sole discretion. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by law or fire underwriter's regulations. Lessee shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee's Personal Property. (c) Subject to the provisions of Articles XIV, XV, XXI and XXII, Lessee covenants and agrees that during the Term it will (1) operate continuously the Leased Property as a hotel facility, (2) keep in full force and effect and comply with all the provisions of the Franchise Agreement (other than requirements with respect to Capital Improvements), (3) not terminate or amend the Franchise Agreement without the consent of Lessor, (4) maintain appropriate certifications and licenses for such use and (5) will seek to maximize the gross revenues generated therefrom consistent with sound business practices. (d) Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Lessee cause or permit any nuisance thereon. (e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Lessee's Personal Property, to be used in such a manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, except as necessary in the ordinary and prudent operation of the Facility on the Leased Property. (f) Throughout the Term, neither Lessee nor any Affiliate of Lessee shall own, lease, operate, manage, franchise or have any interest in any hotel or motel that is within a five (5) mile radius of any hotel or motel property in which Lessor or an Affiliate of Lessor has an interest on the date Lessee or its Affiliate would otherwise commence operating or managing such property, other than pursuant to this Lease or another lease, agreement or arrangement with Lessor or an Affiliate of Lessor. Lessee agrees to notify Lessor, from time to time at the request of Lessor, of the location of any hotel or motel property the Lessee or any Affiliate owns, leases, operates, manages or has an interest in. Lessor 19 25 agrees to notify Lessee, from time to time at the request of Lessee, of the location of any hotel or motel property in which Lessor or an Affiliate of Lessor has an interest. At the request of Lessor, Lessee shall provide such information as Lessor may reasonably request in order to confirm to the Lessor that the requirements of this paragraph (f) are satisfied. 7.3. Lessor to Grant Easements, etc. Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Lessee and at Lessee's cost and expense (but subject to the approval of Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute amendments to any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Leased Property), but only upon delivery to Lessor of an Officer's Certificate stating that such grant, release, dedication, transfer, petition or amendment is not detrimental to the proper conduct of the business of Lessee on the Leased Property and does not materially reduce the value of the Leased Property. ARTICLE VIII 8.1. Compliance with Legal and Insurance Requirements, etc. Subject to Section 8.3(b) below and Article XII relating to permitted contests, and subject further to the obligations of Lessor with respect to Capital Improvements as set forth in Section 9.1(b), Lessee, at its expense, will promptly (a) comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property, and (b) procure, maintain and comply with all appropriate licenses and other authorizations required for any use of the Leased Property and Lessee's Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof. 8.2. Legal Requirement Covenants. Subject to Section 8.3(b) below, Lessee covenants and agrees that the Leased Property and Lessee's Personal Property shall not be used for any unlawful purpose, and that Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others. Lessee shall acquire and maintain all appropriate licenses, certifications, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder. Lessee further covenants and agrees that Lessee's use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Lessee shall cause all such sub-tenants, invitees or others to so comply with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor, contest the legality or applicability of any such Legal Requirement or any licensure or certification decision if Lessee maintains such action in good faith, with due diligence, without prejudice to Lessor's rights hereunder, and at Lessee's sole expense. If by the terms of any such Legal Requirement compliance therewith pending the prosecution of any such proceeding may legally be delayed without the incurrence of any lien, charge or liability of any kind against the Facility or Lessee's leasehold interest therein and without subjecting Lessee or Lessor to any liability, civil or criminal, for failure so to comply therewith, Lessee may delay 20 26 compliance therewith until the final determination of such proceeding. If any lien, charge or civil or criminal liability would be incurred by reason of any such delay, Lessee, on the prior written consent of Lessor, which consent shall not be unreasonably withheld, may nonetheless contest as aforesaid and delay as aforesaid provided that such delay would not subject Lessor to criminal liability and Lessee both (a) furnishes to Lessor security reasonably satisfactory to Lessor against any loss or injury by reason of such contest or delay and (b) prosecutes the contest with due diligence and in good faith. 8.3. Environmental Covenants. Lessor and Lessee (in addition to, and not in diminution of, Lessee's covenants and undertakings in Sections 8.1 and 8.2 hereof) covenant and agree as follows: (a) At all times hereafter until such time as all liabilities, duties or obligations of Lessee to the Lessor under the Lease have been satisfied in full, Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon, subject to the obligations of Lessor with respect to Capital Improvements as set forth in Section 9.1(b) unless caused by the acts or grossly negligent failures to act of Lessee. Lessee agrees to give Lessor written notice of the following, promptly after Lessee receives knowledge thereof: (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release at, on, in or under any property adjacent to the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters. (b) Lessor hereby agrees to defend, indemnify and save harmless any and all Lessee Indemnified Parties from and against any and all Environmental Liabilities other than Environmental Liabilities which were caused by the acts or grossly negligent failures to act of Lessee. (c) Lessee hereby agrees to defend, indemnify and save harmless any and all Lessor Indemnified Parties from and against any and all Environmental Liabilities caused by the acts or grossly negligent failures to act of Lessee. (d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification under either Section 8.3(b) or (c), the Indemnifying Party, upon request, shall at its sole expense resist and defend such Proceeding, or cause the same to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless such counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, nonappealable judgment for an adversary party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgement. 21 27 (e) At any time any Indemnified Party has reason to believe circumstances exist which could reasonably result in an Environmental Liability, upon reasonable prior written notice to Lessee stating such Indemnified Party's basis for such belief, an Indemnified Party shall be given immediate access to the Leased Property (including, but not limited to, the right to enter upon, investigate, drill wells, take soil borings, excavate, monitor, test, cap and use available land for the testing of remedial technologies), Lessee's employees, and to all relevant documents and records regarding the matter as to which a responsibility, liability or obligation is asserted or which is the subject of any Proceeding; provided that such access may be conditioned or restricted as may be reasonably necessary to ensure compliance with law and the safety of personnel and facilities or to protect confidential or privileged information. All Indemnified Parties requesting such immediate access and cooperation shall endeavor to coordinate such efforts to result in as minimal interruption of the operation of the Leased Property as practicable. (f) The indemnification rights and obligations provided for in this Article VIII shall be in addition to any indemnification rights and obligations provided for elsewhere in this Lease. (g) The indemnification rights and obligations provided for in this Article VIII shall survive the termination of this Agreement. For purposes of this Section 8.3, all amounts for which any Indemnified Party seeks indemnification shall be computed net of (a) any actual income tax benefit resulting therefrom to such Indemnified Party, (b) any insurance proceeds received (net of tax effects) with respect thereto, and (c) any amounts recovered (net of tax effects) from any third parties based on claims the Indemnified Party has against such third parties which reduce the damages that would otherwise be sustained; provided that in all cases, the timing of the receipt or realization of insurance proceeds or income tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of damages. Each Indemnified Party agrees to use its reasonable efforts to pursue, or assign to Lessee or Lessor, as the case may be, any claims or rights it may have against any third party which would materially reduce the amount of damages otherwise incurred by such Indemnified Party. Notwithstanding anything to the contrary contained in this Agreement, if Lessor shall become entitled to the possession of the Leased Property by virtue of the termination of the Lease or repossession of the Leased Property, then Lessor may assign its indemnification rights under Section 8.3 of this Agreement (but not any other rights hereunder) to any Person to whom the Lessor subsequently transfers the Leased Property, subject to the following conditions and limitations, each of which shall be deemed to be incorporated into the terms of such assignment, whether or not specifically referred to therein: (1) The indemnification rights referred to in this section may be assigned only if a known Environmental Liability then exists or if a Proceeding is then pending or, to the knowledge of Lessee or Lessor, then threatened with respect to the Leased Property; (2) Such indemnification rights shall be limited to Environmental Liabilities relating to or specifically affecting the Leased Property; and (3) Any assignment of such indemnification rights shall be limited to the immediate transferee of Lessor, and shall not extend to any such transferee's successors or assigns. 22 28 ARTICLE IX 9.1. Maintenance and Repair. (a) Except as provided in Section 9.1(b) or Article XIV, Lessee, at its sole expense, will keep the Leased Property in good order and repair except for ordinary wear and tear (whether or not the need for such repairs occurred as a result of Lessee's use, any prior use, the elements or the age of the Leased Property, or any portion thereof), and, with reasonable promptness, make all necessary and appropriate repairs, replacements, and improvements thereto of every kind and nature, whether interior or exterior, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term of this Lease (concealed or otherwise), or required by any governmental agency having jurisdiction over the Leased Property. Lessee, however, shall be permitted to prosecute claims against Lessor's predecessors in title for breach of any representation or warranty or for any latent defects in the Leased Property to be maintained by Lessee unless Lessor is already diligently pursuing such a claim. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work. Lessee will not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of the Leased Property or any part thereof for its Primary Intended Use. (b) Notwithstanding Lessee's obligations under Section 9.1(a) above or elsewhere in this Lease, unless caused by Lessee's negligence or willful misconduct or that of its employees or agents, Lessee shall not be responsible for any Capital Improvements, including (without limitation) Capital Improvements required by the Franchisor under the Franchise Agreement. Lessor shall be responsible for all Capital Improvements, subject to (i) Lessor's right to approve the Capital Budget pursuant to Article XL, and (ii) Lessor's right in its sole discretion to refuse to make any Capital Expenditure required by the Franchisor; provided that, if such refusal results in a default under or termination of the Franchise Agreement, Lessor shall be responsible for all damages, termination payments payable by Lessee under the terms of the Franchise Agreement, application fees for a new franchise license approved by Lessor, increased royalty fees and other costs arising out of such refusal or out of the resulting need to apply for and enter into a substitute franchise license agreement. Except as set forth in the preceding sentence, Lessor shall not under any circumstances be required to build or rebuild any improvement on the Leased Property, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to the Leased Property, whether ordinary or extraordinary, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, in connection with this Lease, or to maintain the Leased Property in any way. Lessee hereby waives, to the extent permitted by law, the right to make repairs at the expense of Lessor pursuant to any law in effect at the time of the execution of this Lease or hereafter enacted. Lessor shall have the right to give, record and post, as appropriate, notices of nonresponsibility under any mechanic's lien laws now or hereafter existing. (c) Nothing contained in this Lease and no action or inaction by Lessor shall be construed as (1) constituting the request of Lessor, expressed or implied, to any contractor, subcontractor, laborer, materialman or vendor to or for the performance of any labor or services or the furnishing of any materials or other property for the construction, alteration, addition, repair or demolition of or to the Leased Property or any part thereof, or (2) giving Lessee any right, power or permission to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Lessor in respect thereof or to make any agreement that may create, or in any way be the basis for any right, title, interest, lien, claim or other encumbrance upon the estate of Lessor in the Leased Property, or any portion thereof. 23 29 (d) Lessee will, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Lease and except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in good order and repair, as would a prudent owner, during the entire Term of the Lease, to the extent required in Section 9.1(a)), or damage by casualty or Condemnation (subject to the obligations of Lessee to restore or repair as set forth in the Lease.) 9.2. Encroachments, Restrictions, Etc. If any of the Leased Improvements, at any time, materially encroach upon any property, street or right-of-way adjacent to the Leased Property, or violate the agreements or conditions contained in any lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof, or impair the rights of others under any easement or right-of-way to which the Leased Property is subject, then promptly upon the request of Lessor or at the behest of any person affected by any such encroachment, violation or impairment, Lessee shall, at its expense, subject to its right to contest the existence of any encroachment, violation or impairment and in such case, in the event of an adverse final determination, either (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Lessor or Lessee or (b) make such changes in the Leased Improvements, and take such other actions, as Lessee in the good faith exercise of its judgment deems reasonably practicable to remove such encroachment, and to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Leased Improvements for the Primary Intended Use substantially in the manner and to the extent the Leased Improvements were operated prior to the assertion of such violation, impairment or encroachment; provided, however, that any Capital Improvement shall be the responsibility of Lessor. Any such alteration shall be made in conformity with the applicable requirements of Article X. Lessee's obligations under this Section 9.2 shall be in addition to and shall in no way discharge or diminish any obligation of any insurer under any policy of title or other insurance held by Lessor. ARTICLE X 10.1. Alterations. Lessee shall have the right to make additions, modifications or improvements to the Leased Property from time to time as Lessee, in its discretion, may deem to be desirable for its permitted uses and purposes, provided that such action will not significantly alter the character or purposes or significantly detract from the value or operating efficiency thereof and will not significantly impair the revenue-producing capability of the Leased Property or adversely affect the ability of the Lessee to comply with the provisions of this Lease. The cost of such additions, modifications or improvements to the Leased Property shall be paid by Lessee, and all such additions, modifications and improvements shall, without payment by Lessor at any time, be included under the terms of this Lease and upon expiration or earlier termination of this Lease shall pass to and become the property of Lessor. 10.2. Salvage. All materials which are scrapped or removed in connection with the making of repairs required by Articles IX or X shall be or become the property of Lessor or Lessee depending on which party is paying for or providing the financing for such work. 10.3. Joint Use Agreements. If Lessee constructs additional improvements that are connected to the Leased Property or share maintenance facilities, HVAC, electrical, plumbing or other systems, 24 30 utilities, parking or other amenities, the parties shall enter into a mutually agreeable cross-easement or joint use agreement to make available necessary services and facilities in connection with such additional improvements, to protect each of their respective interests in the properties affected, and to provide for separate ownership, use, and/or financing of such improvements. ARTICLE XI Liens. Subject to the provision of Article XII relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including, however, (a) this Lease, (b) the matters, if any, included as exceptions in the title policy insuring Lessor's interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor or any easements granted pursuant to the provisions of Section 7.3 of this Lease, (d) liens for those taxes upon Lessor which Lessee is not required to pay hereunder, (e) subleases permitted by Article XXIII hereof, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (1) the same are not yet payable or are payable without the addition of any fine or penalty or (2) such liens are in the process of being contested as permitted by Article XII, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due provided that (1) the payment of such sums shall not be postponed under any related contract for more than 60 days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor or (2) any such liens are in the process of being contested as permitted by Article XII hereof, and (h) any liens which are the responsibility of Lessor pursuant to the provisions of Article XXXIV of this Lease. ARTICLE XII Permitted Contests. Lessee shall have the right to contest the amount or validity of any Imposition to be paid by Lessee or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim ("Claims") not otherwise permitted by Article XI, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Lessee's covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale or risk the loss of the Leased Property, or any part thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of trust or security deed encumbering the Leased Property or any interest therein. Upon the request of Lessor, Lessee shall either (a) provide a bond or other assurance reasonably satisfactory to Lessor that all Claims which may be assessed against the Leased Property together with interest and penalties, if any, thereon will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company as trustee upon terms reasonably satisfactory to Lessor, as security for the payment of such Claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith, as to all Claims which may be assessed against or become a Claim on the Leased Property, or any part thereof, in said legal proceedings. Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of such deposit within five days of the same. Lessor agrees to join in any such proceedings if the same be required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor from any such costs or 25 31 expenses. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In the event that Lessee fails to pay any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay such charges together with any interest and penalties and the same shall be repayable by Lessee to Lessor as Additional Charges at the next Payment Date provided for in this Lease. Provided, however, that should Lessor reasonably determine that the giving of such Notice would risk loss to the Leased Property or cause damage to Lessor, then Lessor shall give such Notice as is practical under the circumstances. Lessor reserves the right to contest any of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the contest of any claims. ARTICLE XIII 13.1. General Insurance Requirements. During the Term of this Lease, Lessor shall at all times keep the Leased Property insured with the kinds and amounts of insurance described below. This insurance shall be written by companies authorized to issue insurance in the State. The policies must name Lessor as the insured or as an additional named insured, as the case may be. Losses shall be payable to Lessor or Lessee as provided in this Lease. Any loss adjustment shall require the written consent of Lessor and Lessee, each acting reasonably and in good faith. Evidence of insurance shall be deposited with Lessor. The policies on the Leased Property, including the Leased Improvements, Fixtures and Lessee's Personal Property, shall include: (a) Building insurance on the "Special Form" (formerly "All Risk" form) (including earthquake and flood in reasonable amounts as determined by Lessor) in an amount not less than 100% of the then full replacement cost thereof (as defined in Section 13.2) or such other amount which is acceptable to Lessor, and personal property insurance on the "Special Form" in the full amount of the replacement cost thereof; (b) Insurance for loss or damage (direct and indirect) from steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Facility, in the minimum amount of $5,000,000 or in such greater amounts as are then customary or as may be reasonably requested by Lessor from time to time; (c) Loss of income insurance on the "Special Form", in the amount of one year of Base Rent for the benefit of Lessor, and business interruption insurance on the "Special Form" in the amount of one year of gross profit, for the benefit of Lessee; (d) Commercial general liability insurance, with amounts not less than $10,000,000 covering each of the following: bodily injury, death, or property damage liability per occurrence, personal and advertising injury, general aggregate, products and completed operations, with respect to Lessor, and "all risk legal liability" (including liquor law or "dram shop" liability if liquor or alcoholic beverages are served on the Leased Property) with respect to Lessor and Lessee; (e) Insurance covering such other hazards and in such amounts as may be customary for comparable properties in the area of the Leased Property and is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the State at rates which are economically practicable in relation to the risks covered as may be reasonably requested by Lessor; 26 32 (f) Fidelity bonds with limits and deductibles as may be reasonably requested by Lessor, covering Lessee's employees in job classifications normally bonded under prudent hotel management practices in the United States or otherwise required by law; (g) Workers' compensation insurance to the extent necessary to protect Lessor and the Leased Property against Lessee's workers' compensation claims; (h) Vehicle liability insurance for owned, non-owned, and hired vehicles, in the amount of $1,000,000; (i) Such other insurance as Lessor may reasonably request for facilities such as the Leased Property and the operation thereof; and Lessor shall keep in force the foregoing insurance coverages at its expense; provided, however, that Lessee shall reimburse Lessor for any premium or premiums paid by Lessor for the coverages required under Sections 13.1(c)-13.1(i) and any other "casualty" coverages required by Lessor. 13.2. Replacement Cost. The term "full replacement cost" as used herein shall mean the actual replacement cost of the Leased Property requiring replacement from time to time including an increased cost of construction endorsement, if available, and the cost of debris removal. In the event either party believes that full replacement cost (the then-replacement cost less such exclusions) has increased or decreased at any time during the Lease Term, it shall have the right to have such full replacement cost re-determined. 13.3. Worker's Compensation. Lessee, at its sole cost, shall at all times maintain adequate worker's compensation insurance coverage for all persons employed by Lessee on the Leased Property. Such worker's compensation insurance shall be in accordance with the requirements of applicable local, state and federal law. 13.4. Waiver of Subrogation. All insurance policies carried by Lessor or Lessee covering the Leased Property, the Fixtures, the Facility or Lessee's Personal Property, including, without limitation, contents, fire and casualty insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. The parties hereto agree that their policies will include such waiver clause or endorsement so long as the same are obtainable without extra cost, and in the event of such an extra charge the other party, at its election, may pay the same, but shall not be obligated to do so. 13.5. Form Satisfactory, etc. All of the policies of insurance referred to in this Article XIII shall be written in a form, with deductibles and by insurance companies satisfactory to Lessor. Subject to the right to reimbursement or credit specified in Section 13.1, Lessor shall pay all of the premiums therefor, and deliver such policies or certificates thereof to Lessee prior to their effective date (and, with respect to any renewal policy, 30 days prior to the expiration of the existing policy), and in the event of the failure of Lessor either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof to Lessee at the times required, Lessee shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, and Lessor shall reimburse Lessee for any premium or premiums paid by Lessee for the coverages required under Sections 13.1(a) and 13.1(b) upon written demand therefor, and Lessor's failure to repay the same within 30 days after Notice of such failure from Lessee shall constitute an Event of Default within the meaning of Section 16.1(b). Each insurer mentioned in this Article XIII shall agree, by endorsement to the policy or policies issued by it, or by independent instrument furnished to Lessee, that it will give to Lessee 30 days' 27 33 written notice before the policy or policies in question shall be materially altered, allowed to expire or canceled. 13.6. Increase in Limits. If either Lessor or Lessee at any time deems the limits of the personal injury or property damage under the comprehensive public liability insurance then carried to be either excessive or insufficient, Lessor or Lessee shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section. 13.7. Blanket Policy. Notwithstanding anything to the contrary contained in this Article XIII, Lessor may bring the insurance provided for herein within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessor; provided, however, that the coverage afforded to Lessee will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article 0 are otherwise satisfied. 13.8. No Separate Insurance. Lessee shall not on Lessee's own initiative or pursuant to the request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article XIII to be furnished, or increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Lessor, are included therein as additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. Lessee shall immediately notify Lessor that Lessee has obtained any such separate insurance or of the increasing of any of the amounts of the then existing insurance. ARTICLE XIV 14.1. Insurance Proceeds. Subject to the provisions of Section 14.6, all proceeds payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article XIII of this Lease shall be paid to Lessor and held by Lessor in an interest-bearing account, shall be made available, if applicable, for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and, if applicable, shall be paid out by Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions specified by Lessor. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be paid to Lessor. If neither Lessor nor Lessee is required or elects to repair and restore, all insurance proceeds shall be retained by Lessor. All salvage resulting from any risk covered by insurance shall belong to Lessor. 14.2. Reconstruction in the Event of Damage or Destruction Covered by Insurance. (a) Except as provided in Section 14.6, if during the Term the Leased Property is totally or partially destroyed by a risk covered by the insurance described in Article XIII, whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, Lessee shall be obligated, but only to the extent of any insurance proceeds made available to Lessee and any other sums 28 34 advanced by Lessor pursuant to the next sentence, to restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease. If the insurance proceeds are not adequate to restore the Facility to that condition, each of Lessor and Lessee shall have the right to terminate this Lease, without in any way affecting any other leases in effect between Lessor and Lessee, by giving Notice to the other and all insurance proceeds shall be retained by Lessor; provided, however that, if such termination is by Lessee, Lessor shall have the right, in its sole discretion, to nullify the termination and keep this Lease in full force by providing, within thirty (30) days after Lessee's Notice of termination, a Notice to Lessee of Lessor's unconditional, legally binding obligation to be responsible for all restoration costs in excess of the insurance proceeds. If this Lease is terminated by either party as aforesaid (and such termination is not nullified by Lessor) and if the inadequacy of insurance proceeds was the result of Lessor's failure to maintain the proper insurance coverages as required pursuant to Article XIII, Lessor shall, within 180 days after such termination, either (i) pay to Lessee the Fair Market Value of the leasehold estate hereunder as of the termination date or (ii) offer to lease to Lessee one or more hotel facilities pursuant to one or more leases that would create for Lessee leasehold estates having an aggregate Fair Market Value no less than the Fair Market Value of the leasehold estate hereunder, as of the date of termination. If this Lease is not terminated and Lessee restores the Facility, the insurance proceeds, and any other sums made available by Lessor as aforesaid, shall be paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions, and any excess proceeds remaining after such restoration shall be retained by Lessor. (b) Notwithstanding the provisions of Section 14.2(a) above, if Lessee cannot within a reasonable time obtain all necessary government approvals, including building permits, licenses and conditional use permits, after diligent efforts to do so, to perform all required repair and restoration work and to operate the Facility for its Primary Intended Use in substantially the same manner as that existing immediately prior to such damage or destruction and otherwise in accordance with the terms of the Lease, either Lessor or Lessee may terminate this Lease by providing Notice to the other party, without in any way affecting any other Leases then in effect between Lessor and Lessee. 14.3. Reconstruction in the Event of Damage or Destruction Not Covered by Insurance. Except as provided in Section 14.6, if during the Term the Facility is totally or materially destroyed by a risk not covered by the insurance described in Article XIII, whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, the provisions of Section 14.2 applicable to casualties for which insurance proceeds are inadequate shall govern. 14.4. Lessee's Property. All insurance proceeds payable by reason of any loss of or damage to any of Lessee's Personal Property shall be paid to Lessee; provided, however, no such payments shall diminish or reduce the insurance payments otherwise payable to or for the benefit of Lessor hereunder. 14.5. Abatement of Rent. Any damage or destruction due to casualty notwithstanding, this Lease shall remain in full force and effect and Lessee's obligation to make rental payments and to pay all other charges required by this Lease shall remain unabated during the first six months of any period required for the applicable repair and restoration. Thereafter, Base Rent shall be equitably abated. 14.6. Damage Near End of Term. Notwithstanding any provisions of Section 14.2 or 14.3 appearing to the contrary, if damage to or destruction of the Facility unsuitable for its Primary Intended Use occurs during the last 24 months of the Term, then Lessee shall have the right to terminate this Lease by giving written notice to Lessee within 30 days after the date of damage or destruction, whereupon all 29 35 accrued Rent shall be paid immediately, and this Lease shall automatically terminate five days after the date of such notice. 14.7. Waiver. Lessee hereby waives any statutory rights of termination that may arise by reason of any damage or destruction of the Facility that Lessor is obligated to restore or may restore under any of the provisions of this Lease. ARTICLE XV 15.1. Definitions. (a) "Condemnation" means a Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. (b) "Date of Taking" means the date the Condemnor has the right to possession of the property being condemned. (c) "Award" means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. (d) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation. 15.2. Parties' Rights and Obligations. If during the Term there is any Condemnation of all or any part of the Leased Property or any interest in this Lease, the rights and obligations of Lessor and Lessee shall be determined by this Article XV. 15.3. Total Taking. If title to the fee of the whole of the Leased Property is condemned by any Condemnor, this Lease shall cease and terminate as of the Date of Taking by the Condemnor, without in any way affecting any other Leases then in effect between Lessor and Lessee. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have the option, by notice to the other, at any time prior to the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Base Rent, Percentage Rent and Additional Charges paid or payable by Lessee hereunder shall be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts. 15.4. Allocation of Award. The total Award made with respect to the Leased Property in connection with a Total Taking shall be equitably apportioned between Lessor and Lessee in proportion to the then fair market values of the respective estates and interests of Lessor and Lessee in and to the Leased Property and under this Lease. 15.5. Partial Taking. If title to less than the whole of the Leased Property is condemned, and the Leased Property is still suitable for its Primary Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or Lessor is entitled but neither elects not to terminate this Lease as provided in Section 15.3, Lessee at its cost shall with all reasonable dispatch , but only to the extent of any condemnation awards made available to Lessee and any other sums advanced by Lessor pursuant to the 30 36 next sentence, restore the untaken portion of any Leased Improvements so that such Leased Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to the Condemnation. If the condemnation awards are not adequate to restore the Facility to that condition, each of Lessor and Lessee shall have the right to terminate this Lease, without in any way affecting any other leases in effect between Lessor and Lessee, by giving Notice to the other; provided, however that, if such termination is by Lessee, Lessor shall have the right, in its sole discretion, to nullify the termination and keep this Lease in full force by providing, within thirty (30) days after Lessee's Notice of termination, a Notice to Lessee of Lessor's unconditional, legally binding obligation to be responsible for all restoration costs in excess of the condemnation awards. If this Lease is not terminated and Lessee restores the Facility, the condemnation awards, and any other sums made available by Lessor as aforesaid, shall be held in trust by Lessor and paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions, and any excess awards remaining after such restoration shall be retained by Lessor unless the partial condemnation materially impairs the operations or financial performance of the Facility, in which latter event the award shall be equitably apportioned between Lessor and Lessee in proportion to the then fair market values of the respective estates and interests of Lessor and Lessee in and to the Leased Property and under this Lease. 15.6. Temporary Taking. If the whole or any part of the Leased Property or of Lessee's interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, and Lessee shall continue to pay, in the manner and at the terms herein specified, the full amounts of Base Rent and Additional Charges. In addition, the entire amount of any Award made for such Condemnation allocable to the Term of this Lease, whether paid by way of damages, rent or otherwise, shall be paid to Lessee and, except for any portion thereof utilized for restoration, shall be deemed to be Room Revenues for the purpose of calculating the Percentage Rent payable hereunder during such temporary taking. Except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Lessee to be performed and observed, as though such Condemnation had not occurred. Lessee covenants that upon the termination of any such period of temporary use or occupancy it will, at its sole cost and expense (subject to Lessor's contribution as set forth below), restore the Leased Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Condemnation, unless (a) such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Lessee shall not be required to make such restoration, or (b) the condemnation award is inadequate to cover the costs of such restoration, in which case the provisions of Section 15.5 applicable to inadequate awards shall govern. If restoration is required in connection with such temporary taking and the condemnation award (together with any other sums Lessor elects, in its sole discretion, to advance) is adequate to pay the costs thereof, the provisions of Section 15.5 shall govern the disbursement of the awards (and other sums, if applicable) and the disposition of any awards in excess of restoration costs. If restoration is required hereunder, Lessor shall contribute to the cost of such restoration that portion of its entire Award that is specifically allocated to such restoration in the judgment or order of the court, if any, and Lessee shall fund the balance of such costs in advance of restoration in a manner reasonably satisfactory to Lessor. ARTICLE XVI 16.1. Events of Default. If any one or more of the following events (individually, an "Event of Default") occurs: 31 37 (a) if Lessee fails to make payment of the Base Rent when the same becomes due and payable for a period of ten days after receipt by the Lessee of Notice from the Lessor thereof; (b) if Lessee fails to make payment of quarterly Percentage Rent when the same becomes due and payable and such condition continues for a period of ten days after receipt by the Lessee of Notice from the Lessor thereof; (c) if Lessee fails to observe or perform any term, covenant or condition of this Lease, other than the payment of Rent, and such failure is not cured by Lessee within a period of 30 days after receipt by the Lessee of Notice thereof from Lessor, unless such failure cannot with due diligence be cured within a period of 30 days, in which case it shall not be deemed an Event of Default if Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof provided, however, in no event shall such cure period extend beyond 90 days after such Notice; or (d) if the Lessee shall file a petition in bankruptcy or reorganization for an arrangement pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessee shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within 60 days after the entry of an order in respect thereof, or if a receiver of the Lessee or of the whole or substantially all of the assets of the Lessee shall be appointed in any proceeding brought by the Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessee and shall not be vacated or set aside or stayed within 60 days after such appointment; or (e) if Lessee is liquidated or dissolved, or begins proceedings toward such liquidation or dissolution, or, in any manner, permits the sale or divestiture of substantially all of its assets; or (f) if the estate or interest of Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in any proceeding (unless Lessee is contesting such lien or attachment in good faith in accordance with Article XII hereof); or (g) if, except as a result of damage, destruction or a partial or complete Condemnation, Lessee voluntarily ceases operations on the Leased Property for a period in excess of 30 days; or (h) if: (A) an event of default has been declared by the franchisor under the Franchise Agreement with respect to the Facility on the Leased Premises as a result of any action or failure to act by Lessee or any Person with whom Lessee contracts for management services at the Facility, other than a failure to complete a Capital Improvement required by the Franchisor resulting from Lessor's failure to fund the Capital Expenditure therefor pursuant to Section 9.1(b), and (B) Lessee has failed, within 30 days thereafter, to cure such default by either (1) curing the underlying default under the Franchise Agreement and paying all costs and expenses associated therewith, or (2) obtaining at Lessee's sole cost and expense a substitute franchise license agreement with a substitute franchisor acceptable to Lessor, on terms and conditions acceptable to Lessor; provided, however, that if Lessee is in good faith 32 38 disputing an assertion of default by the franchisor or is proceeding diligently to cure such default, the 30-day period shall be extended for such period of time as Lessee continues to dispute such default in good faith or diligently proceeds to cure such default, so long as there is no period during which the Facility is not operated pursuant to a Franchise Agreement approved by Lessor; then, and in any such event, Lessor may exercise one or more remedies available to it herein or at law or in equity, including but not limited to its right to terminate this Lease by giving Lessee not less than ten days' Notice of such termination. If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, such sum as the court shall determine as its reasonable attorneys' fees, and all costs and expenses incurred in connection therewith. No Event of Default (other than a failure to make a payment of money) shall be deemed to exist under clause (c) during any time the curing thereof is prevented by an Unavoidable Delay, provided that upon the cessation of such Unavoidable Delay, Lessee remedies such default or Event of Default without further delay. 16.2. Surrender. If an Event of Default occurs (and the event giving rise to such Event of Default has not been cured within the curative period relating thereto as set forth in Section 16.1) and is continuing, whether or not this Lease has been terminated pursuant to Section 16.1, Lessee shall, if requested by Lessor so to do, immediately surrender to Lessor the Leased Property including, without limitation, any and all books, records, files, licenses, permits and keys relating thereto, and quit the same and Lessor may enter upon and repossess the Leased Property by reasonable force, summary proceedings, ejectment or otherwise, and may remove Lessee and all other persons and any and all personal property from the Leased Property, subject to rights of any hotel guests and to any requirement of law. Lessee hereby waives any and all requirements of applicable laws for service of notice to re-enter the Leased Property. Lessor shall be under no obligation to, but may if it so chooses, relet the Leased Property or otherwise mitigate Lessor's damages, except unless otherwise required by applicable law. 16.3. Damages. Neither (a) the termination of this Lease, (b) the repossession of the Leased Property, (c) the failure of Lessor to relet the Leased Property, nor (d) the reletting of all or any portion thereof, shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. In the event of any such termination, Lessee shall forthwith pay to Lessor all Rent due and payable with respect to the Leased Property to and including the date of such termination. Lessee shall forthwith pay to Lessor, at Lessor's option, as and for liquidated and agreed current damages for Lessee's default, either: (1) Without termination of Lessee's right to possession of the Leased Property, each installment of Rent and other sums payable by Lessee to Lessor under the Lease as the same becomes due and payable, which Rent and other sums shall bear interest at the Overdue Rate, and Lessor may enforce, by action or otherwise, any other term or covenant of this Lease; or (2) the sum of: (A) the unpaid Rent which had been earned at the time of termination, repossession or reletting, and 33 39 (B) the worth at the time of termination, repossession or reletting of the amount by which the unpaid Rent for the balance of the Term after the time of termination, repossession or reletting, exceeds the amount of such rental loss that Lessee proves could be reasonably avoided, and (C) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things, would be likely to result therefrom. The worth at the time of termination, repossession or reletting of the amount referred to in subparagraph (B) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of New York at the time of award plus 1%. Rent for the purposes of this Section 16.3 shall be a sum equal to (i) the average of the annual amounts of the Percentage Rent for the three Fiscal Years immediately preceding the Fiscal Year in which the termination, re-entry or repossession takes place, or (ii) if three Fiscal Years shall not have elapsed, the average of the Percentage Rent during the preceding Fiscal Years during which the Lease was in effect, or (iii) if one Fiscal Year has not elapsed, the amount derived by annualizing the Percentage Rent from the effective date of this Lease. 16.4. Waiver. If this Lease is terminated pursuant to Section 16.1, Lessee waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article XVI, and (b) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt and Lessor waives any right to "pierce the corporate veil" of Lessee other than to the extent funds shall have been inappropriately paid any Affiliate of Lessee following a default resulting in an Event of Default. 16.5. Application of Funds. Any payments received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall be applied to Lessee's obligations in the order that Lessor may determine or as may be prescribed by the laws of the State. ARTICLE XVII Lessor's Right to Cure Lessee's Default. If Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including, without limitation, Lessee's failure to comply with the terms of any Franchise Agreement, and fails to cure the same within the relevant time periods provided in Section 16.1, Lessor, without waiving or releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 16.4, take all such action thereon as, in Lessor's opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of this Lease. 34 40 ARTICLE XVIII INTENTIONALLY OMITTED ARTICLE XIX 19.1. REIT Requirements. (a) Lessee understands that, in order for RFS to qualify as a REIT, the following requirements (the "REIT Requirements") must be satisfied: (i) The average of the fair market values of Lessor's personal property that is leased to Lessee under a lease at the beginning and end of a calendar year cannot exceed 15% of the average of the aggregate fair market values of all of Lessor's property that is leased to Lessee under such lease at the beginning and end of such calendar year. (ii) Lessee cannot sublet the property that is leased to it by Lessor, or enter into any similar arrangement, on any basis such that the rental or other 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 Lessee to Lessor would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code. (iii) Lessee cannot sublease the property leased to it by Lessor to, or enter into any similar arrangement with, any person in which RFS owns, directly or indirectly, a 10% or more interest, within the meaning of Section 856(d)(2)(B) of the Code. (iv) Lessee agrees to make an election to be, and to operate as a "taxable REIT subsidiary" of RFS within the meaning of Section 856(e) of the Code. (v) No person can own, directly or directly, capital stock of RFS that exceeds the "Limit" (as defined in RFS' Charter, as amended and restated). (vi) Lessee shall not (i) directly or indirectly operate or manage a "lodging facility" within the meaning of Section 856(d)(9)(D)(ii) of the Code or a "health care facility" within the meaning of Section 856(e)(6)(D)(ii) or (ii) directly or indirectly provide to any other person (under a franchise, license, or otherwise) rights to any brand name under which any lodging facility or health care facility is operated; provided, however, that Lessee may provide such rights to Manager to operate or manage a lodging facility as long as such rights are held by Lessee as a franchisee, licensee, or in a similar capacity and such lodging facility is either owned by Lessee or is leased to Lessee by Lessor or one of its Affiliates. (b) Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates, to use its best efforts to permit the REIT Requirements to be satisfied. Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates, to cooperate in good faith with RFS and Lessor to ensure that the REIT Requirements are satisfied, including but not limited to, providing RFS with information about the ownership of Lessee, and its Affiliates to the extent that such information is reasonably available. Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates, upon request by RFS, and, where 35 41 appropriate, at RFS'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, Lessee shall notify, or use reasonable efforts to cause its Affiliates to notify, RFS of such noncompliance. 19.2. Lessee Officer and Employee Limitation. Anything contained in this Lease to the contrary notwithstanding, none of the officers or employees of the Lessee or any Affiliate shall be officers or employees of Manager (or any Person who operates or manages the Leased Property). In addition, if a Person serves as both (a) a director of the Lessee or any Affiliate and (b) a director and officer (or employee) of Manager (or any Person who operates or manages the Leased Property), that Person shall not receive any compensation for serving as a director of the Lessee or any Affiliate. If a person serves as both (a) a director of Manager or any Affiliate (or any Person who operates or manages the Leased Property) and (b) a director and officer (or employee) of Lessee, that Person shall not receive any compensation for serving as a director of Manager. 19.3. Management Agreement. Lessee agrees that, in order to comply with certain of the REIT Requirements, it will, at all times during the Term, cause the Leased Property to be operated and managed by a management company ("Manager") that is an Eligible Independent Contractor. Effective as of the Commencement Date, the Lessee shall enter into an initial management agreement in the form of Exhibit "D" attached hereto (the "Management Agreement") and Lessee shall provide Lessor with an executed copy thereof. Lessee may not amend, modify or terminate the Management Agreement in any respect or change the Manager without the prior written consent of Lessor. Lessee shall also provide Lessor with copies of any amendments or modifications to the Management Agreement which are entered into from time to time or any other management agreement. Lessor shall have the right to approve in advance any Manager. ARTICLE XX Holding Over. If Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month two times the aggregate of (a) one-twelfth of the aggregate Base Rent and Percentage Rent payable with respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing during the applicable month and (c) all other sums, if any, payable by Lessee under this Lease with respect to the Leased Property. During such period, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenancies at sufferance, to continue its occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease. ARTICLE XXI Risk of Loss. During the Term, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequence of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, attachments, levies or executions (other than those caused by Lessor and those claiming from, through or under Lessor) is assumed by Lessee except as specifically provided in this Lease, and, in the absence of gross negligence, willful misconduct or breach of this Lease by Lessor pursuant to Section 34.3, Lessor shall in no event be 36 42 answerable or accountable therefor, nor shall any of the events mentioned in this Section entitle Lessee to any abatement of Rent except as specifically provided in this Lease. ARTICLE XXII Indemnification. Notwithstanding the existence of any insurance, and without regard to the policy limits of any such insurance or self-insurance, but subject to Section 16.4 and Article VIII, Lessee will protect, indemnify, hold harmless and defend Lessor from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Lessor Indemnified Parties by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, including without limitation any claims under liquor liability, "dram shop" or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair by Lessee or any of its agents, employees or invitees of the Leased Property or Lessee's Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which a Lessor Indemnified Party is made a party or participant related to such use, misuse, non-use, condition, management, maintenance, or repair thereof by Lessee or any of its agents, employees or invitees, including any failure of Lessee or any of its agents, employees or invitees to perform any obligations under this Lease or imposed by applicable law (other than arising out of Condemnation proceedings), (c) any Impositions that are the obligations of Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, and (e) the non-performance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the landlord thereunder. Lessor shall indemnify, save harmless and defend Lessee Indemnified Parties from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses imposed upon or incurred by or asserted against Lessee Indemnified Parties as a result of (a) the gross negligence or willful misconduct of Lessor arising in connection with this Lease or (b) any failure on the part of Lessor to perform or comply with any of the terms of this Lease. Any amounts that become payable by an Indemnifying Party under this Section shall be paid within ten days after liability therefor on the part of the Indemnifying Party is determined by litigation or otherwise, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. An Indemnifying Party, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against the Indemnified Party. The Indemnified Party, at its expense, shall be entitled to participate in any such claim, action, or proceeding, and the Indemnifying Party may not compromise or otherwise dispose of the same without the consent of the Indemnified Party, which may not be unreasonably withheld. Nothing herein shall be construed as indemnifying a Lessor Indemnified Party against its own grossly negligent acts or omissions or willful misconduct. Lessee's or Lessor's liability for a breach of the provisions of this Article shall survive any termination of this Lease. 37 43 ARTICLE XXIII 23.1. Subletting and Assignment. Subject to the provisions of Article XIX and Section 23.2 and any other express conditions or limitations set forth herein, Lessee may, but only with the prior written consent of Lessor, (a) assign this Lease or sublet all or any part of the Leased Property to an Affiliate of Lessee, or (b) sublet any retail or restaurant portion of the Leased Improvements in the normal course of the Primary Intended Use; provided that any subletting to any party other than an Affiliate of Lessee shall not individually as to any one such subletting, or in the aggregate, materially diminish the actual or potential Percentage Rent payable under this Lease. In the case of a subletting, the sublessee shall comply with the provisions of Section 23.2, and in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be, and become, jointly and severally liable with Lessee for the performance thereof. Notwithstanding the above, Lessee may assign the Lease to an Affiliate without the consent of Lessor; provided that any such assignee assumes in writing and agrees to keep and perform all of the terms of the Lease on the part of the Lessee to be kept and performed and shall be and become jointly and severally liable with Lessee for the performance thereof. In case of either an assignment or subletting made during the Term, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. An original counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Lessor, shall be delivered promptly to Lessor. 23.2. Attornment. Lessee shall insert in each sublease permitted under Section 23.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Lessor or Lessor's assignees, if any, stating that an uncured Event of Default exists under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor's assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Lease. ARTICLE XXIV 24.1. Officer's Certificates; Financial Statements; Budgets; Lessor's Estoppel Certificates and Covenants. (a) At any time and from time to time upon not less than 20 days Notice by Lessor, Lessee will furnish to Lessor an Officer's Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Lessee there is any existing default or Event of Default exists thereunder by Lessor or Lessee, and such other information as may be reasonably requested by Lessor. Any such certificate furnished pursuant to this Section may be relied upon by Lessor, any lender and any prospective purchaser of the Leased Property. 38 44 (b) Throughout the Term, Lessee will furnish to Lessor such historical financial information of Lessee and the Facility as Lessor may reasonably request and shall provide Lessor access to Lessee's books and records with respect thereto. (c) At any time and from time to time upon not less than 20 days notice by Lessee, Lessor will furnish to Lessee or to any person designated by Lessee an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which Rent has been paid, whether to the knowledge of Lessor there is any existing default or Event of Default on Lessee's part hereunder, and such other information as may be reasonably requested by Lessee. (d) Lessee covenants that during the Term it will maintain a ratio of debt-to-Net Worth of 50% or less, exclusive of capitalized leases. (e) During the Term, Lessee will maintain a net worth of not less than $11 million. 24.2. Operating Budget. Not later than sixty (60) days prior to the commencement of each Lease Year, Lessee, in consultation with the Manager, shall prepare and submit to Lessor an operating budget (the "Operating Budget") in form and substance satisfactory to Lessor, prepared in accordance with the requirements of this Section 24.2. The Operating Budget shall be prepared in accordance with the Uniform System to the extent applicable and show by month and quarter and for the year as a whole in the degree of detail specified by the Uniform System for monthly statements, and in accordance with the detail level of monthly financial statements, the following: (a) Lessee's reasonable estimate of Gross Revenues, Room Revenues, Food Sales and Beverage Sales (including room rates) for the Facility for the forthcoming Lease Year itemized on schedules on a monthly and quarterly basis as approved by Lessor and Lessee, together with the assumptions, in narrative form, forming the basis of such schedules. (b) A cash flow projection. (c) Lessee's reasonable estimate for each quarter of the Lease Year of Percentage Rent. 24.3. Marketing Plan. Not later than sixty (60) days prior to the commencement of each Lease Year, Lessee, in consultation with the Manager, will prepare and submit to Lessor a narrative description of the program for advertising and marketing the Facility for the forthcoming Lease Year (the "Marketing Plan") containing a detailed budget itemization of the proposed advertising expenditures by category and the assumptions, in narrative form, forming the basis of such budget itemization. 24.4. Capital Budget. Not later than sixty (60) days prior to the commencement of each Lease Year, Lessor shall prepare and submit to Lessee a capital budget (the "Capital Budget") prepared in accordance with this Section 24.4. The Capital Budget shall be prepared in accordance with the Uniform System to the extent applicable and shall set forth Lessor's proposed Capital Expenditures for the ensuing Lease Year. 24.5. Disputes. In the event of any dispute between Lessor and Lessee as to the Operating Budget, the Marketing Plan or the Capital Budget, Lessor and Lessee shall act promptly, reasonably and 39 45 in good faith in seeking to resolve such disputes and in arriving at a mutually acceptable Operating Budget, Marketing Plan and Capital Budget. ARTICLE XXV Lessor's Right to Inspect. Lessee shall permit Lessor and its authorized representatives as frequently as reasonably requested by Lessor to inspect the Leased Property and Lessee's accounts and records pertaining thereto and make copies thereof, during usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Lessee. ARTICLE XXVI No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach. ARTICLE XXVII Remedies Cumulative. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies. ARTICLE XXVIII Acceptance of Surrender. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender. ARTICLE XXIX No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property. ARTICLE XXX Conveyance by Lessor. If Lessor or any successor owner of the Leased Property conveys the Leased Property to a Person other than an Affiliate of Lessor in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of the Leased Property expressly assumes all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Lessor or 40 46 such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner. ARTICLE XXXI Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs its obligations hereunder, in each case within the applicable grace periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Lessor or hereafter consented to by Lessee or provided for herein. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Section. ARTICLE XXXII Notices. All notices, demands, requests, consents approvals and other communications ("Notice" or "Notices") hereunder shall be in writing and personally served, mailed (by registered or certified mail, return receipt requested and postage prepaid) or sent by facsimile, addressed to Lessor at 850 Ridge Lake Blvd., Suite 220, Memphis, Tennessee 38120, Facsimile (901) 818-5260, Attention: President, and addressed to Lessee at 850 Ridge Lake Boulevard, Suite 220, Memphis Tennessee 38120, Attention: President, Facsimile (901) 818-5260, or to such other address or addresses as either party may hereafter designate. Personally delivered Notice shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five days. ARTICLE XXXIII Appraisers. If it becomes necessary to determine the Fair Market Value of the leasehold estate hereunder for any purpose of this Lease, the party required or permitted to give Notice of such required determination shall include in the Notice the name of a person selected to act as appraiser on its behalf. Within 10 days after Notice, Lessor (or Lessee, as the case may be) shall by Notice to Lessee (or Lessor, as the case may be) appoint a second person as appraiser on its behalf. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (or any successor organization thereto) with at least five years experience in the State appraising property similar to the Leased Property, shall, within 45 days after the date of the Notice appointing the first appraiser, proceed to determine the Fair Market Value of the leasehold estate hereunder as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser shall have been so appointed, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers are appointed and if the difference between the amounts so determined does not exceed 5% of the lesser of such amounts, then the Fair Market Value shall be an amount equal to 50% of the sum of the amounts so determined. If the difference between the amounts so determined exceeds 5% of the lesser of such amounts, then such two appraisers shall have 20 days to appoint a third appraiser. If no such appraiser shall have been appointed within such 20 days or within 90 days of the original request for a determination of Fair Market Value, whichever is earlier, either Lessor or Lessee may apply to any court 41 47 having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers or by such court shall be instructed to determine the Fair Market Value within 45 days after appointment of such appraiser. The determination of the appraiser which differs most in the terms of dollar amount from the determinations of the other two appraisers shall be excluded, and 50% of the sum of the remaining two determinations shall be final and binding upon Lessor and Lessee as the Fair Market Value of the leasehold estate hereunder. This provision for determining by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Lessor and Lessee shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half of the fees and expenses of the third appraiser and one-half of all other costs and expenses incurred in connection with each appraisal. ARTICLE XXXIV 34.1. Lessor May Grant Liens. Without the consent of Lessee, Lessor may, subject to the terms and conditions set forth below in this Section 34.1, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("Encumbrance") upon the Leased Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing. Any such Encumbrance shall (a) contain the right to prepay (whether or not subject to a prepayment penalty); (b) provide that it is subject to the rights of Lessee under this Lease, (c) contain the Agreement by the holder of the Encumbrance that it will (1) give Lessee the same notice, if any, given to Lessor of any default or acceleration of any obligation underlying any such Encumbrance or any sale in foreclosure under such Encumbrance, (2) permit Lessee to cure any such default on Lessor's behalf within any applicable cure period, and Lessee shall be reimbursed by Lessor for any and all costs incurred in effecting such cure, including without limitation out-of-pocket costs incurred to effect any such cure (including reasonable attorneys' fees) and (3) permit Lessee to appear by its representative and to bid at any sale in foreclosure made with respect to any such Encumbrance. Upon the request of Lessor, Lessee shall subordinate this Lease to the lien of a new mortgage on the Leased Property, on the condition that the proposed mortgagee executes a non-disturbance agreement recognizing this Lease, and agreeing, for itself and its successors and assigns, to comply with the provisions of this Article XXXIV. 34.2. Lessee's Right to Cure. Subject to the provisions of Section 34.3, if Lessor breaches any covenant to be performed by it under this Lease, Lessee, after Notice to and demand upon Lessor, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Lessee, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Lessor. All sums so paid by Lessee and all costs and expenses (including, without limitation, reasonable attorneys' fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or, following entry of a final, nonappealable judgment against Lessor for such sums, may be offset by Lessee against the Base Rent payments next accruing or coming due. The rights of Lessee hereunder to cure and to secure payment from Lessor in accordance with this Section 34.2 shall survive the termination of this Lease with respect to the Leased Property. 34.3. Breach by Lessor. It shall be a breach of this Lease if Lessor fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of 30 days after Notice thereof from Lessee, unless such failure cannot with due diligence be cured 42 48 within a period of 30 days, in which case such failure shall not be deemed to continue if Lessor, within such 30-day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof. The time within which Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay. If Lessor fails to cure any such breach within the grace period described above, Lessee, without waiving or releasing any obligations hereunder, and in addition to all other remedies available to Lessee at law or in equity, may purchase the Leased Property from Lessor for a purchase price equal to the then Fair Market Value. If Lessee elects to purchase the Leased Property it shall deliver a Notice thereof to Lessor specifying a settlement date to occur not less than 90 days subsequent to the date of such Notice on which it shall purchase the Leased Property. ARTICLE XXXV 35.1. Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to any date of termination of this Lease shall survive such termination. If any term or provision of this Lease or any application thereof is invalid or unenforceable, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated except by a written instrument in recordable form signed by Lessor and Lessee. All the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Lease shall be governed by and construed in accordance with the laws of the State, but not including its conflicts of laws rules. 35.2. Transfer of Licenses. Upon the expiration or earlier termination of the Term, Lessee shall use its best efforts (i) to transfer to Lessor or Lessor's nominee or designee all Franchise Agreements, licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, that may be necessary for the operation of the Facility (collectively, "Licenses"), or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or Lessor's nominee in connection with the processing by Lessor or Lessor's nominee of any applications for, all Licenses; provided, in either case, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Lessor or Lessor's nominee. 35.3. Waiver of Presentment, etc. Lessee waives all presentments, demands for payment and for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as expressly granted herein. ARTICLE XXXVI Memorandum of Lease. Lessor and Lessee shall promptly upon the request of either enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State in which reference to this Lease, and all options contained herein, shall be made. Lessee shall pay all costs and expenses of recording such memorandum of this Lease. 43 49 ARTICLE XXXVII Lessor's Option to Purchase Assets of Lessee. Effective on not less than 90 days prior Notice given at any time within 180 days before the expiration of the Term, but not later than 90 days prior to such expiration, or upon such shorter Notice period as shall be appropriate if this Lease is terminated prior to its expiration date, Lessor shall have the option to purchase all (but not less than all) of the assets of Lessee, tangible and intangible, relating to the Leased Property (other than this Lease), at the expiration or termination of this Lease for an amount (payable in cash on the expiration date of this Lease) equal to the fair market value thereof as agreed to by the parties or, in the absence of such agreement, as determined by appraisal in conformity with Article XXXIII, except that the appraisers need not be members of the American Institute of Real Estate Appraisers, but rather shall be appraisers having at least ten years experience in valuing similar assets. Notwithstanding any such purchase, Lessor shall obtain no rights to any trade name or logo used in connection with the Franchise unless separate agreement as to such use is reached with the applicable franchisor. ARTICLE XXXVIII Lessor's Option to Terminate Lease. Lessor may terminate the Lease as to any Leased Property prior to the Expiration Date by giving to Lessee not less than thirty (30) days prior Notice of Lessor's election to terminate this Lease. Effective upon the termination date set forth in the Notice, this Lease shall terminate and be of no further force and effect except as to any obligations of the parties existing as of such date that survive termination of this Lease. As compensation for the early termination of Lessee's leasehold estate under this Article XXXVIII, Lessor shall, within 180 days following the termination date, either (a) pay to Lessee the amount determined pursuant to Exhibit "E" attached hereto as of the termination date of the Lease with respect to the Leased Property or (b) within one year following the termination date offer to lease to Lessee one or more substitute hotel facilities pursuant to one or more leases that would create for the Lessee leasehold estates that have an aggregate Fair Market Value of no less than the Fair Market Value of the leasehold estate for the Leased Property being terminated hereunder, both such values as determined as of the termination date of the Lease; provided, however, that in the event Lessor does not pay to Lessee the termination amount or offer to lease to Lessee substitute hotel facilities which meet the requirements described above within 180 days following the termination date, Lessor may extend the 180 day period for an additional 185 days and interest on the amount of the termination payment determined pursuant to Exhibit "E" shall accrue at the Base Rate from the 181st day following the termination date until the date of payment or offer of a substitute lease and the amount of any accrued interest shall be added to the termination payment determined pursuant to Exhibit "E" or shall be included in the computation of the Fair Market Value of the leasehold estate for purposes of this Article XXXVIII. If Lessor elects and complies with the option described in (b) above, regardless of whether Lessee enters into the lease(s) described therein, Lessor shall have no further obligations to Lessee with respect to compensation for the early termination of the Lease. In the event Lessor and Lessee are unable to agree upon the fair market value of an original or replacement leasehold estate, it shall be determined by appraisal using the appraisal procedure set forth in Article XXXIII. ARTICLE XXXIX Compliance with Franchise Agreement. To the extent any of the provisions of the Franchise Agreement impose a greater obligation on Lessee than the corresponding provisions of this Lease, then Lessee shall be obligated to comply with the provisions of the Franchise Agreement (other than requirements with respect to Capital Improvements). It is the intent of the parties hereto that Lessee shall 44 50 comply in every respect with the provisions of the Franchise Agreement so as to avoid any default thereunder during the term of this Lease. Lessee shall not terminate, extend or enter into any modification of the Franchise Agreement without in each instance first obtaining Lessor's prior written consent. Lessor and Lessee agree to cooperate with each other in the event it becomes necessary to obtain a franchise extension or modification or a new franchise for the Leased Property, and in any transfer of the Franchise Agreement to Lessor or any designee of Lessor or any successor to Lessee upon the termination of this Lease. In the event of expiration or termination of a Franchise Agreement, for whatever reason, the Lessor will have the right, in its sole discretion, to approve any new Franchise Agreement for the Facility. If, upon any expiration or earlier termination of this Lease (other than upon an Event of Default by Lessee), a Franchise Agreement remains in effect, or would but for such expiration or termination remain in effect, Lessor shall indemnify, defend and hold Lessee harmless with respect to the obligations and liabilities arising thereunder after the date of expiration or termination of this Lease. ARTICLE XL 40.1. Lessor Approval of Capital Expenditures. All Capital Expenditures whether pursuant to the Capital Budget or otherwise shall be subject to the approval of Lessor, which approval shall extend both to the plans and specifications (including matters of design and decor) and to the contracting and purchasing of all labor, services and materials. Lessor shall have the right to require competitive bidding of contracts for Capital Improvements, review all bids and monitor costs, time, quality and performance. The foregoing restrictions shall not apply to emergency Capital Expenditures made by Lessee in amounts not to exceed $25,000, and with prior notice to Lessor (if possible under the circumstances). 40.2. Inventory. On the Commencement Date, Lessee agrees to purchase from Lessor, for cash, any Inventory at the Facility at a price equal to the fair market value as agreed by Lessor and Lessee. 45 51 IN WITNESS WHEREOF, the parties have executed this Lease by their duly authorized officers as of the date first above written. "LESSOR" RFS PARTNERSHIP, L.P. By: RFS Hotel Investors, Inc. Its: General Partner By: ---------------------------------------- Title: ------------------------------------- "LESSEE" RFS LEASING II, INC. By: ---------------------------------------- Title: ------------------------------------- 46 52 Exhibit "A" PROPERTY DESCRIPTION 53 Exhibit "B" PERCENTAGE RENT 54 Exhibit "C" RFS HOTELS CAPITAL EXPENDITURES POLICY CAPITAL EXPENDITURES A capital expenditure is defined as an investment in a readily identifiable facility which (l) is held for use or income rather than for sale or conversion into goods or cash and (2) has a useful service life in excess of one year. Nonrecurring expenses directly associated with the investment should be included as part of the total expenditure for evaluation purposes, this includes preopening expenses. Capitalization Policy If the cost of the capital addition is $2,500 or greater and the items acquired have an expected service life of more than one year, the expenditure is capitalized. See "Maintenance and Repairs" for those expenditures which are expensed without regard to the $2,500 guideline. If the item(s) acquired meet the more than one-year life criterion, but the total invoice cost is less than $2,500, the expenditure is considered an expense item. Replacement - Component Parts If the estimated job or total invoice cost (including parts and labor) of any particular item or series of items acquired with respect to one particular job for replacement of the following major building components is under $2,500, the expenditure is to be expensed to maintenance and repairs: Heating Equipment - Pumps, boilers, heat exchangers, thermostats, pressure gauges, alarm devices, piping. Plumbing Equipment - Pumps, meters, sprinkler and fire alarm system, piping. Air Conditioning Equipment - Compressors, condensers, motors, cooling towers, evaporative coolers, piping. Fire Prevention Equipment - Major fire system sprinklers, smoke detectors. Power - Transformer, conduits and boxes, panel boards, switches and outlets. Betterments If the estimated job or total invoice cost is $2,500 or above, and the expenditure(s) will extend the useful life of an asset previously capitalized, then the expenditure should be capitalized. 55 EXHIBIT "C" RFS HOTELS CAPITAL EXPENDITURES POLICY Maintenance and Repairs The following replacement expenditures are considered maintenance and repairs and are not subject to the total invoice cost guideline of $2,500. Repainting of Buildings, Pools, Park Areas (1)(6) Refinishing of Furniture (2) Glass Replacement Maintenance Service Contracts, such as Yard, Television, Elevator, Swimming Pool or Wall Paper or Vinyl (2) Reupholstery of Furniture (2) Replastering (2) Replacement of Chain Locks, Key Blanks, Keys, Locks, Locksets. Locks and locksets installed in new doors or offering substantial security improvements should be capitalized if the invoice is over $1000. Patching Parking Lot (3) Roof Repairs (4) Waterproofing of Lamp Globes & Lightbulbs Section Replacement for Neon Signs Caulking and Sealing (1) Chrome Fittings such as Faucets, Towel Bars, etc. (2) Toilet and Toilet Seats Stolen or Damaged Television Small Parts for Equipment Landscaping/Plants (5) Clocks, Clock-Radios or Similar Small Items (2) Capital Items 1. If the complete exterior of the building is repainted, including caulking and sealing of the building, those costs will be capitalized. 2. Expenditures for interior painting, wall paper, refinishing of furniture, replastering, or reupholstering may be capitalized if: 1) these expenditures are part of a major refurbishment project, or 2) the cost of these expenditures exceed $5,000 with respect to any particular item or series of items related to one particular job and extend the useful life of the asset. 3. Repairing of parking lots, including resealing and resurfacing, will be capitalized if the expenditures exceed $5,000. 56 4. Replacement of the complete roof or complete section of the roof (including laying a roof over an existing roof) will be capitalized if total expenditures exceed $5,000. 5. If the landscaping is new or replacement of existing interior or exterior landscaping and exceeds $5,000, the cost of the landscaping can be capitalized. 6. Major overhauls to the pool which exceed $5,000 in cost and extend the useful life of the asset will be capitalized. All expense items will be expensed to M&R expense line items above GOP. 57 Exhibit "D" [MANAGEMENT AGREEMENT] 58 EXHIBIT "E" LEASE TERMINATION PAYMENTS [MIKE - PLEASE CHECK THESE - WE ALSO NEED TO KNOW THE LEASE TERMS TO COMPUTE THE AMORTIZATIONS] The termination payment owed by Lessor to Lessee pursuant to the provisions of Article XXXVIII shall be determined, with respect to each Leased Property, as follows:
Hotel Location Termination Payment Calculation ----- -------- ------------------------------- 1. Holiday Inn Louisville, KY $ 214,000 less $_________ for each month which has elapsed since the Commencement Date 2. Holiday Inn Clayton, MO 3,177,000 less $_________ for each month which has elapsed since the Commencement Date 3. Holiday Inn Columbia, SC 1,217,000 less $_________ for each month which has elapsed since the Commencement Date 4. Holiday Inn Lafayette, LA 2,492,000 less $_________ for each month which has elapsed since the Commencement Date 5. Residence Inn Kansas City, MO 934,000 less $_________ for each month which has elapsed since the Commencement Date 6. Hampton Inn Ft. Lauderdale, FL 846,000 less $_________ for each month which has elapsed since the Commencement Date 7. Holiday Inn Express Arlington Heights, IL 249,000 less $_________ for each month which has elapsed since the Commencement Date 8. Holiday Inn Express Bloomington, MN 975,000 less $_________ for each month which has elapsed since the Commencement Date 9. Hampton Inn Bloomington, MN 640,000 less $_________ for each month which has elapsed since the Commencement Date 10. Holiday Inn Express Downers Grove, IL 602,000 less $_________ for each month which has elapsed since the Commencement Date 11. Comfort Inn Farmington Hills, MI 745,000 less $_________ for each month which has elapsed since the Commencement Date 12. Hampton Inn Indianapolis, IN 296,000 less $_________ for each month which has elapsed since the Commencement Date 13. Hampton Inn Lincoln, NE 259,000 less $_________ for each month which has elapsed since the Commencement Date 14. Hampton Inn Minnetonka, MN 300,000 less $_________ for each month which has elapsed since the Commencement Date 15. Hampton Inn Tulsa, OK 677,000 less $_________ for each month which has elapsed since the Commencement Date 16. Hampton Inn Warren, MI 270,000 less $_________ for each month which has elapsed since the Commencement Date 17. Holiday Inn Express Wauwatosa, WI 254,000 less $_________ for each month which has elapsed since the Commencement Date 18. Residence Inn Tyler, TX 1,117,000 less $_________ for each month which has elapsed since the Commencement Date 19. Residence Inn Fishkill, NY 3,218,000 less $_________ for each month which has elapsed since the Commencement Date 20. Hampton Inn Memphis, TN 572,000 less $_________ for each month which has elapsed since the Commencement Date 21. Residence Inn Torrance, CA 3,392,000 less $_________ for each month which has elapsed since the Commencement Date 22. Residence Inn Wilmington, DE 1,381,000 less $_________ for each month which has elapsed since the Commencement Date 23. Holiday Inn Flint, MI 3,413,000 less $_________ for each month which has elapsed since the Commencement Date
59
Hotel Location Termination Payment Calculation ----- -------- ------------------------------- 24. Hawthorn Suites Hotel Atlanta (Marietta), GA 1,783,550 less $_________ for each month which has elapsed since the Commencement Date 25. Hampton Inn Lakewood, CO 945,000 less $_________ for each month which has elapsed since the Commencement Date 26. Hampton Inn Laredo, TX 1,137,000 less $_________ for each month which has elapsed since the Commencement Date 27. Residence Inn Atlanta, GA 76,000 less $_________ for each month which has elapsed since the Commencement Date 28. Hampton Inn Houston, TX 378,000 less $_________ for each month which has elapsed since the Commencement Date 29. Courtyard by Marriott Flint, MI 1,016,000 less $_________ for each month which has elapsed since the Commencement Date 30. Hampton Inn Chandler, AZ 0 31. Hampton Inn Sedona, AZ 0 32. Sheraton Hotel Milpitas, CA 4,579,000 less $_________ for each month which has elapsed since the Commencement Date 33. Sheraton Four Points Sunnyvale, CA 3,992,000 less $_________ for each month which has elapsed since the Commencement Date 34. Sheraton Four Points Pleasanton, CA 3,140,000 less $_________ for each month which has elapsed since the Commencement Date 35. Sheraton Four Points Bakersfield, CA 1,658,000 less $_________ for each month which has elapsed since the Commencement Date 36. Beverly Heritage Hotel Milpitas, CA 0 37. Hampton Inn Plano, TX 121,000 less $_________ for each month which has elapsed since the Commencement Date 38. Sheraton Birmingham, AL Fair market value as determined by the agreement of the parties, or in the absence of such pursuant to Article XXXII 39. Hilton San Francisco, CA Fair market value as determined by the agreement of the parties, or in the absence of such pursuant to Article XXXII
EX-10.2 4 g66434ex10-2.txt FORM OF MANAGEMENT AGREEMENT 1 EXHIBIT 10.2 HOTEL MANAGEMENT AGREEMENT By and Between -------------- and FLAGSTONE HOSPITALITY MANAGEMENT LLC Dated January ___, 2001 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS.................................................................................... 1 Section 1.01. Definitions.............................................................................. 1 ARTICLE II TERM OF AGREEMENT.............................................................................. 7 Section 2.01. Term..................................................................................... 7 ARTICLE III OPERATION OF THE HOTEL......................................................................... 7 Section 3.01. Representations by Operator; Engagement of Operator...................................... 7 Section 3.02. Standards of Operation................................................................... 7 Section 3.03. Reservations Services.................................................................... 8 Section 3.04. Marketing................................................................................ 8 Section 3.05. Consultations Between Lessee and Operator................................................ 9 Section 3.06. Activities of MeriStar................................................................... 9 ARTICLE IV INDEPENDENT CONTRACTOR......................................................................... 9 Section 4.01. Operator Status.......................................................................... 9 Section 4.02. Employees................................................................................ 9 Section 4.03. Reimbursement of Employee Expenses....................................................... 10 Section 4.04. Employee Benefit Plans................................................................... 10 Section 4.05. Execution of Agreements.................................................................. 11 ARTICLE V INDEMNIFICATION................................................................................ 11 Section 5.01. Indemnification by Operator.............................................................. 11 Section 5.02. Limitations on Indemnification........................................................... 12 Section 5.03. Indemnification by Lessee................................................................ 12 Section 5.04. Survival of Indemnity.................................................................... 12 Section 5.05. Employment Claim......................................................................... 12 Section 5.06. Environmental Matters.................................................................... 13 Section 5.07. Lessee Net Worth......................................................................... 14 ARTICLE VI BUDGETS AND POLICY MEETINGS.................................................................... 14 Section 6.01. Budgets.................................................................................. 14 Section 6.02. Budget Meetings.......................................................................... 15 Section 6.03. Approval by Lessee Required.............................................................. 15 ARTICLE VII OPERATING EXPENSES............................................................................. 15 Section 7.01. Payment of Operating Expenses............................................................ 15 Section 7.02. Operating Expenses Not an Obligation of Operator......................................... 16
3 ARTICLE VIII BANK ACCOUNTS................................................................................. 16 Section 8.01. Bank Accounts............................................................................ 16 Section 8.02. Authorized Signatures.................................................................... 17 Section 8.03. Investment of Hotel Cash................................................................. 17 Section 8.04. Payroll.................................................................................. 17 Section 8.05. Security Deposits........................................................................ 18 ARTICLE IX BOOKS, RECORDS AND STATEMENTS.................................................................. 18 Section 9.01. Books and Records........................................................................ 18 Section 9.02. Statements............................................................................... 18 ARTICLE X OPERATOR'S FEE AND TRANSFERS TO LESSEE......................................................... 19 Section 10.01. Payment of Operator's Basic Fee......................................................... 19 Section 10.02. Payment of Operator's Incentive Fee..................................................... 19 Section 10.03. Distribution of Cash.................................................................... 20 Section 10.04. Adjustments to Allocations.............................................................. 20 Section 10.05. Arbitration............................................................................. 20 Section 10.06. Other Fees.............................................................................. 21 ARTICLE XI REPAIRS AND MAINTENANCE......................................................................... 21 ARTICLE XII INSURANCE....................................................................................... 21 Section 12.01. General.................................................................................. 21 Section 12.02. Employment Insurance..................................................................... 21 Section 12.03. Approval of Companies and Cost by Owner and Lessee....................................... 22 Section 12.04. Maintenance of Coverages................................................................. 22 Section 12.05. Waiver of Subrogation.................................................................... 22 Section 12.06. Blanket Coverage and Self-Insurance...................................................... 22 Section 12.07. Adequacy of Insurance.................................................................... 22 Section 12.08. Exclusions............................................................................... 23 ARTICLE XIII PROPERTY TAXES, LOCAL TAXES, LEVIES AND OTHER ASSESSMENTS....................................... 23 Section 13.01. Property Taxes........................................................................... 23 Section 13.02. Lessee's Right to Contest................................................................ 23 ARTICLE XIV DAMAGE OR DESTRUCTION - CONDEMNATION............................................................ 23 Section 14.01. Damage................................................................................... 23 Section 14.02. Condemnation............................................................................. 24 ARTICLE XV USE OF NAME..................................................................................... 24 ARTICLE XVI OWNER'S RIGHT TO SELL........................................................................... 24
ii 4 ARTICLE XVII DEFAULT AND REMEDIES............................................................................ 24 Section 17.01. Events of Default- Remedies.............................................................. 24 Section 17.02. Rights Not Exclusive..................................................................... 25 ARTICLE XVIII NOTICES......................................................................................... 26 Section 18.01. Notices.................................................................................. 26 ARTICLE XIX ASSIGNMENT...................................................................................... 27 Section 19.01. No Assignment by Operator................................................................ 27 Section 19.02. Assignment by Lessee..................................................................... 27 ARTICLE XX SUBORDINATION................................................................................... 29 Section 20.01. Subordination To First Mortgage.......................................................... 29 Section 20.02. Foreclosure.............................................................................. 29 ARTICLE XXI MISCELLANEOUS................................................................................... 29 Section 21.01. Further Documentation.................................................................... 29 Section 21.02. Captions................................................................................. 30 Section 21.03. Successors and Assigns................................................................... 30 Section 21.04. Competitive Market Area.................................................................. 30 Section 21.05. Assumption of Post Termination Obligations............................................... 30 Section 21.06. Entire Agreement......................................................................... 30 Section 21.07. Governing Law............................................................................ 30 Section 21.08. No Political Contributions............................................................... 30 Section 21.09. Lessee Reimbursement Upon Certain Terminations........................................... 31 Section 21.10. Management of Other Hotels............................................................... 32 Section 21.11. Eligible Independent Contractor.......................................................... 32 Section 21.12. Affiliated Transactions.................................................................. 33 Section 21.13. Non-Recourse to MeriStar................................................................. 33 Section 21.14. No Third Party Beneficiaries............................................................. 33 Section 21.15. Purchase of Furniture, Fixtures and Equipment............................................ 33
EXHIBIT A -- Hotels and Owners EXHIBIT B -- Franchise Agreements EXHIBIT C -- Severance Amounts Reimbursable Pursuant to Section 21.09 EXHIBIT D -- REIT Hotels EXHIBIT E -- Form of Guaranty iii 5 HOTEL MANAGEMENT AGREEMENT This HOTEL MANAGEMENT AGREEMENT is made and entered into as of ________, 2001, by and among __________________, a Tennessee corporation ("Lessee"), and Flagstone Hospitality Management LLC, a Tennessee limited liability company ("Operator"), with reference to the following facts: A. Lessee leases from RFS Partnership, L.P. and its affiliates described on Exhibit A (each, an "Owner" and collectively, the "Owners") the hotel properties described in Exhibit A (each, a "Hotel" and collectively, the "Hotels") pursuant to one or more Lease Agreements dated ________, 2001 (each, a "Lease"); B. Lessee desires to engage Operator to operate and manage the Hotels in accordance with the terms of this Agreement; C. Operator desires to supply the services and to operate the Hotels in accordance with the terms of this Agreement; D. The parties desire that this Agreement represent an individual hotel management agreement for each Hotel described in Exhibit A, as it may be amended from time. NOW, THEREFORE, for and in consideration of the mutual covenants, conditions, stipulations, agreements and obligations hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, Lessee and Operator covenant and agree as follows: ARTICLE I DEFINITIONS Section 1.01.00 Definitions. (a) As used herein, the following terms shall have the indicated meanings: (1) "Accounting Period" shall mean a period of time used by Operator in accounting for the operations of the Hotels, which period of time shall be a full calendar month. (2) "Affiliate" shall mean (a) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (b) any person that owns, beneficially, directly or indirectly, five percent or more of the outstanding capital stock, shares or equity interests of such person, or (c) any officer, director, employee, partner or trustee of such person or any person controlling, controlled by, or under common control with such person. (3) "Agency Account" shall have the meaning set forth in Section 8.01(c). (4) "Agreement" shall mean this Hotel Management Agreement and all amendments, modifications, supplements, consolidations, extensions and revisions to this Hotel Management Agreement approved by Lessee and Operator. 1 6 (5) "Approved Budget" shall mean the Hotel Operating Budget prepared by Operator, and pursuant to Section 6.01 of this Agreement, approved in writing by Lessee. (6) "CPI" shall mean the Consumer Price Index, all items for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor as reported in The Wall Street Journal. (7) "Deposit Account" shall have the meaning set forth in Section 8.01(a). (8) "Employment Claim" shall mean set forth in Section 5.05. (9) "Employment Laws" shall have the meaning set forth in Section 4.02(c). (10) "Environmental Activity" shall have the meaning set forth in Section 5.06(a). (11) "Environmental Laws" shall have the meaning set forth in Section 5.06(a). (12) "Event(s) of Default" shall mean one or more of the events or occurrences listed in Section 17.01 of this Agreement. (13) "First Mortgage" shall mean collectively any mortgage or deed of trust hereafter, from time to time, encumbering in a first lien position all or any portion of a Property, together with all other instruments evidencing or securing payment of the indebtedness secured by such mortgage or deed of trust and all amendments, modifications, supplements, extensions, and revisions of such mortgage, deed of trust and other instruments. (14) "Fiscal Year" shall mean the twelve (12) month calendar year ending December 31, except that the first Fiscal Year and the last Fiscal Year of the term of this Agreement may not be full calendar years. (It is understood and agreed that Lessee, in its discretion, shall have the right to change the Fiscal Year ending date at any time.) (15) "Franchisors" shall mean the franchisors under the Franchise Agreements. (16) "Franchisor Agreements" shall mean the franchise license agreements held by Lessee with respect to each of the Hotels as set forth in Exhibit B as it may be amended from time to time. (17) "Gross Hotel Income" shall mean all income and proceeds of sales of every kind (whether in cash or on credit and computed on an accrual basis) received by Operator for the use, occupancy or enjoyment of the Hotel or for the sale of any goods, services or other items sold on or provided from the Hotel in the ordinary course of the Hotel operation including, without limitation, all income received from tenants, transient guests, lessees (other than communications equipment lessees or service providers), licensees and concessionaires and other services to the Hotel guests, and the proceeds from business interruption insurance, but excluding the following: (i) any excise, sales or use taxes or similar government charges collected directly from patrons or guests, or as a part of the sales price of any goods, services or displays, such as gross receipts, admission, cabaret or similar or equivalent taxes; (ii) receipts from condemnation awards or sales in lieu of or under threat of condemnation; (iii) proceeds of insurance; (iv) other allowances and deductions as provided by the Uniform System in determining the sum contemplated by this definition, by whatever name, it may be called; (v) adjustments made pursuant to Section 10.04; (vi) proceeds of sales whether dispositions of capital assets, furniture and equipment or operating equipment (other than sales of inventory in the ordinary course of business); (vii) gross receipts 2 7 received by lessees, licensees or concessionaires of the Hotel; (viii) consideration received at the Hotel for hotel accommodations, goods and services to be provided at other hotels although arranged by, for or on behalf of, Operator; (ix) gratuities collected for the benefit of employees; (x) proceeds of any financing; (xi) working capital provided by Lessee; (xii) any funds provided by Lessee to Operator whether for Operating Expenses or otherwise; and (xiii) other income or proceeds resulting other than from the use or occupancy of the Hotel, or any part thereof, or other than from the sale of goods, services or other items sold on or provided from the Hotel in the ordinary course of business. (18) "Gross Operating Loss" shall mean for any Accounting Period the amount by which Operating Expenses exceed Gross Hotel Income. (19) "Hazardous Substance" shall have the meaning set forth in Section 5.06(a). (20) "Holder" shall mean the holder of any First Mortgage and the indebtedness secured thereby, and such holder's successors and assigns. (21) "Hotel Capital Budget" shall mean the budget relating to capital expenditures at a Hotel which shall be prepared and administered by Owner as described in Section 6.01. (22) "Hotel FF&E" shall mean the furniture, furnishings, wall coverings, fixtures and hotel equipment for a Hotel and which includes equipment required for operation of the kitchens, restaurants and laundry, office equipment, material handling equipment, cleaning and engineering equipment and vehicles. (23) "Hotel Operating Account" shall mean the bank account opened and maintained in Lessee's name, or in a name designated by Lessee, with a banking institution selected by Lessee, into which all income, receipts and proceeds included in the definition of Gross Hotel Income (without exclusion of any of the items excluded from the definition of such term) shall be deposited and from which disbursements shall be made pursuant to the terms of Section 8.01 of this Agreement. (24) "Hotel Operating Budget" shall mean the operating budget relating to the operation of a Hotel for each Fiscal Year prepared by Operator and submitted to Lessee for approval pursuant to Section 6.01. (25) "Hotel Operating Equipment" shall mean linens, chinaware, glassware, uniforms, utensils and other items of similar nature as Operator shall reasonably determine to be appropriate. (26) "Hotel Operating Supplies" shall mean the initial inventories of paper supplies, cleaning materials and similar consumable items. (27) "Hotel Standards" shall mean the standards established by the respective Franchisors of the Hotels from time to time. (28) "Hotels" shall mean the hotel properties described in Exhibit A hereto, as it may be amended from time to time by mutual agreement of Lessee and Operator to add hotel properties or to delete hotel properties as a result of termination of this Agreement with respect to one or more hotel properties pursuant to the termination provisions set forth in Section 2.01 of this Agreement. "Hotel" shall mean any hotel set forth on Exhibit A as it may be amended from time to time. 3 8 (29) "Independent CPA" shall mean the firm of independent public accountants having hotel experience which is selected by Lessee from time to time. (30) "Land" shall mean the real property described in Exhibit A to the Lease. (31) "Lease" shall mean the Master Lease Agreement dated ____________, 2001, between Lessee and Owner. (32) "Lessee" shall mean __________, a Tennessee corporation and its successors and assigns. (33) "Marketing Plan" shall mean the marketing plan prepared by Operator and approved by Lessee for each Hotel for each Fiscal Year pursuant to Section 3.04(b). (34) "Operating Expenses" shall mean all reasonable costs and expenses of maintaining, conducting and supervising the operation of the Property, subject to the limitations set forth in an Approved Budget, incurred pursuant to this Agreement or as otherwise specifically provided herein which are properly attributable to the period under consideration under Lessee's system of accounting, including without limitation: (i) the cost of all food and beverages sold or consumed and of all Hotel Operating Equipment and Hotel Operating Supplies; (ii) salaries and wages of Hotel personnel, including costs of payroll taxes and employee benefits and all other expenses not otherwise specifically referred to in this Section which are referred to as "Administrative and General Expenses" in the Uniform System. Except as herein otherwise expressly provided with respect to employees regularly employed at the Hotel, the salaries or wages of other employees or executives of Operator, or any Affiliate shall in no event be Operating Expenses; (iii) the cost of all other goods and services obtained by Operator in connection with its operation of the Property including, without limitation, heat and utilities, office supplies and all services performed by third parties, including leasing expenses in connection with telephone and data processing equipment and such other equipment as Owner shall designate; (iv) the cost of repairs to and maintenance of the Property to keep the Property in good condition; (v) insurance premiums for all insurance maintained by Lessee or Operator as provided in Article XII with respect to the Property, including without limitation, property damage insurance, public liability insurance; workers' compensation insurance or insurance required by similar employee benefits acts and such business interruption or other insurance as may be provided for protection against claim, liabilities and losses arising from the use and operation of the Hotel and losses incurred with respect to deductibles applicable to the foregoing types of insurance; (vi) all taxes, assessments and other charges (other than federal, state or local income taxes and franchise taxes or the equivalent) payable by or assessed against Operator or Lessee with respect to the operation of the Hotel and water and sewer charges; 4 9 (vii) legal fees; (viii) the costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non-recurring work on operational, functional, decorating, design or construction problems and activities, including the reasonable fees of Operator or any Affiliate in connection therewith, provided that such employment of Operator or such Affiliate is approved in advance by Lessee; (ix) all expenses for marketing the Hotel, including all expenses of advertising, sales promotion and public relations activities; (x) the Operator's Expenses; (xi) the Operator's Basic Fee; (xii) ad valorem taxes, personal property taxes, utility taxes and other taxes (as those terms are defined in the Uniform System) and municipal, county and state license and permit fees; (xiii) all fees, assessments and charges due and payable under the franchise license agreement for the Hotel; (xiv) reasonable reserves for uncollectible accounts receivable; (xv) credit card fees, travel agent commissions and other third party reservation fees and charges; (xvi) all parking charges and other expenses associated with revenues received by the Hotels related to parking operations, including valet services; and (xvii) common expenses charges. Operating Expenses shall not include (a) depreciation and amortization except as otherwise provided in this Agreement; (b) the cost of any other things specified herein to be done or provided at Lessee's or Operator's sole expense; (c) debt service on any Mortgage; (d) any Operator's Incentive Fee; (e) capital repairs and other expenditures which are normally treated as capital expenditures under the Uniform System or generally accepted accounting principles; (f) other recurring or non-recurring ownership costs such as partnership administration and costs of changes to business and liquor licenses. (35) "Operating Term" shall mean, with respect to any Hotel, the term of this Agreement as set forth in Section 2.01. (36) "Operator" shall mean Flagstone Hospitality Management LLC, a Tennessee limited liability company. (37) "Operator Centralized Services" shall have the meaning set forth in Section 21.12. (38) "Operator's Basic Fee" shall mean a fee to equal to two and one-half percent (2.5%) of Gross Hotel Income for each Fiscal Year of the Operating Term, which is payable as set forth in Section 10.01. 5 10 (39) "Operator's Expenses" shall mean the out-of-pocket expenses and disbursements which are reasonably and necessarily incurred by Operator in the performance of its obligations under this Agreement, all of which expenses shall have been set forth in the Approved Budget. Operator's Expenses may include reasonable travel, business entertainment, telephone, telegram, postage, air express and other incidental expenses, but shall not include, except as herein otherwise expressly provided, the salaries and wages of employees or executives of Operator or of any Affiliate performing services or work in connection with the operation of a Hotel; provided that traveling and other direct expenses incurred by them in connection with the management of a Hotel, including living expenses incurred during travel, shall be considered Operator's Expenses to the extent that they have been identified by category and included in the Approved Budget. (40) "Operator's Incentive Fee" shall mean a fee to be established by agreement between Operator and Lessee pursuant to Section 10.02. (41) "Operator Paid Amounts" shall have the meaning set forth in Section 8.01(c). (42) "Owners" shall mean the entities described on Exhibit A as it may be amended from time to time as the owners of the Hotels. "Owner" shall mean any entity described on Exhibit A as it may be amended from time to time. (43) "Owner Account" shall have the meaning set forth in Section 8.01(b). (44) "Property" shall mean the Land, the Hotel, all real and personal property now or hereafter situated upon the Land and all appurtenant rights and easements thereto. (45) "Rebates" shall have the meaning set forth in Section 21.12. (46) "REIT" shall mean RFS Hotel Investors, Inc. (47) "REIT Hotels" shall mean, initially, the 49 hotels owned by Affiliates of the REIT which will be managed by Operator effective on or about January 1, 2001, as set forth on Exhibit D and any additional hotels owned by the REIT or its Affiliates and managed by Operator from time to time in the future. (48) "Sale of a Hotel" shall have the meaning set forth in Article XVI. (49) "Uniform System" shall mean the "Uniform System of Accounts for Hotels" (9th Revised Edition, 1996), as published by the American Hotel and Motel Association, as it may be amended from time to time, with such exceptions as may be required by the provisions of this Agreement (including without limitation the definitions of Gross Hotel Income, Gross Operating Profit and Operating Expenses). (50) "Unrelated Person" shall have the meaning set forth in Section 21.11. (b) Terms with initial capital letters which appear within the foregoing definitions are defined in this Article I or as indicated in this Agreement. 6 11 ARTICLE II TERM OF AGREEMENT Section 2.01.00 Term. (a) The term of this Agreement (the "Operating Term") shall commence on the date set forth at the beginning of this Agreement and shall terminate at midnight on December 31, 2010, subject to earlier termination as to one or more Hotels at any time as set forth below. (b) This Agreement may be terminated by Lessee or Operator as to one or more Hotels at any time and from time to time by delivery of written notice to the other party not less than ninety (90) days prior to the effective date of termination which notice shall set forth (i) the effective date of termination, and (ii) the Hotel or Hotels with respect to which this Agreement is being terminated. Termination by Lessee pursuant to this Section 2.01(b) shall be subject to the provisions of Section 21.09 of this Agreement. ARTICLE III OPERATION OF THE HOTEL Section 3.01.00 Representations by Operator; Engagement of Operator. Operator hereby represents that Operator (i) is experienced and capable and will remain experienced and capable in the management and operation of hotels throughout the United States and (ii) has reviewed and understands the terms and provisions of the Lease and the Franchise Agreements and the Hotel Standards. In reliance on the foregoing representations, Lessee hereby engages Operator to manage and operate the Hotels during the Operating Term and Operator agrees to manage and operate the Hotels during the Operating Term, in accordance with this Agreement. Lessee and Operator acknowledge that it is the intention of the parties that the Hotels be operated in a profitable manner in accordance with the Hotel Operating Budget and the Hotel Capital Budget. Section 3.02.00 Standards of Operation. Operator agrees to diligently and efficiently operate each Hotel and all of its facilities and activities (i) at all times in accordance with the Hotel Standards; (ii) consistent with the terms of the Lease and Lessee's obligations thereunder; (iii) in the same manner as is customary and usual in the operation of first-class hotels in its market; (iv) in compliance with this Agreement, all easements, covenants and restrictions affecting the Property and all applicable governmental laws rules, regulations, ordinances, orders and requirements; (v) in accordance with the terms and conditions of any financing; and (vi) in accordance with the requirements of any carrier having insurance on the Hotel or any part thereof. Operator shall also obtain and keep in force any and all licenses or permits necessary for the operation of the Hotel (provided that liquor licenses shall be obtained and held by Lessee in Lessee's name). The cost of obtaining and keeping in force any such licenses or permits (including the liquor license, if any) and in complying with governmental laws, rules, regulations, ordinances, orders and requirements shall be Operating Expenses to the extent set forth in the Approved Budget. Notwithstanding any other provision of this Agreement to the contrary, Operator's obligations with respect to the Lease (and any amendments thereto), any ground lease, any franchise agreement with respect to which Operator is expected to comply and the Hotel Standards mandated thereunder, and to any such financing (collectively, "Major 7 12 Agreements") shall be conditioned upon (i) true and complete copies of the relevant provisions thereof have been delivered to Operator sufficiently in advance to allow Operator to perform such obligations and (ii) the provisions thereof and/or compliance with such provisions by Operator (1) being applicable to the day-to-day operation, maintenance and non-capital repair and replacement of the Hotel or any portion thereof, (2) not requiring contribution of capital or payments of Operator's own funds, (3) not materially increasing Operator's obligations hereunder or materially decreasing Operator's other rights hereunder, (4) not limiting or purporting to limit any corporate activity or transaction with respect to Operator or its Affiliates or any other activity, transfer, transaction, property or other matter involving Operator or its Affiliates other than at the site of the Hotel, and (5) otherwise being within the scope of Operator's duties under this Agreement. Lessee acknowledges and agrees, without limiting the foregoing, that any failure of Operator or the Hotel to comply with the provisions of Major Agreements arising out of (A) construction activities at the Hotel, (B) inherent limitations in the design and/or construction of, location of and/or parking at the Hotel and/or (C) Lessee's written instructions to Operator, shall not be deemed a breach by Operator of its obligations under this Agreement. Notwithstanding anything to the contrary set forth in this Agreement, Operator shall not be in breach of any obligation which it may otherwise have under this Agreement so long as Operator is acting in accordance with the Approved Budget and Operator's failure to perform such obligation results from Lessee's failure to provide adequate funding in accordance with the terms of this Agreement. Section 3.03.00 Reservations Services. Operator shall sell, represent and promote the Hotel through the respective Franchisors' sales and reservations systems and will encourage the use of the Hotel by all recognized sources of hotel business. Section 3.04.00 Marketing. (a) Ninety (90) days prior to the beginning of each Fiscal Year and in conjunction with preparation of the Hotel Operating Budget for the forthcoming Fiscal Year, Operator shall deliver to Lessee a proposed marketing plan for each Hotel for such Fiscal Year which shall be consistent with the Hotel Operating Budget. Operator shall review the marketing plan with Lessee and upon Lessee's written approval it shall represent the approved marketing plan (the "Marketing Plan") for the succeeding Fiscal Year and shall be implemented by Operator. The sums expended for advertising and marketing each Fiscal Year shall be an Operating Expense to the extent they are (i) set forth in the Approved Budget and the Marketing Plan for such Fiscal Year and (ii) actually expended for advertising or marketing the Hotel either exclusively or in conjunction with the advertising or marketing of the Franchisor. (b) Operator shall arrange, contract for and carry out such advertising and promotion of the Hotel, as Operator shall deem advisable and consistent with the Approved Budget. Funds for advertising and promotion of the Hotel may be expended exclusively for or with respect to the Hotel or in conjunction with the advertising or promotion of other properties managed by Operator, and in either case may be administered at or through Operator's regional or home office. Operator will make every effort to ensure that the Hotel shall receive an equitable share of the benefit of the cooperative advertising and promotion reasonably commensurate with its contribution to the costs thereof. The costs thereof shall be equitably allocated by Operator between the Hotel and other participating hotels. Upon Lessee's request, Operator shall provide reasonable documentation to support such allocations. (c) Operator, in its discretion, may cause the Hotel to participate in sales and promotional campaigns and activities involving complimentary rooms, food and beverages where such is customary in the travel industry or in the Operator's practice and policy. 8 13 Section 3.05.00 Consultations Between Lessee and Operator. When requested by Lessee, Operator shall, from time to time, render advice and assistance to Lessee and Owner in the negotiation and prosecution of all claims for the reduction of real estate or other taxes or assessments affecting the Hotel and for any award for taking by condemnation or eminent domain affecting the Hotel. Section 3.06.00 Activities of MeriStar. Lessee acknowledges that (i) a member of Operator is a subsidiary of MeriStar Hotels & Resorts, Inc. ("MHR") and is related to MeriStar Hospitality Corporation ("MHC"; MHR, MHC and their respective Affiliates other than Operator being hereinafter collectively referred to as "MeriStar"), and (ii) Lessee is fully aware that MeriStar owns, leases or operates a substantial number of hotel and other properties and intends to own, lease or operate a substantial number of additional such properties, many of which existing or future properties are or may be within the market areas of the Hotels. Notwithstanding anything to the contrary contained in this Agreement, Lessee hereby agrees that nothing in this Agreement restricts or shall be deemed to restrict any activity or opportunity of MeriStar (including, without limitation, the ownership, leasing and/or operation of any such other hotels or properties), whether such activity or opportunity is or may be in competition with the Hotels or any other property leased by Lessee, or to impose on MeriStar any duty to act, or refrain from acting, in the interests of Lessee or Owner, and Lessee hereby irrevocably waives any claim or cause of action it may now or hereafter have against MeriStar arising out of any such activity or opportunity or any such duty or purported duty, whether arising out of this Agreement or otherwise. ARTICLE IV INDEPENDENT CONTRACTOR Section 4.01.00 Operator Status. In the performance of its duties in the administration, management and operation of the Hotel, Operator shall act solely as an independent contractor. Nothing herein shall constitute or be construed to be or create a partnership or joint venture between Lessee and Operator, or be construed to appoint or constitute Operator as an agent of Lessee or Owner for any purpose, or be construed to create a lease by Operator of the Hotel or its facilities. It is expressly covenanted that this Agreement is no more than an agreement for the rendering of services by Operator on behalf of Lessee in the operation and management of the Hotel only. Section 4.02.00 Employees. (a) Each Hotel employee shall be the employee of Operator and not of Lessee, and every person performing services in connection with this Agreement shall be acting as the employee of Operator. All such personnel shall be on the payroll of Operator, but their salaries and other related expenses, in amounts not to exceed those sums allocated to such salaries and expenses in the Approved Budget shall be an Operating Expense. (b) Operator shall provide evidence to Lessee of statutory Worker's Compensation Insurance and Employer's Liability Insurance, with waiver of subrogation endorsements in favor of Lessee and Owner, for each such employee. The insurance coverages (including, without limitation, the carrier, 9 14 policy limits of each and waiver of subrogation endorsements) must be in form, substance and amount satisfactory to Lessee in all respects. (c) The general hiring policies and the discharge of employees at the Hotel shall in all respects comply with all "Equal Employment Opportunity" laws and regulations, and Operator agrees that all laws, regulations and ordinances regarding the employment and payment of persons engaged in the operation of each Hotel (the "Employment Laws") will be complied with. (d) Lessee shall have the right to participate in any negotiations with labor unions representing such employees at the Hotel, and Operator shall not sign any union contracts covering such employees at the Hotel which have not been previously approved in writing by Lessee. (e) Operator shall submit to Lessee the resumes of any person proposed to serve as the General Manager, Director of Marketing, Director of Sales, Resident Manager or Controller of any Hotel. Lessee shall have the right to approve each of the persons proposed for such positions prior to such persons being assigned to any Hotel by Operator which approval shall not be unreasonably withheld or delayed. Section 4.03.00 Reimbursement of Employee Expenses. (a) All costs of every nature pertaining to all employees at the Hotel arising out of the employer-employee relationship, including, without limitation, salaries, benefits, bonuses, relocation costs, employment-related legal costs, costs incurred in connection with governmental laws and regulations, insurance rules, and such other expenses as Operator, in its reasonable discretion, may deem appropriate shall be an Operating Cost of the Hotel to the extent set forth in the Approved Budget and Owner shall reimburse, indemnify and hold harmless Operator from all costs, expenses, liabilities and claims incurred in connection therewith. (b) Subject to the prior written approval of Lessee, Operator may use employees of Operator who are not assigned to the Hotel to perform special services for the Hotel, and the cost of their salaries, payroll taxes and employee benefits shall be reimbursed to Operator as an Operating Expense to the extent such costs are set forth in the Approved Budget or otherwise approved by Lessee. (c) Within limits set forth in the Approved Budget, employees of Operator other than those regularly employed at the Hotel shall be entitled to free room and board and the free use of all hotel facilities at such times as they visit the Hotel in connection with the management of the Hotel or are assigned temporarily to the Hotel to perform services for the Hotel. Likewise, employees regularly employed at the Hotel shall be entitled to free room and board and the free use of all hotel facilities in all other Hotels at such times as they visit other Hotels in connection with the management of such other Hotels or are assigned temporarily to such other Hotels to perform services for such other Hotels. (d) Owner and Lessee shall be entitled to free room and board and the free use of all hotel facilities for their employees and other persons designated by Owner and Lessee. Section 4.04.00 Employee Benefit Plans. Operator may enroll the Operator's employees at the Hotels in pension, medical and health, life insurance and employee benefit plans which are joint plans for the benefit of employees at more than one of the Hotels. Employer contributions to such plans, reasonable administrative fees, at cost, which may be expended in connection therewith, and reasonable expenses for such plans will all be an Operating 10 15 Expense to the extent such costs are provided for in the Approved Budget. The administration expenses of any joint plans will be equitably apportioned among the various Hotels and any other hotels operated by Operator or its affiliates. In addition, Operator may provide lodging, food and beverage privileges to employees of Operator in accordance with the employee benefit operating policy applicable to all Hotels. All costs for the benefits, services and privileges referenced in Section 4.03(c) and this Section 4.04 will be Operating Expenses only to the extent the same are provided for in the Approved Budget, otherwise all such costs shall be borne solely by Operator without reimbursement by Lessee. Section 4.05.00 Execution of Agreements. (a) Except as provided in Section 4.05(b), Operator shall execute as agent of Lessee all leases and other agreements relating to equipment and/or services provided to each Hotel, all of which, unless otherwise approved in writing in advance by Lessee, shall be cancelable upon not more than one hundred eighty (180) days' written notice by Operator or Lessee without the payment of a penalty or fee. Notwithstanding the foregoing, without the prior written approval of Lessee, Operator shall not enter into any agreement (i) which provides for the payment of sums not authorized by Lessee in an Approved Budget, (ii) which would give rise to a lien upon all or any part of the Property, (iii) which would result in liability to Lessee for sums other than as set forth in the applicable Approved Budget, (iv) to lease any retail space in the Hotel, (v) relating to alterations to the exterior, interior or structural design of the Hotel, (vi) which requires the payment of more than $50,000 for the term of the agreement, or (vii) which is not cancelable by Lessee upon 180 days' notice or less. (b) Subject to Lessee's prior approval of the same, Operator shall execute, as agent for Lessee, (i) all leases, as sub-lessor, of retail space in the Hotel, and (ii) equipment rental and/or lease agreements which cannot be terminated upon one hundred eighty (180) days notice or less without the payment of a penalty or fee. Operator shall exercise its best efforts to obtain in each equipment agreement a right on the part of the lessee of such equipment to terminate the same on one hundred eighty (180) days notice or less without the payment of a penalty fee. Notwithstanding anything in this Section 4.05 to the contrary, Lessee reserves the right, exercisable at Lessee's option, to execute any lease or other agreement relating to equipment and/or services being provided to the Hotel. ARTICLE V INDEMNIFICATION Section 5.01.00 Indemnification by Operator. Operator shall indemnify and hold Lessee (and Lessee's agents, principals, shareholders, partners, members, officers, directors and employees) harmless from and against all liabilities, losses, claims, damages, costs and expenses (including, but not limited to, reasonable attorneys' fees and expenses) that may be incurred by or asserted against any such party and that arise from (a) the fraud, willful misconduct or negligence of the employees of Operator at or above the level of general manager, (b) the breach by Operator of any provision of this Agreement or (c) any action taken by Operator which is beyond the scope of Operator's authority under this Agreement. Lessee shall promptly provide Operator with written notice of any claim or suit brought against it by a third party which might result in such indemnification and Operator shall have the option of defending any claim or suit brought against the Lessee with counsel selected by Operator and reasonably approved by Lessee. Lessee shall cooperate with the Operator or its counsel in the preparation and conduct of any defense to any such claim or suit and shall have the right to reasonably participate in such defense. 11 16 Section 5.02.00 Limitations on Indemnification. None of the indemnifications set forth in Section 5.01 shall be applicable to (1) liability resulting from the design or construction of the Hotel, (2) liability to Lessee resulting from Lessee's fraud or willful misconduct, or (3) that portion of a liability which is covered and paid for by insurance maintained for the Hotel (it being understood and agreed that if Lessee is self-insuring against any perils and/or liabilities against which the Lessee is otherwise required to maintain insurance under the terms of this Agreement, then Lessee shall be deemed to be maintaining insurance against such perils and/or liabilities in the same amounts of insurance which Lessee is required to maintain under this Agreement, and that such part of the liability which would have been covered and paid for by such required insurance shall not be covered by the foregoing indemnities). The standard of performance of which Operator is to be responsible under this Agreement shall be that, reasonably and diligently exercised, of a professional hotel operator having the knowledge, experience and expertise which Operator represents to Lessee that Operator has. Notwithstanding any other provision of this Agreement, Operator shall not be obligated to indemnify or hold Lessee harmless against the amount of claims or liabilities which are payable as Operating Expenses (i) as a deductible under applicable insurance which exceeds the lesser of the amount of the claim or five thousand dollars ($5,000) (adjusted each Fiscal Year by the percentage increase in the CPI over the twelve (12) month period immediately preceding the start of the Fiscal Year in question) or (ii) as amounts due under contracts for performance thereof excluding payments for breach thereof, or, which are covered and paid for by insurance which Lessee is required to provide and maintain under this Agreement, whether or not such insurance is actually in place (unless the failure of such insurance to be in place is the result of a breach by Operator of its obligations under this Agreement). Section 5.03.00 Indemnification by Lessee. Except as provided in Section 5.01, Lessee shall indemnify and hold Operator (and Operator's agents, principals, shareholders, partners, members, officers, directors and employees) harmless from and against all liabilities, losses, claims, damages, costs and expenses (including, but not limited to, reasonable attorneys' fees and expenses) that may be incurred by or asserted against such party and that arise from or in connection with (a) the performance of Operator's services under this Agreement, (b) any act or omission (whether or not willful, tortious, or negligent) of Lessee or any third party or (c) any other occurrence related to the Hotel which arising before, during or after the Operating Term. Operator shall promptly provide Lessee with written notice of any claim or suit brought against it by a third party which might result in such indemnification and Lessee shall have the option of defending any claim or suit brought against Operator with counsel selected by Lessee and reasonably satisfactory to Operator. Operator shall cooperate with the Lessee or its counsel in the preparation and conduct of any defense to any such claim or suit and shall have the right to reasonably participate in such defense. Section 5.04.00 Survival of Indemnity. The provisions of this Article V shall survive the expiration or sooner termination of this Agreement with respect to matters arising out of facts or circumstances occurring during the period prior to such expiration or termination. Section 5.05.00 Employment Claim. Supplementing the provisions of Sections 5.01 and 5.03, if any claim shall be made against Lessee and/or Operator which is based upon a violation or alleged violation of the Employment Laws (an "Employment Claim"), the Employment Claim shall fall within Operator's indemnification obligations 12 17 under Section 5.01 only if it is based upon (a) the willful misconduct or negligence of Operator's employees at the level of hotel general manager or above or (b) Operator's breach of its obligations under Section 4.02(c), and shall otherwise fall within Lessee's indemnification obligations under Section 5.03. Section 5.06.00 Environmental Matters. (a) The following terms shall have the respective meanings ascribed to them as hereinafter set forth: (i) The term "Environmental Activity" shall mean any past, present or future storage, holding, existence, release, threatened release, emission, discharge, generation, processing, use, abatement, disposition, handling, transportation or reporting of any Hazardous Substance (as hereinafter defined) in violation of any applicable Environmental Laws (as hereinafter defined) at, from, under, into or on the Hotel, or otherwise relating to the Hotel or the current or former ownership, use, operation or occupancy thereof, or the threat of any such activity. (ii) The term "Environmental Laws" shall mean any and all laws, statutes, ordinances, rules, regulations, judgements, orders, decrees, permits, licenses or other governmental restrictions or requirements relating to health, the environment, any Hazardous Substance or any Environmental Activity now or hereafter or at any time prior to the date of this Agreement in effect in the jurisdiction in which the Hotel is located, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1986, as amended (42 U.S.C. ss.9601 et seq.), the Resource Conservation Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984, as now or hereafter amended (42 U.S.C. ss.6901 et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. ss.1801 et seq.), the Clean Air Act, as amended (42 U.S.C. ss.7401 et seq.), the Clean Water Act, as amended (33 U.S.C. ss.1251 et seq.), the Toxic Substances and Control Act, as amended (15 U.S.C. ss.2601 et seq.), any and all state and local laws similar to, in whole or in part, federal toxic waste laws which from time to time are in effect in the jurisdiction in which the Hotel is located, and the regulations pursuant thereto, any laws or regulations governing "wetlands" and any common law theory based on nuisance or strict liability. (iii) The term "Hazardous Substance" shall mean any substance, material or waste which is regulated, or governed by any Environmental Law, including without limitation (a) any substance, material or waste defined, used or listed as "hazardous waste", "extremely hazardous waste", "restricted hazardous waste", "hazardous substance", "hazardous material", "toxic substance" or similar or related term as defined, used or listed in any Environmental Laws, (b) any asbestos or asbestos containing materials, (c) any underground storage tanks or similar facilities, (d) any petroleum products stored in bulk or polychlorinated biphenyl, (e) any additional substances or materials which are now or hereafter hazardous or toxic substances under any Environmental Laws, and (f) any additional substance or material which from and after the date of this Agreement becomes a "Hazardous Substance" as defined herein. (b) Operator shall (i) perform its obligations under this Agreement in compliance with all Environmental Laws in effect from time to time during the Operating Term, (ii) promptly notify Lessee in writing of (A) any written notice received by Operator with respect to any Environmental Activity or (B) any other Environmental Activity of which Operator has actual knowledge and (iii) cooperate with Lessee, at Lessee's cost (except that Operator shall bear the cost of such cooperation to the extent that such Environmental Activity is a result of Operator's failure to comply with its covenants under clauses (i) or 13 18 (ii) above), and in all reasonable respects, in connection with any and all remediation of Environmental Activities undertaken by Lessee in compliance with applicable Environmental Laws. Notwithstanding the foregoing, Lessee and Operator acknowledge and agree that Lessee shall be responsible for reporting to applicable governmental agencies any Environmental Activities subject to reporting pursuant to applicable Environmental Law and shall undertake any and all remediation or other work required under any Environmental Law or in connection with any Environmental Activity pursuant to contracts between Lessee and a contractor or consultant qualified to perform such work. (c) Except as specifically set forth to the contrary in Sections 5.01, 5.02, 5.03 and 5.06(b) above, Lessee shall (i) be solely responsible for the compliance of the Hotel with all Environmental Laws and (ii) indemnify and hold Operator and its Affiliates (and Operator's and Operator's Affiliates' agents, principals, shareholders, partners, members, officers, directors and employees) harmless from and against all liabilities, losses, claims, damages, costs and expenses (including, but not limited to, reasonable attorneys' fees and expenses) that may be incurred by or asserted against such party and that arise from or in connection with any past, present or future Environmental Activity or other non-compliance of the Hotel with any Environmental Law. The provisions of this Section 5.06(c) shall survive the expiration or earlier termination of this Agreement." Section 5.07.00 Lessee Net Worth. Lessee agrees to maintain a net worth, determined in accordance with generally accepted accounting principles, of not less than $1,000,000 during the Operating Term. Lessee shall deliver to Operator, upon request not more often than twice each Fiscal Year, a certificate from an authorized officer of Lessee, certifying as to Lessee's net worth as of the end of the most recent accounting period. Lessee has executed and delivered to Operator the Guaranty in the form of Exhibit E. ARTICLE VI BUDGETS AND POLICY MEETINGS Section 6.01.00 Budgets. (a) Lessee will cause Owner to prepare an annual capital budget for each Fiscal Year for each Hotel (the "Hotel Capital Budget") at least one hundred twenty (120) days prior to commencement of the Fiscal Year and Lessee will provide Operator with a copy of the Hotel Capital Budget. If requested by Lessee, Operator will assist Owner in preparation of the Hotel Capital Budget. The Hotel Capital Budget will set forth all projected capital improvements and all projected expenditures for replacements, substitutions and additions to Hotel FF&E for such Fiscal Year, which budget shall also be month-to-month as well as annual. At least ninety (90) days prior to the commencement of each Fiscal Year, Operator shall submit to Lessee an annual forecast for the operation of the Hotel for the forthcoming Fiscal Year containing detailed revenue projections and budgets of Operating Expenses (the "Hotel Operating Budget"). The Hotel Operating Budget shall be month-to-month as well as annual and shall be in the form designated by Lessee. Additionally, before the commencement of each Fiscal Year, Operator shall submit to Lessee daily budgeted occupancy, average daily rate and Revenue per Available Room statistics for each hotel. The Hotel Operating Budget and the daily budgeted hotel operating statistics shall contain Operator's reasonable good faith estimates of the amounts set forth therein but Operator shall not be deemed to have made a guarantee as to any amounts in the Hotel Operating Budget. At the same time, Operator shall also present the Marketing Plan. Owner shall be responsible for implementing the 14 19 Hotel Capital Budget and may, in Owner's sole discretion, increase, decrease, delete or modify in any respect any capital expenditure in the Hotel Capital Budget. (b) Operator shall review the Hotel Operating Budget with Lessee, and upon Lessee's written approval of the Budget it shall constitute the Approved Budget for the succeeding Fiscal Year and shall be implemented by Operator. (c) Operator may reallocate all or part of the amount budgeted to any line item to another line item within the same department. (d) Lessee hereby acknowledges that the Hotel Operating Budget is intended to be the best estimate at the time of its preparation and merely a forecast of the Hotel's income and expenses for the ensuing Fiscal Year and that Operator shall not be deemed to have made a guarantee or warranty to Lessee in connection with the Hotel Operating Budget. Section 6.02.00 Budget Meetings. At each budget meeting and at any additional meetings during a Fiscal Year reasonably called by Lessee or Operator, Operator shall consult with Lessee on matters of policy concerning management, sales, room rates, wage scales, personnel, general overall operating procedures, economics and operation and other matters affecting the operation of the Hotel. Section 6.03.00 Approval by Lessee Required. Any request by Operator to make any expenditure or incur any obligations which causes or likely will cause total annual operating expenses at a Hotel to exceed 105% of the total annual operating expenses for the Hotel as set forth in the Approved Budget or which falls into any category of expenditures which in the opinion of Lessee and its counsel is required by law to have the prior approval of Lessee, shall be submitted to Lessee in writing with an explanation of and accompanied by supporting information for the request. Operator shall not make any such expenditure or incur any such obligation without Lessee's prior written consent, except (i) as is necessary, in Operator's reasonable discretion, for the immediate emergency protection of life or property, or (ii) unless such expenditure or obligation is offset by an equal or greater amount of related revenue. Lessee shall endeavor to respond to any such request within fifteen (15) days of the receipt thereof; provided, however, Lessee shall have no obligation to agree to any such request and no liability for failing to respond. ARTICLE VII OPERATING EXPENSES Section 7.01.00 Payment of Operating Expenses. (a) In performing its authorized duties hereunder, Operator shall promptly pay all Operating Expenses, except that if requested by Lessee certain Operating Expenses shall be paid by Operator directly to Lessee for payment by Lessee to the appropriate lender, taxing authority, insurer or other party so identified by Lessee to Operator. 15 20 (b) Subject to Article V, all Operating Expenses or other expenses incurred by Operator in performing its authorized duties shall be reimbursed or borne by Lessee; provided that such Operating Expenses or other expenses are incurred pursuant to and within the limits set forth in an Approved Budget or pursuant to other written authorization by Lessee. To the extent the funds necessary therefor are not generated by the operation of the Hotel, they shall be supplied by Lessee to Operator in the manner provided in Article VIII. Section 7.02.00 Operating Expenses Not an Obligation of Operator. Except as may be otherwise specifically provided in this Agreement, Operator shall in no event be required to advance any of its own funds for Operating Expenses of the Hotel, nor to incur any liability in connection therewith unless Lessee shall have furnished Operator with funds as required of Lessee under the terms of this Agreement. However, if Lessee has provided funds required of Lessee hereunder, Operator shall advance such funds and all other funds necessary to pay expenses incurred by Operator in performing its duties and obligations hereunder. ARTICLE VIII BANK ACCOUNTS Section 8.01.00 Bank Accounts The following special accounts shall be established in connection with the operation of the Hotel: (a) Deposit Account. All cash (other than cash needed to maintain a petty cash fund at the Hotel not to exceed $1,000) and checks received by Operator in the operation of the Hotel shall be deposited in a special account or accounts bearing the name of the Hotel (the "Deposit Account"), in such federally insured banks, savings and loans or trust companies as may be designated from time to time by Lessee and reasonably approved by Operator. The Deposit Account shall be in the name of Operator as agent for Lessee and shall be under the control of Operator. Amounts in the Deposit Account shall not be commingled with other funds of Operator or funds from other properties owned, leased or managed by Operator, other than properties managed by Operator for Lessee or Affiliates of Lessee designated by Lessee. All amounts deposited into the Deposit Account shall be paid into the Owner Account (as hereinafter defined) as set forth in Section 8.01(b). (b) Owner Account. Lessee shall establish, in Lessee's name and under the sole control of Lessee, a master account or accounts in such federally insured banks, savings and loans or trust companies as may be designated from time to time by Lessee (the "Owner Account"). All amounts deposited into the Deposit Account shall be paid into the Owner Account on a daily basis, or on such other basis as may be determined by Lessee from time to time upon written notice to Operator. All credit card receipts shall be deposited directly into the Owner Account. Amounts in the Owner Account may be commingled with funds from other properties owned or leased by Lessee, at Lessee's discretion. Lessee shall be responsible for paying fixed charges and debt service, ground rent and capital costs with respect to the Hotel from the Owner Account or from other funds of Lessee, except to the extent Lessee has designated Operator in writing to pay such amounts from the Agency Account (as hereinafter defined). (c) Agency Account. Operator shall establish, in Operator's name as agent for Lessee and under the control of Operator as hereinafter set forth, a special account or accounts in such federally insured banks, savings and loans or trust companies as may be designated from time to time by Lessee 16 21 (the "Agency Account"). Lessee shall deposit into the Agency Account sufficient working capital on an as-needed basis to pay all Operating Expenses and other amounts which are the responsibility of Operator to pay under this Agreement (including without limitation any fixed charges and debt service, ground rent and capital costs with respect to the Hotel which Lessee may have designated Operator to pay from the Agency Account) (collectively, "Operator Paid Amounts"). From the Agency Account, Operator shall pay all Operating Expenses and other Operator Paid Amounts required to be paid by Operator on Lessee's behalf under this Agreement (to the extent, in each case, such amounts are permitted or required to be paid under this Agreement). Interest on the Agency Account shall accrue to the benefit of Lessee but shall be available to pay any Operator Paid Amounts. Checks or other documents of withdrawal from the Agency Account shall be signed only by representatives of Operator, provided that such representatives shall be bonded or otherwise insured in a manner reasonably satisfactory to Lessee. The identity of such authorized representatives shall be disclosed to Lessee from time to time. The premiums for bonding or other insurance shall be an Operating Expense except for premiums for bonding off-site executive employees of Operator. Upon the expiration or termination of this Agreement, all remaining amounts in the Agency Account shall be transferred to Lessee. Section 8.02.00 Authorized Signatures. The Hotel Operating Account shall be under the control of Operator, without prejudice, however, to Operator's obligation to account to Lessee as and when provided for herein. All receipts and income, including, without limitation, Gross Hotel Income shall be promptly deposited in the Hotel Operating Account. Checks or other documents of withdrawal shall be signed only by the individual representatives of Operator approved in writing by Lessee and duly recognized for such purpose by the bank or banks in which the referenced accounts are maintained. Operator shall supply Lessee with fidelity bonds or other insurance insuring the fidelity of authorized signatories to such accounts, unless said bonds or other insurance shall have been placed by Lessee and delivered directly by the bonding or insurance company to Lessee. The cost of such fidelity bonds or other insurance shall be an Operating Expense and subject to Lessee's approval. Neither Lessee nor Operator shall be responsible for any losses occasioned by the failure or insolvency of the bank or banks in which the referenced accounts are maintained. Upon expiration or termination of this Agreement and the payment to Operator of all amounts due Operator hereunder upon such expiration or termination, as provided in this Agreement, all remaining amounts in the referenced accounts shall be transferred forthwith to Lessee, or made freely available to Lessee. Section 8.03.00 Investment of Hotel Cash. Operator shall invest Hotel Operating Account balances in a cash management program approved in writing by Lessee and which provides for Lessee to receive the interest income thereon. Section 8.04. Payroll. 00 If and to the extent that there are insufficient funds in the Agency Account to pay compensation due to Hotel employees (including all related payroll and withholding taxes) and if Lessee shall fail to deposit such funds in the Agency Account within two (2) business days after written notice from Operator, then Operator may use funds in the Deposit Accounts only to the extent necessary to pay such compensation (not in any event to exceed the amount of such compensation accrued or payable with respect to the two calendar weeks preceding the date of any such draw upon the Deposit Accounts by Operator) and shall immediately advise Lessee as to the use of such funds. 17 22 Section 8.05. Security Deposits. 00 Any security deposit held under a Space Lease shall be held in a separate account if required by law or the terms of such Space Lease or if otherwise required by Lessee. ARTICLE IX BOOKS, RECORDS AND STATEMENTS Section 9.01.00 Books and Records. (a) Operator shall keep full and adequate books of account and other records reflecting the results of operation of the Hotel on an accrual basis, all in accordance with the Uniform System, with such exceptions as may be approved in writing by Lessee. (b) Except for the books and records which may be kept in Operator's home office or other location approved by Lessee the books of account and all other records relating to or reflecting the operation of the Hotel shall be kept at the Hotel. All books and records pertaining to the Hotel and of Operator (including all budgetary records of Operator), wherever kept, shall be available to Lessee and its representatives at all reasonable times for examination, audit, inspection and transcription. All such books and records pertaining to the Hotel, including, without limitation, books of account, guest records and front office records, at all times shall be the property of Lessee and, except for the books of account and as herein otherwise provided, shall not be removed from the Hotel by Operator without Lessee's written approval and consent. Upon any termination of this Agreement, all of such books and records pertaining to the Hotel forthwith shall be turned over to Lessee so as to insure the orderly continuance of the operation of the Hotel, but such books and records shall be available to Operator for a period of five (5) years at all reasonable times for inspection, audit, examination, and transcription of particulars relating to the period in which Operator managed the Hotel, or at any time after two years Lessee may dispose of the same if Operator fails to remove the books and records from the Hotel or other premises where the same are kept upon thirty (30) days' written notice from Lessee. (c) Lessee will cause to be made available to Operator, at no charge to Operator, the hotel accounting system offered by Lessee's Affiliate, Centrafuse [Inc.] and Operator shall utilize such accounting system, including any enhancements or upgrades thereto, in the operation of the Hotels. (d) Lessee acknowledges and agrees that any books and records of MeriStar or any Affiliate of MeriStar other than Operator shall not be deemed to be books and records of the Hotel or of the Operator. Section 9.02.00 Statements. (a) Operator shall deliver to Lessee by the fifteenth (15th) day of each month, a monthly report of the state of the business and affairs of the operation of the Hotel for the immediately preceding month and for the Fiscal Year to date. Such reports shall include at least (i) a balance sheet, (ii) a profit and loss statement, comparing current month and Fiscal Year-to-date profit, loss, and operating expenses to the Approved Budget and the prior year and comparing current month and Fiscal Year-to-date average daily rate and occupancy to the Approved Budget and the prior year, (iii) a statement which details the computation of all fees payable to Operator for the month, (iv) the balance of all bank accounts, (v) an adjusting statement showing the actual cash position of the Hotel for the month and Fiscal Year-to-date, 18 23 and (vi) sources and uses statements. Additionally, Operator shall deliver to Lessee for each month by the end of the following month a narrative discussing any of the aforementioned reports and variances from the Approved Budget; without thereby implying Lessee's approval of such variance, except for such variance as may have been specifically approved in writing by Lessee. (b) Such reports and statements (i) shall be in form and in detail satisfactory to Lessee, (ii) shall be taken from the books and records maintained by Operator in the manner hereinabove specified, (iii) shall follow the general form set forth in the Uniform System, and (iv) shall be accompanied by copies of all paid receipts for the month, if requested by Lessee. (c) Within forty-five (45) days after the end of each Fiscal Year, Operator shall, if requested by Lessee, deliver to Lessee a draft profit and loss statement prepared by the Independent CPA, showing the results of operations of Operator and/or the Hotel during such Fiscal Year including, but not limited to, the Gross Hotel Income, if any, for such Fiscal Year. Further, Operator shall, if requested by Lessee pursuant to a legitimate documented request made to Lessee by a third party not an Affiliate of Lessee (to include, but not limited to, a request of the U.S. Securities or Exchange Commission, other federal or state regulatory bodies or agencies, or any court of competent jurisdiction), provide for an audit of its books and records by the Independent CPA, with the costs of any such requested audit to be borne by Lessee. Any disputes as to the contents of any such statement or any accounting matter hereunder shall be determined by the Independent CPA, whose decisions shall be final and conclusive on Operator and Lessee. (d) In addition, Operator shall deliver to Lessee, upon receipt by Operator, copies of (i) each STAR report from Smith Travel Research; (ii) each Guest Satisfaction report; (iii) each New Competition report; (iv) each Franchisor inspection report; and (v) such other reports or information in such form as may be reasonably requested by Lessee. ARTICLE X OPERATOR'S FEE AND TRANSFERS TO LESSEE Section 10.01.00 Payment of Operator's Basic Fee. (a) On the first (1st) day of each month during the Operating Term, Operator shall be paid out of the Hotel Operating Account the Operator's Basic Fee for that month, based upon Gross Hotel Income for the immediately prior month, as determined from the books and records referred to in Article IX. Operator's Expenses, if any, shall be paid as invoiced for services and materials rendered. (b) Notwithstanding Section 10.01(a), upon commencement of this Agreement, Lessee agrees to pay to Operator the aggregate Operator's Basic Fee for the first three (3) months of the Operating Term as estimated from the initial budgeted revenues for such three-month period previously agreed to by the parties hereto. Section 10.02.00 Payment of Operator's Incentive Fee. On the 60th day following the end of each Fiscal Year, Lessee shall pay to Operator, the Operator's Incentive Fee, if any, for such Fiscal Year. "Operator's Incentive Fee" for any Fiscal Year shall be an amount determined by Lessee and Operator prior to commencement of the Fiscal Year and shall generally be based upon the financial performance of all of the Hotels, in the aggregate. The formula for calculating and determining Operator's Incentive Fee for each Fiscal Year shall be agreed to by 19 24 Operator and Lessee in connection with the Approved Budget and in any event prior to commencement of each Fiscal Year. Lessee and Operator agree that in no event will the Operator's Incentive Fee with respect to the Hotels together with the incentive management fee for the other initial REIT Hotels described in Exhibit D exceed $1,000,000 in the aggregate for any Fiscal Year. Section 10.03.00 Distribution of Cash. (a) On or before the tenth (10th) day of each month during the Operating Term or as requested at any time by Lessee, Operator shall, after transferring to the Hotel Operating Account all funds held in other accounts which Lessee has permitted to be established for the efficient operation of the Hotels and after distribution of cash pursuant to Sections 10.01 and 10.03(a) for the preceding month and retention of working capital sufficient, in the sole judgment of Lessee, to assure the uninterrupted and efficient operation of the Hotels for the next Accounting Period, remit to Lessee all remaining funds in the Hotel Operating Account, including but not limited to funds for items which are excluded from the definition of Gross Hotel Income. Section 10.04.00 Adjustments to Allocations. If at the time calculations are made to determine amounts to be allocated or distributed in accordance with Sections 10.01, 10.02 and 10.03, or if at the end of each Fiscal Year and following receipt by Lessee of the annual audit, if any, it is determined that any amounts have been allocated or distributed in excess of the amounts properly allocable or distributable pursuant to Sections 10.01, 10.02 and 10.03, an adjustment will be made based on said calculations or audit, if necessary, so that the proper allocations and distributions will have been made. Such calculations or annual audit shall set forth the proper calculations, allocations and distributions required to implement such an adjustment. Within thirty (30) days of receipt by Lessee of such audit and/or of Operator's calculations if agreed to by Lessee relating to such an adjustment, Lessee or Operator, as the case may be, shall deposit in the Hotel Operating Account any excess amounts which may have been distributed to them. Section 10.05.00 Arbitration. (a) In the event of a dispute, controversy or difference between Operator and Lessee over the calculation of the amount of the Operator's Incentive Fee for any Fiscal Year, at the request of either party, the parties shall submit such dispute, controversy or difference to arbitration by the American Arbitration Association under its then prevailing rules, except as modified by this Section 10.05. The arbitration tribunal shall be comprised of three (3) arbitrators each of whom shall have at least five (5) years' experience in hotel operation, management or ownership, one to be appointed by each of Lessee and Operator and the third to be appointed by the American Arbitration Association. (b) Prior to the commencement of arbitration hearings, the arbitrator shall provide an oath or undertaking of impartiality. The arbitration shall be conducted in Memphis, Tennessee in accordance with Title 9 of the U.S. Code (the Federal Arbitration Act) and the Commercial Arbitration Rules of the American Arbitration Association and the arbitration session shall be held not later than twenty (20) days after the final selection of the arbitrator. The arbitration session shall be limited to a time period of forty-eight (48) hours from commencement of such session and the costs of arbitration shall be allocated by the arbitrator. Judgment on the award rendered by the arbitrator in accordance with this Section 10.05 may be entered in any court having jurisdiction thereof. 20 25 (c) Notwithstanding the foregoing, in no event shall the arbitrator determine or otherwise designate the formula for calculating the amount of the Operator's Incentive Fee for any Fiscal Year, which shall be determined solely by agreement of the parties prior to the commencement of each Fiscal Year. The sole function of any arbitration under this Section 10.05 shall be to calculate any disputed amount of Operator's Incentive Fee pursuant to the formula agreed by the parties. Section 10.06.00 Other Fees. In addition, if requested by Lessee and agreed to by Operator, Operator will provide management oversight of other hotel management companies engaged by Lessee or its affiliates or Owner or its affiliates with respect to other hotels owned by Owner or its affiliates or leased by Lessee or its affiliates. The fee for such management oversight services shall be established by mutual agreement of the parties. ARTICLE XI REPAIRS AND MAINTENANCE Subject to the provisions of the Approved Budget, Operator shall from time to time make such expenditures for repairs and maintenance as are necessary to keep the Hotel in good operating condition. If any repairs or maintenance shall be made necessary by any condition against the occurrence of which Operator, Lessee or Owner has received the guaranty or warranty of any contractor for the building of the Hotel or of any supplier of labor or materials for the construction of the Hotel, then Operator shall, on Lessee's or Owner's request, cooperate with Lessee and Owner in invoking such guarantees or warranties. Notwithstanding the Approved Budget, Owner or Lessee may from time to time at its expense make such alterations, additions, or improvements (including structural changes or repairs) in or to the Hotel as Owner or Lessee, in its sole discretion, deems to be desirable. ARTICLE XII INSURANCE Section 12.01.00 General. Owner and Lessee shall maintain insurance policies with respect to the Hotels as set forth in the Lease. Operator agrees to cooperate with Lessee and Owner in obtaining any such insurance. Section 12.02.00 Employment Insurance. Operator shall, as an Operating Expense, provide and maintain (i) workers' compensation insurance with respect to all Hotel employees in such amounts as may be required by applicable law, (ii) crime insurance in connection with all operations, business and affairs arising out of or in connection with the Hotel, including coverage on persons employed by Operator in an amount specified by Lessee [and (iii) employment practices liability insurance in commercially reasonable amounts and deductibles]; provided that the cost of such insurance shall be reasonable and shall have been included in the Approved Budget in amounts designated by Lessee. 21 26 Section 12.03.00 Approval of Companies and Cost by Owner and Lessee. (a) All insurance shall be with such insurance company or companies as may be selected by Owner or Lessee. Comprehensive general liability insurance and such other liability insurance as may be obtained or afforded shall be in the name of Owner and Lessee, and shall name Operator as an additional named insured as respects liability arising from the operation, maintenance and use of the Hotel and operations incidental thereto. (b) In the event that Operator is able to obtain any or all of the aforesaid insurance at lower cost than is obtainable by Lessee, Operator will give written notice thereof to Lessee, which notice shall include the types and amounts of such insurance, the premiums therefor, and the name or names of the insurance companies proposed to issue such insurance, and Operator, at Lessee's option, and as an Operating Expense, shall obtain such insurance. Section 12.04.00 Maintenance of Coverages. Lessee shall hold all insurance policies obtained hereunder, and certificates of such policies, if any, shall be delivered to Operator. Should Lessee fail to supply Operator with certificates of any required insurance, Operator shall notify Lessee in writing of such failure. If Lessee's failure to supply either (i) such certificates or (ii) a statement to the effect that Lessee will self-insure as to insurance coverages for which a certificate is being requested shall continue for a period of fifteen (15) days after Lessee's receipt of such notice, then Operator shall have the sole remedy of providing such insurance certificate as an Operating Expense and delivering to Lessee the original of such certificates. Section 12.05.00 Waiver of Subrogation. Lessee shall, to the extent obtainable from carriers and to the extent that endorsement forms are approved by the Insurance Commissioner (or comparable office or department) of the State in which the hotel is located, have all policies of property insurance provide that the insurance companies will have no rights to subrogation against Lessee or Operator or the agents or employees thereof. Lessee shall advise Operator in the event such waivers of subrogation are not available. Section 12.06.00 Blanket Coverage and Self-Insurance. Owner and Lessee specifically reserve the right to self-insure against all hazards, perils, risks and liabilities referred to in this Article XII and reserve the right to provide any insurance referenced in this Article XII by one or more so-called "blanket" or "umbrella" policies of insurance. Operator further acknowledges that the insurance coverage of the Hotel may be part of the general insurance plan of Owner or Lessee or of any of their affiliates. Owner or Lessee may elect to obtain any of the insurance coverages set forth in this Article XII with a "deductible loss" clause providing for per occurrence deductibles. The payment of any deductible losses shall be an Operating Expense. If Owner or Lessee elects to self-insure against certain perils and/or liabilities against which it would otherwise be required to maintain insurance under this Article XII, then Owner or Lessee shall be liable to the same extent as an insurer would be liable under the policy of insurance providing coverage for such perils and/or liabilities in the same amounts required to be carried by this Agreement. Section 12.07.00 Adequacy of Insurance. Except as provided in Article VII, neither Lessee nor Operator assumes any risks in connection with the inadequacy of any insurance required under this Article XII. Lessee or Operator, as the case may 22 27 be, shall give the other a copy of each policy of insurance obtained pursuant to this Article XII and if either believes any policy does not satisfy the provisions of this Agreement, such party shall so advise the other in writing and specify the deficiencies, in which event the obtaining party shall attempt to have such deficiencies remedied. Neither Lessee nor Operator shall have any obligation to remedy any purported deficiencies if the insurance coverages (or lack thereof) provided are consistent with the insurance coverages required by this Agreement to be carried by Lessee or Operator, as the case may be. Section 12.08.00 Exclusions. Except as provided in Article V, all costs and expenses of repairing any uninsured casualty (and all costs and expenses of repairing an insured casualty in excess of the available insurance proceeds) and all costs and expenses of satisfying any uninsured claim (and all costs and expenses of satisfying any insured claim in excess of available insurance proceeds) shall be an Operating Expense if the same can be expensed for tax and accounting purposes, otherwise such costs and expenses shall be capitalized. ARTICLE XIII PROPERTY TAXES, LOCAL TAXES, LEVIES AND OTHER ASSESSMENTS Section 13.01.00 Property Taxes. At Lessee's request, Operator shall pay from the Hotel Operating Account prior to the dates the same become delinquent, with the right upon Lessee's request to pay the same in installments to the extent permitted by law, all personal property taxes. Owner shall pay all real estate taxes with respect to the Property and all betterment assessments levied against the Property or any of its component parts. Section 13.02.00 Lessee's Right to Contest. Notwithstanding the foregoing, Lessee, as an Operating Expense, or Owner may contest the validity or the amount of any such tax or assessment. Operator agrees to cooperate with Lessee and Owner and execute any documents or pleadings required for such purpose, provided that Operator is satisfied that the facts set forth in such documents or pleadings are accurate and that such execution or cooperation does not impose any unreasonable obligations on Operator, and Lessee agrees to reimburse Operator as an Operating Expense for all expenses occasioned to Operator by any such contest, provided that such expenses shall be approved in writing by Lessee prior to the time that they are incurred. Any such expenses so approved shall not be considered an Operating Expense for purposes of determining Operator's Incentive Fee. ARTICLE XIV DAMAGE OR DESTRUCTION - CONDEMNATION Section 14.01.00 Damage. If at any time during the Operating Term any Hotel or any portion thereof should be damaged or destroyed, Owner and Lessee shall have the respective rights and obligations set forth in the Lease with respect to damage or destruction. In the event the Hotel is not repaired, rebuilt or replaced, Lessee may terminate this Agreement by written notice to Operator, effective as of the date sent. 23 28 Section 14.02.00 Condemnation. If at any time during the Operating Term the whole or any part of the Property shall be taken or condemned in any eminent domain, condemnation, compulsory acquisition or like proceeding or sale in lieu thereof by any competent authority, or if such a portion thereof shall be taken or condemned as to make it imprudent or unreasonable to use the remaining portion as a hotel of the type and class immediately preceding such taking or condemnation, then this Agreement shall terminate as of the date of such taking or condemnation and Operator shall have no right to the award from the taking or condemning authority in any such proceeding. ARTICLE XV USE OF NAME During the term of this Agreement, each Hotel shall at all times be known by such name as from time to time may be selected by Lessee. ARTICLE XVI OWNER'S RIGHT TO SELL At any time during the Operating Term, Owner may sell or otherwise dispose of one or more Hotels or lease all or substantially all of the Hotels (hereinafter collectively referred to as "Sale of a Hotel"), to any other person, partnership, firm or corporation (hereinafter referred to as the "Purchaser"). In such event, Lessee may notify Operator in writing no less than thirty (30) days prior to any such Sale of a Hotel and this Agreement shall terminate with respect to such Hotels upon the closing of the Sale of the Hotel. ARTICLE XVII DEFAULT AND REMEDIES Section 17.01.00 Events of Default- Remedies. (a) The following shall constitute Events of Default: (1) The failure of Operator to diligently and efficiently operate a Hotel in accordance with the provisions of this Agreement; (2) The failure of Operator to pay any amount to Lessee provided for herein for a period of five (5) days after written notice by Lessee of failure to pay such sum when payable; (3) The failure of Lessee to pay any amount to Operator provided for herein for a period of five (5) days after written notice by Operator of failure to pay such sum when payable; (4) The filing of a voluntary petition in suspension of payments, bankruptcy or insolvency by either Lessee or Operator; 24 29 (5) The consent to an involuntary petition in bankruptcy or the failure to vacate within sixty (60) days from the date of entry thereof any order approving an involuntary petition by or against either Lessee or Operator; (6) The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating Lessee or Operator a bankrupt or insolvent or appointing a judicial receiver, trustee or liquidator of all or a substantial part of such party's assets, and such order, judgment or decree shall continue unstayed and in effect for a period of one hundred twenty (120) consecutive days; (7) The failure of either Lessee or Operator to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement, and the continuance of any such default for a period of thirty (30) days after written notice of such failure; or (8) Subject to the provisions of Section 3.02, loss of the franchise license for a Hotel as a result of any action, or failure to act, on the part of Operator (other than as a result of Lessee's failure to provide adequate funding in accordance with the terms of this Agreement). (b) If an Event of Default with respect to one or more Hotels shall occur under Section 17.01(a)(1) or (8), the nondefaulting party may give to the defaulting party notice of its intention to terminate this Agreement with respect to such Hotel(s) after the expiration of a period of thirty (30) days from such date of notice and, upon the expiration of such period, this Agreement shall expire. If an Event of Default shall occur under Section 17.01(a)(2), (3), (4), (5), (6) or (7), the nondefaulting party may give to the defaulting party notice of its intention to terminate this Agreement with respect to any or all of the Hotels subject to this Agreement. If, however, with respect to the Events of Default referred to in Section 17.01(a)(1), (4), (5), (6), (7) and (8) above, unless a specific right of termination is specified elsewhere in this Agreement for the breach in question, upon receipt of such notice, the defaulting party shall promptly and with all due diligence cure the default or take and continue action to cure such default within such ten (10) day period. If such default shall not be capable of being cured within such ten (10) day period, then provided the defaulting party diligently pursues the cure of such default, such party shall have an additional five (5) days to cure any such default unless otherwise extended by Lessee. The procedure set forth in the preceding two sentences shall not be available for the curing of any default under Section 17.01(a)(2) or (3). Section 17.02.00 Rights Not Exclusive. (a) The rights granted under this Article XVII shall not be in substitution for, but shall be, except as otherwise provided in this Agreement, in addition to any and all rights and remedies for breach of contract granted by applicable provisions of law; provided, however, upon any termination of this Agreement by Operator or Lessee as provided in this Agreement, Operator shall be entitled to recover only such sums as are owing to Operator under this Agreement on the date of any such termination and in no event will Operator have any claim or cause of action for "future profits," damages resulting from termination or otherwise under this Agreement. (b) No failure of Operator or Lessee to insist upon the strict performance of any covenant, agreement, term or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach or any subsequent breach of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Agreement and no breach thereof shall be waived, altered or modified except by written instrument signed by both Lessee 25 30 and Operator. No waiver of any breach shall affect or alter this Agreement but each and every covenant, agreement, term and condition of this Agreement shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. (c) In the event that Operator shall be in default of this Agreement under Section 17.01 and such Event of Default remains uncured as required under Section 17.01(b), Lessee shall not be subject to the requirements of Section 21.09; however, in the event that Lessee shall be in default of this Agreement under Section 17.01 and such Event of Default remains uncured as required under Section 17.01(b), Lessee shall be fully subject to the requirements of Section 21.09. (d) Notwithstanding anything herein to the contrary, Lessee's remedy with respect to Operator's breach of the provisions of Section 21.11 or a breach of the provisions of Section 19.01 shall be limited to termination of this Agreement; provided, however, that in the event of a breach by Operator of the provisions of Section 21.11 or a breach of the provisions of Section 19.01, Lessee may terminate this Agreement immediately upon notice to Operator without reference to any cure or notice provisions set forth in this Agreement. ARTICLE XVIII NOTICES Section 18.01.00 Notices. (a) Any notice, statement or demand required to be given under this Agreement shall be in writing and shall be delivered by certified or registered mail, postage prepaid, return receipt requested, or by overnight delivery with proof of delivery, or by facsimile with receipt of transmission, addressed to the parties hereto at their respective addresses listed below: (1) Notices to Lessee shall be addressed: ------------------------------- 850 Ridge Lake Boulevard, Suite 220 Memphis, TN 38120 Attention: President Facsimile: (901) 818-5260 (2) Notices to Operator shall be addressed: Flagstone Hospitality Management LLC 889 Ridge Lake Boulevard, Suite 100 Memphis, TN 38120 Attention: Angie Mock Facsimile: (901) 767-5156 26 31 With a copy to: MeriStar Flagstone LLC c/o MeriStar Hotels and Resorts, Inc. 1010 Wisconsin Avenue, N.W. Washington, D.C. 20007 Attention: Vice President - Legal Facsimile: (202) 295-1026 (b) All notices, statements, demands and requests shall be effective three (3) days after being deposited in the United States mail or one day after being sent by overnight delivery or by facsimile. However, the time period in which a response to any such notice, statement, demand or request must be given shall commence to run from date of receipt by the addressee thereof as shown on the return receipt of the notice, statement, demand or request, but in all events not later than the tenth (10th) day after it shall have been mailed as required herein. (c) By giving to the other party at least thirty (30) days written notice thereof, either party shall have the right from time to time and at any time during the Operating Term to change their respective addresses for notices, statements, demands and requests, provided such new address shall be within the United States of America. ARTICLE XIX ASSIGNMENT Section 19.01.00 No Assignment by Operator. (a) Notwithstanding anything to the contrary set forth in this Agreement, and subject to the provisions of Section 19.01(b) and Section 17.02(d), without the prior written consent of Lessee, Operator shall have no right to transfer or assign any of its rights or obligations under this Agreement voluntarily, by operation of law, through a change in control of Operator, or otherwise. (b) Operator shall give Lessee not less than thirty (30) days prior written notice of any event which would result in any change in Mock's or MeriStar's ownership of the equity interests in Operator. If, within thirty (30) days following receipt of such notice Lessee does not consent to the occurrence of such event, and such event occurs, Lessee may terminate this Agreement as to one or more Hotels, effective upon occurrence of the event, without any liability to Operator pursuant to Section 21.09. Notwithstanding the foregoing, MeriStar may transfer or assign all or a portion of its equity interests in Operator to an Affiliate of MeriStar provided that (i) Operator and MeriStar shall notify Lessee of the proposed transfer or assignment not less than thirty (30) days prior to the proposed transfer or assignment and (ii) Lessee shall have determined, in its reasonable discretion, that the proposed transfer or assignment to such Affiliate of MeriStar shall not cause Operator to fail to qualify as an "eligible independent contractor" as defined in Section 856(d)(9) of the Internal Revenue Code of 1986 with respect to the management of the Hotels. Section 19.02.00 Assignment by Lessee. (a) Lessee may transfer or assign its rights and obligations under this Agreement without the consent of Operator but shall deliver to Operator written notice of such transfer or assignment not less 27 32 than thirty (30) days prior to the effective date thereof; provided however, that Operator shall have the right, within thirty (30) days following receipt of such notice to terminate this Agreement as to all of the Hotels and in such event shall be entitled to reimbursement in accordance with Section 21.09. (b) Any transfer or assignment of this Agreement by Lessee shall include an express assumption by the transferee or assignee of Lessee's obligations hereunder, including those set forth in Section 21.09. (c) In the event of a "change in control" of Lessee, Operator shall have the right, upon not less than thirty (30) days notice to terminate this Agreement as to all of the Hotels and shall be entitled to reimbursement in accordance with Section 21.09. For purposes of this Section 19.02(c), a "change in control" of Lessee shall be deemed to have occurred if, at any time during the Operating 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 RFS Hotel Investors, Inc. representing 50% or more of the combined voting power of the then outstanding securities of RFS Hotel Investors, Inc. entitled to vote generally in the election of directors; (ii) individuals who, as of the date, constitute the Board of Directors cease for any reason to constitute at least a majority of the Board of Directors of RFS Hotel Investors, Inc., unless any such change is approved by the vote of at least 80% of the members of the Board of Directors of RFS Hotel Investors, Inc. in office immediately prior to such cessation; (iii) RFS Hotel Investors, Inc. is merged, consolidated or reorganized into or with another corporation or other legal person, or securities of RFS Hotel Investors, Inc. 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 RFS Hotel Investors, Inc. immediately prior to such transaction; (iv) RFS Hotel Investors, Inc. 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 RFS Hotel Investors, Inc. immediately prior to such sale; (v) RFS Hotel Investors, Inc. 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 four most recently completed fiscal quarters for which reports have been filed under the Exchange Act) of RFS Hotel Investors, Inc. and its subsidiaries immediately prior thereto; 28 33 (vi) RFS Hotel Investors, Inc. 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 RFS Hotel Investors, Inc. 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. ARTICLE XX SUBORDINATION Section 20.01.00 Subordination To First Mortgage. Operator hereby agrees that this Agreement, including, but not limited to Operator's Basic Fee, Operator's Incentive Fee and amounts payable pursuant to Section 21.09, shall in all respects be and is hereby expressly made subordinate and inferior to the liens, security interest and/or terms of any First Mortgage and to the promissory note and other indebtedness secured or to be secured thereby and to all other instruments evidencing or securing or to evidence or secure said indebtedness, and all amendments, modifications, supplements, consolidations, extensions and revisions of such note and other instruments. Operator shall execute any and all subordination agreements, estoppel certificates and other documents requested by Lessee or Owner and/or the Holder to further evidence the subordination of this Agreement and Operator's rights hereunder to any such First Mortgage. Section 20.02.00 Foreclosure. Prior to termination of this Agreement by foreclosure under the First Mortgage or by acquisition of the property to be covered by the First Mortgage by deed in lieu of foreclosure, Operator shall have the right to enjoy all rights and privileges conferred upon it pursuant to this Agreement and Operator shall incur no liability to the Holder for acting pursuant to the terms of this Agreement; provided, however, Operator shall be required to (and does hereby agree to) repay to the Holder any Operator's Basic Fee, Operator's Incentive Fee and amounts payable pursuant to Section 21.09 paid to Operator under this Agreement from and after the date which is thirty (30) days after the date of receipt by Operator of a notice of default under the First Mortgage, which default is not cured and results in the acceleration of the indebtedness secured by the First Mortgage and the ultimate foreclosure of the liens and/or security interest under the First Mortgage and/or other acquisition of the property covered thereby by the Holder in lieu of foreclosure. ARTICLE XXI MISCELLANEOUS Section 21.01.00 Further Documentation. Lessee and Operator shall execute and deliver all appropriate supplemental agreements and other instruments, and take any other action necessary to make this Agreement fully and legally effective, binding, and enforceable in accordance with the terms hereof as between them and as against third parties. 29 34 Section 21.02.00 Captions. The titles to the several articles of this Agreement are inserted for convenience only and are not intended to affect the meaning of any of the provisions hereof. Section 21.03.00 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Lessee, its successors and/or assigns, and subject to the provisions of Article XIX, shall be binding upon and inure to the benefit of Operator, its permitted successors and assigns. Section 21.04.00 Competitive Market Area. Operator hereby agrees, for the benefit of Lessee, its successors and assigns, that Operator will not own, operate, lease or otherwise have an interest in, directly or indirectly, any hotel within a five (5) mile radius of any Hotel during the Operating Term unless expressly permitted by Lessee. The foregoing restriction shall apply to Operator and its Affiliates but shall not apply to MeriStar. Notwithstanding the foregoing, Operator hereby represents and warrants to Lessee that there are no agreements or other restrictions which prohibit, limit or otherwise restrict in any manner Operator, its officers, governors, members or Affiliates from entering into this Agreement or performing Operator's obligations under this Agreement. Section 21.05.00 Assumption of Post Termination Obligations. In the event of termination of this Agreement, Lessee shall be responsible for assuming obligations under contracts entered into by Operator in accordance with the provisions of Section 4.05. Operator hereby agrees to indemnify and to hold Lessee harmless from and against any liability in connection with any contracts, agreements or obligations not entered into in accordance with the provisions of Section 4.05. Section 21.06.00 Entire Agreement. This Agreement constitutes the entire Agreement between the parties relating to the subject matter hereof, superseding all prior agreements or undertakings, oral or written. Lessee and Operator hereby represent each to the other, that in entering into this Agreement neither has relied on any projection of earnings, statements as to possibility of future success or other similar matters or the costs or future financial success of any Hotel. Section 21.07.00 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Tennessee. Section 21.08.00 No Political Contributions. Any provision hereof to the contrary notwithstanding, no money or property of the Hotel shall be paid or used or offered, nor shall Lessee or Operator directly or indirectly pay or use or offer, consent or agree to pay or use or offer any money or property of the Hotel, for or in aid of any political party, committee or organization, or for or in aid of, any corporation, joint stock or other association organized or maintained for political purposes, or for, or in aid or, any candidate for political office or for 30 35 nomination for such office, or in connection with any election including referendum for constitutional amendment, or for any political purpose whatever, or for lobbying in connection with legislation or regulation thereunder, or for the reimbursement for indemnification of any person for money or property so used. Section 21.09.00 Lessee Reimbursement Upon Certain Terminations. (a) In the event Lessee terminates this Agreement with respect to a Hotel, other than pursuant to Section 17.01(b) or 17.02(d), and/or Affiliates of Lessee which own or lease other REIT Hotels terminate management agreements with Operator with respect to REIT Hotels to the effect that, as a result of such termination, budgeted annual gross hotel revenues for all the REIT Hotels then managed by Operator (for the latest available budget period) fall below 50% of the aggregate budgeted gross hotel revenue for the initial REIT Hotels set forth on Exhibit D hereto as of the date of this Agreement for the Fiscal Year ending December 31, 2001, then (i) if, as a result of such termination, Operator desires to terminate its lease with respect to Operator's office space at 889 Ridge Lake Boulevard, Suite 100, Memphis, Tennessee or leases (if any) for any additional office space of Operator as to which Lessee has previously consented, Lessee will (1) either (a) assume Operator's obligations under such lease or leases or (b) reimburse Operator for its pro rata share of Operator's actual out-of-pocket costs resulting from the termination or continuation of such lease or leases and (2) purchase, or contribute to the purchase by an affiliate of Lessee, from Operator, Operator's office furniture, fixtures and equipment at a price equal to Operator's net book value for such assets; (ii) Lessee shall reimburse Operator for its pro rata share of the severance amounts owed by Operator to Operator's executive office employees, as described in Exhibit C; and (iii) Lessee will purchase from Operator, at Operator's net book value, all of the Hotel Operating Equipment for the Hotels for which this Agreement is terminated. (b) In the event Lessee from time to time terminates this Agreement with respect to any Hotel, other than pursuant to Section 17.01(b) or 17.02(d), and/or Affiliates of Lessee which own or lease other REIT hotels terminate management agreements with Operator with respect to REIT Hotels to the effect that, immediately after such termination, budgeted annual gross hotel revenues for all the REIT Hotels then managed by Operator (for the latest available budget period) is less than 90% of the aggregate budgeted gross hotel revenues for the initial REIT Hotels set forth on Exhibit D hereto as of the date of this Agreement for the Fiscal Year ending December 31, 2001, and Operator demonstrates to Lessee's reasonable satisfaction that, as a result of such termination, Operator must terminate the employment of one or more of Operator's executive office employees described in Exhibit C, Lessee shall reimburse Operator for its pro rata share of the severance amounts actually paid by Operator to Operator's executive office employees as set forth in Exhibit C. (c) For purposes of this Section 21.09, Lessee's pro rata share of amounts payable to Operator under this Section 21.09 shall be determined by dividing (A) budgeted gross hotel revenue for the year 2001 for the Hotels with respect to which this Agreement is being terminated by (B) budgeted 31 36 gross hotel revenue for the year 2001 for all the REIT Hotels for which the management agreement with the Operator is being terminated. (d) Arbitration. In the event a dispute should arise between the parties with respect to whether termination of an employee described in Exhibit C gives rise to liability for payment by Lessee to Operator pursuant to Section 21.09, the parties agree that the dispute shall be submitted to arbitration by the American Arbitration Association under its then prevailing rules, except as modified by this Section 21.09. The arbitration tribunal shall be comprised of three (3) arbitrators each of whom shall have at least five (5) years' experience in hotel operation, management or ownership, one (1) to be appointed by each of Lessee and Operator, and the third to be appointed by the American Arbitration Association. The arbitration shall otherwise be conducted in accordance with Section 10.05(b). Section 21.10.00 Management of Other Hotels. During the Operating Term, unless otherwise approved by the REIT in writing, Operator and its Affiliates (other than MeriStar) will not manage hotels other than REIT Hotels, if, as a result of such management, Operator's revenues for any Fiscal Year would increase by 30% or more over Operator's budgeted revenues for the Fiscal Year (as reflected in Operator's operating budget at the beginning of the Fiscal Year). Section 21.11.00 Eligible Independent Contractor. During the Operating Term, Operator shall qualify as an "eligible independent contractor" as defined in Section 856(d)(9) of the Internal Revenue Code of 1986, as amended (the "Code"). To that end, during the Operating Term: (a) Operator shall not permit wagering activities to be conducted at or in connection with the Hotels; (b) Operator shall not own, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), more than 35% of the shares of RFS Hotel Investors, Inc.; (c) no more than 35% of the total combined voting power of Operator's outstanding stock (or 35% of the total shares of all classes of its outstanding stock) shall be owned, directly or indirectly, by one or more persons owning 35% or more of the outstanding stock of RFS Hotel Investors, Inc.; and (d) Operator (or a person who is a "related person" within the meaning of Section 856(d)(9)(F) of the Code (a "Related Person") with respect to the Operator) shall be actively engaged in the trade or business of operating "qualified lodging facilities" (defined below) for one or more persons who are not Related Persons with respect to RFS Hotel Investors, Inc. or Lessee ("Unrelated Persons"). In order to meet this requirement, Operator agrees that it (or a Related Person with respect to Operator) (i) shall derive at least 10% of both its revenue and profit from operating "qualified lodging facilities" for Unrelated Persons and (ii) shall comply with any regulations or other administrative guidance under Section 856(d)(9) of the Code with respect to the amount of hotel management business with Unrelated Persons that is necessary to qualify as an "eligible independent contractor" with the meaning of such Code Section. A "qualified lodging facility" is defined in Section 856(d)(9)(D) of the Code and means a "lodging facility" (defined below), unless wagering activities are conducted at or in connection with such 32 37 facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. A "lodging facility" is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, and includes customary amenities and facilities operated as part of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to RFS Hotel Investors, Inc. Operator's breach of the provisions of this Section 21.11 shall be subject to the provisions of Section 17.02(d). Section 21.12.00 Affiliated Transactions. Subject to the provisions of this Section 21.12, Operator may enter into multi-property purchasing, maintenance or service contracts with respect to one or more Hotels pursuant to which Operator or Affiliates of Operator receive rebates, cash incentives, administration fees, concessions, profit participations, stock or stock options, investment rights or similar payments or economic consideration from or in, as applicable, vendors or suppliers of goods or services (collectively, "Rebates", and such purchasing, maintenance or service contracts, "Operator Centralized Services"); provided, however, that (i) prior to entering into any such Operator Centralized Services, Operator shall promptly disclose to Lessee in writing the fact of and the estimated amount of such Rebates, (ii) the charges and other amounts incurred in connection with any such Operator Centralized Services (when taken as a whole for all Hotels to which such Operator Centralized Services are being provided) shall not exceed prevailing market rates with respect to such services and (iii) Lessee shall have approved such Operator Centralized Services in writing in advance (which approval may be withheld or granted in Lessee's sole discretion). In the event that Operator enters into any Operator Centralized Services in accordance with the provisions of this Section 21.12, then any Rebates accruing to Operator or to any Affiliate of Operator shall accrue to Operator or such Affiliate, and Lessee shall have no, and hereby waives any, claim thereto, except to the extent agreed to in writing among Lessee, Operator and such Affiliate, which such agreement may be, at Lessee's election, a condition precedent to the granting of its consent under clause (iii) above. Section 21.13.00 Non-Recourse to MeriStar. No officer, director, employee, shareholder, member or partner of MeriStar or any Affiliate of MeriStar shall have any personal or other liability hereunder and no assets of MeriStar or any Affiliate of MeriStar other than Operator shall be subject to levy, attachment, or satisfaction for any claim arising under or in connection with this Agreement by Lessee or Owner. Section 21.14.00 No Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors and permitted assigns, and the parties do not intend to confer third-party beneficiary rights upon any other party. Section 21.15.00 Purchase of Furniture, Fixtures and Equipment. In the event of the liquidation and/or dissolution of Operator, Lessee or its designee shall have the right, but not the obligation, to purchase from Operator, all or any part of Operator's office furniture, fixtures and equipment at a price equal to Operator's net book value for such assets. 33 38 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. LESSEE: -------------------------------------- By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- OPERATOR: FLAGSTONE HOSPITALITY MANAGEMENT LLC By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 34 39 EXHIBIT A Hotel Owner [TO COME] 35 40 EXHIBIT B Franchise Agreements [TO COME] 36 41 EXHIBIT C Severance Amounts Reimbursable Pursuant to Section 21.09 1. The severance amounts for the following officers of Operator shall be their salary, bonuses and all benefits for the time periods set forth below if their employment is terminated by Operator as a result of the termination of the Agreement by Lessee as described in Section 21.09 of the Agreement: PERSON DURATION OF TIME AFTER TERMINATION Chief Executive Officer Three (3) years West Region VP of Operations Two (2) years East Region VP of Operations Two (2) years Vice President of Finance Two (2) years Vice President of Sales Two (2) years Southwest Regional Manager One (1) year Northeast Regional Manager One (1) year Southeast Regional Manager One (1) year Director of Human Resources One (1) year 2. All other corporate office employees of Operator shall be entitled to receive two (2) weeks pay for each one (1) year of continuous service (which shall include prior continuous employment with RFS, Inc.) up to a maximum of twenty-six (26) weeks' pay. 3. Any additional persons to be covered under the provisions of Section 21.09 of the Agreement must receive the prior written approval of Lessee. 37 42 EXHIBIT D REIT Hotels ALABAMA 1. Sheraton Hotel - Birmingham South ARIZONA 2. Hampton Inn - Chandler 3. Homewood Suites - Chandler 4. Hampton Inn - Sedona CALIFORNIA 5. Sheraton - Bakersfield 6. Sheraton - San Jose / Milpitas 7. Beverly Heritage Hotel - Milpitas 8. Four Points Sheraton - Pleasanton 9. Residence Inn - Sacramento 10. Hilton, Fisherman's Wharf - San Francisco 11. Sheraton - Sunnyvale 12. Residence Inn - Torrance 13. Doubletree Hotel, Del Mar - San Diego COLORADO 14. Hampton Inn, NW/I-70 - Denver 15. Hampton Inn, SW - Denver FLORIDA 16. Hampton Inn - Ft. Lauderdale 17. Residence Inn - Orlando GEORGIA 18. Comfort Inn, Marietta - Atlanta 19. Residence Inn, Perimeter West - Atlanta ILLINOIS 20. Holiday Inn Express - Arlington Heights 21. Holiday Inn - Crystal Lake 22. Holiday Inn Express - Downers Grove INDIANA 23. Hampton Inn, Airport - Indianapolis KENTUCKY 24. Holiday Inn, SW - Louisville 38 43 LOUISIANA 25. Holiday Inn, Central - Lafayette MICHIGAN 26. Residence Inn - Ann Arbor 27. Comfort Inn - Farmington Hills 28. Courtyard by Marriott - Flint 29. Holiday Inn, Gateway Center - Flint MINNESOTA 30. Hampton Inn, Airport - Bloomington 31. Holiday Inn Express - Bloomington 32. Hampton Inn - Minnetonka MISSISSIPPI 33. Hampton Inn - Hattiesburg MISSOURI 34. Sheraton, Clayton Plaza - St. Louis NEBRASKA 35. Hampton Inn, Airport I-80 - Lincoln 36. Hampton Inn, Westroads Mall - Omaha OKLAHOMA 37. Hampton Inn, Airport - Oklahoma City 38. Hampton Inn - Tulsa SOUTH CAROLINA 39. Holiday Inn, Coliseum - Columbia 40. Comfort Inn, Carowinds - Ft. Mill TENNESSEE 41. Hampton Inn, Walnut Grove - Memphis TEXAS 42. Holiday Inn Express, I-35 Airport - Austin 43. Residence Inn, River Plaza - Ft. Worth 44. Towneplace Suites - Ft. Worth 45. Hampton Inn, Hobby Airport - Houston 46. Hampton Inn - Laredo 47. Hampton Inn - Plano 48. Residence Inn - Tyler WISCONSIN 49. Holiday Inn Express, Mayfair Mall - Milwaukee 39 44 EXHIBIT E GUARANTY Each of the undersigned (each, a "Lessee") is a party to a Management Agreement of even date herewith (each, a "Management Agreement") with Flagstone Hospitality Management LLC ("Operator") with respect to certain hotel properties leased by the undersigned. Each Lessee, jointly and severally, hereby unconditionally guarantees the indemnification payment obligations of each other Lessee pursuant to the provisions of Section 5.03, 5.04, 5.05 and 5.06 of each Management Agreement. The undersigned agree that Flagstone may, at its option, enforce this guaranty directly against each of the undersigned regardless of the actual Management Agreement under which the indemnification payment obligation arises. This guaranty shall be binding on each Lessee and its permitted successors and assigns and shall inure to the benefit of Flagstone and its permitted successors and assigns under the Management Agreements. This guaranty shall operate as a continuing guaranty but shall expire when all of the Lessees' indemnification payment obligations pursuant to Article V of the Management Agreements have expired or been terminated. During the terms of the Management Agreements, the Lessees agree to maintain net worth, in the aggregate for all Lessees, in an amount not less than $5,000,000, as determined in accordance with generally accepted accounting principles. This guaranty shall be governed by, and construed and enforced in accordance with, the laws of the State of Tennessee. Executed this ____ day of January, 2001. RFS LEASING II, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- RFS LEASING III, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 40 45 RFS LEASING IV, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- RFS LEASING V, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- RFS LEASING VI, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- RFS LEASING VII, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 41 -----END PRIVACY-ENHANCED MESSAGE-----